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2023 (11) TMI 281 - AT - Income TaxIncome taxable in India - TDS u/s 195 - non-deduction of tax at source on payments made to its Non-Resident Telecom Operators ( NTOs ) for provision of bandwidth capacity and for provision of interconnect services - default u/s. 201 - AR submitted that DTAA will prevail over the Income- Tax Act and also 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 - Characterization of payments received by assessee towards interconnectivity utility charges - 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. Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of Royalty u/s 9(1)(vi) Explanation 5 6. We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of Royalty under India Netherlands 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. On perusal of the agreement between the assessee and the end users placed at pages 228 238 of paper book, it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of royalty as contained in clause 4 of Article 12 of India- Netherlands DTAA. Also 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 4 of Article 12 of India-Netherlands DTAA. Therefore Receipt of IUC charges cannot be taxed as Royalty under Article 12(4) in India of India- Netherlands DTAA. Thus as per case of Vodafone Idea Ltd. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT 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 12(4) 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. Initiation of proceedings under section 147 based on proceedings against another entity. 2. Reassessment proceedings without following due process under section 148. 3. Classification of interconnect usage charges as 'Royalty'. 4. Levy of interest under sections 234A and 234B. 5. Initiation of penalty proceedings under section 271(1)(c). Summary: 1. Initiation of Proceedings under Section 147: The assessee contended that the initiation of proceedings under section 147 was erroneous as it was based merely on proceedings against Vodafone South Limited (VSL) under section 201, without analyzing the specific facts of the assessee's case. The tribunal dismissed these grounds as not pressed by the assessee, noting that the issues on merits were covered by the jurisdictional High Court's decision in Vodafone Idea Ltd. vs. DDIT. 2. Reassessment Proceedings under Section 148: The assessee argued that the reassessment proceedings were completed without following the due process of law under section 148, as laid down by the Supreme Court in GKN Driveshafts (India) Ltd. The tribunal noted that these grounds were not pressed by the assessee due to the High Court's decision favoring the assessee on the merits. 3. Classification of Interconnect Usage Charges as 'Royalty': The primary issue was whether the interconnect usage charges received by the assessee from VSL were taxable as 'Royalty' under the Income Tax Act and the India-Netherlands Double Taxation Avoidance Agreement (DTAA). The tribunal held that the interconnect usage charges do not qualify as 'Royalty' under the DTAA. The tribunal relied on the Karnataka High Court's decision in Vodafone Idea Ltd., which clarified that such charges do not amount to 'Royalty' and are not taxable in India. The tribunal also noted that the definition of 'Royalty' under the DTAA is narrower than under the Income Tax Act, and there was no transfer of intellectual property or exclusive rights to use any process or equipment. 4. Levy of Interest under Sections 234A and 234B: The tribunal noted that the grounds related to the levy of interest under sections 234A and 234B were consequential to the main issue on merits and did not require separate adjudication. 5. Initiation of Penalty Proceedings under Section 271(1)(c): The tribunal noted that the grounds related to the initiation of penalty proceedings under section 271(1)(c) were also consequential and did not require separate adjudication. Conclusion: The tribunal allowed the assessee's appeals on the primary issue, holding that the interconnect usage charges were not taxable as 'Royalty' in India under the DTAA. The other grounds related to procedural issues and penalty were dismissed as not pressed or consequential. The appeals were partly allowed in favor of the assessee.
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