2024 (3) TMI 1062 - AT - Income Tax

Income deemed to accrue or arise in India - payment made for providing interconnect services - consideration paid towards IUC charges treated under the ambit of royalty - benefit under DTAA - requirement of direct control or physical possession over a right or property or information - whether the IUC charges received by the assessee is in the nature of royalty under the Act and India-Sri Lanka DTAA? - assessee s contention that the interconnect service does not permit the use of or transfer of right to use any of assessee s patent, model, design, secret formula or process or trade mark, etc. which are exclusively in possession or control of the assessee, also there is also no use of equipment of the assessee by VSL and does not involve any ancillary services pertaining to the use or transfer of right to use of a process/equipment HELD THAT - It is pertinent to note that the Hon ble Karantaka High Court in the case of Vodafone South Ltd. 2016 (8) TMI 422 - KARNATAKA HIGH COURT to whom the assessee has received the IUC charges has held that the assessee is entitled to take benefit under DTAA and that the amendment to provision of section 9(1)(vi) inserting the Explanation cannot be read into the provisions of DTAA by relying on the decision of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. 2021 (3) TMI 138 - SUPREME COURT . It is also pertinent to point out that the lower authorities have relied on the decision of the Tribunal in the case of Vodafone South Ltd 2015 (1) TMI 1018 - ITAT BANGALORE which has now been reversed by the Hon'ble High Court 2016 (8) TMI 422 - KARNATAKA HIGH COURT thereby holding that the order of the lower authorities to be perversed. We would also place reliance on the decision relied upon by the assessee in the case of New Skies Satellite BV 2016 (2) TMI 415 - DELHI HIGH COURT whereas held that the provision of the DTAA cannot be altered unless by way of amendment through bilateral renegotiation after duly considering the decision of Hon ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. 2013 (11) TMI 1058 - MADRAS HIGH COURT relied upon by the Revenue. It has also held that the amendment or change in a domestic law cannot result in change in the provision of DTAA unless specific amendment is brought about in DTAA. Apart from the grounds of applicability of amendment to section 9(1)(via) and the DTAA between India-Sri Lanka It is observed that the Delhi Tribunal in the case of Bharti Airtel Ltd 2016 (3) TMI 680 - ITAT DELHI and Bharat Sanchar Nigam Ltd 2017 (10) TMI 1093 - ITAT DELHI has held that the payment made towards interconnect usage charges to foreign telecom operators does not accrue or arise in India and in the absence of any permanent establishment in India could not be brought to tax in India under Article 7 of DTAA. - Decided in favour of assessee.

Summary

Issues involved:

1. Whether the Interconnect Usage Charges (IUC) received by the assessee are taxable as 'royalty' under the Income Tax Act and the India-Sri Lanka Double Taxation Avoidance Agreement (DTAA).
2. Whether the amendments to Section 9(1)(vi) of the Income Tax Act, specifically Explanations 5 and 6, can be applied to the provisions of the DTAA.
3. Whether the assessee is entitled to the benefits under the DTAA over the provisions of the Income Tax Act.

Issue 1: Taxability of IUC as 'Royalty'

The assessee, a non-resident telecommunication operator, received Rs. 4,16,80,240/- from Vodafone South Limited (VSL) for providing international carriage and connectivity services. The Assessing Officer (A.O.) reopened the assessment under Section 147 of the Income Tax Act, treating the IUC charges as 'royalty' taxable in India. The Dispute Resolution Panel (DRP) upheld this view, leading to the final assessment order confirming the addition of IUC charges to the assessee's total income as 'royalty'.

Issue 2: Applicability of Amendments to Section 9(1)(vi) to DTAA

The assessee contended that the IUC charges do not fall under the definition of 'royalty' as per the DTAA between India and Sri Lanka, arguing that the amendments to Section 9(1)(vi) of the Act (Explanations 5 and 6) should not be read into the DTAA. The A.O. and DRP, however, relied on these explanations, which expand the definition of 'royalty' to include consideration for the use of any process, including transmission by satellite, cable, optic fiber, or any similar technology.

Issue 3: Benefits under DTAA

The assessee argued that the provisions of the DTAA should prevail over the Income Tax Act as per Section 90(2), which states that the provisions of the Act shall apply to the extent they are more beneficial to the assessee. The Tribunal noted that the Karnataka High Court in the case of Vodafone Idea Limited held that the provisions of the Income Tax Act, including the expanded definition of 'royalty', cannot override the DTAA unless specifically amended. The Tribunal also referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence (P.) Ltd., which supports the view that retrospective amendments to domestic law cannot alter the provisions of the DTAA.

Conclusion

The Tribunal concluded that the IUC charges received by the assessee do not qualify as 'royalty' under the DTAA between India and Sri Lanka. Consequently, the assessee is entitled to the benefits under the DTAA, and the amendments to Section 9(1)(vi) of the Income Tax Act cannot be applied to the DTAA provisions. The appeal filed by the assessee was allowed, and the addition made by the A.O. was deleted.