Mrs. Sahanzeb Akhtar for the Appellant. R. Srinivasan, Chartered Accountant for the Respondent.

ORDER

Smt. P. Madhavi Devi, Judicial Member – This appeal filed by the Revenue is against the order of the Commissioner of Income-tax (Appeals)-III, Bangalore, dated July 14, 2014 in holding that (i) internet services, i.e., leased-line benefits/broadband services are not in the nature of technical services and do not attract the provisions of section 194J of the Income-tax Act, 1961 (hereinafter referred to as “the Act” for short), and (ii) directing the Assessing Officer (AO) to exclude reimbursement of certain expenses both from the export turnover as well as from the total turnover for the purpose of computation of deduction under section 10A of the Act for the assessment year 2007-08.

2. Brief facts of the case are that the assessee-company which is in the business of development of computer software, had filed its return of income for the assessment year 2007-08 on October 31, 2007 declaring a total income of Rs. 69,32,820 after claiming deduction of Rs. 19,60,93,025 under section 10A of the Act. During the assessment proceedings under section 143(3) read with section 144C of the Act, the Assessing Officer observed that the assessee had claimed to have paid leased-line expenses of Rs. 36,11,140 and debited the same under the head ‘communication expenses’ but did not deduct TDS in respect of the aforesaid expenditure. The Assessing Officer was of the opinion that the services rendered were technical services and therefore TDS provisions are applicable. He, therefore, disallowed the sum of Rs. 36,11,140 under section 40(a)(ia) of the Act.

3. Aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who deleted the addition by following the judgment of the hon’ble Delhi High Court in the case of CIT v. Estel Communications (P.) Ltd. [2009] 318 ITR 185 wherein it was held that when there was a simple purchase of internet bandwidth it cannot be held that the payment was for technical services. Against the relief given by the Commissioner of Income-tax (Appeals), the Revenue is in appeal before us by raising grounds Nos. 1 and 2 on this issue.

4. The learned Departmental representative supported the order of the Assessing Officer while learned counsel for the assessee submitted that the same issue had arisen in the assessee’s own case for the assessment year 2009-10 and “C” Bench of this Tribunal, to which both of us, i.e., Judicial Member and the Accountant Member are signatories, had decided the issue in favour of the assessee by following the decisions of the hon’ble Delhi High Court (cited supra) as well as the hon’ble Madras High Court in the case of Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53

5. Having regard to the rival contentions and the material on record, we find that the issue is covered in favour of the assessee by the decision of this Tribunal in the assessee’s own case for the assessment year 2009-10 to which both of us are signatories. The relevant portion of the Tribunal order is reproduced hereunder :

“21. We have perused the orders and heard the rival contentions. Claim of the assessee was denied by the Assessing Officer for want of deduction of tax at source. Payments made by the assessee were undisputedly for purchasing internet bandwidth. The Dispute Resolution Panel had relied on the definition of ‘royalty’ given in Explanation 2 to section 9(1)(vi) of the Act and held that royalty included payments effected for use of any process. Reliance was also placed on Explanation 6 inserted below section 9(1)(vi), through Finance Act, 2012 with retrospective effect from June 1, 1976 which mentions that process used need not be secret and will include transmission by satellite cable, optic fiber or any other similar technology. However, we find that the hon’ble Delhi High Court in the case of Arathi Cellular Ltd., (supra) had held as under at paragraphs 10 to 21 of its judgment ;

10. Section 194J which relates to ‘fees for professional or technical services’, so much as is relevant, reads as under:

‘194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of-

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent. of such sum as income-tax on income comprised therein : . . .

Explanation. – For the purposes of this section,-

11. It is apparent that in respect of fees for technical services tax is to be deducted at source at 5 per cent. (as it then was). It is also clear that the expression ‘fees for technical services’ has the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9. The said Explanation 2 reads as under:

‘Explanation 2. – For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.’

The aforesaid Explanation makes it clear that ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any ‘managerial, technical or consultancy services’ but does not include consideration for any construction, assembly, mining or like project in the country by the recipients or consideration which would be income of the recipients chargeable under the head ‘Salaries’. The said definition is in two parts. The first part is ‘means and includes’ type of definition and the second part is ‘does not include’ definition. In the present appeals we are not concerned with the second part. The entire focus is attracted to the first part and that too, to the expression ‘consideration for the rendering of any managerial, technical or consultancy services’. It is only if the payments made by the respondents/assessees to MTNL/other companies in respect of interconnect/port access charges fall within the ambit of this expression that the said payments could be regarded as fees for technical services as contemplated under section 194J of the said Act.

