Income Tax department sends notices to Jio, Tata Communications on interconnection usage charges

The income tax (I-T) department has sent notices to Reliance Jio Infocomm and Tata Communications on interconnection usage charges (IUC), said people aware of the matter. Both companies have appealed against orders on the matter passed by the Mumbai wing of the I-T department for earlier years.

The matter is now before the Commissioner of Income Tax (Appeals). Tata Communications said it has appealed against the latest notice. Reliance Jio didn't respond to queries.

The department is of the view that Indian telecom companies should deduct taxes at source from IUC payments made to foreign telecom operators under Section 195 of the IT Act.


If they don't, assessee companies are liable to pay the tax deducted at source (TDS) amount and resulting interest under Section 201 of the IT Act.

Interconnection charges have been a bone of contention for the telecom sector for several years now. IUC is the cost that a mobile operator pays to another operator for carrying or terminating a call.

"The department is of the view that fees on technical usage of the facility of foreign telecom operator, i.e. interconnection usage charges, are applicable as there is human intervention," an expert said. The companies contend that the connections are made automatically, hence there are no connecting charges and therefore no case for TDS, he said.

Officials close to the development said that the notices have been sent for FY20. They ask "why the firms should not be treated as an assessee in default under Section 201(1) for failure to deduct tax at source under Section 195 of the Act in respect of interconnection charges paid by them to various foreign telecom operators," said one of them.

Section 195 deals with deduction of tax at source on fees for technical services and royalty to a foreign company.

A Tata Communications spokesperson said, "Compliance with laws in the jurisdictions in which we operate is of utmost importance to Tata Communications. We follow stringent standards of corporate governance in every jurisdiction in which we operate, across all regions. The company has appealed on the order, and as it is still in process, we cannot comment on the matter."

According to sources, IUC paid by an assessee to foreign telecom operators were in the nature of fees for technical services under Section 9(1)(vii) and, alternatively, royalty for the use of process under Section 9(1)(vi), on which tax was deductible under section 195 of the Act. The income from IUC is deemed to arise in India in the case of foreign telecom operators, said a person familiar with the matter.

"This amounts to be a default under Section 201(1) for failure to withhold tax under Section 195 of the Act from the impugned payments," the person said. "Hence notices were issued for failure to deduct tax at source under section 195 of the Act in respect of interconnection charges paid by the appellant to various foreign telecom operators."

The move is being challenged and there needs to be some clarity on what aspect of service attracts the charge, said a senior industry official.