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2023 (9) TMI 257 - AT - Income TaxIncome deemed to accrue or arise in India - Foreign income taxable in India - taxability of payments received by assessee for provision of bandwidth capacity and for provision for interconnect services as royalty u/s. 9(1)(vi) - network / international long distance gateway - payments received by assessee from the Indian telecom operators - Assessee is a non-resident company having headquarters at Singapore providing services in the field of telecommunication outside India and provides ci2ci, sea-bone and wholesale voice interconnect for voice carriers to various companies - 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 term process used under Explanation 2 to section 9(1)(vi) in the definition of 'royalty' does not imply any 'process' which is publicly available. The term process occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a process which is an item of intellectual property. 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. 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. 9.2.15 We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of Royalty under India Singapore DTAA. The definition of Royalty under the DTAA is much more narrower in its scope and coverage, than the definition of Royalty contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act. 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 12 of India-Singapore 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- Singapore DTAA. The above observations are supported by the view expressed by Hon ble Karnataka High Court in case of Vodafone Idea Ltd. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT observed that the equipments and submarine cables are situated overseas and that Vodafone Idea Ltd. had availed certain services from the non-resident telecom operators and that such agreements would not create a permanent establishment of such non-resident telecom operators in India. Thus 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 u/s 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. Even Hon ble High Court has in para 25, held that the non-resident service providers do not have any presence in India. Decided in favour of assessee.
Issues Involved:
1. Taxability of payments received for provision of bandwidth capacity and interconnect services as royalty under Section 9(1)(vi) of the Income Tax Act. 2. Legality of reopening of assessment under Section 148 based on proceedings under Section 201(1) in the case of Vodafone South Ltd. 3. Applicability of Double Taxation Avoidance Agreement (DTAA) over the Income Tax Act. Summary: Issue 1: Taxability of Payments as Royalty The core issue in the appeals was whether payments received by the assessee, a non-resident company based in Singapore, for providing bandwidth capacity and interconnect services to Indian telecom operators, including Vodafone South Ltd., should be classified as royalty under Section 9(1)(vi) of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had treated these payments as royalty, relying on the decision of the Coordinate Bench in Vodafone South Ltd. vs. DIT. The CIT(A) upheld the AO's view that payments were for the use of or the right to use any copyright, secret formula, process, or equipment, thus qualifying as royalty. Issue 2: Reopening of Assessment The assessments for the years under consideration were reopened under Section 148 of the Income Tax Act based on proceedings under Section 201(1) in the case of Vodafone South Ltd. The assessee challenged the reopening of assessments on legal grounds, but these issues were not pressed during the appeal. Issue 3: Applicability of DTAA The assessee argued that the Double Taxation Avoidance Agreement (DTAA) between India and Singapore should prevail over the Income Tax Act, and that the payments received did not qualify as royalty under the DTAA. The Karnataka High Court in Vodafone Idea Ltd. vs. DDIT had ruled in favor of the assessee, stating that the payments for interconnectivity utility charges (IUC) did not amount to royalty. The Tribunal agreed, noting that the term "process" under Explanation 2 to Section 9(1)(vi) refers to intellectual property, which was not applicable in this case. The Tribunal also highlighted that the process involved was not "secret" and that the assessee did not transfer any intellectual property rights to the service recipients. Conclusion: The Tribunal concluded that the payments received by the assessee for interconnectivity utility charges could not be taxed as royalty under Section 9(1)(vi) of the Income Tax Act or the DTAA. The payments were considered business profits taxable in the resident country (Singapore) and not in India, as there was no permanent establishment of the assessee in India. The appeals were partly allowed in favor of the assessee. Order Pronouncement: The order was pronounced in the open court on 31st August 2023.
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