The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that receipts derived by the appellant (Reliance Jio Infocomm USA – taxpayer) from provision of voice termination services could not be brought to tax in India as royalty or FTS under the Income-tax Act or under Article 12 of the India-US DTAA. The ITAT said that the receipts in the hands of the appellant were taxable only as business profits under the applicable law of the U.S. and, in the absence of a Permanent Establishment (PE) in India, could not be taxed in India.
The ITAT accepted that the services constituted standard telecom facilities, that there was no transfer of any intellectual property, equipment, or secret process to the Indian payer, and that the domestic law expansion of the term “process” through Explanations 5 and 6 to section 9(1)(vi) of the Income Tax Act could not be read into the treaty definition of royalty.
The Division Bench comprising Beena Pillai (Judicial Member) and Bijayananda Pruseth (Accountant Member) noted that the issue was covered by earlier decisions, including DDIT v. Vodafone Idea Ltd. [2024] 469 ITR 391 (SC), where it was highlighted that what was received was a standard facility, the payer had access only to services and not to the equipment or process deployed by the service provider, and the infrastructure and process always remained under the control of the service provider.
The Tribunal also noted the judicial position that a standard commercial process followed by industry players could not be treated as a “secret process”, and that amendments in section 9(1)(vi), including Explanation 6, would not override or expand the treaty definition of royalty.
The Tribunal specifically referred to the detailed reasoning in the earlier precedents that Article 3(2) could not be invoked to import the domestic law definition of “process” into the treaty definition of “royalty” where “royalty” itself was a defined treaty term. It also noticed the reasoning that unilateral domestic amendments could not be used to alter treaty taxability and thereby effect a subtle treaty override.
The Tribunal further noted that both sides agreed that the relevant article in the India-Singapore DTAA considered in earlier cases and the India-US DTAA applicable in the present case were pari materia. It reiterated that interconnectivity / call transmission charges were not taxable as royalty or FTS, particularly where there was no transfer of intellectual property rights, no use or right to use equipment or process by the customer, and no secret process.
Briefly, a 100% subsidiary of Reliance Jio Infocomm Limited, India, is engaged in telecom network / infrastructure related technical support services through its Advanced Technology Operation Centre in the USA, international long distance telecom services including voice termination and IP transit, and ancillary marketing and sales support services. For AY 2020-21, it filed its return declaring income of Rs. 21.05 crores. During the relevant year, it received, inter alia, Rs. 23.20 crores from Reliance Jio Infocomm Limited for provision of voice termination services, which it treated as business income not taxable in India in the absence of a Permanent Establishment (PE) in India.
The appellant explained that voice termination services meant provision of standard telecommunication services for termination of voice traffic delivered to its interconnection locations, gateways or network domains for termination to agreed destinations. It had entered into a Reciprocal Carrier Service Agreement dated April 3, 2017 with effect from January 1, 2016 with RJIL, had set up Point of Presence (PoP) infrastructure in the USA, and used its own telecommunication equipment such as hubs, switches, routers and related equipment for providing inbound and outbound voice termination services. For outbound services, RJIL carried calls up to the appellant’s PoPs in the US and the appellant transferred them to the relevant telecom operator; for inbound services, foreign telecom players carried calls up to the appellant’s PoPs and the appellant handed them over to RJIL.
The Assessing Officer treated the receipts from voice termination services as “process royalty” under section 9(1)(vi) and Article 12 of the India-US DTAA, relying on Explanation 6 to section 9(1)(vi), which states that “process” includes transmission by satellite, cable, optic fibre or similar technology, whether or not such process is secret. The AO also held that transfer of rights was not material in view of Explanation 5, and further took the view that since the term “process” was not defined in the DTAA, its domestic law meaning could be imported through Article 3(2) of the DTAA.
The DRP affirmed the AO’s view and recorded that the appellant facilitated inbound and outbound voice termination services through its own infrastructure, software, technology and PoP maintained at its own risk, and therefore the consideration clearly fell within the ambit of process royalty under section 9(1)(vi). The DRP further held that the definition of royalty in Article 12 of the India-US DTAA included “secret formula or process”, and that since “process” was not defined in the treaty, its meaning had to be derived from the Income-tax Act.
Appearances:
Nimesh Vora & Moksha Mehta, for the Appellant/ Taxpayer
Krishna Kumar, for the Respondent/ Revenue
