2016 (3) TMI 680 - AT - Income Tax

Payments to foreign telecom operators are business income, not royalty or FTS under Sections 9(1)(vi) and 9(1)(vii)

ITAT Delhi held that payments made by the assessee to foreign telecom operators (FTOs) for interconnection usage charges (IUC) do not constitute Fee for ... Fee for Technical Services - Payment of IUC by assessee to FTOS - Held that:- No hesitation in upholding the submissions of the Ld. Counsel of the Assessee that, the payment in question cannot be considered as “Fee for Technical Services” in terms of section 9(1)(vii) read with Expln. 2 of the Act as inter connection facility and the service of the FTO in picking up, carrying and successful termination the call over their respective network is a standard facility and the and FTO in question does not render any technical services to the assessee under interconnect agreement. Existence of ‘make available clause’ - Held that:- wherever under the DTAA’s. Make available clause is found, then as there is no imparting, the payment in question is not ‘FTS’ under the Treaty and when there is no ‘FTS’ clause in the treaties, the payment falls under Article 7 of the Treaty and is business income. Wherever under the DTAA’s. Make available clause is found, then as there is no imparting, the payment in question is not ‘FTS’ under the Treaty and when there is no ‘FTS’ clause in the treaties, the payment falls under Article 7 of the Treaty and is business income. Payment in question is not ‘Royalty’ as contemplated under the DTAAs. We agree with the submission of the Ld. Counsel for the assessee that the amendments to the Finance Acts cannot be read into the DTAA’s We uphold the order of the Ld. First Appellate Authority that the payment made for FTO for interconnection charges does not fall within the ambit of the definition of ‘Royalty’ under section 9(1)(vi) of the Act or under the definition of ‘Royalty’ under the Treaties. Default u/s 201 - Held that:- We have held that the payment in question for “IUC” to FTOs is neither FTS nor royalty either under the Act or under the Treaties. We have in subsequent paragraphs given reasons as to why the income in question arising from the payment cannot be deemed to accrue or arise in India. Thus the assessee cannot be declared as “assessee in default” as it has not failed in its statutory obligations to deduct tax at source u/s. 195 of the Act. Assessee cannot be held the Assessee in default under section 201 of the I.T. Act. Hence, this issue is decided in favour of the Assessee. Income deemed to accrue or arise in India - Payment made by assessee to 'FTO' - Held that:- Even under the DTAA, the payments being in the nature of business income of the FTOs, Article ‘7’ of the relevant DTAA’s governs the same. There is no dispute that the FTOs do not have any Permanent Establishment in India. Under such circumstances, under Article 7 of the Treaty the income cannot be brought to tax in India. Hence, the payment of “IUC” to the FTOS cannot be deemed to accrue or arise in India under any of the clause of Section 9(1) read with Section 5(2) of the Act. Therefore this issue is decided in favour of the assessee. Section 206AA application - prospectively or retrospectively - Held that:- This issue of retrospective applicability is covered in favour of the Assessee and against the Revenue by the decision of the ITAT, Pune Bench in the case of DDIT (IT-II), Pune vs. Serum Institute of India Ltd. [2015 (6) TMI 26 - ITAT PUNE] to hold that Section 206AA cannot be applied retrospectively. The beneficial rate provided in the DTAA override the provisions of Section 206AA of the Act. Thus this issue is resolved in favour of the Assessee. Issues Involved:1. Whether the payment of Inter-connect Usage Charges (IUC) by the assessee to Foreign Telecom Operators (FTOs) is taxable as Fee for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act.2. Whether the payment to FTOs for IUCs is in the nature of royalty under Section 9(1)(vi) of the Act.3. Whether the assessee is liable to be treated as an assessee in default under Section 201 of the Income Tax Act.4. Whether the payment made by the assessee to the FTO can be deemed to accrue or arise in India.5. Whether beneficial rates provided under Double Taxation Avoidance Agreements (DTAAs) override the provisions of Section 206AA and whether Section 206AA is applicable retrospectively.6. Whether the CIT(A) acted in violation of the provisions of Rule 46A in admitting additional evidence filed by the assessee.7. Whether the payment is revenue sharing or not.Issue-wise Detailed Analysis:Issue 1: Taxability of IUC as FTS under Section 9(1)(vii)The Hon’ble Delhi High Court in the assessee’s own case (CIT vs. Bharti Cellular Ltd.) held that the expression 'technical services' involves a human element, and the services rendered qua interconnection/port access do not involve any human interface. The Hon’ble Supreme Court upheld this view, emphasizing the need for human intervention for services to be considered technical. The Tribunal found no human intervention in the interconnection process, as it is automated. Therefore, the payment for IUC cannot be considered FTS under Section 9(1)(vii).Issue 2: Nature of Payment as Royalty under Section 9(1)(vi)The AO held that the payment for IUCs could alternatively be considered as royalty for the use of a process. However, the CIT(A) and the Tribunal found that the agreements do not grant the assessee the right to use the FTO’s network or process. The term 'process' under Explanation 2 to Section 9(1)(vi) refers to a process that is an item of intellectual property, which the FTOs do not exclusively own. The Tribunal also noted that the amendments to Section 9(1)(vi) by the Finance Act, 2012, do not affect the definition of royalty under DTAAs, which require the process to be secret. Thus, the payment is not royalty under the Act or the DTAAs.Issue 3: Assessee in Default under Section 201The Tribunal held that since the payment for IUCs is neither FTS nor royalty and does not accrue or arise in India, the assessee is not liable to deduct tax under Section 195. Consequently, the assessee cannot be treated as an assessee in default under Section 201.Issue 4: Deemed Accrual or Arising of Income in IndiaThe Tribunal found that the FTOs’ operations are entirely outside India, and the income does not accrue or arise in India. Even if there is a business connection, no part of the income is attributable to operations carried out in India. Therefore, the payment cannot be deemed to accrue or arise in India under Section 9(1) read with Section 5(2).Issue 5: Override of Section 206AA by DTAAs and Retrospective ApplicabilityThe Tribunal held that Section 206AA cannot override the beneficial provisions of DTAAs, as per the decision in DDIT (IT-II), Pune vs. Serum Institute of India Ltd. It also held that Section 206AA does not apply retrospectively.Issue 6: Admission of Additional Evidence under Rule 46AThe Tribunal upheld the CIT(A)’s decision to admit additional evidence, noting that the assessee was not given sufficient time by the AO to furnish the required details and that the evidence was crucial for deciding the primary issues.Issue 7: Revenue SharingThe Tribunal did not adjudicate this issue due to the lack of sufficient details and documents on record, leaving the question open.Conclusion:The Tribunal allowed the assessee’s appeals and dismissed the revenue’s appeals, holding that the payment for IUCs is neither FTS nor royalty, does not accrue or arise in India, and the assessee cannot be treated as an assessee in default. It also held that Section 206AA does not override DTAAs and does not apply retrospectively, and upheld the CIT(A)’s admission of additional evidence.