BELGACOM INTERNATIONAL CARRIER SERVICES SA,BELGIUM vs. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE-2(2), BENGALURU

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ITITA 200/BANG/2023Status: DisposedITAT Bangalore29 August 2023AY 2017-187 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the sum received by the assessee from Vodafone for interconnectivity services is not chargeable to tax in India as 'Royalty'. This decision was based on the jurisdictional High Court's judgment in the case of Vodafone India Ltd. The High Court had ruled that payments made to non-resident telecommunication operators for providing interconnectivity services and transfer of capacity in foreign countries are not taxable as 'royalty' in India. Furthermore, the High Court held that such income does not accrue or arise in India in the hands of non-resident telecommunication operators like the assessee, especially when the services and equipment are situated outside India and the non-resident entity has no permanent establishment in India. Consequently, the Tax authorities in India lack jurisdiction to tax income arising from extra-territorial sources. As the issue was decided on merits, other grounds raised by the assessee were not adjudicated.

What were the facts?

The assessee, M/s. Belgacom International Carrier Services SA, a Belgian telecommunication operator, entered into a Carrier Service Agreement (CSA) with Vodafone Idea Ltd. (Vodafone) for international voice traffic routing. For assessment years 2013-14 to 2017-18, the assessee provided interconnect services to Vodafone from outside India and received consideration. Vodafone did not deduct tax at source, believing the income was not taxable in India. The assessee also did not file returns, assuming no Indian tax liability. The Assessing Officer (AO) initiated reassessment proceedings under section 147, believing the income was taxable as royalty under section 9(1)(vi) and Article 12 of the DTAA. The Dispute Resolution Panel (DRP) upheld the AO's view. The assessee appealed the final assessment orders passed under section 143(3) r.w.s. 147 r.w.s. 144C(13).

What were the issues?

1. Whether the sum received by the assessee from Vodafone is chargeable to tax in India as royalty under section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the India-Belgium DTAA? 2. Whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra-territorial sources? Assessee's Contention: The assessee argued that the issues are covered by the jurisdictional High Court's judgment in Vodafone India Ltd. (ITA No.160/2015 and Ors., dated 14.07.2023), which held that payments to non-resident telecommunication operators for interconnectivity services and transfer of capacity in foreign countries are not chargeable to tax as 'royalty' and do not accrue or arise in India. Revenue's Contention: The Revenue strongly supported the orders of the AO and the DRP, which held the payments to be taxable in India.

Which sections of the Income-tax Act were involved?

Section 9(1)(vi),Section 143(3),Section 147,Section 144C(13),Section 5(2)(b),Section 201,Section 195,Section 90(2)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH : BANGALORE

Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU

For Appellant: Shri. V. Sridharan, Sr. Advocate, Shri. Ravi Sawana and Ms. Neha Sharma, Advocates
Hearing: 29.08.2023Pronounced: 29.08.2023

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(IT)A Nos.196 to 200/Bang/2023 Assessment Years : 2013-14 to 2017-18

M/s. Belgacom International Carrier Vs. DCIT (International Taxation), Services SA, Circle – 2(2), Boulevard du Roi Alter II, 27 Bengaluru. 1030 Brussels, Belguim. PAN : AAJCB 5259 J

Assessee by : Shri. V. Sridharan, Sr. Advocate Shri. Ravi Sawana and Ms. Neha Sharma, Advocates. Revenue by : Date of hearing : 29.08.2023 Date of Pronouncement : 29.08.2023

O R D E R Per Bench :

These appeals at the instance of the assessee are directed against five Final Assessment Orders passed under section 143(3) r.w.s. 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Years are 2013-14 to 2017-18.

2.

Common issues are raised in these appeals; hence, they were heard together and are being disposed off by this consolidated order.

3.

Brief facts of the case are as follows:

IT(IT)A Nos.196 to 200/Bang/2023 Page 2 of 7

Assessee is a telecommunication operator, headquartered in Belgium and a tax resident of Belgium. In order to facilitate a connecting facility to route its international outbound voice traffic in virtual transit to various foreign destinations, the assessee had entered into a Carrier Service Agreement (hereinafter referred to as ‘CSA’) with Vodafone Idea Ltd., (hereinafter referred to as ‘Vodafone’). During the Assessment Years 2013-14 to 2017-18, assessee provided from outside India the services specified in CSA (hereinafter referred to as ‘Interconnect Services’) to Vodafone. The assessee received certain consideration from Vodafone for the provision of said interconnect services. The consideration was paid by Vodafone without deduction of tax at source in India on the ground that the said sum is not chargeable to tax in India. In respect of the sum received from Vodafone, assessee did not file return of income in India on the belief that no part of income was taxable in India and Vodafone also did not deduct tax on the sum remitted by it to the assessee. The AO, however, issued notice under section 148 of the Act for the Assessment Years 2013-14 to 2017-18, after forming a belief that the sum received by the assessee from Vodafone was income chargeable to tax in India and same has escaped assessment. Initially, Draft Assessment Order was passed proposing to bring to tax the sum received from Vodafone as royalty under section 9(1)(vi) of the Act as well as under Article 12 of the DTAA.

