Vodafone Idea Limited Vs Deputy Director of Income Tax (Karnataka High Court)
Karnataka High Court held that payments made to Non-resident Telecom Operators for provision of bandwidth and Inter-connectivity Usage Charge are not covered as Royalty/ FTS and, accordingly, TDS not deductible. Further, assessee is entitled to take benefit of DTAA between two countries.
Facts- Assessee holds an ILD License and provides telecommunication services. It is responsible to provide connectivity to calls originating or terminating outside India. In order to provide ILD services, assessee avails certain services offered by NTOs to provide seamless connectivity to its customers. Assessee had entered into agreements with non-resident telecom operators (NTOs) for international carriage and connectivity services. As per the agreement, the assessee has to pay inter-connectivity charges to NTOs.
Assessee entered into a CTA with MIS Belgacom International Carrier Services S.A. to acquire bandwidth capacity on EIG which works through a submarine cable system and M/s. Omantel Telecommunications Company is a member of the consortium which owns the EIG system. The agreement allows each party to transfer to another telecommunication entity the whole or a part of its total allocated capacity in the EIG Cable system without any restrictions by way of an IRU. In pursuance of the EIG agreement, Omantel had transferred a certain portion of its capacity in the EIG cable system to Belgacom and in turn, Belgacom had transferred a portion of its capacity to the assessee for consideration.
AO issued a notice stating that the payments made by the assessee to NTOs and Belgacom for the A.Y. 2008-09 to 2015-16 were made without deducting TDS u/s. 195 of the Income Tax Act 1961 and the assessee was liable to be treated as ‘defaulter’ u/s. 201 of the Act.
Conclusion- Held that the question that whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued that for subsequent years in assessee’s own case, the ITAT has held that tax is not deductible when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue.
Held liable for non-reduction of tax at source for payments made for the A.Ys. on the basis of amendment to Section 9(1)(vi) of the Act. This aspect has been considered by us while answering question No.2. It is held in Engineering Analysis that an assessee is not obliged to do the Admittedly, the A.Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
These appeals are filed by the assessee. ITA Nos.160/2015, 161/2015, 162/2015, 163/2015 and 164/2015 are directed against the common order dated December 30, 2014 in IT(IT)A Nos. 1814 to 1818 & 734/Bang/2013 for A.Y1. 2008-09 to 2012-13 and ITA Nos. 64/2020, 65/2020, 66/2020 are directed against the common order dated November 28, 2019 in IT(IT)A Nos. 1160-1161/Bang/2015 and 2818/Bang/2017 for A.Y2. 2013-14 to 2015-16 passed by the ITAT3, have been admitted to consider following questions of law:
1. Whether the Income-Tax Appellate Tribunal (ITAT) was correct in holding that the application of the Double Taxation Avoidance Agreement (DTAA) cannot be considered in proceedings under Section 201 of the Act and that it is not open to the payer to take benefit of the DTAA when he is making payment to a non- resident?
2. Whether the ITAT was correct in holding that amendment to provisions of royalty under Section 9(1)(vi) by inserting Explanation 5 and 6 under the Income-tax Act (hereinafter referred to as the ‘Act’) will also result in amendment of the DTAAS?
3. Whether ITAT was correct in holding that payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms “right” & “process” in the clarificatory Explanation 2, 5 and 6 of Section 9(1)(vi) of the Act, and consequently, appellant was bound to deduct tax at source thereon under Section 195 of the Act?
4. Whether the income tax authorities in India have jurisdiction to bring to tax income arising from extra-territorial source, that is outside India, in respect of business carried on by foreign companies outside India just because Indian residents use and pay for the facilities provided by these foreign companies contrary to the Constitution of India, International Law and Treaties and law declared by the Apex Court?
5. Whether the first respondent was correct in holding that for the current assessment year the withholding tax liability should be levied at a higher rate at 20% in accordance with section 206AA of the Act?
6. Whether the Hon’ble Tribunal was right in repelling the contention of the Appellant to the effect that, as a deductor, it cannot be held liable for non-reduction of tax at source for payments made for the Assessment Year 2008-09 to Assessment Year 2012-13 on the basis of a subsequent amendment to Section 9(1)(vi) whereby Explanation 5 and 6 were introduced?
2. Heard Shri. Percy Pardiwala, learned Senior Advocate for the Assessee and Shri. G.C. Shrivastsava, Special Counsel for the Revenue.
3. Briefly stated the facts of the case are, Assessee holds an ILD4 License and provides telecommunication services. It is responsible to provide connectivity to calls originating or terminating outside In order to provide ILD services, assessee avails certain services offered by NTOs5 to provide seamless connectivity to its customers. Assessee had entered into agreements with NTOs for international carriage and connectivity services. As per the agreement, assessee has to pay inter-connectivity charges to NTOs.
4. Assessee entered into a CTA6 with MIS Belgacom International Carrier Services S.A.7 to acquire bandwidth capacity on EIG8 which works through a submarine cable system and M/s. Omantel Telecommunications Company9, a member of consortium which owns the EIG system. The agreement allows each party to transfer to other telecommunication entity the whole or a part of its total allocated capacity in the EIG Cable system without any restrictions by way of an IRU10. In pursuance to the EIG agreement, Omantel had transferred certain portion of its capacity in the EIG cable system to Belgacom and in turn, Belgacom had transferred a portion of its capacity to the assessee for consideration.
5. The AO11 issued a notice stating that the payments made by assessee to NTOs and Belgacom for the A.Y. 2008-09 to 2015-16 were made without deducting TDS12 under Section 195 of the Income Tax Act 196113 and assessee was liable to be treated as ‘defaulter’ under Section 201 of the Act. Assessee sent its reply explaining that the NTOs are located outside India and they provide telecom services outside India. Hence, it was not necessary to deduct TDS in India.
6. The AO passed an assessment order dated January 28, 2013 holding assessee as ‘defaulter’ for failure to deduct TDS while making payments to the NTOs and Belgacom. The AO also held that payments made to NTOs for provision of bandwidth and IUC14 are taxable under the head ‘other income’ and treated the same as Royalty/FTS15.
7. Assessee challenged AO’s order before the CIT(A)16. The CIT(A) vide order dated March 25, 2013, dismissed assessee’s appeal holding that payments made to NTOs are chargeable to tax in India under Section 195 of the Act as Royalty. He held that the IUC payments could not be taxed under the head ‘other income’. The issue regarding FTS was not adjudicated.
8. On further appeal, the ITAT has partly-allowed assessee’s appeal and confirmed the findings recorded by the CIT(A). Hence, this appeal.
9. Shri. Percy Pardiwala, for the Assessee, praying to allow the appeal, submitted:
Re: Question No. 1 as follows:
