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Facts
The assessee, a foreign company providing telecom services, received interconnect charges from an Indian telecom operator. The Assessing Officer (AO) proposed to tax these charges as royalty. The assessee objected, but their objections were dismissed by the Dispute Resolution Panel (DRP).
Held
The Tribunal held that the interconnect charges received by the assessee are not taxable as 'royalty' under the Act. This decision was based on a High Court judgment which reversed a previous Tribunal ruling on similar matters and also considered the jurisdictional aspect and the non-applicability of DTAA provisions.
Key Issues
Whether the interconnect charges received by the foreign telecom operator are taxable as royalty in India and whether the Indian tax authorities have jurisdiction over such income.
Sections Cited
147, 143(3), 144C(13), 9(1)(vi), 201, 201A, 195(2), 90(2)
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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & SHRI CHANDRA POOJARI
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER IT(IT)A No.28/Bang/2021 Assessment Year : 2011-12 M/s. HCG Global Communications Ltd., Vs. DCIT (IT), 16/F Hutchison Telecom Tower, Circle – 2(2), 99 Cheung Fai Road, Bengaluru. Hong Kong. PAN : AAECH 5871 K APPELLANT RESPONDENT Assessee by : S/Shri. Aliasgar Rampurawala, Vikram Udupa, CAs Revenue by : Shri. D. K. Mishra, CIT(DR)(ITAT), Bengaluru Date of hearing : 11.01.2024 Date of Pronouncement : 11.01.2024 O R D E R Per George George K, Vice President :
This appeal at the instance of assessee is directed against the Final Assessment Order dated 24.11.2020, passed under section 147 r.w.s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2011-12.
Brief facts of the case are as follows:
Assessee is a foreign company incorporated under the laws of Hong Kong. Assessee is a telecom operator and provides telecommunication services. During the Financial Year relevant to Assessment Year 2011-12, assessee company had received charges from M/s. Vodafone South Ltd., (VSL) towards
IT(IT)A No.28/Bang/2021 Page 2 of 6 provision of telecom interconnect facilities to the tune of Rs.17,17,935/-. The DCIT (International Taxation) issued notice under section 148 of the Act on 30.03.2018. The notice under section 148 of the Act was issued to bring to tax the telecom interconnect charges received by the assessee from VSL. The assessee objected to the proposed reassessment notice. However, the objections of the assessee were rejected and Draft Assessment Order was passed on 29.12.2019. In the Draft Assessment Order, the AO relying on the proceedings under section 201 of the Act in the case of VSL for the Financial Years 2007-08 to 2011-12, had held that amounts received by the assessee company are in the nature of “royalty” and therefore liable to be taxed in India.
Aggrieved, assessee filed objections before the DRP on 29.01.2020. The DRP, vide its directions dated 06.11.2020, dismissed the objections raised by the assessee and confirmed the addition made by the AO. The DRP strongly relied on the order of the Tribunal in the case of M/s. VSL for Assessment Years 2008-09 to 2012-13 (orders passed under sections 201 and 201A of the Act in the case of the payer). Pursuant to the DRP’s directions, the impugned Final Assessment Order was passed on 24.11.2020.
Aggrieved by the Final Assessment Order, assessee has filed the present appeal before the Tribunal. Assessee has raised in total 15 grounds (including the additional grounds filed vide application dated 02.12.2022). However, during the course of hearing, the learned AR had only pressed ground No.8. The issue raised in ground No.8 relates to taxability of payment received by the assessee company on account of provision for interconnect services amounting to Rs.1,83,63,303/- as “royalty” under the provisions of the Act. The learned AR submitted that the issue in question is squarely covered by the judgment of the Hon’ble jurisdictional High Court in the case of Vodafone Idea Ltd., Vs. DDIT in of 2015 (order dated 14.07.2023).
IT(IT)A No.28/Bang/2021 Page 3 of 6
The learned DR was unable to controvert the assertions made by the learned AR.
We have heard the rival submissions and perused the material on record. The solitary issue is with regard to the payment received from Vodafone Idea Ltd., for interconnect usage charges, whether it is liable to be taxed as “royalty” under section 9(1)(vi) of the Act. The AO/DRP had brought the amount to tax in the hands of the assessee company solely relying on the orders passed under sections 201 and 201A in the case of the payer. The orders passed by the Tribunal in the case of the payer viz., VSL which was in favour of the Revenue has been reversed by the Hon’ble jurisdictional High Court in the case of Vodafone Idea Ltd., Vs. DDIT (supra). The relevant finding of the Hon’ble jurisdictional High Court reads as follows:
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 Technolgy. We may record 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 provisions of DTAA are also relevant, while applying tax deduction at source provisions." (Emphasis supplied)
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.
IT(IT)A No.28/Bang/2021 Page 4 of 6
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 becausein 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.
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 the impossible, namely, to apply the expandeddefinition of "royalty" inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time 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 deductable 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 etc35, rendered by the ITAT. 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 IT(IT)A No.28/Bang/2021 Page 5 of 6
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.”
The following orders of the Tribunal are also in sync with the above judgment of the Hon’ble jurisdictional High Court wherein it has been held that the interconnect charges are not taxable as “royalty” :
PCCW Global Ltd v. ACIT; IT(IT)A No. 785/Bang/2022 Telefonica Depreciation Espana SA v. ACIT; IT(IT)A No. 2657/Bang/2019 Telefonica Depreciation Espana SA v. ACIT; IT(IT)A No. 215 & 216/Bang/2023 AI Telekom v. DCIT; IT(IT) Nos. 336, 338 &339/Bang/2023 Belgacom International Carrier Services SA v. DCIT; IT(IT)A No. 196 to 200/Bang/2023 Bharti Airtel Ltd. v. ITO; [2016] 67 taxmann.com 223(Delhi)
The order of the co-ordinate Bench of the Tribunal in the case of PCCW Global Ltd v. ACIT (supra) is directly applicable to the facts of the assessee since the said case also relates to Hong Kong – non-treaty country. In light of the aforesaid judicial pronouncements, we hold that the amount received by assessee company from the Indian telecom operator for interconnect usage is not chargeable to tax as “royalty”. It is ordered accordingly.
IT(IT)A No.28/Bang/2021 Page 6 of 6
In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.