2023 (9) TMI 318 - AT - Income Tax

Appeals Partially Allowed: Interconnect Charges Not Taxable as Royalty in India

The Tribunal partially allowed the appeals, ruling that payments for interconnect charges are not taxable as royalty in India. Legal issues for certain ... Income deemed to accrue or arise in India - Royalty receipt - Taxability of Voice Interconnect Services - transaction between assessee and the Indian customers - payments received by the Appellant for provision of Voice Interconnect Services - scope of India-Austria Tax Treaty - revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty since the payment is made to “use the process” or “an equipment” - HELD THAT:- Similar issue came up in case of Bharti Airtel vs.ITO (TDS) [2016 (3) TMI 680 - ITAT DELHI] The issue considered therein was in respect of payment towards call interconnectivity charged for call transmission on foreign network. The Tribunal therein, on applying ratios pronounced in the above referred decisions, held it not as ‘Royalty’. Therefore in our opinion, the Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of ‘Royalty’ under section 9(1)(vi) Explanation 5 & 6. We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of “Royalty” under India- Austria DTAA. The definition of “Royalty” under the DTAA is much more narrower in its scope and coverage, than the definition of “Royalty” contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act. On perusal of the agreement between the assessee and the end users it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of “royalty” as contained in clause 3 of Article 13 of India-Austria DTAA. We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end users / customers is not “secret” but a standard commercial process followed by the industry players. Therefore the said process also cannot be classified as a “secret process”, as is required by the definition of “royalty” mentioned in clause 3 of Article 13 of India-Austria DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 13 in India of India- Austria DTAA. As relying in case of Vodafone Idea Ltd. [2023 (7) TMI 1164 - KARNATAKA HIGH COURT] and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty to be brought to tax in India under section 9(1)(vi) of the Act and also as per DTAA. The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India. Even Hon’ble High Court held that the non-resident service providers do not have any presence in India. Decided in favour of assessee. Issues involved: 1. General2. Non-Compliance under section 144C of the Act during assessment proceedings3. Assumption of Jurisdiction under section 147 and 148 of the Act4. Taxability of Voice Interconnect Services as Royalty5. Levy of interest under section 234A of the Act6. Levy of Interest under section 234B and 234C of the Act7. Initiation of penalty proceedings under section 271(1)(b) and 271(1)(c) of the ActSummary:General:The learned CIT(A) upheld the action of the learned AO in determining the total income of the Appellant at Rs. 4,49,80,244 and raising a demand of Rs. 1,70,47,510. The CIT(A) erroneously recorded the date of the order as 28.02.2022 instead of 28.02.2023.Non-Compliance under section 144C of the Act during assessment proceedings:The learned CIT(A) upheld the action of the learned AO of not issuing a draft assessment order under section 144C(1) of the Act, despite the appellant being an 'eligible assessee'. The reassessment was deemed null and void.Assumption of Jurisdiction under section 147 and 148 of the Act:The learned CIT(A) upheld the action of the learned AO in assuming jurisdiction to reassess under section 147 by issuing notices under section 148 without specifying the sanction/approval from higher authorities as mandated under section 151. The reassessment proceedings were considered bad in law and ought to be quashed.Taxability of Voice Interconnect Services as Royalty:The learned CIT(A) upheld the action of the learned AO in treating the payments received by the Appellant for Voice Interconnect Services as royalty under section 9(1)(vi) of the Act and under the India-Austria Tax Treaty. However, the Tribunal found that the interconnect charges do not fall within the ambit of FTS owing to the absence of human intervention in the process. The Tribunal held that the payments received for interconnectivity utility charges from Indian customers cannot be considered as Royalty under section 9(1)(vi) of the Act and as per DTAA, and thus, they are not taxable in India.Levy of interest under section 234A of the Act:The learned CIT(A) upheld the action of the learned AO in levying interest under section 234A. The Tribunal noted that interest under section 234A is consequential to the main issue on merits and need not be adjudicated separately.Levy of Interest under section 234B and 234C of the Act:The learned CIT(A) upheld the action of the learned AO in levying interest under sections 234B and 234C without considering that the Appellant, being a non-resident, is not required to pay advance tax as its entire income is subject to tax withholding under the Act.Initiation of penalty proceedings under section 271(1)(b) and 271(1)(c) of the Act:The learned CIT(A) erred in dismissing the ground of penalty initiation by holding that the ground of appeal is premature and erroneously mentioned section 271B instead of 271(1)(b). The Tribunal found that no penalty is leviable under sections 271(1)(b) and 271(1)(c).The Tribunal allowed the appeals partly, holding that the payments received by the assessee for interconnect charges are not taxable as royalty in India under section 9(1)(vi) of the Act and as per DTAA. The Tribunal dismissed the legal issues raised in Ground nos. 1 and 2 for A.Ys. 2010-11 and 2011-12 as not pressed. The interest computed under sections 234A, B, and C was deemed consequential and not adjudicated separately. General grounds were not adjudicated. The Tribunal's order was pronounced on 25th August 2023.