Introduction
The Income Tax Appellate Tribunal, Bangalore Bench (‘ITAT’) has, in the matter of M/s Globe Teleservices Ltd. v. Deputy Commissioner of Income Tax (International Taxation)[i], held that interconnect utility charges (‘IUC’) do not constitute ‘royalty’ under s. 9(1)(vi) of the Income-tax Act, 1961 (‘Act’).
Brief Facts
The Assessee, M/s Globe Teleservices, a non-resident company registered in Hong Kong, received a payment of approximately Rs. 20 lakhs and 36 lakhs for assessment years (‘AY’) 2014-15 and 2017-18, respectively, from one M/s Vodafone South Ltd., an Indian entity.
The Assessee and the Indian entity had entered into an agreement for international carriage and connectivity services, and the aforementioned payments were made in pursuance of such IUC.
Upon examination, the assessing officer (‘AO’) opined that the Assessee’s income was taxable in India as the deductor had failed to deduct the tax deductible at source (‘TDS’) under s. 191 of the Act. Consequentially, the AO initiated reassessment proceedings against the Assessee under s. 148 of the Act.
Subsequently, a draft assessment order was passed under s. 147 of the Act, wherein it was held that the payment made by the Indian entity to the Assessee was royalty under s. 9(1)(vi) read with exps. 2 and 6 of the Act. The views of the AO and the observations made vide the draft assessment order were affirmed by the Dispute Resolution Panel (‘DRP’) relying on the Madras High Court’s decision in M/s Verizon Communications[ii]. Resultantly, the AO made additions to the Assessee’s income for AYs 2014-15 and 2017-18. Aggrieved by such an order passed by the AO, the Assessee was constrained to file the present appeal.
Held
The ITAT, while partially ruling in favour of the Assessee, held that the payment received by the Assessee could not be considered as royalty under s. 9(1)(vi) of the Act. The grounds challenging the reopening of assessments were dismissed as not pressed, and those challenging the classification of payments as royalty for both AYs were allowed.
The ITAT noted that there was no transfer of any intellectual property rights and/or any other exclusive rights by the Assessee in favour of the Indian entity and further that there was no double taxation avoidance agreement (‘DTAA’) between India and Hong Kong during the relevant years.
It was observed that the term ‘process’ under exp. 2 to s. 9(1)(vi) of the Act refers to intellectual property, which was not transferred and even upon examining exps. 5 and 6 inserted by the Finance Act, 2012, it could not be concluded that the payments made in the aforementioned case would qualify/be construed as ‘royalty’ under the Act and thus be taxable as same.
The ITAT referred to decisions of the Authority for Advance Ruling (‘AAR’) and other forums that clarified that the ‘use’ or ‘right to use’ must involve control and possession of the property by the service recipient. Further, considering the Assessee had no permanent establishment in India, the receipts were taxed as business profit in the recipient country, i.e., Hong Kong.
Our Analysis
While providing clarity on the taxability of IUC, which has been a contentious issue for non-resident companies providing such services to Indian entities, this decision also interprets the term ‘process’ entirely. The ITAT laid down that the term ‘process’ in exp. 2 to s. 9(1)(vi) of the Act does not imply any ‘process’ publicly available. Instead, it refers to a ‘process’ which is an item of intellectual property.
The decision of the ITAT in the present matter holds significant importance, especially regarding the taxability of payments made by Indian entities to non-resident entities. It reinforces the principle that, for payments to be classified as ‘royalty’ under the Act, there ought to be a clear transfer of rights or intellectual property. A mere expansion of definitions and/or wide interpretation of the amendments that have been made subsequently cannot alter the nature of such payments under existing DTAA terms.
End Notes
[i] [2024] 163 taxmann.com 73 (Bangalore – Trib.), dated 25.04.2024.
[ii] Verizon Communications Singapore Pte Ltd. v. ITO, International Taxation, [2013] 39 taxmann.com 70 (Madras)
Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.