2023 (9) TMI 280 - AT - Income Tax

Income taxable in India - Characterization of payments received towards interconnectivity utility charges as Royalty - satisfy 'use or right to use' - payment is made to use the process or an equipment - scope of presence in India - various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee - HELD THAT - As in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end users / customers is not secret but a standard commercial process followed by the industry players. Therefore the said process also cannot be classified as a secret process , as is required by the definition of royalty mentioned in clause 3 of Article 13 of India-Spain DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 13 in India of India-Spain DTAA. As relying in case of Vodafone Idea Ltd. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT and Vodafone South Ltd. 2015 (1) TMI 1018 - ITAT BANGALORE and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty / FTS to be brought to tax in India under section 9(1)(vi)/(vii) of the Act and also as per DTAA. The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India. Even Hon ble High Court has held that the non-resident service providers do not have any presence in India. Decided in favour of assessee.

Summary

Issues Involved:
1. Lack of jurisdiction of AO to pass Order
2. Challenging the Re-assessment Proceedings/order u/s 147
3. Main Grounds - Taxability of inter-connect charges u/s 9(1)(vi) & (vii) of the Act (as 'royalty' and 'fees for technical services') and under Article 13 of India-Spain DTAA
4. Interest under section 234A, 234B & 234C
5. General grounds

Summary:

1. Lack of Jurisdiction of AO to Pass Order:
The assessee did not press this issue for AY 2010-11 and AY 2011-12.

2. Challenging the Re-assessment Proceedings/order u/s 147:
This issue was not pressed by the assessee for AY 2010-11, AY 2011-12, and AY 2012-13.

3. Main Grounds - Taxability of Inter-connect Charges:
The primary issue revolved around whether the inter-connect charges (IUC) received by the assessee from Indian telecom operators could be taxed as 'royalty' or 'fees for technical services' (FTS) under Section 9(1)(vi) & (vii) of the Act and Article 13 of the India-Spain DTAA. The Tribunal held that:
- The payments received by the assessee towards interconnectivity utility charges cannot be considered as royalty or FTS to be taxed in India.
- The term "process" under Explanation 2 to Section 9(1)(vi) implies intellectual property and does not include publicly available processes.
- The insertion of Explanation 5 & 6 by the Finance Act, 2012, which expanded the definition of 'process', does not affect the definition of 'royalty' under the DTAA.
- The Tribunal referred to several decisions, including the Karnataka High Court's ruling in Vodafone South Ltd., which supported the assessee's stance.
- The Tribunal concluded that the IUC charges are business profits of the assessee, taxable in the resident country (Spain) and not in India, as there is no permanent establishment of the assessee in India.

4. Interest under Section 234A, 234B & 234C:
The Tribunal noted that the interest computed under these sections is consequential to the main issue on merits and thus did not require separate adjudication.

5. General Grounds:
The general grounds raised in the appeals were considered non-substantial and did not require adjudication.

Conclusion:
The appeals filed by the assessee were partly allowed, with the main issue regarding the taxability of inter-connect charges decided in favor of the assessee, and the other grounds either dismissed as not pressed or deemed consequential.

Order pronounced in the open court on 10th August, 2023.