Relief to Airtel, Charges Paid for Bandwidth to Overseas Telecom Operators Do Not Amount to  Royalty under Income Tax Act: Delhi HC [Read Order]

In the case of Bharati Airtel, the Delhi High Court has dismissed an appeal preferred by the Income Tax Department and held that charges paid for bandwidth to overseas telecom operators do not amount to royalty under the Income Tax Act, 1961.

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The revenue challenged the Income Tax Appellate Tribunal [ITAT]  order in favour of the respondent assessee. The Assessing Officer [AO] passed an order dated 28.03.2017 under Section 201(1)/201(1A)/195 of the Act holding that the respondent [Assessee] was an assessee in default as it had failed to deduct the withholding tax on the payments made to overseas entities.  The AO had found that certain payments, which were made for bandwidth charges to foreign telecom service providers as well as the annual maintenance charges and other charges, were either like fees for technical services [FTS] or royalties and thus were chargeable to tax under the Act.

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Consequently, the Assessee was obliged to deduct and deposit tax at source (TDS).

The Assessee had appealed the said decision before the CIT(A).  The CIT(A) had partially allowed the appeals. Whilst it accepted the Assessee’s contention regarding certain charges being remitted to entities overseas that were not chargeable to tax, and therefore, it was not obliged to deduct tax at source, it rejected the assessee’s contention that bandwidth charges paid to telecom service providers overseas are not like royalties.

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The Revenue as well as the assessee appealed the said decision before the learned ITAT. While the Revenue was aggrieved by the decision to the extent that the decision of the AO had been set aside, the assessee was aggrieved by the decision to reject its contention that bandwidth charges paid to overseas telecom service providers were not FTS or royalty.

It thus preferred an appeal before ITAT, which held that payment for bandwidth service does not qualify as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

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Section 9 deals with cases where income is deemed to accrue or arise in India. Section 9(1)(vi)/ (vii) deals with cases where Royalty or fees for technical services (FTS) is deemed to be accrued or arise in India.

A division bench of Justices Vibhu Bakhru and Tejas Karia held that where those availing services provided by a foreign telecom company were not accorded a right over the technology, infrastructure or any intellectual property, the agreements merely enabling the availment of services cannot be construed as royalty taxable in India.

While dismissing the revenue’s appeal, the High Court observed that undisputedly, the questions raised are covered by the earlier decisions of the court in New Skies Satellite BV [68 taxmann.com8] [2016] and CIT v. Telstra Singapore Pte. Ltd. : [2024]. Thus, the charges paid for bandwidth to overseas telecom service providers cannot be construed as royalties in the meaning of Section 9(1)(vi) of the Act.

To Read the full text of the Order CLICK HERE

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