Vodafone Idea Not Liable To Deduct TDS On Inter-Connectivity Usage & Bandwidth Charges: Karnataka High Court

The Karnataka High Court has held that the assessee, Vodafone Idea, is not liable to deduct TDS on interconnectivity usage and bandwidth charges.

The bench of Justice P.S. Dinesh Kumar and Justice Ramachandra D. Huddar has observed that since the assessee was entitled to the benefits under the Double Taxation Avoidance Agreement (DTAA), it was not liable to deduct tax at source.

The court has overturned the ITAT’s ruling in which the assessee was held to be a TDS defaulter on payment for inter-connectivity usage charges (IUC) and bandwidth charges to non-residents by classifying the sum paid as royalty.

The appellant/assessee, Vodafone Idea Ltd., entered into agreements with non-resident telecom operators (NTOs) for international connectivity and carriage services, for which it paid interconnection fees. The assessee entered into a capacity transfer agreement with a Belgian organisation to obtain bandwidth capacity on the Europe-India Gateway (EIG), which utilises a network of submarine cables. It led to the transfer of a portion of the assessee's bandwidth in the EIG to the Belgian company, which in turn transferred a portion of its capacity to the Assessee for a fee.

The AO issued a notice stating that the payments made by the assessee to NTOs and Belgacom for the years 2008–09 to 2015–16 were made without deducting TDS under Section 195 of the Income Tax Act 1961 and that the assessee was liable to be treated as a defaulter under Section 201.

The assessee sent its reply, explaining that the NTOs are located outside India and that they provide telecom services outside India. Hence, it was not necessary to deduct TDS in India.

The AO passed an assessment order holding the assessee as ‘defaulter’ for failure to deduct TDS while making payments to the NTOs and Belgacom. The AO also held that payments made to NTOs for the provision of bandwidth and IUC are taxable under the heading ‘other income’ and treated the same as royalty or FTS.

The Assessee challenged the AO’s order before the CIT (A). The CIT (A) dismissed the assessee’s appeal, holding that payments made to NTOs are chargeable to tax in India under Section 195 as Royalty. The IUC payments could not be taxed under the heading ‘other income’. The issue regarding FTS was not adjudicated.

The assessee contended that the payments made by the assessee cannot be characterised as royalty, FTS, or business profits as no part of the activity was admittedly carried out in India.

The court invoked 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 a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused. In other words, the court held that the assessee is not obliged to do the impossible, and even otherwise, the AYs under consideration were 2008-09 to 2012-13, and the Explanations were inserted by the Finance Act, 2012.

The court stated that India's Revenue Authorities have no jurisdiction to tax income arising from extra-territorial sources when facilities are situated outside India where the NTOs and the Belgian entity do not have any presence in India.

Case Title: M/S. Vodafone Idea Limited Versus Deputy Director Of Income Tax

Case No.: ITA NO. 160 OF 2015

Citation: 2023 LiveLaw (Kar) 288

Date: 14/07/2023

Counsel For Appellant: Percy Pardiwala

Counsel For Respondent: G.C. Srivatsava

Click Here To Read The Order