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2024 (6) TMI 804 - AT - Income TaxIssues Involved: 1. Validity of reopening of assessment. 2. Characterization of interconnect utility charges (IUC) as 'Royalty' under the Income Tax Act and India-Japan DTAA. 3. Applicability of DTAA over the Income Tax Act. 4. Jurisdiction of Indian tax authorities over extraterritorial income. 5. Withholding tax liability at a higher rate u/s 206AA. 6. Liability for non-deduction of tax at source based on retrospective amendments. Summary: 1. Validity of Reopening of Assessment: The assessee did not press the grounds challenging the validity of reopening. Consequently, these grounds were dismissed. 2. Characterization of IUC as 'Royalty': The primary issue was whether the IUC received by the assessee, a non-resident telecom operator, from Indian telecom operators, should be classified as 'Royalty' u/s 9(1)(vi) of the Income Tax Act and under Article 12 of the India-Japan DTAA. The Tribunal referred to the Karnataka High Court's decision in Vodafone Idea Ltd., which held that such payments do not amount to 'Royalty'. The Tribunal emphasized that the term "process" in Explanation 2 to section 9(1)(vi) refers to intellectual property, and the process involved in providing telecom services is not a "secret process". Therefore, the IUC cannot be taxed as 'Royalty' under the Act or the DTAA. 3. Applicability of DTAA over the Income Tax Act: The Tribunal reiterated that the DTAA provisions prevail over the Income Tax Act, as held by the Karnataka High Court in Vodafone Idea Ltd. The amendments to the definition of 'Royalty' in the Act do not affect the DTAA's definition, which is narrower. Hence, the IUC is not taxable as 'Royalty' under the DTAA. 4. Jurisdiction of Indian Tax Authorities over Extraterritorial Income: The Tribunal noted that the non-resident telecom operators did not have any presence in India, and the services were provided outside India. Therefore, the Indian tax authorities do not have jurisdiction to tax the income arising from such extraterritorial sources, as per the Karnataka High Court's ruling in Vodafone Idea Ltd. 5. Withholding Tax Liability at a Higher Rate u/s 206AA: The Tribunal followed the Karnataka High Court's decision in Vodafone Idea Ltd., which held that the withholding tax liability should not be levied at a higher rate under section 206AA. 6. Liability for Non-Deduction of Tax at Source Based on Retrospective Amendments: The Tribunal, relying on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., held that the assessee cannot be held liable for non-deduction of tax at source for payments made in the assessment years prior to the retrospective amendments. The DTAA benefits were also upheld. Conclusion: The Tribunal allowed the appeals on merits, holding that the IUC received by the assessee is not taxable as 'Royalty' under the Income Tax Act or the India-Japan DTAA. The stay petitions filed by the assessee were dismissed as infructuous. The appeals were partly allowed.
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