Payments to Non-resident Telecom Operators are not subject to TDS deductions

Fact and issue of the case

These appeals are filed by the assessee. ITA Nos.160/2015, 161/2015, 162/2015, 163/2015 and 164/2015 are directed against the common order dated December 30, 2014 in IT(IT)A Nos. 1814 to 1818 & 734/Bang/2013 for A.Y1. 2008-09 to 2012-13 and ITA Nos. 64/2020, 65/2020, 66/2020 are directed against the common order dated November 28, 2019 in IT(IT)A Nos. 1160-1161/Bang/2015 and 2818/Bang/2017 for A.Y2. 2013-14 to 2015-16 passed by the ITAT3, have been admitted to consider following questions of law:

Whether the Income-Tax Appellate Tribunal (ITAT) was correct in holding that the application of the Double Taxation Avoidance Agreement (DTAA) cannot be considered in proceedings under Section 201 of the Act and that it is not open to the payer to take benefit of the DTAA when he is making payment to a non- resident?

Whether the ITAT was correct in holding that amendment to provisions of royalty under Section 9(1)(vi) by inserting Explanation 5 and 6 under the Income-tax Act (hereinafter referred to as the ‘Act’) will also result in amendment of the DTAAS?

Whether ITAT was correct in holding that payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms “right” & “process” in the clarificatory Explanation 2, 5 and 6 of Section 9(1)(vi) of the Act, and consequently, appellant was bound to deduct tax at source thereon under Section 195 of the Act?

Whether the income tax authorities in India have jurisdiction to bring to tax income arising from extra-territorial source, that is outside India, in respect of business carried on by foreign companies outside India just because Indian residents use and pay for the facilities provided by these foreign companies contrary to the Constitution of India, International Law and Treaties and law declared by the Apex Court?

Whether the first respondent was correct in holding that for the current assessment year the withholding tax liability should be levied at a higher rate at 20% in accordance with section 206AA of the Act?

Whether the Hon’ble Tribunal was right in repelling the contention of the Appellant to the effect that, as a deductor, it cannot be held liable for non-reduction of tax at source for payments made for the Assessment Year 2008-09 to Assessment Year 2012-13 on the basis of a subsequent amendment to Section 9(1)(vi) whereby Explanation 5 and 6 were introduced?

Heard Shri. Percy Pardiwala, learned Senior Advocate for the Assessee and Shri. G.C. Shrivastsava, Special Counsel for the Revenue.

Briefly stated the facts of the case are, Assessee holds an ILD4 License and provides telecommunication services. It is responsible to provide connectivity to calls originating or terminating outside In order to provide ILD services, assessee avails certain services offered by NTOs5 to provide seamless connectivity to its customers. Assessee had entered into agreements with NTOs for international carriage and connectivity services. As per the agreement, assessee has to pay inter-connectivity charges to NTOs.

Assessee entered into a CTA6 with MIS Belgacom International Carrier Services S.A.7 to acquire bandwidth capacity on EIG8 which works through a submarine cable system and M/s. Omantel Telecommunications Company9, a member of consortium which owns the EIG system. The agreement allows each party to transfer to other telecommunication entity the whole or a part of its total allocated capacity in the EIG Cable system without any restrictions by way of an IRU10. In pursuance to the EIG agreement, Omantel had transferred certain portion of its capacity in the EIG cable system to Belgacom and in turn, Belgacom had transferred a portion of its capacity to the assessee for consideration.

The AO11 issued a notice stating that the payments made by assessee to NTOs and Belgacom for the A.Y. 2008-09 to 2015-16 were made without deducting TDS12 under Section 195 of the Income Tax Act 196113 and assessee was liable to be treated as ‘defaulter’ under Section 201 of the Act. Assessee sent its reply explaining that the NTOs are located outside India and they provide telecom services outside India. Hence, it was not necessary to deduct TDS in India.

The AO passed an assessment order dated January 28, 2013 holding assessee as ‘defaulter’ for failure to deduct TDS while making payments to the NTOs and Belgacom. The AO also held that payments made to NTOs for provision of bandwidth and IUC14 are taxable under the head ‘other income’ and treated the same as Royalty/FTS15

Assessee challenged AO’s order before the CIT(A)16. The CIT(A) vide order dated March 25, 2013, dismissed assessee’s appeal holding that payments made to NTOs are chargeable to tax in India under Section 195 of the Act as Royalty. He held that the IUC payments could not be taxed under the head ‘other income’. The issue regarding FTS was not adjudicated.

On further appeal, the ITAT has partly-allowed assessee’s appeal and confirmed the findings recorded by the CIT(A). Hence, this appeal.

Observation of the court

We have carefully considered the rival contentions and perused the records.

Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards inter-connectivity charges.

Assessee has also entered into a CTA with a Belgium entity Belgacom. Belgacom had certain arrangement with the Omantel for utilisation of Omantel transferred certain portion of its capacity to Belgacom and Belgacom had in turn transferred a portion of its capacity to the assessee.

Admittedly the equipments and the submarine cables are situated overseas. To provide ILD calls, assessee had availed certain services from NTOs. It is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any ‘permanent establishment’ in India.

Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue’s reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable.

The first question is whether the ITAT was correct in holding that DTAA cannot be considered under Section 201 of the Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows:

While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions.” (Emphasis supplied)

The above passage has been noted and extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ITAT’s view that DTAA cannot be considered in proceedings under Section 201 of the Act is tenable.

The second question for consideration is whether the ITAT was correct in holding that the amendment to provisions of Section 9(1)(vi) inserting the Explanations will result in amendment of DTAA. The answer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012.

The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows:

It is thus clear that the “person” mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute.” “

Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA…….. ”

The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessee’s own case, the ITAT has held that tax is not deductible when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc35, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue.

The fourth question is whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. Assessee’s contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilization of bandwidth. In substance, Belgacom has permitted utilization of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source.

The fifth question is whether the Revenue is right in holding that withholding tax liability should be levied at a higher rate. It was contended by Pardiwala that this issue is covered in assessee’s favour in CIT Vs. M/s. Wipro36 and the same is not disputed. Hence, this question also needs to be answered against the Revenue.

The sixth question is whether assessee can be held liable for non-reduction of tax at source for payments made for the A.Ys. on the basis of amendment to Section 9(1)(vi) of the Act. This aspect has been considered by us while answering question No.2. It is held in Engineering Analysis that an assessee is not obliged to do the Admittedly, the A.Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA.

In view of the above discussion, the following:

ORDER

i) Appeals are allowed.

ii) The questions of law are answered in favour of the assessee and against the Revenue.

iii) Common order dated December 30, 2014 in IT(IT)A Nos. 1814 to 1818 & 734/Bang/2013 passed by the ITAT is set-aside.

iv) Common order dated November 28, 2019 in IT(IT)A Nos. 1160-1161/Bang/2015 and 2818/Bang/2017 passed by the ITAT is set-aside.