Interconnect usage charges not taxable as royalty or technical services when provided outside India without PE or business connection

Interconnect usage charges received by a non-resident telecom operator were treated as not taxable in India because the facility was provided outside India without any transfer of intellectual property, right to use equipment or process, or possession or control of equipment by the Indian service recipients. The process was characterised as a standard commercial process, not a secret process, so the receipts did not constitute royalty or fees for technical services under the Income-tax Act or the India-Spain DTAA. On the alternative section 5 basis, mere payment from India did not establish accrual or arising in India, and no business connection or permanent establishment in India was shown.

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Issues: Whether interconnect usage charges received by a non-resident telecom operator from Indian telecom operators are taxable in India as royalty or fees for technical services under section 9(1)(vi) and section 9(1)(vii) of the Income-tax Act, 1961 and under Article 13 of the India-Spain DTAA, and whether such receipts can be brought to tax in India as income accruing or arising in India under section 5 of the Income-tax Act, 1961.

Analysis: The receipts arose from provision of interconnect facility outside India, without transfer of any intellectual property, grant of right to use equipment or process, or possession, control or custody of any equipment by the service recipients. The process involved was held to be a standard commercial process and not a secret process. The Tribunal also followed its earlier view in the assessee's own case and the connected decision concerning Vodafone South Ltd., holding that interconnectivity charges do not fall within the charge of royalty or fees for technical services under the Act or the DTAA. On the alternative plea under section 5, the Tribunal held that mere payment from India does not establish accrual or arising of income in India, since the rendition of the service was outside India and no business connection or permanent establishment in India was established.

Conclusion: The interconnect usage charges were not taxable in India either as royalty or fees for technical services or as income accruing or arising in India, and the assessee succeeded on the substantive taxability issue.

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