Amount received towards Interconnectivity Utility charges from Indian Customers was not taxable as Royalty

KDDI Corporation Vs DCIT (ITAT Bangalore)

Conclusion: Payments received by assessee towards interconnectivity utility charges from Indian customers or end users could not be considered royalties to be brought to tax in India  under Article 12 of India -Japan DTAA as Explanations 5 and 6 to section 9(1)(vi) were not found in the definition of “Royalty” under India-Japan DTAA. The definition of “Royalty” under the DTAA was much more narrower in its scope and coverage, than the definition of “Royalty” contained in section 9(1)(vi) r.w. Explanations 2, 5 and 6 of the Act.

Held: Assessee was incorporated in Japan and was in the business of providing telecommunication services. Assessee provided fixed, mobile, wholesale, and associated telecommunication services across the globe. Assessee was a tax resident of Japan in accordance with Article 4 of the Double Taxation Avoidance Agreement between India and Japan (DTAA), and it was entitled to the beneficial provisions of the India-Japan DTAA. Assessee did not have any presence in India, either in the form of an office, a branch, or any other fixed place of business in India. Assessee provided telecom interconnect facilities to various Indian telecom operators, including Vodafone South Ltd., and had received payment on account of interconnect usage charges. AO passed the final assessment orders, considering the receipt for interconnect utility charges as “royalty” in the hands of assessee. Assessee contended that Explanations 5 and 6 did not override the DTAA between India and Japan. Hence, the subject payment received from Vodafone and other telecom operators in India was not taxable as ‘royalty’ as per DTAA. It was held that by insertion of Explanations 5 and 6, the meaning of the word ‘process’ had been widened. As per these explanations, the word ‘process’ need not be ‘secret’, and the status of control and possession of rights, property, or information had been rendered irrelevant. However, all the changes in the Act did not affect the definition of ‘royalty’ as per DTAA. The word employed in DTAA was ‘use or right to use’, in contradistinction to “transfer of all or any rights” or ‘use of’, in domestic law. As per Explanations 5 and 6, the word ‘process’ included and should be deemed to include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber, or any other similar technology, whether or not such process was secret. However, the explanation did not do away with the requirement of successful exclusivity of such a right in respect of such a process being with the person claiming ‘royalty’ for granting its usage to a third party.  The tribunal, while allowing the appeal of assessee, held that the receipt of IUC charges could not be taxed as royalty under Article 12 of the India-Japan DTAA.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Present appeals are filed by assessee against the separate orders passed by the Ld.CIT(International Taxation), Circle – 2(1), Bangalore for A.Ys. 2013-14 to 2015-16.

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