2025 (7) TMI 1586 - AT - Income Tax

Income taxable in India or not - taxability of interconnectivity usage charges received by a foreign company from Indian entities - as per revenue service provided by the assessee to the Indian entities were in the nature of the FTS and hence taxable in India. HELD THAT - Coordinate bench in own case 2024 (11) TMI 361 - ITAT DELHI has held that interconnectivity services provided by the assessee to Indian companies does not involve any human intervention and hence out of the purview of section 9(1)(vii). The Coordinate Bench has also dealt with the issue of chargeability of the amounts received by the assessee under the head Income from other Sources . No contrary decision has been brought to our notice. Therefore following the verdict of Coordinate Bench we allow this appeal of the assessee.

Summary

ISSUES:

Whether interconnectivity usage charges received by a foreign company from Indian entities constitute fees for technical services (FTS) taxable under section 9(1)(vii) of the Income Tax Act, 1961.Whether such interconnectivity usage charges can be treated as "other income" under section 56 of the Income Tax Act and Article 24 of the India-Oman Double Taxation Avoidance Agreement (DTAA).Whether the interconnectivity usage charges constitute business income under Article 7 of the India-Oman DTAA and the implications of absence of a Permanent Establishment (PE) in India on taxability.

RULINGS / HOLDINGS:

The interconnectivity usage charges do not qualify as fees for technical services under section 9(1)(vii) because the services provided are fully automated without any human intervention, and the expression "technical services" as per Explanation 2 to section 9(1)(vii) requires rendition of service through human interface.Such receipts cannot be treated as "other income" under section 56 of the Act and Article 24 of the India-Oman DTAA merely because they do not fit within royalty or FTS definitions; the residual clause does not apply when the income falls under another specific Article of the Treaty.The interconnectivity usage charges constitute business income under Article 7 of the India-Oman DTAA, and in absence of a Permanent Establishment in India, the profits are taxable only in the country of residence (Oman), thus not taxable in India.

RATIONALE:

The Court applied the statutory framework of section 9(1)(vii) of the Income Tax Act, 1961, and Explanation 2 thereto, emphasizing the necessity of human element or human interface in rendering technical services for taxability as FTS.Judicial precedents including decisions of the Delhi High Court and Karnataka High Court were relied upon to interpret the scope of "technical services" and to distinguish automated interconnectivity services from taxable FTS.The Court analyzed the India-Oman DTAA, particularly Articles 7 and 24, to determine the correct characterization of income and the source country's taxing rights, clarifying that residual provisions cannot override specific treaty provisions related to business profits.The decision reflects adherence to the principle that the mere inability to classify income under royalty or FTS does not justify taxing it under residual "other income" provisions when it clearly constitutes business income.No dissenting or differing opinion was noted; the judgment follows a consistent doctrinal approach aligned with established case law.