2024 (11) TMI 361 - AT - Income Tax

Taxability of interconnectivity usage charges received by the assessee from Vodafone, an Indian entity - Receipts can be considered as FTS or alternatively as other income - DRP recharacterized the interconnectivity usage charges as FTS both under the domestic law as well as the treaty provisions - HELD THAT - If we proceed to analyze the nature of services provided by the assessee to the Indian entity, it can be seen that such services were provided without any human intervention at any stage. The roaming services and termination of international voice traffic services were provided by the assessee using its own system located outside Indian and the entire process of providing such services is fully automated without any human element involved therein. DRP has acknowledged the fact that the interconnectivity usage involves high degree of machines powered by sophisticated software. Thus, the facts on record clearly indicate that the assessee has provided the services to the Indian entity through a standard facility and system set up by it, which is fully automated. In case of CIT Vs. Bhari Cellular Limited 2008 (10) TMI 321 - DELHI HIGH COURT while deciding identical nature of dispute has held that the expression technical services as used in Explanation 2 to section 9(1)(vii) takes colour from the expression managerial and consultancy services , which necessarily involve a human element or human interface. The Hon ble Court proceeded further to hold that the interconnect/port access facility is only a facility to use the gateway and the network of service provider. Hence, such service provider does not provide any assistance or aid or help to the service recipient in managing, operating and setting up their infrastructure and network. While interpreting the expression technical services it cannot be construed in the abstract and general sense but in the narrower sense as circumscribed by the expression managerial service and consultancy service as appearing in Explanation 2 to section 9(1)(vii) of the Act, which requires rendition of service through human interface. Thus, we hold that the receipts towards interconnectivity usage charges cannot be treated as FTS. Whether the receipts can be treated as other income under section 56 of the Act and under Article 24 of India Oman DTAA? - The departmental authorities themselves were not sure regarding the true nature and character of the receipts. Merely, because a particular item of income cannot be treated as royalty or FTS, as such, receipts may not fit into the definition of royalty/FTS provided under the Treaty, that by itself would not make it taxable under the residual clause of the treaty. It needs to be seen, whether such income can come within the ambit of any other Article preceding Article 24 of the Treaty. Undisputedly, the roaming and termination of international voice traffic services were provided by the assessee in course of its regular business activities. Hence, it cannot be said that provision of such facility is not connected to assessee s business activity. That being the factual position on record, the interconnectivity usage charges have to be treated as business income, hence covered under Article 7 of India Oman DTAA. However, since, the assessee did not have any Permanent Establishment (PE) in India, the business profit has to be taxed in the country of residence in Oman. Merely, because the income is not taxable in India under a particular head due to beneficial provisions under the Treaty, it cannot automatically lose its character, as in the present case, and made taxable as other income. Thus, interconnectivity usage charges received by the assessee are not taxable in India, either as FTS or as other income. Assessee appeal allowed.

Summary

Issues Involved:

1. Taxability of interconnectivity usage charges as Fee for Technical Services (FTS).
2. Alternative characterization of interconnectivity usage charges as other income under section 56 of the Income-tax Act and Article 24 of the India-Oman DTAA.

Detailed Analysis:

1. Taxability of Interconnectivity Usage Charges as Fee for Technical Services (FTS):

The primary issue in the appeal was whether the interconnectivity usage charges received by the assessee from an Indian entity could be classified as Fee for Technical Services (FTS) under the Income-tax Act and the India-Oman Double Taxation Avoidance Agreement (DTAA). The assessee, a non-resident corporate entity incorporated in Oman, provided roaming and termination of international voice traffic services to an Indian corporate entity. The Assessing Officer initially treated these receipts as royalty income, but the Dispute Resolution Panel (DRP) recharacterized them as FTS, citing Explanation 2 to section 9(1)(vii) of the Act, which defines FTS as services involving managerial, technical, or consultancy elements.

The assessee argued that the services were fully automated and did not involve any human intervention, thus not qualifying as FTS. The Delhi High Court in CIT v. Bharti Cellular Ltd. and the Karnataka High Court in CIT v. Vodafone South Ltd. had previously ruled that technical services require a human element, which was absent in the automated interconnectivity services provided by the assessee. The Tribunal agreed with the assessee, noting that the services were automated and involved no human interface, thus not meeting the criteria for FTS as defined in the Act or the DTAA.

2. Alternative Characterization as Other Income:

The DRP alternatively suggested that if the receipts could not be treated as FTS, they should be taxed as other income under section 56 of the Act and Article 24 of the India-Oman DTAA. The Tribunal examined whether the receipts could be classified under any other head of income before defaulting to the residual category of other income. It was noted that the interconnectivity services were part of the assessee's regular business activities, indicating that the income was business-related.

The Tribunal concluded that the interconnectivity usage charges should be treated as business income under Article 7 of the DTAA. Since the assessee did not have a Permanent Establishment (PE) in India, the business profits were taxable in Oman, the country of residence. The Tribunal emphasized that the income's character as business income could not be altered simply because it was not taxable in India under a particular head due to treaty provisions.

In conclusion, the Tribunal held that the interconnectivity usage charges were not taxable in India as FTS or as other income, allowing the appeal on these grounds. The decision was supported by judicial precedents that underscored the necessity of a human element for services to qualify as technical under the relevant tax provisions. The appeal was partly allowed, and the stay application was dismissed as infructuous.