The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the interconnect usage payments received by a foreign company from an Indian telecom operator should not be classified as ‘Royalty’. M/s HCG Global Communications Ltd., the assessee in this case, is a foreign entity registered under the laws of Hong Kong and operates as a telecom service provider.

During the relevant Financial Year for Assessment Year 2011-12, the company received charges from M/s. Vodafone South Ltd. ( VSL ) amounting to Rs. 17,17,935/- for providing telecom interconnect facilities. Initially, the assessee objected to the proposed reassessment notice. However, the objections were dismissed, and a Draft Assessment Order was issued on December 29, 2019. In this order, the Assessing Officer ( AO ), drawing on proceedings under section 201 of the Act in the case of VSL for the Financial Years 2007-08 to 2011-12, concluded that the amounts received by the assessee company constituted “royalty” and thus were subject to taxation in India.

Advocate Mr. Aliasgar Rampurawala, representing the assessee, argued against the taxability of the payment received for interconnect services, amounting to Rs. 1,83,63,303/-, as “royalty” under the provisions of the Act. It was contended that this issue had been decisively addressed in a judgment by the jurisdictional High Court in the case of Vodafone Idea Ltd. vs. DDIT. The bench relied on tribunal orders which has rendered interconnect charges are not taxable as “royalty” including PCCW Global Ltd v. ACIT, Telefonica Depreciation Espana SA v. ACIT, Bharti Airtel Ltd. v. ITO..etc.

According to the ITAT, the order of the co-ordinate Bench of the Tribunal in the case of PCCW Global Ltd v. ACIT is directly applicable to the facts of the assessee since the said case also relates to Hong Kong – non-treaty country. In light of the aforesaid judicial pronouncements, the tribunal viewed that “the amount received by assessee company from the Indian telecom operator for interconnect usage is not chargeable to tax as “royalty”.” The two-member bench, consisting of Chandra Poojari ( Accountant member ) and George George K ( Vice President ), determined that the amount received by the assessee company from the Indian telecom operator for interconnect usage did not meet the criteria for taxation as “royalty”. Accordingly, the ruling was made in favor of the assessee, resulting in a partial allowance of the appeal.