DTAA shields assessee from TDS under Sections 195/201; post-1976 Section 9(1)(vi) changes don't override; interconnectivity payments not royalty

Karnataka HC held that the assessee is entitled to DTAA benefits for TDS under Section 195/201 and the ITAT's view excluding DTAA in Section 201 proceedings is tenable. The post-1976 amendments to Section 9(1)(vi) do not amend or nullify DTAA rights; an assessee cannot be compelled to do the impossible. Payments to non-resident telecom operators for interconnectivity/capacity abroad are not taxable as royalty, and Indian authorities lack jurisdiction to tax such extra-territorial income where the non-residents have no India presence. Higher withholding rates were not justified, and the assessee cannot be held liable for non-deduction for the AYs in question.

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Issues Involved:

1. Application of Double Taxation Avoidance Agreement (DTAA) in Section 201 proceedings.
2. Amendment to provisions of royalty under Section 9(1)(vi) and its impact on DTAA.
3. Taxability of payments to non-resident telecom operators as royalty.
4. Jurisdiction of Indian tax authorities over income from extra-territorial sources.
5. Withholding tax liability at a higher rate under Section 206AA.
6. Liability for non-deduction of tax at source based on subsequent amendments to Section 9(1)(vi).

Summary:

Issue 1: Application of DTAA in Section 201 Proceedings

The court held that the ITAT was incorrect in holding that the DTAA cannot be considered in proceedings under Section 201 of the Act. It was emphasized that a DTAA is a sovereign document between two countries, and the provisions of the DTAA are relevant while applying tax deduction at source provisions.

Issue 2: Amendment to Provisions of Royalty under Section 9(1)(vi) and its Impact on DTAA

The court ruled that the ITAT was incorrect in holding that the amendment to Section 9(1)(vi) by inserting Explanations 5 and 6 would result in an amendment of the DTAA. The court referred to the Engineering Analysis case, which held that the Explanation 4 to Section 9(1)(vi) of the Act expands the position and is not merely clarificatory.

Issue 3: Taxability of Payments to Non-Resident Telecom Operators as Royalty

The court found that the payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries are not chargeable to tax as royalty. It was noted that for subsequent years, the ITAT had held that tax is not deductible when payment is made to non-resident telecom operators.

Issue 4: Jurisdiction of Indian Tax Authorities Over Income from Extra-Territorial Sources

The court held that the Indian tax authorities do not have jurisdiction to tax income arising from extra-territorial sources. It was noted that the non-resident telecom operators have no presence in India, and the facilities are situated outside India.

Issue 5: Withholding Tax Liability at a Higher Rate under Section 206AA

The court ruled in favor of the assessee, holding that the withholding tax liability should not be levied at a higher rate. This issue was found to be covered by the case of CIT v. Wipro Limited.

Issue 6: Liability for Non-Deduction of Tax at Source Based on Subsequent Amendments

The court held that the assessee cannot be held liable for non-deduction of tax at source for payments made for the assessment years 2008-09 to 2012-13 based on the subsequent amendment to Section 9(1)(vi). It was noted that the amendment was inserted by the Finance Act, 2012, and the assessee is entitled to the benefits under the DTAA.

Order:

i) Appeals are allowed.
ii) The questions of law are answered in favor of the assessee and against the Revenue.
iii) Common order dated December 30, 2014, in IT(IT)A Nos. 1814 to 1818 & 734/Bang/2013 passed by the ITAT is set aside.
iv) Common order dated November 28, 2019, in IT(IT)A Nos. 1160-1161/Bang/2015 and 2818/Bang/2017 passed by the ITAT is set aside.
v) No costs.

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