The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held 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.
The assessee/appellant M/s. KDDI Corporation is incorporated in Japan and is in the business of providing telecommunication services. The assessee provides fixed, mobile, wholesale, and associated telecommunication services across the globe. The assessee is a tax resident of Japan in accordance with Article 4 of the Double Taxation Avoidance Agreement between India and Japan (DTAA), and it is entitled to the beneficial provisions of the India-Japan DTAA.
The assessee does not have any presence in India, either in the form of an office, a branch, or any other fixed place of business in India. The assessee provided telecom interconnect facilities to various Indian telecom operators, including Vodafone South Ltd., and has received payment on account of interconnect usage charges. The AO passed the final assessment orders, considering the receipt for interconnect utility charges as “royalty” in the hands of the assessee.
The assessee contended that Explanations 5 and 6 do not override the DTAA between India and Japan. Hence, the subject payment received from Vodafone and other telecom operators in India is not taxable as ‘royalty’ as per DTAA.
It was further observed that the payment received by the non-resident assessee amounts to the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India.
The two-member bench of Beena Pillai (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) has observed that 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. Therefore, the process also cannot be classified as a “secret process,” as is required by the definition of “royalty” mentioned in clause 3 of Article 12 of the India-Japan DTAA.
While allowing the appeal of the assessee, the ITAT held that the receipt of IUC charges cannot be taxed as royalty under Article 12 of the India-Japan DTAA.
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