2022 (3) TMI 1561 - AT - Income Tax

Connectivity payments not taxable as royalty under India-UK DTAA Article 13, Section 80IA deduction confirmed, license fee disallowance deleted

M/s B.T. Global Communications India Pvt. Ltd. Versus The Dy. C.I.T., Circle – 4 (2), New Delhi. AND (Vice-Versa)

ITAT Delhi ruled in favor of the assessee on three issues. First, payments for connectivity services were held not taxable as royalty under India-UK DTAA ... Income taxable in india - TDS u/s 195 not deducted on payment made for connectivity services - use equipment or process of equipment - payment made by the assessee is a royalty for use of equipment of BT as concluded by AO - HELD THAT:- As decided in New Skies Satellite [2016 (2) TMI 415 - DELHI HIGH COURT] wherein as relied upon the decision of Asia Satellite [2011 (1) TMI 47 - DELHI HIGH COURT] as held that where the customer does not use equipment or process of equipment itself payment cannot be termed as royalty for use of a process or equipment. As in the case in hand, no equipment is given by FTO to the assessee. The assessee merely delivers the calls using its own network through international connection with FTO which picks up the calls and further transmits at the desired destination by using its own network. We are of the consdiered opinion that the payment made for connectivity services are not taxable as royalty in terms of Article 13 of the India –UK DTAA. No doubt, that service is being provided with the help of scientific equipment and technology. That by way itself could not qualify the payment as royalty. We accordingly, direct the Assessing Officer to delete the impugned addition. no deduction of TDS required - Assessee appeal allowed. Deduction u/s 80IA @ 30% of eligible profit - determination of initial assessment year - HELD THAT:- In our considered view, unless the operation of the decision of the co-ordinate bench is stayed by the Hon'ble High Court, the same needs to be followed. We find that in [2018 (9) TMI 2131 - ITAT MUMBAI] conclude that as the assessee had opted A.Y 2007-08 as the initial assessment year for claim of deduction under Sec. 80IA(2), therefore, it would be entitled for 100% deduction from A.Y 2007-08 to A.Y 2011-12 and thereafter 30% from A.Y 2012-13 to A.Y 2016-17, subject to satisfaction of all other conditions.” Disallowance of license fee paid - HELD THAT:- The addition has been made only in the year under consideration for the reason that Department has filed SLP in the case of Bharti Hexacom Ltd. [2023 (10) TMI 786 - SUPREME COURT] & Vodafone Mobile Services Ltd. [2016 (11) TMI 1702 - DELHI HIGH COURT] Hon’ble Bombay High Court in the case of CIT vs. Forest Development of Maharashtra Ltd [2017 (8) TMI 384 - BOMBAY HIGH COURT] has observed that even if the principle of res judicata does not apply in tax matters yet consistency and certainty of law would require the State to take uniform position and not change their stand in the absence of change in facts and /or law. In the present case, admittedly there is no change in the facts and/or law. In such a situation, merely because on SLP has been filed by 6 Revenue in some other case on identical facts, cannot be justification for the disallowance of expenditure. We thus find no justification in the order of AO for disallowing the expenditure. Decided in favour of assessee. Issues Involved:1. Classification of network connectivity charges as 'Royalty' or 'Fee for technical services' under the Income Tax Act and the India-United Kingdom Double Taxation Avoidance Agreement (India-UK DTAA).2. Disallowance of network connectivity charges under section 40(a)(i) of the Income Tax Act due to non-withholding of tax.3. Determination of whether payments to BT Pic are business income not taxable in India due to the absence of a Permanent Establishment (PE) in India.4. Restriction of disallowance under section 40(a)(ia) to the amount 'payable' based on the Victor Shipping Services Pvt. Ltd. decision.5. Deduction under section 80IA of the Income Tax Act at 30% of eligible profits.6. Disallowance of variable license fee.Detailed Analysis:Issue 1: Classification of Network Connectivity Charges- Assessee's Argument: The assessee argued that the payments made to BT Pic were for network connectivity services and not for the use of any equipment or process, thus not falling under 'Royalty' or 'Fee for technical services' as per the India-UK DTAA.- Assessing Officer's View: The AO considered the payments as 'Royalty' under Article 13(3) of the India-UK DTAA and section 9(1)(vi) of the Income Tax Act, relying on the judgment in Verizon Communications.- Tribunal's Decision: The Tribunal referred to the TSA Agreement and concluded that the assessee did not have the right to use any equipment of BT Pic. The Tribunal relied on the Delhi High Court's decision in New Skies Satellite BV, which held that amendments to domestic law cannot be read into treaties unless the DTAAs are amended by bilateral negotiations. The Tribunal concluded that the payments were not 'Royalty.'Issue 2: Disallowance under Section 40(a)(i)- Assessee's Argument: The assessee contended that no tax was withheld as BT Pic had no PE in India, and the payments were not 'Royalty' or 'Fee for technical services.'- Assessing Officer's View: The AO disallowed the payments under section 40(a)(i) due to the non-withholding of tax, considering the payments as 'Royalty.'- Tribunal's Decision: The Tribunal directed the AO to delete the addition, holding that the payments were not taxable as 'Royalty' under Article 13 of the India-UK DTAA.Issue 3: Business Income and Permanent Establishment- Assessee's Argument: The assessee argued that the payments were business income of BT Pic and not taxable in India due to the absence of a PE in India as per Article 5 and Article 7 of the India-UK DTAA.- Tribunal's Decision: The Tribunal agreed with the assessee, concluding that the payments were for services and not for the use of any equipment, thus not taxable as 'Royalty.'Issue 4: Restriction of Disallowance under Section 40(a)(ia)- Revenue's Argument: The Revenue argued that the CIT(A) erred in restricting the disallowance to the amount 'payable' based on the Victor Shipping Services Pvt. Ltd. decision, which was overruled by the Supreme Court in Palam Gas Service vs CIT.- Tribunal's Decision: Since the Tribunal allowed the assessee's appeal, this ground became otiose.Issue 5: Deduction under Section 80IA- Revenue's Argument: The Revenue contended that the CIT(A) erred in allowing the deduction as the matter was pending before the Delhi High Court for AY 2010-11.- Tribunal's Decision: The Tribunal followed the co-ordinate bench's decision, which allowed the deduction for the specified years, and dismissed the Revenue's ground.Issue 6: Disallowance of Variable License Fee- Revenue's Argument: The Revenue argued that the CIT(A) erred in allowing the deduction of the license fee, as SLPs were filed in similar cases.- Tribunal's Decision: The Tribunal followed its earlier decision, which held that consistency and certainty of law require uniformity unless there is a change in facts or law. The Tribunal directed the deletion of the addition, dismissing the Revenue's ground.Conclusion:- The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal concluded that the payments made for network connectivity services were not taxable as 'Royalty' under the India-UK DTAA, and the disallowance under section 40(a)(i) was not justified. The Tribunal also upheld the deduction under section 80IA and the allowance of the variable license fee.