Toll-Free Telephone Charges paid by Insurance Company is ‘Royalty’, TDS applicable: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) while upholding the order of the CIT(A) held that payments made by the assessee towards the toll-free telephone charges constitute royalty, in terms of Section 9(1)(vi) of Income Tax Act, and is liable to deduct TDS under Section 194J of the Income Tax Act.

The assessee, M/s. Vidal Health Insurance TPA Pvt. Ltd. is a company engaged in the business of providing Third Party Administration (TPA) services to insurance companies. Income is earned by the assessee based on the contract entered with insurance companies in respect of policies entrusted to the assessee for rendering TPA services. The assessee has been given license by the Insurance Regulatory and Development Authority in May 2002, to operate as a TPA.

Assessee for the year under consideration filed its return of income declaring loss. The case was selected for scrutiny and notices under section 143 (2) and 142 (1) was issued, in response to which, representative of assessee appeared before AO and filed relevant details, particulars, and clarifications as called for.

AO observed that, the assessee claimed a sum in respect of toll-free numbers. He observed that assessee did not deduct any TDS on these payments. AO accordingly, called upon the assessee to show cause, as to how provisions of TDS were not applicable to these payments. In response to show cause, the assessee submitted that these payments were not towards professional services rendered, and also that these payments are not in the nature of royalty. Contentions of the assessee were not accepted by AO. AO opined that due to amendment to section 194J, tax is required to be reduced on domestic royalty payment. He thus made disallowance under section 40 (a) (ia) of the Act in the hands of the assessee, for failure to deduct TDS as per provisions of section 194J of the Act. Aggrieved by additions made by AO, assessee preferred appeal before CIT (A), who upheld observations of AO.

The assessee contended that AO wrongly held payments for toll-free telephone charges as royalty in view of the insertion of a definition of the term ‘process’ by Finance Act 2012, with retrospective effect. It has further been submitted that section 194J deals with deduction of taxes towards payment of ‘royalty’, as defined under Explanation 2 to section 9 (1) (vi) of the Act.

The Tribunal consists of an Accountant Member O.P. Meena and a Judicial Member Beena Pillai while upholding the order of the CIT(A) held that payments made by the assessee is royalty, in terms of Section 9(1)(vi) of Income Tax Act, and is liable to deduct TDS under Section 194J of the Income Tax Act.