DCIT v. Vodafone Idea Ltd. (2024)

📡 DCIT v. Vodafone Idea Ltd. (2024) – Supreme Court Upholds: Payments to Non-Resident Telecom Operators Not Taxable as Royalty under Section 9(1)(vi) or India–Belgium DTAA

📘 Background

The taxation of cross-border payments for telecommunication bandwidth and interconnectivity services has long been a contentious issue under Section 9(1)(vi) of the Income-tax Act, 1961.

In a landmark affirmation, the Supreme Court in DCIT v. Vodafone Idea Ltd. [(2024) 300 Taxman 364 (SC)] dismissed the Revenue’s Special Leave Petition (SLP) both on account of delay (222 days) and on merits, thereby upholding the Karnataka High Court’s decision in Vodafone Idea Ltd. v. DCIT (2023) 457 ITR 189 (Karn).

The Court ruled that payments made to non-resident telecom operators for bandwidth and interconnectivity usage cannot be treated as royalty, reaffirming that amendments to Section 9(1)(vi) introduced by Finance Act, 2012 cannot retrospectively alter the terms of a DTAA—a sovereign treaty between two nations.

⚙️ Facts of the Case

• Assessee: Vodafone Idea Ltd., an Indian telecommunication company.
• Assessment Years: 2008–09 to 2015–16.
• Nature of Payment:
  Payments made to foreign telecom operators (particularly a Belgium-based company “B”) for bandwidth and interconnectivity services and transfer of transmission capacity located outside India.
• Transaction Structure:
  • Vodafone India entered into contracts with B (Belgium) for utilization of a portion of bandwidth that B had acquired from another non-resident, OMT.
  • The facilities and network infrastructure were located outside India.
  • The foreign entities had no Permanent Establishment (PE) in India.
• AO’s Findings:
  • Payments were for use of equipment and hence taxable as “royalty” under Section 9(1)(vi).
  • Vodafone should have deducted tax at source under Section 195.
  • For later years (AY 2013–14 to 2015–16), AO applied a higher withholding rate of 20%.
• Assessee’s Argument:
  • The services were entirely rendered and utilized outside India.
  • No income accrued or arose in India.
  • The India–Belgium DTAA overrides domestic amendments.
  • No obligation to deduct tax under Section 195 as payments were not taxable.

❓ Key Issue

Whether payments made by Vodafone Idea Ltd. to non-resident telecom operators for bandwidth and interconnectivity services constitute royalty under Section 9(1)(vi) or Article 12 of the India–Belgium DTAA, and whether Vodafone was liable to withhold tax under Section 195.

📑 Relevant Legal Framework

🔹 Section 9(1)(vi) – Royalty

Deems income to accrue in India if payable for the use or right to use any copyright, patent, or equipment.
Explanation 4–6 (inserted retrospectively by the Finance Act, 2012) expanded this definition.

🔹 Section 195 – TDS Obligation

Tax must be deducted only if sum is chargeable to tax under the Act.

🔹 DTAA – Article 12 (India–Belgium)

Defines royalty narrowly as payment for use or right to use intellectual property or industrial equipment.

🔹 Section 90(2)

Allows the assessee to opt for the more beneficial provisions of the DTAA over domestic law.

⚖️ Findings of the Karnataka High Court (2023)

1. DTAA Prevails over Domestic Law:
   • The DTAA is a sovereign document between two nations; it overrides conflicting provisions of domestic law.
   • Hence, retrospective domestic amendments (Finance Act, 2012) cannot alter the DTAA.
2. Nature of Payment:
   • Payments for bandwidth and interconnectivity were for use of network capacity, not use of any equipment.
   • The equipment remained under full control of the foreign telecom operator.
   • Thus, payments did not qualify as “royalty” under Section 9(1)(vi) or Article 12 of the DTAA.
3. Extraterritorial Operations:
   • The entire infrastructure (equipment and bandwidth) was located outside India.
   • Hence, the income did not accrue or arise in India and was outside Indian tax jurisdiction.
4. No PE in India:
   • The foreign telecom operators had no permanent establishment in India.
   • Hence, business profits could not be taxed under Article 7 of the DTAA.
5. Amendments Not Clarificatory:
   • Following the Supreme Court ruling in Engineering Analysis Centre of Excellence (2021), the Court held that Explanation 4 to Section 9(1)(vi) was not clarificatory but expansive in nature.
   • Therefore, it cannot apply retrospectively to earlier assessment years.
6. No TDS Obligation:
   • Since the payments were not taxable in India, Vodafone was not liable to deduct tax under Section 195.
   • The Department had no jurisdiction to treat Vodafone as an assessee-in-default under Section 201.

⚖️ Supreme Court’s Decision (2024)

The Supreme Court dismissed the Revenue’s SLP with a brief but decisive order, holding that:

1. The appeal was barred by delay of 222 days, and
2. Even on merits, no case was made out for interference with the Karnataka High Court’s judgment.

By dismissing the SLP, the Supreme Court upheld the High Court’s reasoning that:

• The DTAA overrides retrospective amendments,
• Payments for bandwidth and interconnectivity usage are not royalty, and
• No TDS liability arises under Section 195.

✅ Held

• Payments to non-resident telecom operators for bandwidth/interconnectivity services are not taxable as royalty under Section 9(1)(vi) or Article 12 of the India–Belgium DTAA.
• No obligation to deduct tax under Section 195.
• Finance Act, 2012 amendments cannot retrospectively amend or override the DTAA.
• The Department lacks jurisdiction to tax income from extra-territorial sources.
• Supreme Court dismissed the Revenue’s SLP for delay and lack of merit.

💡 Key Takeaways

1. DTAA Sovereignty:
   A DTAA is a bilateral sovereign treaty; domestic amendments cannot unilaterally modify it.
2. Retrospective Amendments Not Binding on DTAAs:
   The 2012 expansions of “royalty” under Section 9(1)(vi) do not apply to treaty cases.
3. No Tax on Extra-Territorial Income:
   India has no jurisdiction to tax income arising entirely outside its borders.
4. No TDS Obligation:
   If the income is not chargeable to tax, no withholding under Section 195 is required.
5. Consistency with Engineering Analysis (2021):
   The decision aligns with SC jurisprudence that technical or infrastructure usage abroad does not constitute royalty.

🌐 Why This Case Matters

This ruling cements India’s international tax stance that payments for cross-border bandwidth or telecom capacity services are not taxable as royalty, reaffirming that treaty protection prevails over retrospective domestic amendments.

The judgment enhances legal certainty for telecom operators and multinational technology enterprises, ensuring India’s compliance with OECD-aligned principles on taxation of cross-border digital and telecom services.

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