ULTRA ENTERTAINMENT SOLUTIONS LTD v. INCOME TAX OFFICER
[Citation -2007-LL-0628-2]

Citation 2007-LL-0628-2
Appellant Name ULTRA ENTERTAINMENT SOLUTIONS LTD
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 28/06/2007
Assessment Year 2003-04
Judgment View Judgment
Keyword Tags co-operative housing society • fee for technical services • infrastructure facility • intellectual property • deduct tax at source • maintenance contract • revenue authorities • commission payment • composite contract • electricity board • business premises • company secretary • prescribed period • state government • deduction of tax • levy of interest • tds certificate • refund of tax • hire charges • advance tax • power plant
Bot Summary: The assessee is also aggrieved by the decision of the learned CIT(A) in holding the assessee in default under s. 201 and directing the AO to levy interest under s. 201(1A) of the Act even when the computer network provider had no taxable income no loss to revenue on account of tax or interest. Survey under s. 133A was carried out at the business premises of the assessee for the TDS purpose, wherefrom, it was found that assessee had paid a sum of Rs. 54.89 crores to M/s Playwin Infravest Ltd. as operating fees and wherein, the assessee had not deducted tax at source. The AO, accordingly, treated the assessee as assessee in default and liable for interest under s. 201(1A). The learned CIT(A) observed that the assessee was appointed by Government of Karnataka as its Marketing Agent to sell online computerized lottery the assessee had no infrastructure facility it engaged the services of Playwin both in respect of sales as well as provision of infrastructure. Now, coming to the question of chargeability of interest under s. 201(1A) the assessee has mainly relied on the aspect that in the case of Playwin there have been losses and assessment has been completed in the case of Playwin wherein refund has been granted in such situation the assessee is not liable for any interest. Now, coming to the fact of this case, the assessee has submitted a chart, which does not establish the fact that all the taxes paid by the assessee have been paid on due dates, specially, when the assessee has not paid any taxes by way of advance tax/self- assessment tax and all the credits have been taken from tax-deducted-at-source by payers. As a result of such verification if it is found that tax deducted and deposited as per the provisions of the Act and Rules made thereunder covers the entire tax liability of the assessee no interest shall be charged from the assessee under s. 201(1A) of the Act.


This appeal filed by assessee is directed against order dt. 29th Dec., 2005 of CIT(A), Mumbai for asst. yr. 2003-04. We have heard both parties and have also perused material on record. In this appeal, assessee is aggrieved by decision of learned CIT(A) in holding that payment for shared use of computer network for sale of online lottery tickets was in nature of technical services , hence, assessee was liable to deduct TDS under s. 194J of IT Act 1961. assessee is also aggrieved by decision of learned CIT(A) in holding assessee in default under s. 201 and directing AO to levy interest under s. 201(1A) of Act even when computer network provider had no taxable income, hence, no loss to revenue on account of tax or interest. facts, in brief, are that assessee company is engaged in business of selling of online lottery, under license from State Government of Karnataka. survey under s. 133A was carried out at business premises of assessee for TDS purpose, wherefrom, it was found that assessee had paid sum of Rs. 54.89 crores to M/s Playwin Infravest (P) Ltd. (hereinafter called as Playwin ) as operating fees and wherein, assessee had not deducted tax at source. It was explained by company secretary that assessee had entered into two agreements with Playwin and in respect of commission payment t o Playwin TDS was deducted and deposited, however, in respect of impugned sum tax was not deducted as assessee was of opinion that it was not liable to do so, because under s. 194C, this payment did not fall. AO, however, analysed, cls. 2 and 3 of agreement dt. 7th Aug., 2002 and based upon those clauses held that payment made by assessee to Playwin fell within ambit of s. 194C of Act. AO, accordingly, treated assessee as assessee in default and liable for interest under s. 201(1A). Aggrieved by this, assessee carried matter into appeal before learned CIT(A), who, after examining documents and submissions of assessee prima facie formed opinion that assessee was liable to deduct tax under s. 194J and not under s. 194C as held by AO and accordingly, he issued notice of enhancement to assessee. assessee replied that M/s Playwin was engaged in to selling of online tickets for various parties, hence, they were required to maintain computer network for that purpose. It was also contended that assessee required services