Payment towards interconnectivity utility charges from Indian customers not taxable as Royalty

Al Telekom Austria Vs DCIT (ITAT Bangalore)

ITAT Bangalore held that payments received towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty to be brought to tax in India under section 9(1)(vi) of the Income Tax Act and also as per DTAA.

Facts- The assessee company M/s. A1 Telekom Austria TA AG is a non-resident telecommunications operator engaged in the business of telecommunication services, interconnect services, internet services, etc. and a tax resident of Austria. Proceedings u/s 201 were initiated in respect of non-deduction of tax at source on payments made to Non-resident Telecom Operators (NTOs) for the provision of bandwidth capacity and for the provision of interconnect services. The said charges were considered royalties or FTS both as per the Act and the respective DTAAs.

CIT(A) thus held that the payment received by the assessee for interconnect charges for the years under consideration would amount to royalty under the provisions of the act as well as DTAA. Being aggrieved, the present appeal is filed.

Conclusion- Held that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty to be brought to tax in India under section 9(1)(vi) of the Act and also as per 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.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Present appeals arises out of the orders passed by the Ld.CIT(A)- 12, Bangalore dated 28.02.2022 for A.Y. 2009-10, dated 16.03.2023 for A.Y. 2011-12 and dated 21.03.2023 for A.Y. 2012­13.

2. It is submitted that, the issues raised by the assessee in all the three appeals are common and on identical facts. It is submitted that the observations of the Ld.CIT(A) as well as the Ld.AO are identical and similar for all the years under consideration. Accordingly, all the appeals are being disposed of by way of common order.

For the sake of convenience, grounds raised by the assessee for A.Y. 2009-10 are reproduced as under:

“Al Telekom Austria Aktiengesellschaft (`the Appellant’ or Al- Telekom”) craves leave to prefer appeal against order dated 28 February 2023 passed by the Commissioner of Income-tax (Appeals) — 12, Bangalore (hereinafter referred to as the ‘learned CIT(A)’) under Section 250 of the Income-tax Act, 1961(`the Act’) and in respect of assessment order dated 26 December 2017 (received on 5 January 2018) passed by the Deputy Commissioner of Income Tax (International Taxation) – Circle 2(1), Bangalore [hereinafter referred to as the ‘learned AO’] under section 147 read with section 144 of the Act, on the grounds as set out herein.

The following grounds are independent of, and without prejudice to, one another:

1. General

1.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in determining the total income of the Appellant at Rs. 4,49,80,244 by making adjustment in respect of which specific ground has been raised.

1.2. On the facts, and in the circumstances of the case, and in law, the learned AO has erred in raising a demand of Rs. 1,70,47,510 (Rs. 89,51,069 as per order under section 154 of the Act) on the Appellant.

1.3. On the facts, and in the circumstances of the case, and in law, the learned C1T(A) has erred in erroneously recording the date of order as 28.02.2022 instead of the correct date i.e. 28.02.2023.

2. Non – Compliance under section 144C of the Act during assessment proceedings

2.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of the learned AO of not issuing draft assessment order under section 144C(1) of the Act inspite of the appellant being an ‘eligible assessee’ as per the mandate of section 144C(15) of the Act. Accordingly, the entire reassessment is null and void and deserves to be quashed.

3. Assumption of Jurisdiction under section 147 and 148 of the Act

3.1. On the facts, and in the circumstances of the case, and in the law, the learned CIT(A) has erred in upholding the action of learned AO in assuming jurisdiction to reassess under section 147 of the Act by issuing notices under section 148 of the Act without specifying the sanction/approval from higher authorities as mandated under section 151 of the Act.

3.2. On the facts, and in the circumstances of the case, and in the law, the learned CIT(A) has erred in upholding the action of learned AO in assuming jurisdiction when the entire copy of reasons recorded for reopening were not provided within 6 years from the end of relevant Assessment Year. Accordingly, the reassessment proceedings are bad in law and ought to be quashed.

