Income Tax Appellate Tribunal - Bangalore
Telefonica De-Espana S.A, Bangalore vs Deputy Commissioner Of Income Tax, ... on 17 August, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
IT(IT)A Nos.215 and 216/Bang/2023
Assessment Years : 2013-14 and 2014-15
M/s. Telefonica De Espana S. A, The Deputy Commissioner of Income Tax
C/o BSR & Co LLP, (International Taxation),
3rd Floor, Pebble Beach, Vs. Circle - 2(2),
Embassy Golf Links Business Park, Bengaluru.
Off Intermediate Ring Road,
Bengaluru - 560 071.
PAN : AAHCT 0411 G
APPELLANT RESPONDENT
Assessee by : Shri. Sharath Rao, CA
Revenue by : Dr. Satyasai Rath, CIT(DR), ITAT, Bengaluru.
Date of hearing : 17.08.2023
Date of Pronouncement : 17.08.2023
ORDER
Per George George K, Vice President :
These appeals at the instance of the assessee are directed against two Final Assessment Orders (both orders are dated 20.01.2023) passed under section 143(3) r.w.s. 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called 'the Act'). The relevant Assessment Years are 2013-14 and 2014-15.
2. Common issues are raised in these appeals; hence, they were heard together and are being disposed off by this consolidated order.
3. Brief facts of the case are as follows:
IT(IT)A Nos.215 and 216/Bang/2023 Page 2 of 8 Assessee is a telecom company incorporated and a tax resident of Spain. It is engaged in the business of providing telecommunications services, interconnection services, internet services, etc. The assessee has entered into interconnect services agreements that enables subscribers of one telecom operator to call a subscriber of another operator in any part of the world and vice- versa for receiving the calls from subscribers of other operators. Therefore, interconnection agreements are entered into between two telecom operators to provide seamless service of carrying/delivering outbound and inbound calls.
4. For the Assessment Years 2013-14 and 2014-15, assessee has received the following amounts towards interconnect charges from Indian telecom operators, viz., Bharti Infotel Limited ('BIL'), Tata Communications Limited ("TCL") and Vodafone Essar South Limited ('VESL), to provide seamless services of carrying/delivering outbound and inbound calls.
Amounts in USD
Sl.No. Parties AY 2013-14 AY 2014-15
1 Bharti Infotel Limited ('BIL') 11,43,656 NIL
2 Tata Communications Limited 53,740 1,45,439
3 Vodafone Essar South Limited ('VESL) 2,19,421 NIL
Total 14,16,817 1,45,439
5. The relevant agreements have been filed before the Income Tax authorities. The relevant service agreements along with relevant pages of the Paper Book containing the relevant clauses are as follows:
Sl.No. Parties AY AY Nature of Charge
2013-14 2014-15
1 Bharti Infotel Limited Pg 49- Inter-connect charge - Clause 4
59 of PB (pg 54 of PB for 2013-14
IT(IT)A Nos.215 and 216/Bang/2023
Page 3 of 8
2 Tata Pg 72- Pg 51- Inter-connect charge - Page 88 of
Communications 94 of PB 73 of PB PB for AY 2013-14
Limited
3 Vodafone Essar Pg 60- Inter-connect charge - Clause 1
South Limited 71 of PB and 2 of Agreement in Page 61 of
PB for AY 2013-14
* Interconnect Usage Charge (hereinafter referred to as 'IUC') refers to the consideration paid by the recipient telecom operator for provision of service (of carriage/ transmission of calls), pursuant to the interconnect agreements, by the other telecom operator. Per the interconnect agreements, invoices are issued on a monthly basis indicating the applicable rate per minute, destination country and traffic volume in minutes.
