Vodafone Idea Not Liable To Deduct TDS On Charges Paid To Non-Resident Telecom Operators : Supreme Court

Dismissing a petition filed by the Income Tax Department, the Supreme Court recently upheld the view that Vodafone Idea is not liable to deduct TDS (tax deducted at source) on interconnectivity usage and bandwidth charges paid to non-resident telecom operators.

A bench of Justices BV Nagarathna and N Kotiswar Singh observed that the case was covered by the 2021 decision in Engineering Analysis Centre for Excellence Private Ltd v. The Commissioner of Income Tax and Anr., where it was held that payments made by Indian companies to non-residents for use of software cannot be taxed as 'royalty'.

Notably, the three-judge bench in Engineering Analysis had ruled that such payments do not give rise to income taxable in India and therefore, there is no liability for Indian companies to deduct tax at source with respect to purchase of software from foreign companies.

In dismissing the instant plea, which was filed against a Karnataka High Court order, the bench of Justices Nagarathna and Singh also followed the order dated April 23, 2024 passed in The Commissioner of Income Tax v. GE India Technology Private Limited Etc., whereby a batch of review petitions against the Engineering Analysis judgment were dismissed - both on the ground of delay and merits.

Background

Vodafone Idea Ltd. (assessee) entered into agreements with non-resident telecom operators (NTOs) for international connectivity and carriage services, for which it paid interconnection fees. It executed a capacity transfer agreement with a Belgian organization (Belgacom) to obtain bandwidth capacity on the Europe-India Gateway (EIG), which utilizes a network of submarine cables.

This led to the transfer of a portion of Vodafone's bandwidth in the EIG to the Belgian company, which in turn transferred a portion of its capacity to Vodafone for a fee.

The Assessing Officer issued a notice stating that payments by Vodafone 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 Vodafone was liable to be treated as a defaulter under Section 201.

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

The AO passed an assessment order declaring Vodafone 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 Interconnect Utility Charges (IUC) were taxable under the heading 'other income' and treated the same as royalty or FTS (Fee for Technical Services).

Vodafone challenged the AO's order before Commissioner of Income Tax (Appeals), however, CIT (A) dismissed the appeal, holding that payments made to NTOs were chargeable to tax in India under Section 195 as 'Royalty' and IUC payments could not be taxed under 'other income'. The issue regarding FTS, however, was not adjudicated.

When Vodafone approached the High Court, the ITAT's ruling in which Vodafone was held to be a TDS defaulter, was overturned. It was observed that since Vodafone was entitled to the benefits under the Double Taxation Avoidance Agreement (DTAA), it was not liable to deduct tax at source.

Challenging the High Court order, the IT department moved the Supreme Court.

Case Title: Deputy Director of Income Tax & Anr. v. M/S. Vodafone Idea Ltd., SLP(C) Diary No.24154/2024

Citation :2024 LiveLaw (SC) 522

Click here to read/download the order