2023 (12) TMI 1122 - AT - Income Tax

Income taxable in India - interconnectivity utility charges (IUC) received by the assessee as Royalty / FTS in India - HELD THAT - On perusal of the agreement between the assessee and the end users, 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 3 of Article 13 of India-France DTAA. We note that the issue has now been settled pursuant to the decision of in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) Ors. 2023 (7) TMI 1164 - KARNATAKA HIGH COURT In case of Vodafone Idea Ltd 2023 (7) TMI 1164 - KARNATAKA HIGH COURT also 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. Thereafter Hon'ble High Court after verifying the facts of the case having regards to the decision of Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence (P.) Ltd 2021 (3) TMI 138 - SUPREME COURT . We hold that payments received by assessee towards interconnectivity utility charges from Indian customers/end users cannot be considered as Royalty/FTS to be brought to tax in India under section 9(1)( vi )/( vii ) of the Act and also as per DTAA. 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 13 of India-France DTAA. The receipt of IUC charges cannot be taxed as Royalty under Article 13 in India of India-France 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. Appeal filed by the revenue stands dismissed.

Summary

Issues Involved:
1. Taxability of payments for interconnect services and capacity transfer as Royalty.
2. Presence of Non-Resident Telecom Operators (NTOs) in India and income accrual.
3. Applicability of process royalty.
4. Relevance of the Engineering Analysis case and amendments to Section 9 of the Act.
5. Validity of the assessment order without Document Identification Number (DIN).

Summary:

Issue 1: Taxability of Payments as Royalty
The Tribunal examined whether payments to NTOs for interconnect services and capacity transfer are taxable as royalty. The Ld.AO considered these payments as royalty under Section 9(1)(vi) of the Income Tax Act. However, the Ld.CIT(A) relied on the Karnataka High Court's decision in Vodafone Idea Ltd. vs. DCIT, which held that such payments are not taxable as royalty. The Tribunal upheld this view, stating that the payments for interconnect services do not qualify as royalty under the Act or the India-France DTAA.

Issue 2: Presence and Income Accrual in India
The Tribunal addressed whether NTOs have a presence in India and if the income accrued in India. The Ld.AO argued that the income accrues in India when calls are made. The Ld.CIT(A) and Tribunal, referring to the Karnataka High Court's decision, concluded that NTOs do not have a permanent establishment in India, and thus, the income cannot be taxed in India.

Issue 3: Applicability of Process Royalty
The Ld.AO classified the interconnect charges as process royalty. The Tribunal, however, noted that the Karnataka High Court and various Tribunal decisions have consistently held that such charges do not constitute process royalty. The Tribunal emphasized that the interconnect services provided by NTOs are standard telecom services requiring no human intervention and do not involve the use of any secret process.

Issue 4: Engineering Analysis Case and Amendments to Section 9
The Tribunal discussed the relevance of the Engineering Analysis case and the retrospective amendments to Section 9 of the Act. The Karnataka High Court in Vodafone Idea Ltd. held that the amendments to Section 9 do not affect the definition of royalty under the DTAA. The Tribunal upheld this interpretation, stating that the DTAA provisions take precedence over domestic law amendments.

Issue 5: Validity of Assessment Order Without DIN
The Tribunal examined the validity of the assessment order dated 29.12.2019, which did not bear a DIN. The Ld.CIT(A) treated the order as invalid due to this omission. The Tribunal upheld the Ld.CIT(A)'s decision, noting that the Intimation letter issued alongside the assessment order mentioned the DIN, but the assessment order itself did not comply with the requirement.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the Ld.CIT(A)'s order that the payments for interconnect services and capacity transfer are not taxable as royalty in India. The Tribunal also confirmed that the assessment order without a DIN is invalid. The decision was based on consistent judicial precedents and the interpretation of relevant legal provisions, including the DTAA and the Income Tax Act.