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2024 (6) TMI 804 - AT - Income TaxTDS / Withholding Tax u/s 195 - Characterization of interconnect utility charges (IUC) as Royalty under the Income Tax Act and India-Japan DTAA - AR submitted that there is no use of process or any use of equipment hence the entire assumption of process royalty / equipment royalty does not arise in the case of the assessee - HELD THAT - We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty since the payment is made to use the process or an equipment . It is an admitted fact that 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. The words which surround the word process in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi) refer to various species of intellectual properties such as patent invention model design formula trade mark etc. The expression similar property used at the end of the list further fortifies the stand that the terms patent invention model design secret formula or process or trade mark are to be understood as belonging to the same class of properties viz. intellectual property. We also note that Intellectual property as understood in common parlance means Knowledge creative ideas or expressions of human mind that have commercial value and are protectable under copyright patent service mark trademark or trade secret laws from imitation infringement and dilution. Intellectual property includes brand names discoveries formulas inventions knowledge registered designs software and works of artistic literary or musical nature. Thus the word process thus must also refer to specie of intellectual property applying the rule of ejusdem generis or noscitur a sociis as held by Hon ble Supreme Court in case of CIT vs. Bharti Cellular 2010 (8) TMI 332 - SUPREME COURT 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 recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoked. By insertion of Explanation 5 6 meaning of word Process has been widened. As per these explanations the word Process need not be secret and situs of control possession of right property or information has been rendered to be irrelevant. However in our opinion all these changes in the Act do not affect the definition of Royalty as per DTAA. The word employed in DTAA is use or right to use in contradistinction to transfer of all or any rights or use of in the domestic law. As per Explanation 5 6 the word process includes and shall be deemed to included transmission by satellite (including up- linking amplification conversion for down-linking of any signal) cable optic fibre or by any other similar technology whether or not such process is secret. However the Explanation 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. Similar issue came up before Hon ble Delhi Tribunal in case of Bharti Airtel 2016 (3) TMI 680 - ITAT DELHI The issue considered therein was in respect of payment towards call interconnectivity charged for call transmission on foreign network. The Tribunal therein on applying ratios pronounced in the above referred decisions held it not as Royalty . Therefore in our opinion the Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of Royalty under section 9(1)(vi) Explanation 5 6. We also note that 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 12 of India-Japan DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 12 in India of India- Japan DTAA. Respectfully following the above view in case of Vodafone Idea Ltd . ( 2019 (12) TMI 206 - 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 to be brought to tax in India under section 9(1)(vi) 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. Decided in favour of assessee.
Issues Involved:
1. Validity of reopening of assessment. 2. Characterization of Interconnect Usage Charges (IUC) as 'Royalty' under the Income Tax Act and the India-Japan DTAA. 3. Applicability of amendments to Section 9(1)(vi) of the Income Tax Act to the DTAA. 4. Jurisdiction of Indian tax authorities over extra-territorial income. 5. Applicability of higher withholding tax rates under Section 206AA of the Income Tax Act. 6. Liability for non-deduction of tax at source based on subsequent amendments to Section 9(1)(vi). Issue-wise Detailed Analysis: 1. Validity of Reopening of Assessment: The appeals challenge the validity of reopening assessments for the years 2013-14 to 2015-16. However, the assessee did not press these grounds. Consequently, the Tribunal dismissed these grounds for all the assessment years under consideration. 2. Characterization of Interconnect Usage Charges (IUC) as 'Royalty': The primary issue was whether the IUC received by the assessee, a Japanese tax resident, from Indian telecom operators, constitutes 'Royalty' under the Income Tax Act and the India-Japan DTAA. The Tribunal noted that the revenue characterized the payments as 'Royalty' since they were made for the "use of process" or "equipment". However, the Tribunal referred to various judicial precedents, including the Karnataka High Court's decision in Vodafone Idea Ltd., which held that such payments do not amount to 'Royalty'. It was emphasized that the term 'process' in Explanation 2 to Section 9(1)(vi) implies a process that is intellectual property. The Tribunal concluded that the IUC payments do not involve the transfer of any intellectual property rights or exclusive rights and thus cannot be classified as 'Royalty' under the DTAA. 3. Applicability of Amendments to Section 9(1)(vi) of the Income Tax Act to the DTAA: The Tribunal examined whether the amendments to Section 9(1)(vi) by adding Explanations 5 and 6 would affect the definition of 'Royalty' under the DTAA. The Tribunal cited the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that such amendments do not retroactively alter the DTAA provisions. It was held that the DTAA definition of 'Royalty' would prevail over the Income Tax Act, and the amendments do not override the DTAA between India and Japan. 4. Jurisdiction of Indian Tax Authorities Over Extra-Territorial Income: The Tribunal addressed whether Indian tax authorities could tax income arising from extra-territorial sources. It was noted that the non-resident telecom operators did not have any presence or permanent establishment in India. The Tribunal, following the Karnataka High Court's decision in Vodafone Idea Ltd., held that Indian tax authorities do not have jurisdiction to tax such extra-territorial income. 5. Applicability of Higher Withholding Tax Rates Under Section 206AA: The Tribunal considered whether the higher withholding tax rate under Section 206AA should apply. It was noted that this issue was covered in favor of the assessee by the Karnataka High Court in the case of Wipro. Consequently, the Tribunal ruled against the revenue on this issue. 6. Liability for Non-Deduction of Tax at Source Based on Subsequent Amendments: The Tribunal examined whether the assessee could be held liable for non-deduction of tax at source for payments made before the amendments to Section 9(1)(vi). It was held that the assessee could not be expected to apply the expanded definition of 'Royalty' retrospectively. The Tribunal, following the Supreme Court's decision in Engineering Analysis, concluded that the assessee is not liable for non-deduction of tax at source based on subsequent amendments. Conclusion: The Tribunal held that the IUC received by the assessee cannot be taxed as 'Royalty' under the India-Japan DTAA and the Income Tax Act. The payments were instead classified as business profits, taxable in the resident country (Japan), as there was no permanent establishment in India. The Tribunal allowed the appeals on merits, dismissing the stay petitions as infructuous. The appeals were partly allowed, and the stay petitions were dismissed. The order was pronounced in the open court on 15th April 2024.
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