Interconnectivity Utility Charges From Indian Customers/End Users Can’t Be Considered As Royalty/FTS: CESTAT

The Banglore Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that payments received by the assessee towards interconnectivity utility charges from Indian customers or end users cannot be considered royalties or fees for technical services (FTS).

The bench of Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) has observed that the payment received by the non-resident assessee amounts to the business profits of the assessee, which are taxable in the resident country and are not taxable in India under Article 5 of the Double Taxation Avoidance Agreement (DTAA), as there is no case of permanent establishment of the assessee that has been made out by the revenue in India.

The appellant/assessee is a telecom company incorporated in Spain and a tax resident of Spain. The assessee is in the business of providing telecommunications services, interconnection services, internet services, etc. The assessee entered into interconnect services agreements that enable subscribers of one telecom operator to call a subscriber of another operator in any part of the world and vice versa for receiving calls from subscribers of other operators. Interconnection agreements are entered into between two telecom operators to provide seamless service for carrying and delivering outbound and inbound calls.

The assessee received the amounts towards interconnect charges (IUC) from Indian telecom operators to provide seamless services for carrying and delivering outbound and inbound calls.

The assessee submitted that the receipts towards IUC charges are not taxable in India since these do not amount to royalty or FTS but would constitute the assessee’s business income.

The CESTAT noted 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 process involved in providing the services to the end users or customers is not secret," but a standard commercial process followed by industry players. The process also cannot be classified as a "secret process", as is required by the definition of "royalty" mentioned in clause 3 of Article 13 of the India-Spain DTAA.

"We are therefore of the opinion that the receipt of IUC charges cannot be taxed as royalty under Article 13 of the India-Spain DTAA," the CESTAT concluded.

Case Title: M/s. Telefonica Depreciation Espana Versus The ACIT(IT) or DCIT(IT)

Case No.: IT(IT)A Nos. 2657/Bang/2019, 180/Bang/2021 & 817/Bang/2022

Date: 10-08-2023

Counsel For Appellant: Sharath Rao

Counsel For Respondent: D.K. Mishra

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