Interconnect Service Charges Not Royalty: Karnataka High Court Dismisses Revenue Appeal
Background and Context
The Karnataka High Court, in DCIT Vs Orange, once again addressed the contentious issue of whether payments made towards interconnect service charges in the telecom sector should be treated as “royalty” for the purposes of the Income Tax Act 1961.
The Revenue had approached the High Court in appeal, contending that such interconnect usage charges payable to non-resident telecom operators ought to be characterised as royalty and subjected to tax deduction at source. The assessee, on the other hand, maintained that these payments represented standard commercial charges for connectivity and telecom capacity, and therefore did not fall within the scope of royalty.
The Division Bench examined the matter against the backdrop of an earlier binding judgment of a Co-ordinate Bench dated 14.07.2023, which had already determined the tax character of such payments.
Core Question Before the Court
The appeal revolved around a single legal issue:
Whether interconnect service charges paid by the assessee can be regarded as “royalty” and taxed accordingly.
The Court identified that no new or distinct legal question was being raised. Instead, the Revenue was effectively inviting the Court to revisit a point of law that had already been conclusively settled by a Co-ordinate Bench in ITA.No.160/2015 and connected matters.
Reference to Earlier Co-ordinate Bench Decision
Prior Judgment Dated 14.07.2023
In the earlier set of appeals, the Karnataka High Court had examined the tax treatment of payments made to non-resident telecom operators (NTOS) for interconnect services and transfer of telecom capacity outside India. The Co-ordinate Bench had delivered a detailed ruling on 14.07.2023, where it concluded that these payments would not qualify as royalty.
The present Bench specifically referred to paragraph 21 of that earlier decision, which reads:
“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 deductable 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.”
This extract underscores two crucial aspects:
- The nature of the payment: consideration for interconnect services and telecom capacity, not for the use of intellectual property or rights akin to royalty; and
- The conduct of the Revenue: acceptance, in subsequent assessment years, of the position that no tax was deductible at source on similar payments, in light of decisions such as Viacom rendered by the Income Tax Appellate Tribunal (ITAT).