27 July 2015 EY Tax Alert Chennai Tribunal rules on tax withholding obligation on provision for site restoration, year-end expense provisions and roaming charges Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of the Chennai Tribunal (Tribunal) in the case of Dishnet Wireless Ltd. (Taxpayer) [1], a telecom service provider, on taxpayer s obligation to withhold taxes on (a) roaming charges paid by telecom service provider to other telecom service providers for roaming facility provided to its subscribers, (b) provision for site restoration expense and (c) year-end expense provisions. As regards roaming charges, the Tribunal took note of expert opinion from Sub- Divisional Engineer of Bharat Sanchar Nigam Ltd. [2] (expert opinion) supporting the fact that no human intervention is required for providing roaming services to telecom subscribers. Applying the ratio laid down by the Supreme Court (SC) in the case of Bharti Cellular Ltd. [3], the Tribunal held that since no human intervention is involved, the services cannot be regarded as technical services and hence do not trigger withholding obligation. As regards provision for site restoration expenses, the Tribunal held that provision made in books on best estimate basis, in compliance with Accounting Standard 29, for future dismantling and site restoration work on premises acquired on long term lease to install telecommunication equipment did not attract withholding since the identity of payees and exact amount payable was not known. [1] [TS-409-ITAT-2015(CHNY)] [2] Government owned telecom company [3] [330 ITR 239]
As regards year-end expense provision towards services availed from various vendors for new subscriber verification and value added services like daily horoscopes, astrology, songs, wall paper downloads, cricket scores, etc. the Tribunal held that withholding will be triggered if the payees are identifiable and amount payable is quantifiable. The Tribunal set aside the issue to the Tax Authority to examine the facts and determine withholding obligation. Background and facts The Indian Tax Laws (ITL) cast an obligation on the payer to withhold taxes on specified payments. The obligation is triggered at the time of crediting amount payee s account or at the time of making payment, whichever is earlier. The ITL further specifies that the credit may be to any account, whether called as suspense account or by any other name, in the books of account of the payer. The Taxpayer is engaged in providing telecommunication services. In the course of survey proceedings, the Tax Authority found that the Taxpayer did not withhold tax on following items of expenses: Roaming charges paid to other telecom service providers for roaming facility provided to its subscribers; Provision for site restoration expense; and Provision for year-end expenses where invoices are not received from vendors; The Tax Authority raised demand on the Taxpayer to recover shortfall of taxes which were not withheld and also levied interest for period of delay. The Taxpayer preferred appeal to First Appellate Authority who affirmed the Tax Authority s action. Being aggrieved, the Taxpayer appealed further to the Tribunal. The nature of each item, cross contentions of the Taxpayer and the Tax Authority and Tribunal ruling are explained below: Roaming charges To provide roaming facility to its subscribers, the Taxpayer entered into bilateral roaming agreements with other telecommunication service providers. When subscribers in the Taxpayer s telecom circle visited another telecom circle, roaming facility enabled them to automatically connect with telecommunication service provider in that other circle; by which they could, in that other circle, make and receive voice calls, access data, and avail other value added services. The telecommunication service provider in that other circle charged the Taxpayer for providing such automatic connectivity. The connection was established automatically, without any human intervention. In this context, the Taxpayer relied on the SC ruling in case of Bharti Cellular Ltd. (supra) in which the SC held that services not involving direct human intervention were not fees for technical services, and hence did not trigger obligation to withhold taxes. The Taxpayer argued that pursuant to Bharti Cellular s case, the Tax Authority obtained expert opinion which categorically stated that no human intervention was required to render roaming services. Human intervention was required merely for making initial necessary configuration to provide roaming services, for maintenance, or for taking corrective actions to address technical defects in the telecommunication equipment. Once initial configuration was made, subscribers could automatically avail roaming services without any human intervention. The Tax Authority, on the other hand, contended that roaming charges were in the nature of technical services rendered by other telecommunication service providers to the Taxpayer which, in turn, was availed by its subscribers and hence, attracting withholding obligation. On the aspect of involvement of human intervention, the Tax Authority contended that as per expert opinion, human intervention was initially required to establish physical connectivity between two telecommunication service providers and to make the necessary
configuration. Therefore, it cannot be said that no human intervention is involved to render roaming services. The Tribunal ruled in Taxpayer s favour and held as follows: The expert opinion made it clear that once necessary configuration was made, no human intervention was required to connect the roaming calls. Subsequent human intervention may be limited to correcting any system breakdowns, as in the case of any other machinery. Since no human intervention was required at the time of availing services in the present case, it cannot be said that the Taxpayer availed any technical services. Therefore, the Taxpayer was not obligated to withhold taxes on payments for roaming charges. Provision for site restoration expense The Taxpayer acquired various premises on long term lease to install telecommunication equipment such as towers etc. The lease was generally for 20 years. The lease agreement required the Taxpayer upon expiry of the lease, to dismantle the equipment and restore the leased premises on as is basis, i.e. to the same position as existed at the time of entering into the lease. The Taxpayer, following Accounting Standard 29 - Provisions, Contingent Liabilities and Contingent Assets [4], made a provision