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2025 (6) TMI 813 - AT - Income Tax


1. ISSUES PRESENTED and CONSIDERED

The Tribunal considered two core legal issues arising from separate appeals by the revenue against orders of the Commissioner of Income-tax (Appeals) pertaining to different assessment years:

(a) Whether payments made towards internet, broadband, and bandwidth charges in foreign currency attract tax deduction at source (TDS) under section 195 read with section 40(a)(ia) of the Income-tax Act, 1961, and whether disallowance of such expenses on account of non-deduction of TDS was justified.

(b) Whether deduction claimed under section 80G of the Act for donations made towards Corporate Social Responsibility (CSR) activities is liable to be disallowed under explanation 2 to section 37(1) of the Act, which disallows CSR expenses as business expenditure.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Applicability of TDS on payments for internet, broadband, and bandwidth charges under section 195 and consequent disallowance under section 40(a)(ia)

Relevant legal framework and precedents: Section 195 of the Income-tax Act mandates deduction of tax at source on payments made to non-residents. Section 40(a)(ia) provides for disallowance of expenses where tax is deductible but not deducted. The key question was whether payments for internet and bandwidth services constitute "royalty" or "fees for technical services" attracting TDS.

Precedents relied upon included the Bombay High Court decision in UTV Entertainment Television (399 ITR 433), which held that placement charges paid to cable operators for signal placement or preferred bandwidth do not constitute royalty. Similarly, the Madras High Court decision in Skycell Communications Services Ltd. (251 ITR 53) was cited to support the non-applicability of TDS on such payments.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer (AO) had disallowed Rs. 7,65,58,000/- under section 40(a)(ia) for non-deduction of TDS on payments towards connectivity costs in foreign currency, treating these payments as royalty. The assessee contended these were payments for services and did not confer any right to use intellectual property or similar rights, hence not attracting TDS under section 195.

The CIT(A) accepted the assessee's contention, relying on the aforementioned High Court decisions, and deleted the disallowance. The Tribunal found no infirmity in the CIT(A)'s order, emphasizing that payments for internet, broadband, and bandwidth charges do not amount to royalty or fees for technical services and thus do not attract TDS under section 195.

Key evidence and findings: The AO's show cause notice and disallowance order, the assessee's detailed replies, and judicial precedents formed the basis of the analysis. The Tribunal also considered the fact that the payments were for connectivity and bandwidth services, not for any proprietary rights.

Application of law to facts: The Tribunal applied the legal principle that TDS under section 195 is attracted only if the payment falls within specified categories such as royalty or fees for technical services. Since the payments were for standard connectivity services, they did not fall within these categories.

Treatment of competing arguments: The revenue's argument for disallowance was based on the AO's view that payments were royalty. However, the Tribunal found that the revenue failed to bring any binding or distinguishing precedent to counter the CIT(A)'s reliance on High Court rulings. The Tribunal thus upheld the deletion of disallowance.

Conclusions: The Tribunal dismissed the revenue's appeal on this issue, holding that the payments did not attract TDS under section 195 and thus disallowance under section 40(a)(ia) was not justified.

Issue (b): Deduction under section 80G for donations towards CSR activities and applicability of explanation 2 to section 37(1)

Relevant legal framework and precedents: Section 80G provides deduction for donations made to specified funds or institutions. Explanation 2 to section 37(1) disallows expenditure incurred under CSR activities as business expenditure. The question was whether CSR donations claimed under section 80G can be allowed deduction despite explanation 2.

The Tribunal referred to coordinate bench decisions including Motilal Oswal Securities Ltd., Allegis Services India Pvt. Ltd., and JMS Mining Pvt. Ltd., which held that if the donee satisfies conditions under section 80G, the deduction for CSR donations under section 80G should be allowed.

Court's interpretation and reasoning: The AO disallowed Rs. 2,17,84,962/- claimed as deduction under section 80G for CSR donations, treating them as CSR expenses disallowed under section 37(1) read with explanation 2. The assessee clarified that the claim was under section 80G and not as CSR expenses under section 37(1).

The CIT(A) accepted the assessee's submissions and allowed the deduction. The Tribunal, following coordinate bench precedents, held that the explanation 2 to section 37(1) does not override the specific provisions of section 80G. Therefore, CSR donations qualifying under section 80G are deductible.

Key evidence and findings: The Tribunal relied on the assessee's claim under section 80G, the AO's disallowance order, and judicial precedents clarifying the interplay between section 37(1) and section 80G.

Application of law to facts: The Tribunal applied the principle of specific provisions prevailing over general provisions, recognizing that section 80G specifically allows deduction for donations to eligible entities, even if related to CSR activities.

Treatment of competing arguments: The revenue's reliance on explanation 2 to section 37(1) was rejected in light of binding coordinate bench decisions. The Tribunal declined to interfere with the CIT(A)'s order allowing the deduction.

Conclusions: The Tribunal dismissed the revenue's appeal and upheld the deduction claimed under section 80G for CSR donations.

3. SIGNIFICANT HOLDINGS

"The decision of the CIT(A) is based upon the decisions of the Hon'ble jurisdictional High Court of Bombay, Hon'ble Madras High Court and Hon'ble Delhi High Court. We, therefore, do not find any reason to interfere with the findings of the CIT(A)."

"If the assessee satisfies the condition u/s 80G of the donees, the claim of the assessee for deduction of CSR expenses/contributions u/s 80G has to be allowed."

The Tribunal established the core principle that payments for connectivity services such as internet, broadband, and bandwidth do not constitute royalty or fees for technical services and hence do not attract TDS under section 195, precluding disallowance under section 40(a)(ia).

It also clarified that CSR donations qualifying under section 80G are deductible notwithstanding explanation 2 to section 37(1), which disallows CSR expenses as business expenditure.

Final determinations:

(i) The disallowance of Rs. 7,65,58,000/- under section 40(a)(ia) for non-deduction of TDS on payments towards internet and bandwidth charges is set aside.

(ii) The disallowance of Rs. 2,17,84,962/- claimed as deduction under section 80G for CSR donations is deleted.

Both appeals filed by the revenue were dismissed.

 

 

 

 

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