3.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) ought to have held the order passed by the learned AO under 147 read with section 144 of the Act as illegal, null and void and ought to be quashed.

4. Taxability of Voice Interconnect Services as Royalty

4.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under section 9(1)(vi) of the Act.

4.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under India-Austria Tax Treaty.

4.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) and the learned AO have erred in treating the Voice Interconnect Services as taxable in India.

5. Levy of interest under section 234A of the Act

5.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of the learned AO in levying interest under section 234A of the Act.

5.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in levying interest under section 234A for a period beyond two years where it is not possible for the appellant to file a valid return beyond the due date prescribed under section 139 of the Act.

6. Levy of Interest under section 234B and 234C of the Act 6.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in levying interest under section 234B and 234C of the Act, without considering the fact that the Appellant being a non-resident is not required to pay advance tax as its entire income is subject to tax withholding under the Act.

6.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in not considering the rectification order wherein the interest under section 234B and 234C of the Act has been deleted by the learned AO.

7. Initiation of penalty proceedings under section 271(1)(b) and 271(1)(c) of the Act

7.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in dismissing the ground of penalty initiation by holding that the ground of appeal is premature.

7.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in erroneously mentioning section under section 271B instead of 271(1)(b) of the Act.

7.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of the learned AO for initiating the penalty proceedings under section 271(1)(b) and 271(1)(c) of the Act, when no such penalty is leviable.

The Appellant reserves the right to add, amend, alter or vary all or any of the above grounds of appeal as they or their representative may think fit.”

2. Brief facts of the case are as under:

The assessee company M/s. Al Telekom Austria TA AG is a non­resident telecommunications operator and is engaged in the business of telecommunication services, interconnect services, internet services etc. and a tax resident of Austria. Proceedings u/ s 201 were initiated in the case of M/s Vodafone South Limited (VSL), which was earlier known as Vodafone Essar South Limited (VESL), for the F.Ys.2007-08 to 2011-12 in respect of non-deduction of tax at source on payments made to Non­resident Telecom Operators (NTOs) for provision of bandwidth capacity and for provision of interconnect services. The said charges were considered as Royalty/FTS both as per the Act and the respective DTAAs.

2.1 During the course of the section 201 proceedings, it was found that VSL had paid certain amounts for assessment years under consideration to the present assessee towards interconnect utility charges. The assessee had neither paid taxes on the sums received by it from VSL nor had the payer made the TDS. No return of income was filed by the assessee for A.Ys. 2009-10, 2011-12 & 2012-13. The Ld.AO formed the belief that the sum received by the assessee for years under consideration was chargeable to tax, and escaped assessment. He therefore issued a notice u/s 148 of the Act to the assessee.

2.2 The assessee did not respond to the aforesaid notice u/s 148 nor to the notices u/s 129 r.w.s 142(1). Subsequently, a show-cause letter was issued by the Ld.AO, whereby the assessee was asked to show cause as to why the sum received by it from VSL during relevant assessment years under consideration towards ‘interconnect charges’ should not be taxed in its hands, as per the provisions of the Act and the relevant DTAA.

2.3 The assessee did not respond to the show-cause letter for A.Y. 2009-10. Since the assessee had not responded to any of the notices/ letters issued to it, the AO concluded the assessment ex-parte by bringing to tax the amount received by assessee as Inter-connect utility charges as FTS/Royalty.

In respect of A.Ys. 2011-12 and 2012-13, the assessee had responded to the statutory notices and necessary communications as required u/s. 144C of the Ld.AO to pass the final assessment order.

Aggrieved by the impugned assessment orders, the assessee filed appeals before the Ld.CIT(A), for the relevant assessment years under consideration.

Before the Ld.CIT(A), assessee filed written submissions, reiterating the submissions made in the rejoinder (supra). I have given careful consideration to the assessee’s submissions. The case laws relied upon by the assessee in support of the contention that the interconnect charges do not fall within the ambit of FTS owing to the absence of human intervention in the process, are also applicable to the facts of the assessee’s case. These include the decision of the Hon’ble Karnataka High Court in the case of CIT vs Vodafone South Limited (2016) 72 taxmann.com 347 (Karnataka). In view of the same, it is held that the interconnect charges cannot be brought to tax as FTS.