only to sale lottery tickets and all terminals were owned by M/s Playwin , hence no technical service was rendered by them to assessee. assessee also placed reliance on decision of Hon ble Madras High Court in case of Skycell Communications Ltd. vs. Dy. CIT (2001) 170 CTR (Mad) 238: (2001) 251 ITR 53 (Mad) . learned CIT(A) observed that assessee was appointed by Government of Karnataka as its Marketing Agent to sell online computerized lottery, however, assessee had no infrastructure facility, hence, it engaged services of Playwin both in respect of sales as well as provision of infrastructure. learned CIT(A) also analysed scope of responsibilities as per agreement and held that to accomplish all these tasks, services of technically qualified and skilled persons were required. learned CIT(A) also referred to nature of fee for technical services as defined in Explanation to cl. (vii) of s. 9(1) of Act and held that all services provided by Playwin were in nature of technical services. learned CIT(A) also distinguished decision of Hon ble Madras High Court in case of Skycell Communications Ltd. (supra) on ground that in that case company was providing standard facility whereas in present case Playwin provided customized computer network and also rendered services of maintenance and operation of network. CIT(A) also held that M/s Playwin was engaged in providing such services to other parties also, hence, this fact further established that M/s Playwin was provider of technical services to various parties. learned CIT(A) also held that interest under s. 201(1A) was mandatory and assessee was liable to pay same for its default under s. 201 rule with s. 194J of Act. learned CIT(A), however, directed AO to verify facts and accordingly decide whether demand under s. 201(1) was to be raised or not, as payee had paid taxes and claimed refund. Still aggrieved, assessee is in appeal before us. learned counsel narrated factual matrix of case, reiterated submissions made before Revenue authorities and contended that Playwin h d given only computers on hire and it was not providing any technical or professional services to assessee company. It was also contended that Playwin was required to maintain its network in working condition and only for this purpose various provisions were made in agreement, but that would not mean that any professional or technical services were rendered by Playwin to t h e assessee company. learned counsel also placed k reliance on decision of Tribunal in case of Gujarat State Electricity Corpn. Ltd. vs. ITO (2004) 82 TTJ (Ahd) 456 wherein it was held that payment by company to Gujarat Electricity Board for entire operation and maintenance of power plant under comprehensive contract could not be treated as payment of Technical or professional services as contemplated in s. 194J of Act. learned counsel also placed reliance on decision of Tribunal in case of HFCL Infotel Ltd. vs. ITO (2006) 99 TTJ (Chd) 440. Thereafter, learned counsel drew our attention to amendment made in s. 194-I w.e.f. 13th June., 2006 wherein payment for hire equipments/machinery was covered under s. 194-I and on this basis learned counsel contended that such type of payments were not included in definition of technical services as mentioned in s. 194J of Act. It was also contended that there was no loss to Revenue as M/s Playwin had claimed refund of tax to tune of approximately 1.4 crores. learned counsel also contended that on similar payments received by M/s Playwin from other parties, no tax had been deducted and it had been accepted by Department, hence, Department could not be selective in its approach. With regard to interest under s. 201(1A) learned counsel contended that recipient of hire charges suffered loss and claimed refund hence levy of interest was not justified. learned counsel also pleaded that even Revenue authorities was not sure which section had to be applied hence, assessee acted bona fidely. It was also contended that in respect of commission income, assessee deducted tax at source and deposited same, hence, it was case of genuine belief and under these facts and circumstances of. case, no interest under s. 201(1A) was leviable. learned counsel, in this regard placed reliance on following decisions: (i) CIT vs. Rishikesh Apartments Co-operative Housing Society Ltd. (2001) 171 CTR (Guj) 288: (2002) 253 ITR 310 (Guj); (ii) CIT vs. Rajasthan Rajya Vidyut Prasaran Nigam Ltd. (2006) 287 ITR (ii) CIT vs. Rajasthan Rajya Vidyut Prasaran Nigam Ltd. (2006) 287 ITR 354 (Raj). learned Departmental Representative, on other hand, took us through various clauses of agreement and based upon provisions of agreement contended it wag composite agreement wherein assessee obtained technical services of nature as defined under s. 194J of Act, hence, it was liable to deduct tax-at-source. It was also contended that if payee was suffering loss and was likely not liable to pay any tax, then, assessee