The Two member bench of Bangalore Income Tax Appellate Tribunal ( ITAT ) held that the receipt of Interconnect Utility Charges ( IUC ) charges cannot be taxed as Royalty under Article 12 India- Japan DTAA.
The Assessee, KDDI Corporation,is engaged in the business of providing telecommunication services. The assessee provides fixed, mobile, wholesale and associated telecommunication services across the globe.
Further assessee is a tax resident of Japan in accordance with Article 4 of the Double Taxation Avoidance Agreement between India – Japan and it is entitled to beneficial provisions of the India – Japan DTAA.
A proceeding under Section 201 of the Income Tax Act was initiated against Vodafone South Ltd. in respect of alleged non deduction of tax at source on payments made to its non-resident telecom operators for provision of bandwidth capacity and interconnect services. It is submitted that the said charges were considered as taxable by the revenue in case of VSNL both under the provisions of the act and the respective DTAAs.
On the basis of the proceedings initiated against VSNL, reassessment proceedings were initiated against the assessee for the years under consideration and notice under Section 148 of the Income Tax Act was issued to the assessee.
Accordingly the AO ordered that IUC received by the assessee are in the nature of ‘Royalty’ under the provisions of the act, as well under the India-Japan DTAA.
Aggrieved by the order the assessee filed an objection before the DRP confirmed the proposed addition , Accordingly, On receipt of the DRP directions, the AO passed the final assessment orders considering the receipt for interconnect utility charges as “royalty” in the hands of the assessee. Hence the assessee filed another appeal before the tribunal.
During the adjudication Arjit Prasad, the counsel for assessee submitted that on merits raised in above grounds, the decision of Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd had decided the similar issue in favor of assessee. Thus the payment received from Vodafone and other telecom operators in India is not taxable as ‘royalty’ as per DTAA.
Further argued that there is no “use of process” or any “use of equipment”. Hence, the entire assumption of “process royalty” / “equipment royalty” does not arise in the case of the assessee.
Dr. Subash K R, Counsel for Revenue, supported the order of lower authorities .
It was observed that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which interconnectivity charges are received by the assessee.
Further On perusal of the agreement between the assessee and the end users it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of “royalty” as contained in clause 3 of Article 12 of India-Japan DTAA.
After reviewing the facts, the ITAT bench of Beena Pillai (Judicial Member) and Laxmi Prasad Sahu (Accountant Member) held that the receipt of IUC charges cannot be taxed as Royalty under Article 12 of India-Japan DTAA.
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