2024 (6) TMI 804 - AT - Income Tax

Non-resident's interconnect utility charges for international telecom services ruled as business profits, not royalty under section 9(1)(vi)

M/s. KDDI Corporation Versus The Deputy Commissioner of Income Tax (International Taxation), Circle – 2 (1), Bangalore.

M/s. KDDI Corporation Versus The Deputy Commissioner of Income Tax (International Taxation), Circle – 2 (1), Bangalore. - TMI Issues Involved:1. Validity of reopening of assessment.2. Characterization of Interconnect Usage Charges (IUC) as 'Royalty' under the Income Tax Act and the India-Japan DTAA.3. Applicability of amendments to Section 9(1)(vi) of the Income Tax Act to the DTAA.4. Jurisdiction of Indian tax authorities over extra-territorial income.5. Applicability of higher withholding tax rates under Section 206AA of the Income Tax Act.6. Liability for non-deduction of tax at source based on subsequent amendments to Section 9(1)(vi).Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment:The appeals challenge the validity of reopening assessments for the years 2013-14 to 2015-16. However, the assessee did not press these grounds. Consequently, the Tribunal dismissed these grounds for all the assessment years under consideration.2. Characterization of Interconnect Usage Charges (IUC) as 'Royalty':The primary issue was whether the IUC received by the assessee, a Japanese tax resident, from Indian telecom operators, constitutes 'Royalty' under the Income Tax Act and the India-Japan DTAA. The Tribunal noted that the revenue characterized the payments as 'Royalty' since they were made for the 'use of process' or 'equipment'. However, the Tribunal referred to various judicial precedents, including the Karnataka High Court's decision in Vodafone Idea Ltd., which held that such payments do not amount to 'Royalty'. It was emphasized that the term 'process' in Explanation 2 to Section 9(1)(vi) implies a process that is intellectual property. The Tribunal concluded that the IUC payments do not involve the transfer of any intellectual property rights or exclusive rights and thus cannot be classified as 'Royalty' under the DTAA.3. Applicability of Amendments to Section 9(1)(vi) of the Income Tax Act to the DTAA:The Tribunal examined whether the amendments to Section 9(1)(vi) by adding Explanations 5 and 6 would affect the definition of 'Royalty' under the DTAA. The Tribunal cited the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that such amendments do not retroactively alter the DTAA provisions. It was held that the DTAA definition of 'Royalty' would prevail over the Income Tax Act, and the amendments do not override the DTAA between India and Japan.4. Jurisdiction of Indian Tax Authorities Over Extra-Territorial Income:The Tribunal addressed whether Indian tax authorities could tax income arising from extra-territorial sources. It was noted that the non-resident telecom operators did not have any presence or permanent establishment in India. The Tribunal, following the Karnataka High Court's decision in Vodafone Idea Ltd., held that Indian tax authorities do not have jurisdiction to tax such extra-territorial income.5. Applicability of Higher Withholding Tax Rates Under Section 206AA:The Tribunal considered whether the higher withholding tax rate under Section 206AA should apply. It was noted that this issue was covered in favor of the assessee by the Karnataka High Court in the case of Wipro. Consequently, the Tribunal ruled against the revenue on this issue.6. Liability for Non-Deduction of Tax at Source Based on Subsequent Amendments:The Tribunal examined whether the assessee could be held liable for non-deduction of tax at source for payments made before the amendments to Section 9(1)(vi). It was held that the assessee could not be expected to apply the expanded definition of 'Royalty' retrospectively. The Tribunal, following the Supreme Court's decision in Engineering Analysis, concluded that the assessee is not liable for non-deduction of tax at source based on subsequent amendments.Conclusion:The Tribunal held that the IUC received by the assessee cannot be taxed as 'Royalty' under the India-Japan DTAA and the Income Tax Act. The payments were instead classified as business profits, taxable in the resident country (Japan), as there was no permanent establishment in India. The Tribunal allowed the appeals on merits, dismissing the stay petitions as infructuous. The appeals were partly allowed, and the stay petitions were dismissed. The order was pronounced in the open court on 15th April 2024.