12. In Skycell Communications Ltd. [2001] 251 ITR 53 (Mad.), a learned single judge of the Madras High Court noted that installation and operation of sophisticated equipment with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. It was also held that technical service referred to in Explanation 2 to section 9(1)(vii) contemplated the rendering of a ‘service’ to the payer of the fee and that mere collection of a ‘fee’ for use of a standard facility provided to all those willing to pay for it did not amount to the fee having been received for technical services. We find ourselves to be in agreement with the views expressed by the learned single judge of the Madras High Court in Skycell Communications Ltd. (supra). However, we still have to deal with the submissions made by learned counsel for the appellant/Revenue that the payments that were considered in the case of Skycell Communications Ltd. (supra) were those made by a subscriber to the cellular mobile telephone facility provider and not by one cellular network provider to another. For this purpose, we must examine the appeals at hand de hors the decision of the Madras High Court in Skycell Communications Ltd. (supra).

13. We have already pointed out that the expression ‘fees for technical services’ as appearing in section 194J of the said Act has the same meaning as given to the expression in Explanation 2 to section 9(1)(vii) of the said Act. In the said Explanation the expression ‘fees for technical services’ means any consideration for rendering of any ‘managerial, technical or consultancy services’. The word ‘technical’ is preceded by the word ‘managerial’ and succeeded by the word ‘consultancy’. Since the expression ‘technical services’ is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable.

The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:

‘Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.’

This would mean that the word ‘technical’ would take colour from the words ‘managerial’ and ‘consultancy’, between which it is sandwiched. The word ‘managerial’ has been defined in the Shorter Oxford English Dictionary, Fifth Edition as:

‘of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc.’

The word ‘manager’ has been defined, inter alia, as :

‘a person whose office it is to manage an organization, business establishment, or public institution, or part of one ; a person with the primarily executive or supervisory function within an organization etc. ; a person controlling the activities of a person or team in sports, entertainment, etc.’

It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression ‘manager’ and consequently ‘managerial service’ has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.

14. Similarly, the word ‘consultancy’ has been defined in the said Dictionary as ‘the work or position of a consultant ; a department of consultants’. ‘Consultant’ itself has been defined, inter alia, as ‘a person who gives professional advice or services in a specialized field’. It is obvious that the word ‘consultant’ is a derivative of the word ‘consult’ which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said dictionary as ‘ask advice for, seek counsel or a professional opinion from ; refer to (a source of information) ; seek permission or approval from for a proposed action’. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.

15. From the above discussion, it is apparent that both words ‘managerial’ and ‘consultancy’ involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word ‘technical’ as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1)(vii) of the said Act. This is so because the expression ‘technical services’ takes colour from the expressions ‘managerial services’ and ‘consultancy services’ which necessarily involve a human element or, what is now-a-days fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection/port access do not involve any human interface and, therefore, the same cannot be regarded as ‘technical services’ as contemplated under section 194J of the said Act.

16. Since we have applied the rule of noscitur a sociis, it would be necessary to indicate that this rule or principle has been applied and accepted by the Supreme Court whenever the meaning of a word, which falls within a group of words, is unclear and the intention of the Legislature is doubtful. In Godfrey Phillips India Ltd. v. State of U.P. [2005] 139 STC 537 (SC), a Constitution Bench of the Supreme Court was considering the meaning of the word ‘luxuries’ as appearing in Entry 62 of the List II of the VIIth Schedule to the Constitution which empowers the State Legislature to make laws with respect to ‘taxes on luxuries including taxes on entertainment, amusement, betting and gambling’. The Supreme Court was of the view that the general meaning of ‘luxury’ had been explained or clarified and must be understood in a sense analogous to that of the less general words such as ‘entertainment’, ‘amusements’, ‘gambling’ and ‘betting’, which were clubbed with it. The Supreme Court, employing the said principle of noscitur a sociis, noted that this principle of interpretation had received the approval of the Supreme Court in an earlier decision in Rainbow Steels Ltd. v. CST [1981] 47 STC 298 (SC). The Supreme Court also noted that earlier, indiscriminate application of this rule was doubted in the case of State of Bombay v. Hospital Mazdoor Sabha [1960] AIR 1960 SC 610. However, after referring to the said decision (Hospital Mazdoor Sabha), the Supreme Court in Godfrey Philips India Ltd. v. State of U.P. [2005] 139 STC 537 (SC) observed that they did not read the said decision as excluding the application of the principle of noscitur a sociis to the case before them inasmuch as it had been amply demonstrated that the word ‘luxury’ in Entry 62 was doubtful and had been defined and construed in different senses. The Supreme Court further observed as under :

’81. We are aware that the maxim of noscitur a sociis may be a treacherous one unless the “societas” to which the “socii” belong, are known. The risk may be present when there is no other factor except contiguity to suggest the “societas”. But where there is, as here, a term of wide denotation which is not free from ambiguity, the addition of the words such as “including” is sufficiently indicative of the societas. As we have said, the word “includes” in the present context indicates a commonality or shared features or attributes of the including word with the included.’

17. In the appeals before us it is obvious that the meaning of the expression ‘technical services’ by itself, is far from clear. It is also clear that the word ‘technical’ has been used in the ‘society’ of the words ‘managerial’ and ‘consultancy’. In such a situation, the rule would clearly apply and, therefore, the expression ‘technical services’ would have to take colour from the expressions ‘managerial services’ and ‘consultancy services’.

