The Bangalore Bench of Income Tax Appellate Tribunal) ITAT) has held that the receipt of interconnectivity utility charges (IUC) from Indian customers or end users could not be taxed as royalty or Fee for Technical Services (FTS) under Section 9(1)(vi)/(vii) of Income Tax Act, 1961 and also as per India-Spain Double Taxation Avoidance Agreement.
The assessee, Telefonica is a telecom company incorporated and a tax resident of Spain, engaged in the business of providing telecommunications services, interconnection services, internet services, etc. The assessee entered into interconnect services agreements that enabled subscribers of one telecom operator to call a subscriber of another operator in any part of the world and vice-versa for receiving the calls from subscribers of other operators.
It was submitted that the interconnection agreements were entered into between two telecom operators to provide seamless service of carrying/delivering outbound and inbound calls. The assessee received the amounts towards interconnect charges from Indian telecom operators, namely Bharti Infotel Limited, Tata Communications Limited and Vodafone Essar South Limited, to provide seamless services of carrying/delivering outbound and inbound calls.
Based on the AY 2010-11, the AO issued notice under Section 148 of the Income Tax Act for AY 2011-12 and 2012-13 and concluded the assessment by making addition in the hands of assessee as Royalty and taxed at 10% thereon for A.Y. 2011-12.
Sharath Rao, who appeared on behalf of the assessee submitted that the receipts towards IUC charges were not taxable in India since these would not amount to Royalty / FTS, but would constitute assessee’s business income. And, as the assessee had no permanent establishment in India, the same would not be attributed towards any income earned in India.
He also submitted that the services rendered by the assessee were standard telecom services which were automated, requiring no human intervention and the same could not be considered as FTS.
D.K. Mishra, who appeared on behalf of the revenue, relied on the orders passed by the authorities and vehemently argued the observations as recorded by the revenue in their orders.
The two-member Bench of Chandra Poojari, (Accountant Member) and Beena Pillai, (Judicial Member) allowed the appeal filed by the assessee referring to the decision in case of “Vodafone Idea Ltd and Vodafone South Ltd” and held that payments received by assessee towards interconnectivity utility charges from Indian customers / end users could not be considered as Royalty / FTS to be brought to tax in India under Section 9(1)(vi)/(vii) of the Income Tax Act and also as per DTAA.
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