Interconnectivity Utility Charges Can’t Be Taxed As Royalty Under India-Austria Tax Treaty: ITAT

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that interconnectivity utility charges (IUC) cannot be taxed as royalty under the India-Austria Double Taxation Avoidance Treaty (DTAA).

The bench of Beena Pillai (Judicial Member) and Chandra Poojari (Accountant Member) has observed 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 under Section 9(1)(vi) of the Income Tax Act and also as per DTAA.

The assessee company is a non-resident telecommunications operator engaged in the business of telecommunication services, interconnect services, internet services, etc. and is a tax resident of Austria.

The proceedings under Section 201 were initiated for the non-deduction of tax at source on payments made to non-resident telecom operators (NTOs) for the provision of bandwidth capacity and for the provision of interconnect services. The charges were considered royalties or FTS both as per the Income Tax Act and the respective DTAAs.

The CIT(A) thus held that the payment received by the assessee for interconnect charges would amount to royalty under the provisions of the act as well as DTAA.

The assessee contended that the DTAA would prevail over the Income Tax Act. Explanations 5 and 6 do not override the DTAA between India and Austria. Hence, the payment received from Vodafone and Bharti Airtel is not taxable as 'royalty' as per DTAA.

The department characterised the payments received by the assessee towards interconnectivity utility charges as royalty since the payment is made to "use the process" or "an equipment".

The tribunal noted that various service providers in India entered into agreements with the assessee for international carriage and connectivity services, against which interconnectivity charges are received by the assessee. The term "process" used under Explanation 2 to Section 9(1)(vi) in the definition of 'royalty' does not imply any 'process' that is publicly available. The term "process" occurring under clauses (i), (ii), and (iii) of Explanation 2 to Section 9(1)(vi) means a process," which is an item of intellectual property.

The ITAT held that the payments made by the assessee in lieu of services provided by the assessee cannot fall within the ambit of royalty under Section 9(1)(vi) Explanation 5 and 6.

Case Title: M/s. Al Telekom Austria Versus The Deputy Commissioner of Income Tax

Case No.: IT(IT)A Nos. 336, 338 & 339/Bang/2023

Date: 25-08-2023

Counsel For Petitioner: Siddhesh Chaugule

Counsel For Respondent: Sathyasai Rath

Click Here To Read The Order