2024 (5) TMI 909 - AT - Income Tax

Income deemed to accrue or arise in India - revenue characterization - Taxability of IUC Interconnect utility charges as Royalty u/s 9(1)(vi) - DTAA between India and Hongkong was come into effect later - whether 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 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. Thus as following the decision of Vodafone Idea Ltd. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT we hold that the payments received by the assessee cannot be held to be royalty under section 9(1)(vi) of the Act. Further the revenue has not made out a case that there is a permanent establishment of assessee in India in order to tax the receipt by assessee in India as it is arising from extra territorial sources. Accordingly, in our opinion, the payments received by assessee amounts to be business profits of the assessee which is taxable in the recipient country. Decided in favour of assessee.

Issues Involved:
1. Reopening of the assessment.
2. Characterization of Interconnect Utility Charges (IUC) as royalty u/s 9(1)(vi) of the Income Tax Act.

Summary:

Issue 1: Reopening of the Assessment

The Ld.AR submitted that Ground nos. 1-2 for A.Y. 2014-15 and Ground no. 1 for A.Y. 2017-18 challenge the reopening of the assessment. However, as the issue on merit is in favor of assessee by various decisions of this Tribunal, assessee did not wish to press the legal issue raised in these grounds. Accordingly, ground nos. 1-2 for A.Y. 2014-15 and ground no. 1 for A.Y. 2017-18 stands dismissed as not pressed.

Issue 2: Characterization of IUC as Royalty u/s 9(1)(vi)

The Ld.AR submitted that Ground nos. 3-4 for A.Y. 2014-15 and Ground nos. 2-3 for A.Y. 2017-18 are on the single issue of payment received towards IUC held as royalty in the hands of the assessee u/s. 9(1)(vi) of the act.

4.1 Assessee is a non-resident company registered in Hongkong. It had received payment of Rs. 20,19,231/- for A.Y. 2014-15 and Rs. 36,97,710/- for A.Y. 2017-18 from M/s. Vodafone South Ltd., an Indian entity during the relevant assessment years. The Ld.AO was of the opinion that the assessee's income was chargeable to tax in India as the deductor did not deduct TDS under the provisions of section 191 of the act that would fasten to assessee. The Ld.AO reopened the assessment by issuing notice u/s. 148 of the act for the years under consideration in the case of assessee. Various details were called for and the objections of the assessee were dealt with.

4.2 The assessment was passed u/s. 147 of the act by holding the income received by assessee from the Indian company as royalty u/s. 9(1)(vi) of the act r.w. Explanation 2 and 6.

4.3 Against the draft assessment order, the assessee filed the objections before the DRP. The DRP upheld the view of the Ld.AO by relying on the decision of Hon'ble Madras High Court in case of M/s. Verizon Communications reported in 361 ITR 275. The Ld.DRP thus upheld that the receipt by the non-resident assessee from the Indian customer in lieu of bandwidth services provided, were to be treated as royalty within the meaning of clause (iii) to Explanation 2 to section 9(1)(vi) of the Act.

4.4 On receipt of the DRP directions, the Ld.AO for both the assessment years under consideration made addition in the hands of the assessee in respect of payment received from against the IUC charges as Royalty u/s. 9(1)(vi) of the Act.

5. The Ld.AR submitted that though there was no DTAA between India and Hongkong for the relevant AYs under consideration, the payment received from Indian customers cannot be taxed in India u/s. 9(1)(vi) Explanation 2 or to that extent Explanation 5 and 6 of the Act. He cited the case of Vodafone Idea Ltd. vs. DDIT reported in (2023) 152 taxmann.com 575 where the Hon'ble Jurisdictional High Court held that the amendments made in the Act cannot be incorporated while construing the scope of the definition of the term 'royalty' in the relevant Article of the DTAA.

6. The Ld.AR further referred to the decision of Coordinate Bench of this Tribunal in the case of HCG Global Communications vs. DCIT reported in (2024) 158 taxmann.com 633 and M/s. PCCW Global Ltd. vs. ACIT in IT(IT)A No. 785/Bang/2022, where it was held that interconnect utility charges cannot be taxed as royalty in India u/s. 9(1)(vi) of the Act in the hands of the non-resident assessee.

8.1 The revenue characterized the payments received by assessee towards interconnectivity utility charges as Royalty under the Act, since the payment is made to "use the process" or "an equipment".

8.2 It is an admitted fact that, service provider in India entered into agreement with assessee for international carriage and connectivity services, against which, an interconnectivity charges were received by the assessee. The term "Process" that occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi) means a "process" which is an item of intellectual property.

8.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipient for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) of the Act cannot be invoked.

8.2.8 By Finance Act, 2012, Explanation 5 & 6 were added with retrospective effect from 1.6.1976. The word 'Process' has been widened but it does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party.

9. Hon'ble Karnataka High Court in case of Vodafone Idea Ltd. (supra) has already answered question of law no. 3 in favour of assessee by holding that payment to NTOs for providing interconnect services and transfer of capacity in foreign countries cannot be charged as royalty as there is no "use" or "right to use" process or equipment as alleged by the revenue.

10. 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. 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.

11. Based on the above discussion and respectfully following the decision of Hon'ble Karnataka High Court in case of Vodafone Idea Ltd. (supra), we hold that the payments received by the assessee cannot be held to be royalty under section 9(1)(vi) of the Act. Accordingly, ground nos. 3-4 for A.Y. 2014-15 and ground nos. 2-3 for A.Y. 2017-18 stands allowed.

In the result, both the appeals filed by the assessee for both the years under consideration stands partly allowed.

Order pronounced in the open court on 25th April, 2024.

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