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2024 Supreme(Online)(ITAT) 2331
INCOME TAX APPELLATE TRIBUNAL (BANGALORE BENCH)
SMT. BEENA PILLAI, J, SHRI LAXMI PRASAD SAHU, ACJ
KDDI CORPORATION JAPAN – Appellant
Versus
DEPUTY COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION) CIRCLE 2(1) BANGALORE KARNATAKA BANGALORE – Respondent
ITA 100/BANG/2024[2013-14]
For the Appellants/Petitioners: Ld.AR
For the Respondents: Ld.DR
Payments for interconnectivity utility charges do not constitute 'royalty' and are not taxable in India as per the India-Japan DTAA, as no exclusive rights were granted.
Headnote:(A) Income Tax Act - Sections 9(1)(vi), 201, 144C(1) - Double Taxation Avoidance Agreement between India and Japan - Tax implications for telecom services - Payment classified as 'royalty' by revenue - Assessee argued payments for interconnect utility charges not taxable as 'royalty' per DTAA, supported by Karnataka High Court ruling - No presence of assessee in India. (Paras 2, 7.2.20)
(B) Legal Definitions - Definition of 'royalty' under tax treaty entails 'use' of intellectual property - Payment to assessee does not confer 'use', lacking control or possession, thus not royal payment. (Paras 7.2.8, 7.2.21)
(C) Jurisdiction - Indian tax authorities cannot tax income earned outside India when no permanent establishment exists. (Paras 7.2.19, 7.2.21)
Facts of the case:
The appeals arose from the assessee, a Japanese entity providing telecommunications services, contesting the interpretation of interconnect utility charges as 'royalty' and the validity of tax deductions by the Indian revenue. The reassessment was pursued regarding IUC payments received for the assessment years 2013-14 to 2015-16.
Findings of Court:
The Tribunal concluded that the payment received by the non-resident did not constitute 'royalty' taxable in India, recognizing payments as business profits not subject to Indian taxation.
Issues: The primary issues encompassed the classification of interconnectivity utility charges as 'royalty' and the jurisdiction of Indian tax authorities over offshore income.
Ratio Decidendi: The court reasoned that the nature of the charges did not meet the criteria for 'royalty' as defined in the DTAA, emphasizing that no exclusive rights were granted to support such classification.
Result: Appeals partly allowed.
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeals are filed by assessee against the separate orders passed by the Ld.CIT(International Taxation), Circle – 2(1), Bangalore for A.Ys. 2013-14 to 2015-16.
2. Brief facts of the case are as under:
2.1 It is submitted by the Ld.AR that assessee is incorporate in Japan and is engaged in the business of providing telecommunication services. The assessee provides fixed, mobile, wholesale and associated telecommunication services across the globe.
2.2 It is further submitted that the assessee is a tax resident of Japan in accordance with Article 4 of the Double Taxation Avoidance Agreement between India – Japan (“DTAA” or “tax treaty”) and it is entitled to beneficial provisions of the India – Japan DTAA. It is also submitted that the assessee does not have any presence in India either in form of an office, a branch or any other fixed place of business in India.
2.3 The Ld.AR submitted that for the years under consideration, the assessee provided telecom interconnect facility to various Indian telecom operators including Vodafone South Ltd. and has received payment on account of interconnect usage charges as under:
| S.No. | Assessment Year | Amount |
| 1. | 2013-14 | 35,18,79,980/- |
| 2. | 2014-15 | 36,53,06,495/- |
| 3. | 2015-16 | 39,58,29,947/- |
2.4 It is submitted that a proceeding u/s. 201 of the 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.
2.5 On the basis of the proceedings initiated against VSNL, reassessment proceedings was initiated against the assessee for the years under consideration and notice u/s. 148 of the act was issued to the assessee.
2.6 Thereafter the Ld.AO passed an order dated 29.03.2023 u/s. 144C(1) of the act holding 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.
2.7 Aggrieved by the order of the Ld.AO, the assessee filed objections before the DRP. The DRP after hearing the submissions of the assessee, passed direction dated 28.11.2023, and held that, since the revenue has not accepted the decision of the Hon’ble High Court and contemplated filing Special Leave Petition before the Hon’ble Supreme Court, the issue is sub judice and thus, to keep the issue alive the DRP confirmed the proposed addition by the Ld.AO. Further the Ld.DRP, in its directions dated 28.11.2023 ought to tax IUC as other income under Article 22 of India-Japan DTAA considering IUC is not specifically covered in the definition of royalty under Article 12 of tax treaty.
2.8 On receipt of the DRP directions, the Ld.AO passed the final assessment orders considering the receipt for interconnect utility charges as “royalty” in the hands of the assessee.
2.9 Aggrieved by the final assessment order, the assessee preferred appeal before this Tribunal.
3. At the outset, the Ld.AR vide submission dated 04.04.2024 restricted the arguments only relating to the issues on merits. In connection to the same, the Ld.AR has filed the following details in the synopsis as under:
4. Based on the above submission by the Ld.AR on behalf of the assessee, the issues raised in the grounds referred to hereinabove in the present appeals challenging the validity of reopening are not pressed.
Accordingly, Ground no. 2 for A.Y. 2013-14, Ground no. 3 for A.Y. 2014-15 and Ground no. 2 for A.Y. 2015-16 stands dismissed.
4.1 Ground no. 1 in all the three appeals are general in nature and therefore do not require adjudication.
5. Ground no. 2 for A.Y. 2013-14, Ground no. 3 for A.Y. 2014-15 and Ground no. 2 for A.Y. 2015-16.
5.1 The Ld.AR submitted that on merits raised in above grounds, the decision of Hon’ble Karnataka High Court in a group of cases between M/s. Vodafo
