2023 (9) TMI 257 - AT - Income Tax

Non-resident company's utility charges not taxable as royalty. Business profits exempt from tax.

M/s. Telecom Italia Sparkle Singapore Pte. Ltd., M/s. TI Sparkle Singapore Pte. Ltd. Versus The Deputy Commissioner of Income Tax, (International Taxation), Circle – 2 (1), Bangalore.

M/s. Telecom Italia Sparkle Singapore Pte. Ltd., M/s. TI Sparkle Singapore Pte. Ltd. Versus The Deputy Commissioner of Income Tax, (International ... Issues Involved:1. Taxability of payments received for provision of bandwidth capacity and interconnect services as royalty under Section 9(1)(vi) of the Income Tax Act.2. Legality of reopening of assessment under Section 148 based on proceedings under Section 201(1) in the case of Vodafone South Ltd.3. Applicability of Double Taxation Avoidance Agreement (DTAA) over the Income Tax Act.Summary:Issue 1: Taxability of Payments as RoyaltyThe core issue in the appeals was whether payments received by the assessee, a non-resident company based in Singapore, for providing bandwidth capacity and interconnect services to Indian telecom operators, including Vodafone South Ltd., should be classified as royalty under Section 9(1)(vi) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had treated these payments as royalty, relying on the decision of the Coordinate Bench in Vodafone South Ltd. vs. DIT. The CIT(A) upheld the AO's view that payments were for the use of or the right to use any copyright, secret formula, process, or equipment, thus qualifying as royalty.Issue 2: Reopening of AssessmentThe assessments for the years under consideration were reopened under Section 148 of the Income Tax Act based on proceedings under Section 201(1) in the case of Vodafone South Ltd. The assessee challenged the reopening of assessments on legal grounds, but these issues were not pressed during the appeal.Issue 3: Applicability of DTAAThe assessee argued that the Double Taxation Avoidance Agreement (DTAA) between India and Singapore should prevail over the Income Tax Act, and that the payments received did not qualify as royalty under the DTAA. The Karnataka High Court in Vodafone Idea Ltd. vs. DDIT had ruled in favor of the assessee, stating that the payments for interconnectivity utility charges (IUC) did not amount to royalty. The Tribunal agreed, noting that the term 'process' under Explanation 2 to Section 9(1)(vi) refers to intellectual property, which was not applicable in this case. The Tribunal also highlighted that the process involved was not 'secret' and that the assessee did not transfer any intellectual property rights to the service recipients.Conclusion:The Tribunal concluded that the payments received by the assessee for interconnectivity utility charges could not be taxed as royalty under Section 9(1)(vi) of the Income Tax Act or the DTAA. The payments were considered business profits taxable in the resident country (Singapore) and not in India, as there was no permanent establishment of the assessee in India. The appeals were partly allowed in favor of the assessee.Order Pronouncement:The order was pronounced in the open court on 31st August 2023.