18. To conclude the discussion on the application of the rule of noscitur a sociis, we think that a reference to the Supreme Court decision in the case of Stonecraft Enterprises v. CIT [1999] 237 ITR 131 (SC) would be apposite. In that case the Supreme Court was required to interpret the provisions of section 80HHC(2)(b) of the said Act relating to the assessment years 1985-86, 1987-88 and 1988-89. In the said sub-section (2)(b) of section 80HHC, it was provided that the section did not apply to the following goods or merchandise, namely :

The question that arose before the Supreme Court was whether granite fell within the meaning of the word ‘minerals’. The contention of the assessee before the Supreme Court was that while granite was a mineral in the general sense, it was not a mineral for the purposes of section 80HHC and, therefore, the deduction provided for therein was available to the assessee who was in the business of exporting granite. The Supreme Court noted the arguments of learned counsel for the assessee based upon the doctrine of noscitur a sociis that the word ‘minerals’ in section 80HHC should be read in the context of the words ‘ores’ which it was associated with and must draw colour therefrom. It was submitted that the word ‘minerals’ must be read as referring only to such minerals as are extracted from ores and not others. While the Supreme Court agreed that the doctrine of noscitur a sociis was applicable, it held that the word ‘minerals’, in sub-section (2)(b) of section 80HHC must be read in the context of both ‘mineral oil’ and ‘ores’ and not just ‘ores’. The Supreme Court held that these three words taken together are intended to encompass all that may be extracted from the earth. Consequently, the Supreme Court held that all minerals extracted from the earth, granite included, must, therefore, be held to be covered by the provisions of sub-section (2)(b) of section 80HHC, and the exporter thereof was, therefore, disentitled to the benefit of that section.

19. From this decision, it is apparent that the Supreme Court employed the doctrine of noscitur a sociis and held that the word ‘minerals’ took colour from the words ‘mineral oil’ which preceded it and the word ‘ores’ which succeeded it. A somewhat similar situation has arisen in the present appeals where the word ‘technical’ is preceded by the word ‘managerial’ and succeeded by the word ‘consultancy’. Therefore, the word ‘technical’ has to take colour from the word ‘managerial’ and ‘consultancy’ and the three words taken together are intended to apply to those services which involve a human element. This concludes our discussion on the applicability of the principle of noscitur a sociis.

20. Before concluding we would also like to point out that the interconnect/port access facility is only a facility to use the gateway and the network of MTNL/other companies. MTNL or other companies do not provide any assistance or aid or help to the respondents/assessees in managing, operating, setting up their infrastructure and networks. No doubt, the facility of interconnection and port access provided by MTNL/other companies is ‘technical’ in the sense that it involves sophisticated technology. The facility may even be construed as a ‘service’ in the broader sense such as a ‘communication service’. But, when we are required to interpret the expression ‘technical service’, the individual meanings of the words ‘technical’ and ‘service’ have to be shed. And, only the meaning of the whole expression ‘technical services’ has to be seen. Moreover, the expression ‘technical service’ is not to be construed in the abstract and general sense but in the narrower sense as circumscribed by the expressions ‘managerial service’ and ‘consultancy service’ as appearing in Explanation 2 to section 9(1)(vii) of the said Act. Considered in this light, the expression ‘technical service’ would have reference to only technical service rendered by a human. It would not include any service provided by machines or robots.

21. Thus, it is clear, whether we follow the line of reasoning taken in Skycell Communications Ltd. v. Deputy CIT[2001] 251 ITR 53 (Mad) or not, the result is the same. The interconnect charges/port access charges cannot be regarded as fees for technical services. Consequently, both questions are answered against the Revenue and in favour of the assessees.

Their Lordships had followed the decision of the hon’ble Mumbai High Court in the case of Skycell Communications Ltd. (supra), though for different reasons. The assessee here had produced bills to show that payments effected thereof for purchasing internet bandwidth. We are therefore, of the opinion that the assessee was not bound to deduct tax at source under section 194J of the Act on the payments effected to the service providers. Vis-a-vis application of section 194C, the Assessing Officer was not able to show that the service provided were based on any specific contract entered by the assessee with the service providers. We are therefore, of the opinion that disallowance under section 40(a)(ia) of the Act was not warranted. Such a disallowance stands deleted. Ground No. 13 of the assessee is allowed.”

6. Respectfully following the same, we do not see any reason to interfere with the order of the Commissioner of Income-tax (Appeals). Ground No. 2 is accordingly rejected.

7. As regards grounds Nos. 3 and 4 on the second issue are concerned, we find that this issue also is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 , wherein it has been held that any expenditure which is excluded from the export turnover will have to be excluded from the total turnover as well for computing deduction under section 10A of the Act. We find that the Commissioner of Income-tax (Appeals) has followed the decision of the hon’ble High Court in granting relief to the assessee. Therefore, we do not see any reason to interfere with the order of the Commissioner of Income-tax (Appeals) on this issue as well. Thus grounds Nos. 3 and 4 are also rejected.

8. In the result, the Revenue’s appeal is dismissed.

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