Treaty protection for interconnect charges excluded royalty taxation of a non-resident telecom operator's receipts.

Interconnect usage charges received by a non-resident telecom operator were analysed as to whether they constituted royalty under the Income-tax Act. The applicable DTAA definition was held to prevail over the wider domestic expansion of royalty under section 9(1)(vi) where it was more beneficial to the assessee, and treaty protection remained available even in proceedings linked to tax deduction at source or reassessment. The facilities were also noted to be situated outside India, so the receipts could not be taxed on an extra-territorial basis. The royalty addition was deleted and the assessee obtained partial relief.

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Issues: Whether interconnect usage charges received by a non-resident telecom operator from an Indian telecom operator are taxable as royalty under the Income-tax Act, 1961.

Analysis: The assessment was founded on the view that the receipts constituted royalty, primarily by relying on proceedings under section 201 in the payer's case. The jurisdictional High Court decision and earlier Tribunal rulings held that interconnect charges do not amount to royalty, that the benefit of the DTAA remains available in such proceedings, and that the wider domestic amendment to the definition of royalty cannot override the treaty position where it is more beneficial to the assessee. The Court also noted that the facilities were situated outside India and that income arising from an extra-territorial source could not be brought to tax in India on those facts.

Conclusion: The receipts were not taxable as royalty and the issue was answered in favour of the assessee.

Final Conclusion: The addition based on royalty characterisation was deleted, and the assessee obtained partial relief in the appeal.

Ratio Decidendi: Interconnect usage charges received by a non-resident telecom operator are not royalty where the applicable treaty definition is more beneficial than the domestic expansion of section 9(1)(vi), and such treaty protection remains available even in proceedings connected with tax deduction at source or reassessment.

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