4.

Aggrieved by the Draft Assessment Order, assessee filed objections before Dispute Resolution Panel (DRP). The DRP also held that the sum received by the assessee from Vodafone is taxable in India under section 5(2)(b) as well as royalty under section 9(1)(vi) of the Act and as well as under Article 12 India-Belgium DTAA. Pursuant to the directions of the DRP, impugned Final Assessment Orders were passed.

IT(IT)A Nos.196 to 200/Bang/2023 Page 3 of 7

5.

Aggrieved by the impugned Final Assessment Orders, assessee has filed these appeals before the Tribunal. The learned Sr. Counsel Shri. V. Sridharan submitted that all the issues raised in these appeals are squarely covered in favour of the assessee by the judgment of the Hon’ble jurisdictional High Court in the case of Vodafone India Ltd., in ITA No.160/2015 and Ors (vide judgment dated 14.07.2023).

6.

The learned DR strongly supported the orders of the AO and the DRP.

7.

We have heard the rival submissions and perused the material on record. The subject matter of appeals relates taxability of sum received by the assessee from Vodafone. In the hands of the Vodafone, proceedings were initiated under section 201 of the Act for non-deduction of tax on the sum paid to the assessee. Tribunal in the case of Vodafone South Ltd., reported in 44 ITR (T) 330 held that the payments made to the assessee are liable to be taxed in India and accordingly upheld the orders passed under section 201 of the Act. The AO as well as the DRP had followed the order rendered by the Tribunal in the case of Vodafone South Ltd., (supra). The said order of the Tribunal in the case of Vodafone South Ltd., (supra) was reversed by the Hon’ble jurisdictional High Court in the case cited supra. The Hon’ble jurisdictional High Court had decided all the questions of law in favour of the assessee and held that payments to non-resident telecommunication operators for providing interconnectivity services and transfer of capacity in foreign countries is not chargeable to tax as ‘royalty’ and also that the income does not accrue or arise in India in the hands of the non-resident telecommunication operators such as the assessee in the instant case. The relevant finding of the Hon’ble jurisdictional High Court reads as follows:

IT(IT)A Nos.196 to 200/Bang/2023 Page 4 of 7

“………. 12. We have carefully considered the rival contentions and perused the records.

13.

Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. Acccording to the assessee, payment made to NTOs is towards inter-connectivity charges. 14. Assessee has also entered into a CTA with a Belgium entity Belaacom. Belaacorn had certain arrangement with the Omantel for utilisation of bandwidth. Omantel transferred certain portion of its capacity to Belgacorri and Beigacom had in turn transferred a portion of its capacity to the assessee. 15. Admittedly the equipments and the submarine cables are situated overseas. To provide ILD calls, assessee had availed certain services from NTOs. It is also not in dispute that Belgacorn, a Belgium entity with whom assessee has entered into an agreement does riot have any 'permanent establishment' in India. 16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue's reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable. 17. The first question is whether the ITAT was correct in holding that DTAA cannot be considered under Section 201 of the Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technology. We may record

IT(IT)A Nos.196 to 200/Bang/2023 Page 5 of 7

that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows:

"7. .. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provions of DTAA are also relevant, while applying tax deduction at source provisions." (Emphasis supplied) 18. The above passage has been noted and extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ITAT's view that DTAA cannot be considered in proceedings under Section 201 of the Act is tenable. 19. The second question for consideration is whether the ITAT was correct in holding that the amendment to provisions of Section 9(1)(vi) inserting the Explanations will result in amendment of DTAA. The answer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows: "85. It is thus clear that the "person" mentioned in section 195 of the income Tax Act cannot be expected to do

IT(IT)A Nos.196 to 200/Bang/2023 Page 6 of 7

the impossible, namely, to apply the expanded definition of "royalty" inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a rime when such explanation was not actually and factually in the statute." "100. Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA…” 21. The third question is, 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 by Shri. Pardiwala, 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-35, rendered by the ITA-1. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra- territorial source. Admittedly, the NTOs have no presence in India. Assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra- territorial source.”

IT(IT)A Nos.196 to 200/Bang/2023 Page 7 of 7

8.

In view of the above judgment of the Hon’ble jurisdictional High Court, sum received by the assessee from Vodafone as interconnectivity services are not chargeable to tax in India as “Royalty”. It is ordered accordingly.

9.

Since we have decided the issue on merits, the other grounds taken by the assessee in these appeals are not adjudicated and are left open.

10.

In the result, appeals filed by the assessee are partly allowed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President

Bangalore. Dated: 29.08.2023. /NS/*

Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order

Assistant Registrar, ITAT, Bangalore.

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