Odds of Interpretation: Human intervention required for taxing a payment as ‘fees for technical services’

CA Maneet Pal Pasricha

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Telecom industry in India is suffering from the tussle between the odds of two interpretations. In recent time’s payments for various types of technology-related transactions has been a subject matter of disagreement between taxpayer and income tax department. Telecom industry make payment’s to companies like MTNL and BSNL for availing inter-connectivity ports. These interconnectivity ports come in use when a caller make’s a call from one network (say Airtel) to another network (say Vodafone) i.e., subscribers which fall outside the specified circle of the Taxpayer, then these calls are necessarily to be routed through national long distance telecommunication carriers viz., MTNL and BSNL, which provide interconnection between the two networks.

According to the provisions of Income-tax Act “The Act”, providing any managerial, technical or consultancy services for any consideration is termed as Fees for Technical services “FTS”. Where a payment qualifies as FTS, it is subject to withholding tax i.e tax deducted at source.

Now the point of disagreement is that whether payments made by the Taxpayer to BSNL/MTNL for availing the interconnection/port access services should be subject to withholding tax as FTS.

In respect of this disagreement Delhi High Court had decided the issue in favor of the taxpayer on the basis that these services do not involve any “human interface”. The HC approved the Taxpayer contention that the term ‘technical’ needs to be interpreted in light of the words ‘managerial’ and ‘consultancy’, as it is sandwiched between in the definition of ‘FTS’ under the Income Tax Law. Assorted judgements of the various high courts and tribunals have taken a view that the expression ‘technical services’ has to be read in the narrow sense by following the rule of “Noscitur a sociis” i.e., questionable meaning of a word can be derived from its association with other words.

Thus an element of human intervention is essential for providing managerial and consultancy services and consequently, by applying a similar equivalence, the term ‘technical’ would also have to be construed as involving a human element. This judgement gave any new perspective to the definition of Fees for technical services.

On bringing the matter before the Honourable Supreme court, the court first analysed the evidence’s to construct that human element is involved in the process of interconnectivity ports. But unfortunately or fortunately supreme court found no expert evidence from the tax authority’s to show how human intervention takes place in the present process blueprint. Expert evidence is required to decide whether there is any manual intervention involved during the traffic of such calls. Thus, whether at any stage, any human intervention is involved needs to be examined based on the technical evidence from technical experts. This would enable appellate authorities to decide the legal issue based on factual basis.

Therefore, keeping in mind the importance of the case and the implication of the issue, the matter was remitted to the tax Authority to decide the issue after examining technical experts within a period of four months. Such experts would be cross-examined. The taxpayers are also at liberty to examine the experts and adduce any other evidence. Till such time, the tax administrative authority was asked to issue directions to all its officers that in such cases, the Tax Authority would not proceed against other taxpayers only on the basis of agreements placed before them. Once the issue is settled, the tax authority would be able to levy both interest and penalty on such transactions based on the outcome of the issue.

On remitting the matter to the tax authority to determine the element of human intervention, the SC appears to have acknowledged the fact that human intervention is necessary for a technical service to qualify as FTS.

This interpretation should be of great relevance to telecom companies because when it comes to interconnectivity port charges, the telecom companies need to pay not only to domestic companies but also to the foreign companies for such services. The telecom companies pays interconnectivity charges to domestic companies for providing national long distance calls and similarly for providing International calls services they make some payment to foreign companies like AT&T etc. In addition, number of India’s tax treaties also uses a similar definition for FTS. Therefore for such cross-border technology related payments the issue of determining the applicability of withholding tax on cross-border service fee payments become of huge importance.

Now the telecom companies eagerly wait for the judgement day on the matter. The faith of the matter is in the hands of technical experts. In end, we should hope that our technical experts don’t suffer with any odds of engineering view’s like we suffer from odds of interpretation in income tax act.