Bharti Airtel Not Liable To Pay TDS Towards Remittance Of Bandwidth Charges And Agency Fees: Delhi ITAT

Since bandwidth charges are not royalty, the ITAT held that assessee was not required to deduct tax at source on such receipts.

Where the payment for use or right to use computer software, falls within the definition of royalty u/s 9(1)(vi) of Income tax Act, the Payor is required to withhold tax u/s Section 195, unless such payments do not meet the definition of 'royalty', under the relevant DTAAs.

Referring to decision of CIT Vs. Telstra Singapore, the Division Bench comprising Saktijit Dey (Vice-President) and Naveen Chandra (Accountant Member) reiterated that telecom service providers had not accorded right over the technology while providing bandwidth services.

Since the customer was not provided any effective control over any intellectual property or equipment, the Bench observed that bandwidth charges cannot be treated as royalty for use or right to use of an equipment.

As per the facts of the case, the assessee, a telecom service provider in India, remitted substantial amounts towards communication charges, cellular roaming charges, bandwidth charges, FTS & AMC charges. The AO observed that while remitting such amounts to the Foreign Telecom Services Providers, the assessee has failed to deduct tax at source (TDS) and accordingly, issued notice u/s 201. Further, the AO held that the remittances made by assessee, being in nature of royalty u/s 9(1)(vi), the assessee was required to deduct TDS at the rate of 20%. Since the assessee failed to deduct TDS on such remittances, the AO raised demands u/s 201(1) and also levied interest u/s 201(1A).

On appeal, the CIT(A) held that the remittances made to foreign telecom service providers cannot be treated as royalty in cases where such telecom service providers are located in countries with whom India has signed DTAAs. However, he held that the remittances can be treated as royalty in cases where payments were made to foreign telecom service providers located in countries with whom India has not signed any agreement. Hence, the assessee approached the Tribunal.

The Bench noted that the present case is squarely covered by the jurisdictional High Court judgment in Telstra Singapore, as regards an identical issue relating to taxability of bandwidth charges as royalty income, wherein it was held that bandwidth charges cannot be treated as royalty for use or right to use of an equipment.

Also, the Bench reiterated that the consideration that the service recipient pays cannot be recognized as being intended to acquire a right in respect of a patent, invention, process or equipment.

Thus, the Bench observed that bandwidth charges remitted by assessee to the service providers cannot be treated as royalty either under the treaty provisions or under section 9(1)(vi), and therefore, assessee was not required to deduct TDS.

As regards demand raised on account of non-deduction of TDS on payment of agency fees, the Bench noted that since the Indian branch of the payee has not played any role in arranging loan or reimbursement of interest, no part of receipt towards agency fee can be attributed to the Indian branches.

Since no part of receipt towards agency fee can be attributed to the Indian branches, there was no liability on assessee to deduct TDS, added the Bench.

The Bench observed that even though the payee banks have branches in India, the Indian Branches had not played any role either in arranging loan or reimbursement of loan.

Finding that AO did not record any finding regarding the role played by Indian branch, the Bench observed that no part of the agency fee can be attributed to the Indian branches, even if they are held as PE.

As regards taxability of annual maintenance charges (AMC) paid to certain foreign companies as FTS requiring deduction of TDS, the Bench noted that assessee had remitted certain amounts to foreign entities towards AMC without deducting tax at source or in some cases, deducted at a lesser rate than the applicable rate.

Taking note of assessee's stand that services rendered do not qualify as technical services, the Bench found that said stand was taken for the first time, and therefore, restored the issue to the file of AO to factually verify assessee's claim.

Therefore, the ITAT partly allowed the Assessee's appeal.

Counsel for Appellant/ Assessee: Anil Bhalla

Counsel for Respondent/ Revenue: Vijay B. Vasanta

Case Title: Bharti Airtel Limited vs. Assistant CIT

Case Number: ITA No.7891/Del/2019

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