2025 (1) TMI 27 - AT - Income Tax

Accrual of income in India or not? - royalty income - whether interconnect service charges paid by Vodafone and Bharti Airtel are chargeable to tax in India as per the Income-tax Act or DTAA? - HELD THAT - As held so in series of judgements such as M/S Belgacom International Carrier Services SA Belgium 2024 (9) TMI 1675 - KARNATAKA HIGH COURT , M/s. M.I. Limited 2024 (9) TMI 1677 - KARNATAKA HIGH COURT , M/s. Maxis International Sdn Bhd. 2024 (9) TMI 1676 - KARNATAKA HIGH COURT and Emirates Telecommunications group company, etc. 2024 (9) TMI 1678 - KARNATAKA HIGH COURT that Interconnect charges are not royalty. In case of assessee, on identical facts and circumstances, Coordinate Benches have also held so. Therefore respectfully following all those decisions, we do not find any infirmity in the order of ld. CIT(A) in holding that interconnect charges cannot be taxed as royalty. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

1. Whether the CIT(A)-12 was correct in determining that payments made to NTOS for interconnect services and capacity transfer are not taxable as royalty under the Income Tax Act, despite the processes being initiated in India.

2. Whether the CIT(A)-12 was justified in holding that the notice issued under Section 148 of the Income Tax Act was not warranted, given the assessee's failure to file a return of income for payments deemed taxable in India.

3. Whether the CIT(A)-12 rightly concluded that process royalty is not applicable without adequately considering the agreements between the assessee and the payees, expert opinions in telecommunications, and the relevant provisions of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Interconnect Service Charges as Royalty

- Relevant Legal Framework and Precedents: The key legal framework involves the interpretation of 'royalty' under Section 9 of the Income Tax Act and the relevant provisions of the DTAA between India and Austria. Precedents include decisions by the Karnataka High Court and the Supreme Court, which have established that interconnect charges do not qualify as royalty.

- Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s reliance on the Karnataka High Court's decision, which was further supported by the Supreme Court's dismissal of the SLP. The Tribunal found that the interconnect charges do not involve human intervention or specialized services that would qualify them as royalty.

- Key Evidence and Findings: The Tribunal noted the absence of any requirement for human intervention in the provision of interconnect services, which are considered standard facilities. It also referenced the tax residency certificate and the agreements provided by the assessee.

- Application of Law to Facts: The Tribunal applied the legal definition of royalty and the established precedents to the facts of the case, concluding that the payments made by Vodafone and Bharti Airtel to the assessee do not constitute royalty.

- Treatment of Competing Arguments: The Tribunal considered the arguments presented by the AO, which reiterated the position that the payments should be taxed as royalty. However, these were outweighed by the precedents and the CIT(A)'s reasoning.

- Conclusions: The Tribunal concluded that the interconnect charges are not taxable as royalty, affirming the CIT(A)'s decision.

Issue 2: Justification of Notice under Section 148

- Relevant Legal Framework and Precedents: Section 148 of the Income Tax Act deals with the issuance of notices for reassessment. The Tribunal considered whether the notice was justified based on the non-filing of returns by the assessee.

- Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) correctly determined the notice under Section 148 was not justified, as the underlying payments were not taxable as royalty.

- Key Evidence and Findings: The Tribunal noted that the CIT(A) had relied on the Supreme Court's decision, which had reached finality on the issue of interconnect charges not being royalty.

- Application of Law to Facts: The Tribunal applied the legal standards for issuing a notice under Section 148 and concluded that the prerequisites for such a notice were not met.

- Treatment of Competing Arguments: The Tribunal considered the AO's argument for the necessity of the notice but found it unsupported by the legal definition of royalty.

- Conclusions: The Tribunal upheld the CIT(A)'s decision that the notice under Section 148 was unjustified.

Issue 3: Applicability of Process Royalty

- Relevant Legal Framework and Precedents: The Tribunal considered the provisions of the Income Tax Act and DTAA regarding process royalty, alongside expert opinions in telecommunications.

- Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the agreements and expert opinions did not support the classification of the payments as process royalty.

- Key Evidence and Findings: The Tribunal noted the lack of evidence for human intervention or specialized processes that would necessitate a classification as process royalty.

- Application of Law to Facts: The Tribunal applied the legal standards for process royalty and found that the payments did not meet these criteria.

- Treatment of Competing Arguments: The Tribunal evaluated the AO's arguments but found them lacking in light of the legal definitions and precedents.

- Conclusions: The Tribunal upheld the CIT(A)'s decision that process royalty was not applicable.

3. SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The Honourable Karnataka High Court following the above judgments has held so in series of judgements... that Interconnect charges are not royalty."

- Core Principles Established: The Tribunal reinforced the principle that interconnect charges, as standard facilities without human intervention, do not constitute royalty under the Income Tax Act or DTAA.

- Final Determinations on Each Issue: The Tribunal dismissed the appeal by the AO, affirming the CIT(A)'s decision that interconnect charges are not taxable as royalty, and that the notice under Section 148 was unjustified.