Interconnect usage charges received by non-resident entities are classified as business profits and not taxable as royalty under Indian law or DTAA, lacking permanent establishment.

ORDER

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against order of DCIT (International Taxation) Circle-2(1), Bengaluru for the assessment year 2017-18 passed u/s 143(3) r.w.s. 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (in short “The Act”). The assessee has raised following concise grounds of appeal:

1. “On the facts and circumstances of the case and in law, the final assessment order passed by the Learned Deputy Commissioner of Income-tax (International Taxation), Circle — 2(1), Bangalore ("Ld. AO"), under section 143(3) read with section 147 and section 144C(13) of the Income-tax Act, 1961 ("the Act") assessing the income of the Appellant at INR instead of returned income of INR 2,34,34,767/- is bad in law.

2. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel -- 2, Bengaluru (" Ld. DRP") has erred in confirming the validity of initiation of the proceedings under section 147 of the Act in the case of the Appellant merely on the basis of proceedings initiated against Vodafone South Limited ("VSL") under section 201 of the Act without analyzing the facts of present case and jurisprudence in this regard.

3. On the facts and in the circumstances of the case and in law, the Ld. DRP/ AO erred in holding that the interconnect usage charges amounting to INR 2,29,02,314/- received by the Appellant from various Indian Telecom Operators ("ITOs") accrues or arise in India and are in the nature of 'Royalty' under the provisions of the Act and India-Japan Double Taxation Avoidance Agreement ("DTAA").

4. On the facts and in the circumstances of the case and in law, the Ld. DRP/AO has erred in not following the ratio laid down by the Hon'ble Jurisdictional High Court in case of Vodafone Idea Limited v. DDIT (International Taxation) [(2023) 457 ITR 189 (Karnataka)] holding that payment for interconnect usage charge is not chargeable to tax as 'royalty'.

5. On the facts and in the circumstances of the case and in law, the Ld. DRP has erred in holding that the interconnect usage charges would fall under residuary Article 22 of India — Japan DTAA.

6. On the facts and in the circumstances of the case and in law, the ld. AO grossly erred in not granting the credit of tax deducted at source amounting to INR 1,09,683/- claimed by the appellant in the return of income.”

2. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case for the assessment years 2013-14 to 2015-16 vide order in IT(IT)A No.100 to 102/Bang/2024 dated 15.4.2024, wherein held as under:

7.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as ‘Royalty’, since the payment is made to “use the process” or “an equipment”.

7.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee. We refer to the term "Process" occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:—

'Explanation 2.: For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;'

7.2.1 The term "process" used under Explanation 2 to section 9(1)(vi) in the definition