2023 (12) TMI 1122 - AT - Income Tax

Non-resident telecom company's interconnectivity charges not taxable as royalty under Section 9(1)(vi)/(vii) or India-France DTAA

The Deputy Commissioner of Income Tax, Circle – 2 (2), International Taxation, Bengaluru. Versus M/s. Orange (formerly known as France Telecom)

The Deputy Commissioner of Income Tax, Circle – 2 (2), International Taxation, Bengaluru. Versus M/s. Orange (formerly known as France Telecom) - TMI Issues Involved:1. Taxability of payments for interconnect services and capacity transfer as Royalty.2. Presence of Non-Resident Telecom Operators (NTOs) in India and income accrual.3. Applicability of process royalty.4. Relevance of the Engineering Analysis case and amendments to Section 9 of the Act.5. Validity of the assessment order without Document Identification Number (DIN).Summary:Issue 1: Taxability of Payments as RoyaltyThe Tribunal examined whether payments to NTOs for interconnect services and capacity transfer are taxable as royalty. The Ld.AO considered these payments as royalty under Section 9(1)(vi) of the Income Tax Act. However, the Ld.CIT(A) relied on the Karnataka High Court's decision in Vodafone Idea Ltd. vs. DCIT, which held that such payments are not taxable as royalty. The Tribunal upheld this view, stating that the payments for interconnect services do not qualify as royalty under the Act or the India-France DTAA.Issue 2: Presence and Income Accrual in IndiaThe Tribunal addressed whether NTOs have a presence in India and if the income accrued in India. The Ld.AO argued that the income accrues in India when calls are made. The Ld.CIT(A) and Tribunal, referring to the Karnataka High Court's decision, concluded that NTOs do not have a permanent establishment in India, and thus, the income cannot be taxed in India.Issue 3: Applicability of Process RoyaltyThe Ld.AO classified the interconnect charges as process royalty. The Tribunal, however, noted that the Karnataka High Court and various Tribunal decisions have consistently held that such charges do not constitute process royalty. The Tribunal emphasized that the interconnect services provided by NTOs are standard telecom services requiring no human intervention and do not involve the use of any secret process.Issue 4: Engineering Analysis Case and Amendments to Section 9The Tribunal discussed the relevance of the Engineering Analysis case and the retrospective amendments to Section 9 of the Act. The Karnataka High Court in Vodafone Idea Ltd. held that the amendments to Section 9 do not affect the definition of royalty under the DTAA. The Tribunal upheld this interpretation, stating that the DTAA provisions take precedence over domestic law amendments.Issue 5: Validity of Assessment Order Without DINThe Tribunal examined the validity of the assessment order dated 29.12.2019, which did not bear a DIN. The Ld.CIT(A) treated the order as invalid due to this omission. The Tribunal upheld the Ld.CIT(A)'s decision, noting that the Intimation letter issued alongside the assessment order mentioned the DIN, but the assessment order itself did not comply with the requirement.Conclusion:The Tribunal dismissed the revenue's appeal, upholding the Ld.CIT(A)'s order that the payments for interconnect services and capacity transfer are not taxable as royalty in India. The Tribunal also confirmed that the assessment order without a DIN is invalid. The decision was based on consistent judicial precedents and the interpretation of relevant legal provisions, including the DTAA and the Income Tax Act.