The Delhi Bench of Income Tax Appellate Tribunal(ITAT) ruled in favor of Bharti Airtel Ltd., stating that bandwidth charges were exempt from Tax Deducted at Source (TDS) as they do not constitute royalty under Section 9(1)(vi) of the Income Tax Act,1961 or relevant Double Taxation Avoidance Agreements (DTAAs).
Bharti Airtel Limited,the appellant-assessee, a resident corporate entity providing mobile telecom services in India. Following information on non-compliance with TDS provisions, the Assessing Officer(AO) initiated proceedings under Section 201 of the Act.
During these proceedings, the AO found that the assessee had made substantial payments for communication, roaming, bandwidth, and other charges without deducting TDS or deducting it at a lower rate. Specifically, for bandwidth charges paid to Foreign Telecom Service Providers, the AO noted the failure to deduct tax at source and issued a show-cause notice to the appellant-assessee.
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In response, the assessee argued that the bandwidth charges were for standard services and did not qualify as “Technical Services” under domestic law or relevant DTAAs. They asserted that the payments should be considered business income for the foreign entities and not taxable in India due to the absence of a Permanent Establishment(PE).
However, the AO rejected these arguments, stating that the payments were in the nature of royalty under Section 9(1)(vi) of the Act. He concluded that the assessee was required to deduct TDS at 20%. Since the assessee failed to do so, the AO raised demands under Section 201(1) and imposed interest under Section 201(1A).
The assessee appealed the AO’s decision to the learned first appellate authority, who found that the remittances for bandwidth charges were not Fee for Technical Services (FTS) since they were standard services. However, he classified them as ‘equipment royalty’ or ‘process royalty’ under Section 9(1)(vi).
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The authority stated that the classification as royalty depended on relevant DTAAs, citing the Delhi High Court’s ruling in New Skies Satellite BV. He concluded that payments to foreign telecom providers in countries with DTAAs were not considered royalty, while those to providers in countries without agreements could be. Ultimately, he granted partial relief to the assessee.
The Tribunal considered the rival submissions and materials on record, finding that the issue had been conclusively decided in favor of the assessee by the Jurisdictional High Court in CIT Vs. Telstra Singapore Pte. Ltd. The court addressed the taxability of bandwidth charges as royalty income and interpreted Section 9(1)(vi) of the Act.
The Court concluded that bandwidth charges could not be treated as royalty for using or having the right to use equipment, secret formulas, or processes. It emphasized that amendments to domestic law did not automatically apply to treaty provisions without corresponding changes.
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The bench noted that findings from the New Skies Satellite BV case confirmed that the amendments to Section 9 did not affect the relevant DTAAs. It stated that remittances to foreign telecom providers in countries with treaties were not considered royalty, while those in non-treaty countries could be.
The two member bench comprising Saktijit Dey(Vice President) and Naveen Chandra (Accountant Member) held that the bandwidth charges paid by the assessee were not classified as royalty under either the treaty provisions or Section 9(1)(vi) of the Act, concluding that the assessee was not required to deduct TDS.
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