Interconnectivity utility charges not taxable as royalty in absence of PE

Hearing an appeal involving the issue regarding taxability of inter-connectivity utility charges, the Bangalore Income Tax Appellate Tribunal held that payments received by a non-resident company towards interconnectivity utility charges from Indian customers and end users, could not be treated as Royalty for purpose of taxing such payment under Section 9(1)(vi) of the Income Tax Act and as per the India-Austria Double Taxation Avoidance Agreement (DTAA).

A Division Bench of Ms. Beena Pillai, Judicial Member, and Mr. Chandra Poojari, Accountant Member, observed that that payment received by the non-resident Assessee amounted to business profits of the Assessee which were taxable in the resident country, i.e., Austria and was not taxable in India as per Article 5 of the DTAA. The Bench also observed that the Assessee had no Permanent Establishment in India in order for the receipt to be taxable in India.

The Appellant-Assessee was represented by Mr. Siddhesh Chaugule, Advocate, whereas the Respondent-Revenue was represented by Mr. Sathyasai Rath, CIT (DR).

The Assessee is a tax resident of Austria and is engaged in the Telecommunications sector and provides telecommunication services, interconnect services, internet services, etc.

In the relevant period, proceedings under Section 201 were commenced against M/s Vodafone South Limited in respect of non-deduction of tax at source on payments made to non-resident telecom operators, for providing bandwidth capacity and interconnect services. Such payments were deemed to be Royalty and Fees For Technical Service (FTS) under the Income Tax Act 1961 and under the India-Austria Double Taxation Avoidance Agreement (DTAA).

It was observed by the Revenue that M/s Vodafone South Limited made payment to the Assessee-company for interconnect utility and on which, the Assessee neither paid tax nor deducted tax at source. The Assessee was also found to not have filed Income Tax Returns for the relevant AYs. Thus the Revenue opined that taxable income had escaped assessment and issued Show Cause Notice under Section 148 of the Act, proposing to re-open assessment for the relevant AYs.

The Assessee neither filed any reply to Show Cause Notice issued under Section 148 nor to notices under Section 139 of the Act issued for delay in filing Income Tax Return. Another notice was issued by the AO, proposing to tax under the Income Tax Act and the India-Austria DTAA, the amount paid by M/s Vodafone South Ltd to the Assessee for provision of inter-connect services.

As the Assessee filed no reply to the notice, the AO passed ex parte order by bringing to tax the amount received by the Assessee as Inter-connect utility charges as FTS/Royalty.

In respect of AYs 2011-12 and 2012-13, the Assessee responded to the statutory notices and necessary communications as required under Section 144C, for the AO to pass final assessment order.

On appeal, the Commissioner of Income Tax (Appeals), 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.

On considering the contentions of both sides, the Bench observed that at no point of time, any possession or physical custody, control or management over any equipment had been received by the end users or customers.

The Bench also noted that the process involved in providing the services to the end users or customers was not “secret”, but rather, a standard commercial process followed by the industry players. Therefore, the said process also could not be classified as a “secret process”, as was required by the definition of “Royalty” mentioned in clause 3 of Article 13 of India-Austria DTAA.

Therefore, the Bench concluded that the receipt of Inter-connect Utility Charges could not be taxed as Royalty under Article 13 in India of India-Austria DTAA.

Cause Title: M/s. Al Telekom Austria Aktiengesellschaft vs. The Deputy Commissioner of Income Tax, (International Taxation), Circle – 2(2), Bangalore [IT(IT)A Nos. 336, 338 & 339/Bang/2023 / 2023-Enterslice-19-ITAT-Bang]

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