6. The assessee was of the view that the receipts towards Interconnect Usage Charges ("IUC") are not taxable in India since these do not amount to royalty/FTS but would constitute business income which is not taxable in the absence of a Permanent Establishment (PE) in India. Hence, assessee had not filed return of income in India. However, re-assessment proceedings were initiated for the impugned years under section 147 of the Act, based on the proceedings under section 201 of the Act initiated on M/s Vodafone South Limited. The Assessing Officer ("AO") held that such payments would qualify to be 'royalty'/'fees for technical services and hence taxable in India. The Dispute Resolution Panel ("DRP") upheld the order of the AO primarily relying on the ITAT decision in the case of Vodafone South Ltd (2015) 53 taxmann.com
441. Pursuant to the direction of the DRP, the impugned Final Assessment Orders were passed.
7. Aggrieved by the Final Assessment Orders, the assessee has filed these appeals before the ITAT. The solitary issue argued by learned AR is the taxability of IUC under sections 9(1)(vi) and 9(1)(vii) of the Act and under the article 13 of the Double Taxation Avoidance Agreement ("DTAA"). The learned AR submitted whether IUC is taxable under sections 9(1)(vi) and 9(1)(vii) of the IT(IT)A Nos.215 and 216/Bang/2023 Page 4 of 8 Act is squarely covered by the order of the Tribunal in assessee's own case for Assessment Years 2010-11 to 2012-13 in ITA Nos.2657/Bang/2019, 180/Bang/2021 and 817/Bang/2022 (order dated 10.08.2023).
8. Learned DR submitted that the payment received by the assessee is covered under section 5 of the Act as the income arises / accrues in India. Accordingly, it was submitted that the deeming section of section 9 of the Act is not warranted in the instant case.
9. In rejoinder, the learned AR submitted whether it is liable to be taxed under section 5 has been specifically considered by the Bangalore Bench of the Tribunal in the case of Vodafone South Ltd., (supra) wherein it has been clearly held that inference drawn by the Revenue authorities income is deemed to accrue or arise in India or received in India is incorrect.
10. We have heard the rival submission and perused the material on record. At the outset, we notice that Assessment Year 2010-11 has been considered by the AO as the base year and has been followed in the subsequent Assessment Years. The Tribunal in ITA Nos. 2657/Bang/2019, 180/Bang/2021 and 817/Bang/2022 for Assessment Years 2010-11 to 2012-13 has decided the issue in favour of the assessee vide order dated 10 August 2023. The Tribunal has passed a detailed order after considering several judicial precedents including the Hon'ble Karnataka High Court judgments in the case of Vodafone in ITA No. 161/2015 and Vodafone South Ltd. (2016) 72 taxmann.com 347 which have held that interconnectivity charges are not taxable as royalty and FTS respectively. The relevant portion of the Tribunal order is extracted before ready reference:
IT(IT)A Nos.215 and 216/Bang/2023 Page 5 of 8 Tribunal Findings / Observations Page no.
/ Para It is an admitted fact that there is no transfer of any intellectual property Page 10 rights or any exclusive rights that has been granted by the assessee to the Para service recipients for using such intellectual property. Therefore Explanation 5.2.7 2 to section 9(1)(vi) cannot be invoked.
All these changes in Act (insertion of Explanation 5 & 6) do not affect the Page 10 definition of Royalty as per DTAA Para 5.2.9 On perusal of agreement, it is noted that installation and operation of Page 21 sophisticated equipment are with the view to earn income by allowing the Para users to avail the benefits of such equipment or facility and does not 5.2.16 tantamount to granting the "use or right to use" the equipment or process so as to be considered as royalty At no point of time, any possession or physical custody, control or Page 21 management over any equipment is received by the end users/customers. Para 5.2.17 Process involved in providing the services to the end users/customers is not Page 21 "secret" but a standard commercial process followed by the industry players. Para Hence, same cannot be classified as "secret process" as per clause 3 o Article 5.2.17 13 of India-Spain DTAA We hold that payments received by assessee towards interconnectivity utility Page 26 charges from Indian customers / end users cannot be considered as Royalty Para / FTS to be brought to tax in India under section 9(1)(vi)/(vii) of the Act and 5.2.20 also as per DTAA The payment received by the non-resident assessee amounts to be the Page 26- business profits of the assessee which is taxable in the resident country and 27 Para is not taxable in India under Article 5 of the DTAA as there is no case of 5.2.21 permanent establishment of the assessee that has been made out by the revenue in India.
