Notices have been issued by Tax Department on major Indian telecom operators (ITOs) on the ground that payments of Inter Connecting User Charges (IUC) to non-resident telecom operators (NTOs) were made without deducting taxes under section 195 of the IT Act.
IUC are charges paid by one telecom operator for connecting their customers to different service providers where the former doesn’t have the license or capacity to provide connectivity to its users.
Globally, interconnection user charges are generally designed on the following basis:
👉🏼 Revenue sharing model: Under this model, the telecommunications operators involved in the exchange of traffic agree to share revenues on a percentage or on some other agreed basis and share the risk of billing disputes and bad debts
👉🏼 Interconnection usage charges model: Under this model, charges are explicitly set to compensate one operator for the costs imposed on him by the other operator’s “use” of his network to originate or terminate a call.
Under the revenue sharing model, withholding tax may not be applicable as amounts are disbursed on account of only sharing of revenue which qualify as business income, making it taxable only when there is a business connection or a permanent establishment in India. However, the key concern surrounding the IUC model is whether consideration paid by the ITOs is towards “use of or right to use of a process” which would fall within the ambit of “royalty” or whether any human intervention is involved for providing these services by the NTOs, regarding it as “Fees for Technical Services”.
Usually, the inter connect agreements put the burden of bearing the taxes (if any) on the ITOs thereby requiring IUC charges to be disbursed “net of taxes”. Hence, a detailed evaluation of the clauses of the agreement will have to be undertaken along with the ITOs demonstrating that neither do they possess any rights in the equipment’s or network of the NTO’s nor there is any element of human involvement for connecting the calls for which IUC is paid. This will have to be further supported by a report of a technical expert who designs such processes in the telecom industry.