WPI GROUP INC.,NEW JERSEY, USA vs. DCIT, CIRCLE INT. TAX 3(1)(1), NEW DELHI

Facts

The assessee, WPI Group Inc., a US-based foreign telecom operator, is engaged in supplying VoIP services. For Assessment Year 2018-19, the Assessing Officer (AO) noted that the assessee received Rs. 1,48,63,238/- from M/s World Phone Internet Services Pvt. Ltd. for VoIP services. The AO observed that no tax was deducted at source under Section 195 of the Income-tax Act, 1961, and the assessee had not filed its Income Tax Return (ITR) for the AY. The AO treated the receipts as 'Royalty/FTS' under Sections 9(1)(vi) and 9(1)(vii) read with Section 115A of the Act, deeming the assessee ineligible for DTAA benefits due to the absence of a Tax Residency Certificate (TRC) for its shareholders. The assessee appealed to the Dispute Resolution Panel (DRP), which directed the AO to complete the assessment as per its directions. The assessee is now in appeal before the Income Tax Appellate Tribunal (ITAT).

Held

The Tribunal held that the receipts for VoIP services cannot be treated as 'Royalty' under Section 9(1)(vi) of the Act and Article 12(3) of the India-USA DTAA. Following the Supreme Court's decision in Engineering Analysis Center of Excellence Pvt Ltd., the Tribunal found that the agreements do not create any interest or right amounting to the use of or right to use any copyright. The Tribunal also held that the receipts are not 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Act and Article 12(4) of the India-USA DTAA, respectfully following the ITAT decision in Novanet India Pvt. Ltd. v. ITO, which held that VoIP services involve a fully automated process with no human intervention and the provider acts as an intermediary, not rendering technical services. Regarding DTAA eligibility, the Tribunal allowed the ground, finding that the assessee's TRC, issued by the IRS, along with the nature of an S-Corporation, indicated that its shareholders are US tax residents, making the assessee eligible for DTAA benefits, as supported by the ITAT decision in General Motors Company, USA. Consequently, the AO was directed to delete the impugned additions. The penalty proceedings under Section 234F and Section 270A were deemed premature.

Key Issues

1. Whether the payments received by the assessee for VoIP services constitute 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12(3) of the India-USA DTAA? The assessee contended that such receipts are not 'Royalty', relying on decisions from the Supreme Court and Delhi High Court in cases like Engineering Analysis Center of Excellence Pvt Ltd., Telstra Singapore Pte Ltd., and Amazon Web Services, Inc. The revenue argued that the payments are for 'use of process' and 'use of equipment'. 2. Whether the payments received by the assessee for VoIP services constitute 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961, and Article 12(4) of the India-USA DTAA? The assessee argued that VoIP services do not involve technical services and relied on the ITAT Mumbai Bench decision in Novanet India Pvt. Ltd. The revenue contended that the payments are FTS. 3. Whether the assessee is eligible for the benefits of the India-USA DTAA, given it is an S-Corporation and has not submitted TRCs of its shareholders? The assessee argued that its TRC establishes its residency and that of its shareholders, citing the ITAT decision in General Motors Company, USA. The revenue contended that without shareholder TRCs, DTAA benefits are not available. 4. Whether penalty proceedings initiated under Section 234F and Section 270A are sustainable? The assessee argued that penalties cannot be imposed for debatable interpretations of law without mala-fide intent or willful misreporting.