could have taken certificate from concerned AO for non- deduction of tax as provided in law and failing to do so assessee, withheld money which was due to Government, hence, it was liable for interest under s. 201(1A) of Act. learned Departmental Representative further placed k reliance on order of learned CIT(A). We have considered submissions made by both side materials on record and orders of authorities below. Admittedly, assessee is engaged in business of selling Online Lottery under licence from State Government of Karnataka. assessee, after obtaining license from State Government, h s entered into two agreements with Playwin on 7-8-2002. Under one agreement, Playwin is authorised to sell Online Computerised Lottery directly or through retailers for consideration in form of commission @ 2 per cent of t h e total revenue. As per this agreement, among other responsibilities of marketing, collection of proceeds, Playwin is also entrusted with responsibility of maintaining of books, records, etc., in accordance with generally accepted accounting principles. assessee has got right of inspection. It is also noted that both parties have secured Intellectual Property Rights for them where such rights have been developed by them. It is also noted that M/s Playwin cannot assign his rights under agreement without prior written consent of assessee. In other agreement, M/s Playwin have been appointed to provide its infrastructure to sell online lotteries. It is noted that assessee does not have infrastructure, capabilities and resources to sell online lottery, hence, this agreement has been entered into. If we look at responsibilities which have been entrusted to Playwin, it appears that it is not merely provision of hardware but Playwin is required to carry out all operations connected with sell of online lottery tickets. In addition to these responsibilities, it is required to maintain all records as per procedures prescribed by assessee. It is also noted that Playwin is also required to back-up at different locations and stand-by arrangement for safety and security of network and data. restriction on Playwin also been imposed in manner that, it cannot crowd network affecting access or sale of service to customers of assessee. Playwin has also role in designing of schemes and games. Thus, if both agreements are read together, it is amply clear that assessee has put initial resources, to obtain license for sale of online lottery and every subsequent activity has been outsourced. Accordingly, this is case of customised service because requirement of each and every customer, though, they may be engaged in similar kind of activities would be different, and Playwin has to take care of interest of every customer accordingly. Thus, as rightly pointed out by learned CIT(A) decision of Hon ble Madras High Court in case of Skycell Communications Ltd. vs. Dy. CIT (supra) is distinguishable because in that case customers were obtaining standard facility from service providers. However, observations of Hon ble Gujarat High Court in case that technical service referred to in s. 9(1)(vii) contemplates rendering of service to payer of fee which, in present case, support view of Revenue authorities. Hon ble High Court has also dealt with aspect that in context of present business practices what would constitute rendering of technical services. In present case, it is important to note that it is not merely payment for user of equipments or machineries but all personnel, consumables, spares, maintenance remains responsibility of Playwin, hence, it is composite contract. assuming for moment that all these activities, if would have been carried on by assessee on its own, it would have employed people, given maintenance contracts, hired office on rent, if not owned and in all this cases it would have required to deduct TDS in respect of relevant transactions as per provisions of Act. If it would have owned equipment and machineries and then hired services for run and maintenance, therefore, provision of s. 194C might have been attracted. Hence, having regard to extensive coverage of TDS provisions, payer cannot normally escape from its responsibility from deducting tax-at-source, in respect of various transactions at time of execut- ing such transaction. We are further of opinion that in changed business circumstances, when service industry is gaining prominence, term technical services should be interpreted in widest possible manner otherwise objects of TDS provision would get defeated. In this legal background, we hold that assessee is liable to deduct tax under s. 194J of Act. Accordingly, ground No. 1 is rejected. Before parting with this issue, we consider it to point out that decision of Tribunal in case of Gujarat State Electricity Corpn. Ltd. vs. ITO (2004) 82 TTJ (Ahd) 456 is distinguishable on fact because in that case assessee was owner and had given only operation and maintenance