Supreme Court Upholds HC Ruling; Interconnect Charges Not Taxable as Royalty

The Deputy Commissioner of Income Tax (International Taxation) challenged a judgment from the High Court of Karnataka regarding the taxability of payments made to non-resident telecom operators. The dispute involved M/s Orange (a French entity) and Vodafone Idea Limited. The central issue was whether “interconnect service charges” paid for telecom network access should be characterised as “Royalty” and thus be subject to tax deduction at source (TDS) in India.

The High Court had ruled in favor of the assessee, relying on a coordinate bench precedent which established that such charges do not constitute royalty. The Revenue Department subsequently moved the Supreme Court via a Special Leave Petition (SLP).

Main Issue: Whether interconnect service charges paid to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries qualify as “Royalty” taxable under the Income Tax Act.

SC’s Decision: The Supreme Court of India dismissed the Special Leave Petition filed by the Income Tax Department. After condoning the delay in filing, the Court stated it was “not inclined to interfere” with the High Court’s judgment.

This effectively upholds the High Court’s position that interconnect charges are not royalty, following the principle that such payments are for standard telecom services rather than for the use of copyright or specialized equipment. The dismissal reaffirms that the Revenue cannot treat these routine cross-border telecom payments as taxable royalty income.

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