2023 (11) TMI 1239 - AT - Income Tax

Income deemed to be agreed or arising in India - Revenue Characterization - FTS or Royalty or business income - payments received by assessee towards interconnectivity utility charges treated as Royalty since the payment is made to use the process or an equipment - HELD THAT - Admittedly there is no treaty between India and Hong Kong, the country of which the assessee is a tax resident. Therefore the payment received by assessee has to be analysed under the Income Tax Act alone. We note that the decision relied by the Ld.AR in the following cases has analysed the taxability of the identical payment received by the assessee therein for similar services, under the provisions of Income Tax Act, having regards to section 9(1)(vi); Explanation 2, 5 and 6 also. And this Tribunal has held that payments made by an Indian telecom company for identical services, as rendered by the present assessee will not fall within the ambit of Royalty under section 9(1)(vi), Explanation 2,5 and 6. As per the decision of case of Vodafone Idea Ltd. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT we hold that the receipts in the hands of the assessee could be taxed as business profits as per the applicable laws of Hong Kong and cannot be brought to tax either as FTS or Royalty under the Income Tax Act in India. Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of payment received by the non-resident telecom operator from an Indian entity as royalty.
2. Applicability of section 9(1)(vi) of the Income Tax Act.
3. Relevance of judicial precedents in determining the nature of interconnect utility charges.

Summary:

1. Taxability of Payment as Royalty:
The primary issue was whether the payment received by the non-resident telecom operator from Vodafone South Ltd. should be treated as royalty. The Assessing Officer (AO) deemed the payment taxable as royalty under section 9(1)(vi) of the Income Tax Act, 1961, for the usage of a process provided by the assessee. The Dispute Resolution Panel (DRP) upheld this view, relying on a previous tribunal decision involving Vodafone South Ltd.

2. Applicability of Section 9(1)(vi) of the Income Tax Act:
The Tribunal referenced the Karnataka High Court decision in Vodafone Idea Ltd. vs. DCIT, which clarified that payments to non-resident telecom operators for interconnect services and transfer of capacity in foreign countries are not taxable as royalty under the Income Tax Act, 1961. The Tribunal noted that the term "process" in Explanation 2, 5, and 6 of section 9(1)(vi) does not apply to publicly available processes but refers to intellectual property.

3. Judicial Precedents:
The Tribunal cited several judicial precedents, including decisions from the Karnataka High Court and other tribunal cases, which consistently held that interconnectivity charges are not taxable as royalty. The Tribunal emphasized that there was no transfer of intellectual property rights or exclusive rights to the service recipients, and the payments should be considered business profits taxable in the resident country of the assessee, not in India.

Conclusion:
The Tribunal concluded that the receipts in the hands of the assessee should be taxed as business profits under the applicable laws of Hong Kong and cannot be brought to tax as royalty or Fees for Technical Services (FTS) under the Income Tax Act in India. The appeal by the assessee was partly allowed, with grounds related to the royalty issue being upheld in favor of the assessee. The order was pronounced on 08th November 2023.