IT Dept Has No Jurisdiction Over Tax Utilization Of ‘Bandwidth Facilities’ Situated Overseas As It Is Extra-Territorial Source: Karnataka HC

While setting aside the order of ITAT wherein, disregarding the DTAA provisions, the Assessee (Vodafone) 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 in terms of Explanations to Section 9(1)(vi), the Karnataka High Court ruled that Assessee was not liable for TDS on connectivity & bandwidth charges.

Negating ITAT’s observation that DTAA need not be considered for deciding TDS obligation, the Division Bench comprising of Justice P.S. Dinesh Kumar and Justice Ramachandra D. Huddar observed that “Admittedly, the NTOs have no presence in India. Assessee’s contract is with Belgacom, a Belgium entity which had made certain arrangements with Omantel for the utilisation of bandwidth. In substance, Belgacom has permitted utilisation 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”.

Remarking that DTAA is a sovereign document between two countries, the Bench observed that “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”.

On the scope of retrospective insertions of Explanation 4,5, and 6 to Section 9(1)(vi), the Bench followed the Apex Court ruling in Engineering Analysis Centre of Excellence Private Limited Vs. CIT [(2021) 125 taxmann.com 42 (SC)] and stated that “it is not clarificatory of the position as on 01.06.1976 and expands that position to include what is stated therein vide Finance Act, 2012”.

The High Court also 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.

Senior Advocate Percy Pardiwala appeared for the Assessee while the Revenue was represented by Advocate G.C. Srivatsava.

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 noted that it is an admitted fact that equipment and the submarine cables are situated overseas and the Belgian company does not have any PE in India.

The High Court underscores 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%, the Bench found it to be covered in favour of Assessee by a co-ordinate bench ruling in CIT vs. Wipro [ITA No. 181/2019 dated 29 November 2022] wherein it was held that DTAA overrides TDS rates u/s 206AA of the Income-tax Act.

For retrospective amendments, the High Court concluded that Assessee is 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, since the Assessee is entitled to the benefits under DTAA, it was not liable to deduct tax at source, added the Court.

Cause Title: Vodafone v. Deputy Director of Income Tax

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