The Ld.CIT(A) then proceeded on analysing whether the transaction between assessee and the Indian customers would fall as royalty as per the provisions of section 9(1)(vi) of the act and also under DTAA.

The Ld.CIT(A) thus held the payment received by assessee for interconnect charges for the years under consideration would amount to be royalty under the provisions of the act as well as DTAA.

Aggrieved by the observations of the Ld.CIT(A), assessee is in appeal before this Tribunal.

At the outset, the Ld.AR submitted that Ground no. 1 is general in nature and therefore do not require adjudication.

The Ld.AR also submitted that Ground nos. 2 & 3 raised for A.Ys. 2009-10, 2011-12 and 2012-13 are legal issues which are not pressed by assessee as it has a good case on merit. The Ld.AR submitted that on merits, the decision of Hon’ble Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) & Ors. in ITA Nos. 160-164/2015 & ITA Nos. 64­66/2020 for A.Ys. 2008-09 to 2015-16 vide order dated 14.07.2023 had decided the issue in favour of assessee.

It is submitted that in all the years under consideration, the payment has been received by the assessee from Vodafone South Ltd. and for A.Ys. 2011-12 to 2012-13, assessee has received payments from Bharti Airtel Ltd. towards the IUC. It is further submitted that entire reassessment proceedings was initiated by the Ld.AO based on the proceedings u/s. 201 of the act in case of M/s. Vodafone South Ltd. The Ld.AR thus effectively argued Ground no. 4 for A.Y. 2009-10 and Ground nos. 3-4 for A.Ys. 2011-12 and 2012-13 that reads as under:

A.Y. 2009-10:

“4. Taxability of Voice Interconnect Services as Royalty

4.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under section 9(1)(vi) of the Act.

4.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under India-Austria Tax Treaty.

4.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) and the learned AO have erred in treating the Voice Interconnect Services as taxable in India.”

Ground nos. 3-4 (A.Ys. 2011-12 & 2012-13)

3.1 The Ld.AR submitted that DTAA will prevail over the Income-Tax Act as held by Hon’ble Karnataka High Court and it is further submitted that Explanation 5 and 6 do not override the DTAA between India and Austria. Hence, the subject payment received from Vodafone and Bharti Airtel is not taxable as ‘royalty’ as per DTAA. It is submitted that Hon’ble Karnataka High Court in the case of Vodafone reversed the ITAT judgment on this point. The substantial questions of law 2,3 and 4 in the judgment of Vodafone by Hon’ble Karnataka High Court has answered the question regarding the IUC charges not amounting to ‘royalty’.

3.2 Without prejudice to the above, the Ld.AR also submitted that there is No “use of process” or any “use of equipment”. Hence, the entire assumption of “process royalty” / “equipment royalty” does not arise in the case of the assessee.

3.3 The Ld.AR submitted that the provision apparently reads “secret formula or process”, and hence the process has to be a “secret process” as held by Hon’ble Delhi Tribunal in the case of Bharti Airtel Limited [2016] 67 taxmann.com 223 (Delhi ITAT).

3.4 Further, it is submitted that the decision of the Hon’ble Madras High Court in the case of Verizon Communications was been dissented by the Hon’ble Delhi High Court in the case of New Skies and Hon’ble Bombay High Court in the case of Neo Sports. It is also submitted that when there exists two conflicting judgments – the one favouring the assessee should prevail as observed in case of J&P Coats by the Coordinate Bench of this Tribunal.

