The Delhi High Court has dismissed an appeal filed by the Income Tax Department against Bharti Airtel, ruling that the company is not required to deduct Tax Deducted at Source (TDS) on payments made to overseas telecom service providers for bandwidth services. The court’s decision was based on its previous judgments in similar cases, including CIT v. Telstra Singapore Pte. Ltd. (2024), which held that agreements for availing services from foreign telecom companies do not constitute royalty taxable in India if they do not grant any right over technology, infrastructure, or intellectual property.
In this case, the Assessing Officer had ordered Airtel to pay withholding tax on payments made to foreign entities for bandwidth charges, annual maintenance charges, and other charges, claiming that these payments were either fees for technical services (FTS) or royalty and therefore taxable under the Income Tax Act, 1961. However, the Commissioner of Income Tax (Appeals) accepted Airtel’s contention that certain charges were not taxable, and the ITAT also ruled that payment for bandwidth services does not qualify as royalty under Section 9(1)(vi) of the Income Tax Act, 1961.
The High Court observed that the questions raised in the appeal were covered by its earlier decisions in New Skies Satellite BV (2016) and CIT v. Telstra Singapore Pte. Ltd. (2024), and therefore, the charges paid for bandwidth to overseas telecom service providers cannot be construed as royalty. The court dismissed the appeal, upholding the ITAT’s decision in favor of Bharti Airtel.
The case highlights the importance of understanding the nuances of international taxation and the distinction between royalty and fees for technical services. The court’s decision provides clarity on the tax implications of payments made to foreign entities for services such as bandwidth, and it is likely to have significant implications for companies operating in the telecommunications sector. The ruling also underscores the need for careful consideration of tax laws and regulations when entering into international agreements for services.
The Income Tax Department had argued that Airtel should have deducted TDS on the payments made to overseas entities, but the court’s decision suggests that such payments do not constitute royalty or FTS and are therefore not subject to TDS. The case is a significant victory for Bharti Airtel, which had contested the tax department’s demands, and it is likely to set a precedent for similar cases in the future. Overall, the court’s decision provides clarity and certainty on the tax treatment of international transactions, and it is likely to have far-reaching implications for businesses operating in the telecommunications sector.