2023 (12) TMI 206 - AT - Income Tax

Income taxable in India - Taxability of the receipts as Royalty - HELD THAT - The Bangalore Bench of the Tribunal in the case of Telefonica De Espana S. A, 2023 (9) TMI 280 - ITAT BANGALORE had decided all the issues raised on merits in favour of the assessee i.e., with regard to taxability as royalty/FTS and alternatively under section 5(2) of the Act. The Bangalore Bench of the Tribunal had followed its earlier order in the case of Telefonica De Espana S. A 2023 (8) TMI 1375 - ITAT BANGALORE as well as the judgment of the Hon ble jurisdictional High Court in the case of VSL, 2016 (8) TMI 422 - KARNATAKA HIGH COURT wherein held Revenue authorities have erred in construing that the income has accrued or arisen in India. The situs of the source of income in respect of payment received by a non resident i.e. NTOs would be the place where the non resident carries on its business and perform the business activities pursuant to which it received income. Once the situs is outside India, then in order to determine whether the payments made by a resident of India to a non resident involves element of income is to be examined u/s 9 and in the present case, the Assessing Officer has examined the applicability of section 9(1) (vi) 9(1)(vii) i.e. the payments involve royalty as well as fee for technical services. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of receipts as "Royalty."
2. Taxability of receipts as Fees for Technical Services (FTS).
3. Taxability of receipts under Section 5(2) of the Income Tax Act.

Summary:

Issue 1: Taxability of Receipts as "Royalty"

The assessee, a foreign company providing international telecommunications services, received payments from Indian telecom operators. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) categorized these receipts as "Royalty" under Section 9(1)(vi) of the Income Tax Act and the India-UK Double Taxation Avoidance Agreement (DTAA). The assessee argued that these services do not involve the transfer of any rights in equipment or processes and are standard telecom services without active human intervention. The Tribunal, citing previous judgments and orders, held that the receipts do not qualify as "Royalty" under the Act or the DTAA. The Tribunal emphasized that the services provided do not grant the right to use any equipment or process and are not technical in nature.

Issue 2: Taxability of Receipts as Fees for Technical Services (FTS)

The AO alternatively categorized the receipts as FTS for certain assessment years. The assessee contended that the services provided do not qualify as managerial, technical, or consultancy services under Explanation 2 to Section 9(1)(vii) of the Act. The Tribunal agreed, stating that the services do not involve active human intervention or specialized skills and are standardized telecom services. Under the DTAA, the Tribunal noted that the services do not "make available" technical knowledge, experience, skill, or processes to the customers, thereby not qualifying as FTS.

Issue 3: Taxability of Receipts under Section 5(2) of the Act

The AO also argued that the receipts are taxable under Section 5(2) of the Act as income arising or accruing in India. The assessee countered that all services were rendered outside India, and hence, the income does not accrue in India. The Tribunal upheld this view, relying on judicial precedents that income accrues where the services are rendered. Since the assessee provided services from outside India without any presence in India, the income does not accrue or arise in India.

Conclusion:

The Tribunal concluded that the receipts from rendering telecommunication services are not taxable as "Royalty" or FTS under the Act or the DTAA. Consequently, the appeals filed by the assessee were partly allowed, and the grounds relating to the reopening of assessment were left open.