3.5 Reliance is placed on the following decisions that are referred to hereinabove:

1. Bharat Sanchar Nigam Ltd. [2017] 87 com 152 (Delhi – Trib.)

2. Pan AmSat International Systems Inc. [2006] 9 SOT 100 (DELHI ITAT)

3. Asia Satellite Telecommunications Co Ltd [2011] 197 Taxman 263 (Delhi)

4. New Skies Satellite BV [2016] 68com 8 (Delhi)

5. Neo Sport Broadcast (P.) Ltd. [2019] 107 com 17 (Bombay)

6. Viacom18 Media (P.) Ltd. [2022] 134 com 243 (Mumbai -Trib.) – Para 9 page 656 of PB which has followed Bom HC decision in Neo Sports as opposed to earlier ITAT adverse view in own case

7. J & P Coats Ltd. No.11/Bang/2014, ITA 382 & 1493/Bang/2015, 2135/Bang/2016 and 1365-1367/Bang/2019

8. Engineering Analysis Centre of Excellence (P.) Ltd . [2021] 125 taxmann.com 42 (SC)

3.6 It is submitted that in respect of the treatment of the interconnectivity utility charges as ‘Royalty’, has been considered in a recent decision by Hon’ble Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) & Ors. in ITA Nos. 160-164/2015 & ITA Nos. 64-66/2020 for A.Ys. 2008-09 to 2015­16 vide order dated 14.07.2023.

3.7 He thus submitted that the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty in India stands squarely covered in favour of assessee.

4. On the contrary, the Ld. DR relying on the orders passed by the authorities below vehemently argued the observations as recorded by the revenue in their orders.

5. We have perused the submissions advanced by both sides in the light of records placed before us.

5.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty since the payment is made to “use the process” or “an equipment”.

5.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee. We refer to the term “Process” occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:—

‘Explanation 2.: For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;’

5.2.1 The term “process” used under Explanation 2 to section

9(1)(vi) in the definition of ‘royalty’ does not imply any ‘process’ which is publicly available. The term “process” occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a “process” which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows:

“(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property”

Clauses (i) & (ii) of the said explanation also use identical terms.

5.2.2 The words which surround the word ‘process’ in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression ‘similar property’ used at the end of the list, further fortifies the stand that the terms ‘patent, invention, model, design, secret formula or process or trade mark’ are to be understood as belonging to the same class of properties viz. intellectual property.

5.2.3 We also note that ‘Intellectual property’ as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature.

5.2.4 We refer to the commentary in Prof.Klaus Vogel’s Commentary on Double Taxation Convention, wherein, the term ‘Royalty’ is defined as under:

“Paragraph 2 contains definition of the term ‘royalties’. These relate, in general, to rights or property constituting different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right.”

5.2.5 Thus the word “process” thus must also refer to specie of intellectual property, applying the rule of, ejusdem generis or noscitur a sociis, as held by Hon’ble Supreme Court in case of CIT vs. Bharti Cellular reported in (2011) 330 ITR 239.

5.2.6 We refer to the decision of Hon’ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 wherein Hon’ble High Court observed as under:

“10.The term (royalty’ normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty”.

5.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoked.

5.2.8 Further we note that by Finance Act, 2012, Explanation 5 & 6 were added with retrospective effect from 1.6.1976 which reads as under:—

“Explanation 5: For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not –

(a) The possession or control of such right, property or information is with the payer;

(b) Such right, property or information is used directly by the payer;

(c) The location of such right, property or information is in India. Explanation 6: For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.”

5.2.9 By insertion of Explanation 5 & 6, meaning of word ‘Process’ has been widened. As per these explanations, the word ‘Process’ need not be ‘secret’, and situs of control & possession of right, property or information has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition of ‘Royalty’ as per DTAA. The word employed in DTAA is ‘use or right to use’, in contradistinction to, “transfer of all or any rights” or ‘use of’, in the domestic law. As per Explanation 5 & 6, the word ‘process’ includes and shall be deemed to included, transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. However, the Explanation does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person claiming ‘royalty’ for granting its usage to a third party.

5.2.10 We may also refer to the following decisions of AAR wherein meaning of the phrase “use” or “right to use” has been explained.

The meaning attached to phrase “use” or “right to use” has been explained in following decisions: