Karnataka High Court: IT Dept Has No Jurisdiction Over Tax Utilization of ‘Bandwidth Facilities’ Situated Overseas

Karnataka High Court: IT Dept Has No Jurisdiction Over Tax Utilization of ‘Bandwidth Facilities’ Situated Overseas

The Karnataka High Court while setting aside the order of Income Tax Appellate Tribunal (ITAT) observed that as per the Double Taxation Avoidance Agreement (DTAA) provisions, the Assessee (Vodafone Idea) was not liable to deduct TDS on interconnectivity usage and bandwidth charges.

The division judge’s bench Justices P.S. Dinesh Kumar and Ramachandra D. Huddar reversed the ITAT’s ruling in which the assessee was held to be a TDS defaulter on payment for inter-connectivity usage charges (IUC) and bandwidth charges to non-residents by classifying the sum paid as royalty.

The brief facts of the case were that the Assessee-Company entered into contracts with Non-Resident Telecom Operators (NTOs) for international carriage and connectivity services for which it paid inter-connectivity charges. Further, Assessee entered into a capacity transfer agreement with a Belgian entity to acquire bandwidth capacity on Europe-India Gateway (EIG) which works through a submarine cable system and with a member of consortium which owns EIG.

This led to the transfer of a certain portion of its bandwidth in EIG to a Belgian company which in turn transferred a portion of its capacity to the Assessee for consideration.

For AY 2008-09 to AY 2015-16, Assessee was held to be a TDS defaulter with regard to the payments made for bandwidth and inter-connectivity usage charges to NTOs and Belgian company by holding that payments were in the nature of process royalty, which was upheld by ITAT.

After considering the submission, the High Court dealt with the first question that whether the ITAT was correct in holding that DTAA cannot be considered under Section 201 of the Income Tax Act, 1961 (in short- Act).

The Court recorded that a DTAA is a sovereign document between two countries. The Court referred to case of GE India Technology Centre Private Limited vs. CIT and observed that the assessee was 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 was 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 Court answered this question in negative because the Supreme Court in Engineering Analysis Centre of Excellence Private Limited vs. CIT, had observed that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 1 June, 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 1 June, 1976. The Court invoked the legal maxim ‘lex no cogit ad impossibilia’ i.e., the law does not demand the impossible and ‘impotentia excusat legem’ i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of law is excused.

The next question was, 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.

The Court underscored that India’s Revenue authorities have no jurisdiction to bring to tax the income arising from extra-territorial source when facilities are situated outside India where the NTOs and the Belgian entity does not have any presence in India.

On the issue of withholding tax at a higher rate of 20 per cent, the Bench found it to be covered in favor of Assessee by a co-ordinate bench ruling in CIT vs. Wipro (2022) wherein it was held that DTAA overrides TDS rates under Section 206AA of the Income Tax Act.

For retrospective amendments, the High Court concluded that Assessee was not obliged to do the impossible and even otherwise the AYs under consideration were 2008-09 to 2012-13 and the Explanations were inserted by Finance Act, 2012.

Therefore, the Court ruled that since the Assessee was entitled to the benefits under DTAA, it was not liable to deduct tax at source.