Payment made to non-resident company for providing roaming services cannot be characterized as ‘royalty’

The Mumbai Income Tax Appellate Tribunal upholds that income received by a UK telecom company (Assessee) from an Indian telecom company in lieu of rendering roaming services to its customers abroad cannot be considered as ‘royalty’ as stipulated under Section 9(1)(vi) or Article 13 of India-UK DTAA in absence of a grant of right to use the process or property to the said Indian telecom company.

A Division Judge Bench of Justice Amit Shukla and Accountant Member Gagan Goyal observed that “a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment.”

“In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of the Court, indefensible”, added the Bench.

Advocate Hiten Chande appeared for the Assessee whereas Advocate A. Anbuselvam appeared for the Revenue.

The brief facts of the case were that the Assessee entered into an agreement with Vodafone Idea Limited (VIL) to provide roaming services to VIL’s customers while they are in the UK and consequently received Rs.45 Cr from VIL in lieu of roaming services which was not offered to tax since the services were provided outside India. Revenue initiated reassessment proceedings and by relying on Madras HC ruling in Verizon and coordinate bench ruling in Vodafone South (subsequently reversed by Jurisdictional HC in Vodafone Idea) held that the amount received by Assessee in lieu of roaming service is covered within the meaning of ‘process’ stipulated in Explanation to Section 9(1)(vi) to constitute royalty. Hence, the Assessee approached the Bench for justice. 

After considering the submission, the Bench noted that it is evident that no right as mentioned in Explanation 2 to Section 9(1)(vi) or any kind of use of any process/equipment has been provided to VIL.

The Bench opined that there is nothing on record to suggest that VIL has the right to use or has used the process/equipment owned by the Assessee and it is amply clear that the Assessee is using its own process/equipment and network to render roaming services to customers of VIL in the UK.

The Bench stated by relying on Bangalore ITAT ruling in M/s. Telefonica Depreciation Espana SA vs. CIT in ITA No.2657/BANG/2019, 180/BANG/2022& 817/BANG/2022 for the A.Yrs. 2010-11 to 2012-13, that the broader definition of process to constitute royalty in terms of Explanation 5 and 6 cannot affect the definition royalty stipulated in Article 13 India-UK DTAA in absence of amendment to the said DTAA.

The Bench also expressed by relying on SC ruling in Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT reported in 432 ITR 471 as well as Delhi HC ruling in New Skies Satellite N.V. (126 TTJ 1) (Delhi Tribunal), Vodafone South Ltd. the difference on the premise that it has not given any reason for reading the amendment to the Act into the provisions of DTAA and held that applying domestic law amendment to DTAA is illegal.

Further on relying on the jurisdictional HC ruling in CIT Vs. Reliance Infocomm Ltd. in ITA No.1395 of 2016 stated that payment made to a non-resident company for providing standard bandwidth services cannot be characterised as ‘royalty’ under DTAA.

On finding amount received by the Assessee from VIL in the form of roaming charges is not taxable, the Bench allowed the Assessee’s appeal.

Cause Title: M/s. Telefonica UK Limited Vs. Deputy Commissioner of Income Tax (DCIT) [ITA No.771/Mum/2023 / 2023-Enterslice-49-ITAT-Mum]

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