contract, hence, transaction squarely fell within ambit of s. 194C of Act. Similarly, decision of Tribunal in case of HFCL Infotel Ltd. vs. ITO (2006) 99 TTJ (Chd) 440 is related to standard facility and not with provision of customised services. We also do not find any force in contention of assessee that rent/hire charges for use of machines/plant have been incorporated subsequently under s. 194-I and not 194J, because in present case, it is not merely hire of machines/equipments and even after amendment, such types of composite contract, in our view, would fall within scope of s. 194J of Act. Now, coming to question of chargeability of interest under s. 201(1A) assessee has mainly relied on aspect that in case of Playwin there have been losses and assessment has been completed in case of Playwin wherein refund has been granted, hence, in such situation assessee is not liable for any interest. In this regard, assessee has placed reliance on decision of Hon ble Gujarat High Court in case of CIT vs. Rishikesh Apartment Cooperative Housing Society Ltd. (2001) 171 CTR (Guj) 288: (2002) 253 ITR 310 (Guj) . We find that, in that case payee had paid more amount of tax by way of advance tax than what was payable and had also paid tax on self -assessment and where in other years, tax was paid late, assessee had accepted finding of AAC regarding its liability towards interest under s. 201(1A) of Act. In situation, Hon ble Court held that assessee s liability to deduct tax at source and payment same to Revenue was not independent of liability of contractor by charging interest to pay tax n d since, contractor was not liable to pay any tax, hence, by charging interest under s. 201(1A) Revenue would derive undue benefit or advantage interest under s. 201(1A) Revenue would derive undue benefit or advantage by getting interest on amount of tax it had already received on due date and such position could not be accepted. Similarly, in case of CIT vs. Rajasthan Rajya Vidyut Prasaran Nigam Ltd. (supra). recipient of income had claimed refund, which had arisen due to TDS and deposited on due dates. Thus, crux of both these judgments is that where due taxes have been paid by recipient of income directly on time, interest under s. 201(1A) cannot be charged, because it is of compensatory nature and is levied for withholding money belonging to Government. Now, coming to fact of this case, assessee has submitted chart, which does not establish fact that all taxes paid by assessee have been paid on due dates, specially, when assessee has not paid any taxes by way of advance tax/self- assessment tax and all credits have been taken from tax-deducted-at-source by payers. It is further noted that, even assessee has been made liable to made interest under s. 201(1A) for delay in deposit of tax-deducted-at-source, in respect of commission paid to M/s Playwin. From chart submitted to us it is also noted in case of Foshi De Lak Gaming Solution (P) Ltd. certificate of TDS has been issued on 27th Nov., 2003 and in case of E-Cool Gaming Solutions (P) Ltd., TDS certificate has been issued on 31st May 2003 and in both cases certificate has been issued for whole financial year. Therefore, fact whether tax was deducted/deposited in time or not cannot be ascertained from material brought on record. It is settled position that liability to pay interest under s. 201(1A) arises in both these situations, where there is failure to deduct tax or after deducting, there is failure to deposit same within prescribed period as per Rules. It is also settled position that levy of interest under s. 201(1A) is mandatory and no exception has been provided. Even in cases relied on by assessee, liability has been quashed on basis of general principles of natural justice. Hence, if assessee has to be given relief in this regard, it can be given only after verification of correct facts with regard to deduction and deposit of tax-at-source on due dates which has resulted into refund of tax to payee. Such interest shall be payable only on net amount of tax liability i.e. tax liability assessed by AO less amount of tax deducted and deposited in time by payers and, then, such amount shall be further reduced by interest already paid under s. 201(1A) by payers of various incomes to Playwin. Accordingly, we restore this issue to file of AO to decide quantum of interest to be charged under s. 201(1A) of Act. As result of such verification if it is found that tax deducted and deposited as per provisions of Act and Rules made thereunder covers entire tax liability of assessee, then, no interest shall be charged from assessee under s. 201(1A) of Act. Thus, this ground of assessee stands accepted for statistical purposes to be disposed off in accordance with our directions as above. In result, appeal filed by assessee stands partly allowed. *** ULTRA ENTERTAINMENT SOLUTIONS LTD v. INCOME TAX OFFICER
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