Payments Received Towards Interconnectivity Utility Charges From Indian Customers Is Not Royalty: ITAT
The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that payments received by the assessee towards interconnectivity utility charges from Indian customers or end users cannot be considered royalties to be brought to tax in India.The bench of Beena Pillai (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) has observed that at no point in time, any possession,...
The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that payments received by the assessee towards interconnectivity utility charges from Indian customers or end users cannot be considered royalties to be brought to tax in India.
The bench of Beena Pillai (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) has observed that at no point in time, any possession, physical custody, control, or management over any equipment is received by the end users or customers. The bench noted that the process involved in providing the services to the end users or customers is not “secret” but a standard commercial process followed by industry players. Therefore, the process also cannot be classified as a “secret process," as is required by the definition of “royalty” mentioned in clause 3 of Article 12 of the India-Japan DTAA.
The assessee/appellant is incorporated in Japan and is in the business of providing telecommunication services. The assessee provides fixed, mobile, wholesale, and associated telecommunication services across the globe. The assessee is a tax resident of Japan in accordance with Article 4 of the Double Taxation Avoidance Agreement between India and Japan (DTAA), and it is entitled to the beneficial provisions of the India-Japan DTAA.
The assessee does not have any presence in India, either in the form of an office, a branch, or any other fixed place of business in India. The assessee provided telecom interconnect facilities to various Indian telecom operators, including Vodafone South Ltd., and has received payment on account of interconnect usage charges.
The AO passed the final assessment orders, considering the receipt for interconnect utility charges as “royalty” in the hands of the assessee.
The assessee contended that Explanations 5 and 6 do not override the DTAA between India and Japan. Hence, the subject payment received from Vodafone and other telecom operators in India is not taxable as 'royalty' as per DTAA.
By insertion of Explanations 5 and 6, the meaning of the word 'process' has been widened. As per these explanations, the word 'process' need not be'secret', and the status of control and possession of rights, property, or information has been rendered irrelevant. However, all the changes in the Act do not affect the definition of 'royalty' as per DTAA. The word employed in DTAA is 'use or right to use', in contradistinction to “transfer of all or any rights” or 'use of', in domestic law. As per Explanations 5 and 6, the word 'process' includes and shall be deemed to include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber, or any other similar technology, whether or not such process is secret. However, the explanation does not do away with the requirement of successful exclusivity of such a right in respect of such a process being with the person claiming 'royalty' for granting its usage to a third party.
The tribunal, while allowing the appeal of the assessee, held that the receipt of IUC charges cannot be taxed as royalty under Article 12 of the India-Japan DTAA.
Counsel For Appellant: Arjit Prasad
Counsel For Respondent: Dr. Subash K R
Case Title: M/s. KDDI Corporation Versus The Deputy Commissioner of Income Tax (International Taxation)
Case No.: IT(IT)A Nos. 100 to 102/Bang/2024