Income Tax Deduction On Passive Infrastructure Payments

The Income Tax Act provides provisions for Tax Deduction at Source (TDS) which requires the person making payments to deduct a certain amount as prescribed and deposit it with the Government. There are various sections that govern the TDS applicability of various transactions. 

This article will explain the treatment of payment related to the use of passive infrastructure with reference to a case law and help determine the TDS applicability, whether under section 194I or section 194C of the Act. 

What Are Sections 194-I and 194C?

Section 194-I provides provisions with respect to TDS applicability on rent paid if such payments exceed Rs. 2,40,000 in a year (this has been increased to Rs. 50,000 per month from FY 2025-26). 

Whereas, Section 194C lays down provisions for TDS on payments made to contractors when such payments exceed Rs. 30,000 in a single transaction or Rs. 1,00,000 aggregate annually.

Case Law

Case

Indus Towers Ltd v. CIT (2014) 364 ITR 114 (Delhi)

Key Facts Of The Case

• Indus Towers Ltd. was engaged in providing telecom infrastructure services, including passive infrastructure such as towers, shelters, power equipment, and other related facilities to telecom operators.
• The company entered into agreements with telecom operators, under which the operators were allowed to use the tower infrastructure for their services.
• The Assessing Officer and Commissioner of Income Tax) held that the payments made by telecom operators to Indus Towers Ltd. amounted to rent and TDS should be deducted under Section 194-I.
• The Income Tax Appellate Tribunal passed a decision in favour of Indus Towers Ltd. holding that the payment was not in the nature of "rent" as defined under Section 194-I.

Delhi High Court’s Verdict

• Delhi High Court held that the payment was not in the nature of rent and did not meet the definition of rent as per 194-I. This was because Indus Tower provided other composite services such as maintenance and security. Also, the telecom operator did not have exclusive rights to the asset.
• Thus the payment was not only for the use of passive infrastructure but also for the composite services.
• Therefore TDS as per 194-I was not applicable. However, TDS at a lower rate under section 194C could be deducted if the conditions were met.

Conclusion

The Delhi High Court upheld the decision of the Income Tax Appellate Tribunal as the payment was not for rent but for other composite services also. This judgment had significant implications for telecom infrastructure providers and companies availing such services, as it provides clarity on TDS applicability on infrastructure sharing agreements.

Tax Implications On Passive Infrastructure

Payments received by the assessee providing passive infrastructure to telecom operators will not be covered under section 194-I if other allied services such as maintenance are also provided. Thus, if the payment is for a bundled service it will be subject to TDS under section 194C provided the conditions under the section are met. This will ensure a lower TDS deduction. 

Final Word

Therefore, payment for passive infrastructure services does not fall under the definition of rent as specified under section 194-I if composite services are provided to the telecom operator. Such bundled services will be covered under section 194C when the specifications for works contract are met.