for site restoration expense in the books of account on reliable estimate basis and reflected the same as a liability. Correspondingly, the Taxpayer increased cost of fixed asset (termed as asset retirement obligation ). However, while computing taxable income, the Taxpayer did not claim any depreciation on the cost reflecting the provision towards asset retirement obligation. Thus, the Taxpayer did not claim any tax deduction (whether by way of depreciation or as expense) in respect of such provision in computing the taxable income. [4] Notified under Companies Act, 1956 as mandatory accounting standard to be adopted by companies The Taxpayer did not withhold any taxes at the time of making provision for site restoration expense in the books of account on the basis that at that time, the payee was not identifiable and the exact sum payable was not ascertained. According to the Taxpayer, requirement to withhold taxes would trigger only at the end of lease period, when contractors may be engaged to carry out dismantling and site restoration work. The Tax Authority, on the other hand, held that requirement to withhold taxes is attracted once provision is made in the books of account. The Tax Authority asserted that once provision is made, it has to be presumed that work had to be carried out by a contractor, though the actual payment may be deferred to a future date. The Tribunal ruled in Taxpayer s favour and held as follows: At the stage of making provision in the books of account, no payment was made to anyone and no amount was credited to the account of any party or individual. The account did not disclose the person to whom amount is payable. The contractor is not identified. Upon expiry of lease period, the Taxpayer may, as one option, engage its own labourers to restore the site, in which case the Taxpayer would pay only salary and question of deducting tax on payments to contractor would not arise. If restoration work is entrusted to contractor, definitely the Taxpayer will need to deduct tax. However, the contractor will be identified only after expiry of lease period. Even if one proceeds on the basis that withholding is attracted at the stage of making provision in the books of account, it will raise several difficulties. There will be no credit in favor of any individual. Also, the Taxpayer may not be able to furnish, in the tax deduction certificate and/or withholding return, details such as name, address and permanent account number (PAN) of payee and the amount credited. Considering these difficulties, it can be inferred that obligation to withhold tax is triggered only when the payer is able to identify the payee. Accordingly, no withholding obligation arose at the time of making provision for
site restoration expense in books of account. Year-end provisions for availing various services: The Taxpayer availed various services like address verification; credit certification as also content development which enabled its subscribers to enjoy value added services like daily horoscopes, astrology, songs, wallpaper downloads, cricket scores; etc. At the year end, the Taxpayer made provision on basis of past experience for estimated amount of expenditure incurred for month of March for which invoices were yet to be received from various service providers. The amount was not credited in any particular service provider s account. downloads, cricket scores, etc., the Tribunal held that details of service providers and amount payable to them may be monitored by, and would be available in the system. Therefore, wherever identity of payees was available and exact amount payable could be quantified, the Taxpayer had to necessarily deduct tax. Since above factual aspects were not examined by the lower authorities, the Tribunal remitted the matter to the Tax Authority to re-examine whether at the year end, the payee was identifiable and the amount payable was quantifiable and determine withholding obligation accordingly. The Taxpayer submitted that, since name of payee and exact amount payable was not known, no taxes were withheld on such provisions. Tax withholding was made as and when service providers raised an invoice and amount was credited to their individual accounts. The Tax Authority, on the other hand, stated that requirement to withhold taxes was attracted; and the Taxpayer itself, having engaged the service providers, was not justified in stating that the payees were not identifiable. The Tribunal held that the principle involved is whether payee is identifiable and amount payable is quantifiable at the time of making provision in which case withholding obligation stands attracted. The Tribunal held that the Taxpayer may be justified in not withholding taxes on making provision towards services like address verification and credit certification since the Taxpayer may not have the exact details of the number of verifications that have been completed in the month of March and the amount payable therefor. However, in respect of services which enabled the Taxpayer s subscribers to enjoy value added services like daily horoscopes, astrology, songs, wallpaper
Comments The present ruling reiterates the principle laid down in earlier judicial precedents that withholding obligation is not triggered where payee is not identifiable and exact amount payable is not quantifiable. As regards technical services, the present ruling upholds that human involvement in technology-driven services is to be ascertained at the time of availing services. Merely because there is human involvement for initial configuration of the system and/or maintenance/repairs of the system does not render technology-driven services as technical services. It may be clarified that the Tribunal, in the present case, was concerned with recovery of shortfall of withholding tax and interest for withholding tax default. The Tribunal was not concerned with base tax deductibility of site-restoration expenses and year-end provisions which needs to be evaluated on independent basis. Also, in respect of site restoration expenses, it may be noted that going forward, IFRS converged Indian Accounting Standards (Ind- AS) will require companies to recognize discounted value of estimated site restoration and decommissioning costs as part of cost of property, plant and equipment, in the year of acquisition of the asset itself. Ind-AS are notified to become mandatory for companies (in a phased manner based on net worth and other criteria) from tax year 2016-17.
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