Connectivity charges treated as royalty under Income Tax Act; disallowance upheld.

The Tribunal upheld the disallowance of connectivity charges paid to TATA Communications UK Ltd. as royalty under Section 40(a)(i) of the Income Tax Act, 1961, for non-deduction of TDS. The decision was based on the use of equipment and specialized services provided, following the precedent set by a High Court case. The assessee's arguments regarding the nature of the payments were not accepted, leading to the dismissal of all appeals and confirming the disallowance as royalty.

---

---

Issues Involved:
1. Disallowance of connectivity charges paid to TATA Communications UK Ltd. and TATA US treating the same as Royalty and Fees for Technical Services (FTS) for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Disallowance of Connectivity Charges:
The assessee-company, engaged in the business of Data & Call Centre for Export of services & Domestic BPO, filed its returns for the Assessment Years 2012-13, 2013-14, 2014-15, and 2015-16. The Assessing Officer (A.O) observed that the assessee made payments for connectivity charges to TATA Communications UK Ltd. and TATA US without deducting TDS. The A.O invoked Section 40(a)(i) of the Income Tax Act, 1961, disallowing these payments, treating them as royalty under Explanation 6 to Section 9(1)(vi) of the Act.

2. Assessee's Argument:
The assessee contended that the payments were not subject to TDS as the payees had no business connection or permanent establishment in India. The payments were for regular business charges and not for the right to use any equipment or technical knowledge, thus not falling under the definition of Royalty or FTS.

3. CIT(A)'s Decision:
The CIT(A) upheld the disallowance concerning payments to TATA Communications UK Ltd., stating that the services provided involved the use of equipment and triggered equipment royalty taxation. The CIT(A) relied on the Jurisdictional High Court's decision in the case of Verizon Communications Singapore Pvt. Ltd. vs. ITO, which held that IPLC services involve the use of equipment and are subject to royalty taxation.

4. Tribunal's Analysis:
The Tribunal reviewed the facts and the agreement between the assessee and TATA Communications UK Ltd. The agreement included provisions for specialized and customized services, including plant maintenance on the customer's equipment. The Tribunal noted that similar arguments were made in the case of Verizon Communications Singapore Pte Ltd. vs. ITO, where the High Court held that the use of the process provided by the assessee, guaranteeing the transmission of data and voice through assured bandwidth, constituted royalty.

5. Assessee's Reliance on Other Cases:
The assessee relied on the decision of the Mumbai Tribunal in the case of Rackspace, US Inc. Vs. Dy. CIT, which held that cloud hosting services do not constitute royalty as the payer does not have possession or control over the equipment. The assessee also cited the Hon'ble Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Private Limited Vs. CIT.

6. Revenue's Argument:
The Revenue argued that the Jurisdictional High Court's decision in the case of Verizon Communications Singapore Pte Ltd. vs. ITO was directly applicable. The High Court had held that payments for the use and right to use the process, even when bandwidth is shared, fall under the definition of royalty.

7. Tribunal's Conclusion:
The Tribunal, following the Jurisdictional High Court's decision in the case of Verizon Communications Singapore Pte Ltd. vs. ITO, held that the connectivity charges paid to TATA Communications UK Ltd. constituted royalty. The Tribunal dismissed the assessee's appeals, confirming the disallowance under Section 40(a)(i) of the Act.

Final Judgment:
All four appeals by the assessee were dismissed, and the order pronounced on 11th January 2023 confirmed the disallowance of connectivity charges as royalty for non-deduction of TDS.

---