Voice Termination Charges Not Royalty Under India-USA DTAA: ITAT Mumbai Upholds Business Profits Treatment

Overview of the Dispute

The Income Tax Appellate Tribunal (ITAT), Mumbai rendered a significant ruling in the case of Reliance Jio Infocomm USA Inc. Vs DCIT (ITAT Mumbai), holding that receipts from voice termination services do not constitute "royalty" under Section 9(1)(vi) of the Income Tax Act, 1961 or under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA). The Tribunal concluded that such receipts are in the nature of business profits and, in the absence of a Permanent Establishment (PE) in India, are not chargeable to tax in India.

The appeal before the Tribunal arose from the final assessment order dated 30.06.2023 passed under Section 143(3) read with Section 144C(13) for Assessment Year 2020–21, issued pursuant to directions of the Dispute Resolution Panel (DRP) under Section 144C(5) of the Income Tax Act, 1961.

Background and Profile of the Assessee

The assessee, Reliance Jio Infocomm USA Inc., is a wholly owned subsidiary of Reliance Jio Infocomm Limited (RJIL), India. Its core business activities encompass:

• Technical support services provided through its Advanced Technology Operation Centre (ATOC) established in the USA
• International Long Distance (ILD) telecom services, including voice termination and IP transit
• Ancillary marketing and sales support services

For AY 2020–21, the assessee filed its return of income on 22.01.2021 declaring total income of ₹21,05,67,840. The case was selected for complete scrutiny under the Computer-Aided Scrutiny Selection (CASS) mechanism, and a statutory notice under Section 143(2) of the Act was issued on 29.06.2021.

Nature of Receipts During the Year

During AY 2020–21, the assessee received the following payments from India:

The central controversy revolved around receipt No. 2 — whether ₹23,20,70,453 received for voice termination services amounted to "royalty" taxable in India.

How Voice Termination Services Actually Work

The assessee provided a detailed operational explanation of how voice termination services function, which became critical to the Tribunal's analysis.

Outbound Voice Termination Services (Calls Originating in India, Terminating Outside India)

1. RJIL carries outbound calls originating on its network up to the assessee's Point of Presence (PoP) infrastructure located in the USA
2. The assessee picks up the call from its PoP and routes it to the relevant overseas telecom operator on whose network the call is to terminate
3. The assessee is responsible for monitoring its own infrastructure, software, and technology to facilitate the transfer
4. The local telecom operator completes delivery of the call to the end recipient

Inbound Voice Termination Services (Calls Originating Outside India, Terminating in India)

1. The overseas telecom operator on whose network the call originates routes the call to the assessee's PoPs in the USA
2. The assessee hands over the call to RJIL
3. RJIL arranges for carriage and termination of the call to the end recipient in India

Key structural point: The assessee charges RJIL for outbound voice termination on a cost-plus 5% markup basis. For inbound services, charges received from local telecom players are passed on to RJIL at actuals.

The assessee operated under a Reciprocal Carrier Service Agreement dated 3 April 2017 (effective from 1 January 2016) with RJIL. Under this agreement, each party manages and monitors its own telecommunications network facilities, other than customer premises equipment, for the provision of IP Transit Services (IPST).

Grounds of Appeal Before the Tribunal

The assessee raised the following grounds before the ITAT:

• Ground No. 1: The final assessment order dated 27th June 2023 was passed beyond the time limit specified under Section 153 of the Act, which expired on 30 September 2022
• Ground No. 2: The receipts for voice termination services do not constitute "Royalty" under Section 9(1)(vi) of the Act and Article 12 of the India-USA DTAA
• Ground No. 3: Retrospective amendments to domestic law cannot be read as amendments to the DTAA by virtue of Article 3(2) of the DTAA
• Ground No. 4: The receipts are "Business Profits" and are not chargeable to tax in India in the absence of a PE in India, as per Article 5 read with Article 7 of the DTAA

Ground No. 1 was not pressed by the assessee at the hearing stage and was accordingly left open by the Tribunal.

Position of the Assessing Officer