Interconnectivity service payments to non-residents were held not taxable in India as royalty or income arising in India.

Consideration for interconnectivity and bandwidth-related services provided from outside India was held not taxable in India where the services and facilities were located abroad and the recipient had no presence in India. The Tribunal followed jurisdictional High Court authority that payments to non-resident telecom operators for interconnectivity services and foreign capacity transfer do not constitute royalty. It further noted that income does not accrue or arise in India on these facts and that Indian tax authorities lack jurisdiction over an extra-territorial source. Treaty protection under the applicable DTAA could also apply, and the more beneficial treaty position would prevail over the wider domestic definition.

---

---

Issues: Whether consideration received for interconnectivity and bandwidth-related services rendered from outside India was chargeable to tax in India as royalty or as income accruing or arising in India.

Analysis: The Tribunal followed the jurisdictional High Court's ruling that payments to non-resident telecommunication operators for interconnectivity services and transfer of capacity in foreign countries do not constitute royalty. It also accepted that, where the services and facilities are situated outside India and the recipient has no presence in India, the income does not accrue or arise in India and the Indian tax authorities lack jurisdiction to tax an extra-territorial source. The Tribunal noted that treaty protection under the applicable DTAA could be considered and that the wider domestic definition could not override the treaty where the treaty was more beneficial.

Conclusion: The receipt from Vodafone for interconnectivity services was not taxable in India as royalty or otherwise on the facts considered, and the issue was decided in favour of the assessee.

---