2023 (9) TMI 1158 - AT - Income Tax

Income taxable in India - cellular roaming charges - India-UK DTAA under Article 13(3) - Royalty - Assessee is a non-resident telecommunication service provider, primarily engaged in the business of providing mobile and broadband services along with various other ancillary services such as text, media messaging, games, music, video and data connections in the United Kingdom - AO held that the amount received by Assessee is covered within the scope of process and taxable as royalty under the Act as well as India-UK DTAA - HELD THAT - Nowhere it has been elaborated by the ld. AO how the right to use process has been allowed by the assessee to VIL. It is a call connectivity services which has a standard process employed by various telecom operators around the world. In fact, VIL already possessed the process used for providing roaming services and used the same to provide services to customers in India, however, since VIL could not provide services to its customers who travelled to UK and it does not have any facility or infrastructure in UK and for this, even the arrangement with the assessee was made to provide services to its customers whenever they travel to UK. Thus, it cannot be held that the amount paid by VIL to the assessee falls within the scope and meaning of royalty u/s. 9(1)(vi). ITAT, Bangalore Bench in the case of group concern 2023 (9) TMI 280 - ITAT BANGALORE had also dealt with the Explanation 5 6 to Section 9(1)(vi) and held that this definition cannot be read in to the DTAA which were in the nature and scope and held that it does not fall within the definition of Royalty as contained in Article 13(3) of India-Spain DTAA which is also applicable to India-UK DTAA. The Tribunal has also relied heavily upon the judgment of Vodafone Idea Ltd. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT which has reversed the judgment of Vodafone South 2015 (1) TMI 1018 - ITAT BANGALORE which has been relied upon by the ld. AO. Thus, following the same reasoning, we hold that the amount received by the assessee from VIL in the form of roaming charges is not taxable. Accordingly, the same is delayed. In the result, on this ground, appeal of the assessee is treated as allowed.

Summary

Issues Involved:
1. Taxability of cellular roaming charges as "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA.
2. Validity of the final assessment orders dated 25/01/2023 and 30/01/2023.

Summary:

Issue 1: Taxability of Cellular Roaming Charges as Royalty

The primary issue in the appeals ITA No.771/Mum/2023 and ITA No.772/Mum/2023 was whether the amount of Rs. 7,45,72,450/- received by the assessee for providing cellular roaming services to Vodafone Idea Limited (VIL) is taxable as "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA.

The assessee, Telefonica UK Ltd, argued that the roaming charges received were not taxable in India as they were for services rendered outside India (in the UK). The assessee contended that the income was not "royalty" or "fees for technical services" (FTS) under the Act or the DTAA. The agreement with VIL was a service agreement where the assessee provided telecommunication services using its own network and equipment, without granting access or rights to VIL over its network or process.

The Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that the roaming charges were taxable as "royalty" under the Act and the DTAA, relying on the Madras High Court judgment in Verizon Communications Singapore Pte. Ltd. and other tribunal decisions. They argued that the insertion of Explanations 5 and 6 to Section 9(1)(vi) clarified that the term "process" included transmission by satellite, cable, optic fibre, or similar technology, and that possession or control over the process was not necessary for it to be considered "royalty."

The Tribunal, however, disagreed with the AO and DRP. It held that the roaming charges were not taxable as "royalty" because there was no transfer of rights or use of the process by VIL. The Tribunal emphasized that the process used for providing roaming services was not an item of intellectual property and that VIL did not have any right to use the process or equipment of the assessee. The Tribunal also noted that amendments to the Act could not automatically be read into the DTAA unless the DTAA itself was amended. The Tribunal relied on the Delhi High Court judgment in New Skies Satellite B.V. and the Supreme Court judgment in Engineering Analysis Centre of Excellence (P) Ltd. to support its conclusion.

Issue 2: Validity of Final Assessment Orders

The Tribunal addressed the validity of the two final assessment orders dated 25/01/2023 and 30/01/2023. The Departmental Representative clarified that the order dated 25/01/2023 should be considered valid, and the order dated 30/01/2023 should be ignored. Consequently, the Tribunal dismissed the appeal against the order dated 30/01/2023 as academic.

Conclusion:

The Tribunal allowed the appeal in ITA No.771/Mum/2023, holding that the roaming charges received by the assessee were not taxable as "royalty" under the Income Tax Act or the India-UK DTAA. The appeal in ITA No.772/Mum/2023 was dismissed as academic. Other grounds raised by the assessee were treated as not pressed.