2025 (5) TMI 129 - HC - Income Tax

Telecom Bandwidth Payments Not Royalties: Service Charges Clarified Under Income Tax Act Section 9(1)(vi)

Legal Case Summary:SC ruled on tax treatment of bandwidth service payments to overseas telecom providers. The court held that such payments do not ... Income deemed to accrue or arise in India - bandwidth charges paid to overseas telecom service providers - FTS or royalty - Scope of clear definition of 'process' in Explanation to introduced by the Finance Act, 2012 - Whether the beneficial provision of the DTAA override retrospective amendments in domestic tax law, particularly when such amendments are clarificatory in nature and aim to bring clearly to the taxation of 'process' and 'equipment' under section 9 (1) (vi) of the Income Tax Act, 1961 ? HELD THAT:- Undisputedly, the questions raised are covered by the earlier decisions of this court in New Skies Satellite BV [2016 (2) TMI 415 - DELHI HIGH COURT] and Telstra Singapore Pte. Ltd. [2024 (7) TMI 1340 - DELHI HIGH COURT] Thus, the charges paid for bandwidth to overseas telecom service providers cannot be construed as royalty in the meaning of Section 9(1)(vi) of the Act. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether payments for bandwidth services to overseas telecom service providers qualify as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961. 2. Whether treaty (DTAA) provisions can override or preclude application of retrospective/clarificatory amendments to domestic tax law concerning the taxation of 'process' and 'equipment' for purposes of Section 9(1)(vi). 3. Whether prior decisions treating bandwidth payments as royalty (specifically the decision identified from the Madras High Court) remain binding on the present question, and whether the ITAT correctly applied the principle of substance over form in characterising such payments. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of bandwidth payments as 'royalty' under Section 9(1)(vi) Legal framework: Section 9(1)(vi) taxes income deemed to accrue or arise in India by way of royalty; the Act (as amended and with explanations introduced by Finance Act, 2012) contains definitions/references to 'process' and related concepts relevant to royalty characterisation. Precedent treatment: Earlier decisions of this Court (identified as New Skies Satellite BV and Telstra Singapore Pte. Ltd.) have considered and held that charges paid for bandwidth to overseas telecom providers do not constitute 'royalty' under Section 9(1)(vi). Interpretation and reasoning: The Court notes that the present appeal is confined to the royalty question and observes that the earlier binding decisions squarely cover the legal issue - namely, that bandwidth charges paid to foreign telecom service providers cannot be construed as royalty within the meaning of Section 9(1)(vi). The Court treats those decisions as directly applicable to the facts and statutory construction in the present appeals and therefore concludes that the AO's characterization of such payments as royalty was incorrect. Ratio vs. Obiter: The holding that bandwidth charges are not royalty is applied as ratio: the Court follows prior authoritative rulings on identical legal question and adopts that principle as binding for the present appeal. Any discussion of other factual charges (e.g., fees for technical services, annual maintenance) not necessary to the royalty issue is ancillary/obiter in the context of this decision. Conclusions: Payments for bandwidth services to overseas telecom providers do not qualify as 'royalty' under Section 9(1)(vi) of the Act; accordingly, there is no basis to treat the payer as an assessee in default for failure to deduct tax on that basis in respect of such payments. Issue 2: Effect of DTAA and retrospective/clarificatory domestic amendments Legal framework: Interaction between domestic tax law amendments (including clarificatory explanations introduced by Finance Act, 2012) and treaty obligations under the relevant DTAA; principle that treaty provisions may affect characterisation of income for taxability subject to domestic law and judicial interpretation. Precedent treatment: The Court refers to its prior rulings (New Skies Satellite BV and Telstra Singapore Pte. Ltd.) which addressed the interplay between domestic law amendments/explanations and DTAA/taxability of bandwidth charges and concluded that the payments were not royalty notwithstanding such amendments. Interpretation and reasoning: The Court observes that the Revenue's challenge framed questions about whether DTAA benefits override retrospective or clarificatory domestic amendments, but finds that those questions are answered by the earlier decisions which have already considered and rejected the contention that such bandwidth payments are taxable as royalty even in light of the 2012 explanatory amendment. The Court therefore treats the prior reasoning as resolving any asserted conflict between treaty protections and the domestic clarificatory measures for the specific issue of bandwidth payments. Ratio vs. Obiter: The determination that DTAA provisions do not yield a different outcome for the specific question (bandwidth payments) is applied as ratio insofar as it follows and applies prior controlling authority. Broader propositions about DTAA versus domestic amendments beyond the present factual matrix are not necessary to the decision and therefore remain obiter. Conclusions: The beneficial provisions of the DTAA do not alter the conclusion (following earlier decisions) that payments for bandwidth services are not royalty; the retrospective/clarificatory domestic amendment does not change that outcome insofar as the matter is governed by the Court's earlier rulings. Issue 3: Application of precedent and principle of substance over form - treatment of contrary Madras High Court authority Legal framework: Principle that where there are competing precedents, the Court must apply binding authority; substance-over-form is a recognised interpretive tool to look at the real nature of arrangements and rights conferred rather than labels. Precedent treatment: The Revenue urged reliance on a decision identified from the Madras High Court (holding bandwidth payments taxable as royalty). The Court, however, expressly states that the questions raised are covered by earlier decisions of this Court (New Skies Satellite BV and Telstra Singapore Pte. Ltd.) and applies those decisions. Interpretation and reasoning: The Court treats the ITAT decision as consistent with the Court's prior treatments and holds that the ITAT did not err in declining to adopt the Madras High Court approach for the facts and law before it. The Court indicates that the ITAT's analysis did not improperly ignore substance over form; rather, on the proper interpretation of statutory language and explanations, the nature of bandwidth payments falls outside 'royalty.' Ratio vs. Obiter: The rejection of the contrary Madras High Court approach with respect to the characterization of bandwidth payments is applied as ratio in this Court's decision; any broader reconciliation of conflicting High Court authorities beyond applying binding precedent in the present appeals is obiter. Conclusions: The ITAT's ruling (followed by this Court) correctly declined to characterise bandwidth payments as royalty and did not contravene substance-over-form principles; the contrary Madras High Court decision is not followed for the purposes of these appeals. Final Disposition Because the legal question on characterization of bandwidth charges is covered by binding prior decisions of this Court, no substantial question of law arises; the Revenue's appeal is dismissed. (Delay in filing condoned as recorded.)