11. The learned DR's alternative argument that the payment received by the assessee is covered under section 5 of the Act as the income arises or accrues in India and accordingly deeming section 9 of the Act is not warranted also deserves to be rejected due to the following reasons:
i. The accrual of the income happens where the rendition of service takes place. In the instant case, the actual rendition of service of interconnect facility is provided by the taxpayer outside India i.e., in Spain. The taxpayer does not have any presence in India. Hence, the income does not accrue in India as argued by the learned DR. ii. Reliance is placed on the judgment of the Hon'ble Delhi High Court in the case of Havells India Ltd. [2012] 21 taxmann.com 476 IT(IT)A Nos.215 and 216/Bang/2023 Page 6 of 8 (Delhi) wherein the hon'ble Court has clearly demarcated the source of income and source of receipt under section 9(1)(vii) of the Act. The High Court categorically held that the place/situs of the payer cannot be said to be the source of income.
iii. Reliance is also placed on the order of the Bangalore Tribunal in the case of Vodafone South Ltd (2015) 53 taxmann.com 441 (para 13-
16) which reads as under:
16. On an analysis of the learned CIT (A)'s findings, we are of the view that there is some ambiguity or confusion in appreciating the position of law. The learned CIT (A) is right in observing to the extent that the Assessing Officer is right in articulating that where income is actually received or accrues in India, resort to deeming provision is not warranted and in such a case, provisions contained in section 5(2) is sufficient to create a charge in respect of non resident's income. However, while drawing inference that payments made by a resident would also indicate accrual or arising of the income in the hands of non resident in India. It is pertinent to mention that section 9 of the Act is a deeming section and it provides for taxation of specified income, received by foreign tax resident in India. It has different sub sections. Section 9(1)(i) of the Act provides for taxation of business income of non resident, whereas section 9(1)(vi) and 9(1)(vii) of the Act provides for taxation of income in the nature of "royalty" and FTS respectively. In order to assume accrual or arousal of business income in India, then section 9(1)(vi) along with its explanation would be relevant and it would come from the circumstances that non resident constitute a business connection in India. In that situation only so much income shall be taxable in India as is relatable to operations carried on in India. As discussed earlier section 5(2) of the Act provides that the total income of a non resident would include income accrues or arise, received. In order to fulfill the requirements contemplated under this provision, that same income to be taxed in the hands of a non resident under the aforesaid provisions, then such income should accrue or arose to such non resident in India. Both the learned Revenue authorities have construed that since the payments have been made from India, therefore, income has arisen or accrued in the hands of non resident. They lost sight to the fact that non resident has no business connection in India. The connectivity services are provided by the payee outside India and also utilized by the assessee outside India.
Therefore, to our mind, the learned Revenue authorities have erred in construing that the income has accrued or arisen in India. The situs of the source of income in respect of payment received by a non resident i.e. NTOs would be the place where the non resident carries on its IT(IT)A Nos.215 and 216/Bang/2023 Page 7 of 8 business and perform the business activities pursuant to which it received income. Once the situs is outside India, then in order to determine whether the payments made by a resident of India to a non resident involves element of income is to be examined u/s 9 and in the present case, the Assessing Officer has examined the applicability of section 9(1) (vi) & 9(1)(vii)i.e. the payments involve royalty as well as fee for technical services. The two judgments relied upon by the assessee namely decision of the Hon'ble Delhi High Court in the case of EON Technology (P.) Ltd. (supra) and the order of the ITAT in the case of Adani Enterprises Ltd. (supra) are fully applicable on the facts of the present case. The inference drawn by the learned Revenue authorities that income is deemed to be accrued or arisen in India or accrued or arisen or received in India merely on the basis that such payments was made from India is incorrect."'
12. The Department / Revenue has not appealed against the above finding / observation of the Tribunal. Hence, the contention of learned DR placing reliance on the section 5 of the Act is rejected. In light of the aforesaid reasoning and judicial pronouncements cited supra, we hold that the IUC charges do not qualify as royalty or FTS and hence is not taxable in India.
13. In the result, appeals filed by the assessee for Assessment Years 2013-14 and 2014-15 are partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(LAXMI PRASAD SAHU) (GEORGE GEORGE K)
Accountant Member Vice President
Bangalore.
Dated: 17.08.2023.
/NS/*
IT(IT)A Nos.215 and 216/Bang/2023
Page 8 of 8
Copy to:
1. Appellants 2. Respondent
3. DRP 4. CIT
5. CIT(A) 6. DR, ITAT, Bangalore.
7. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.