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Taxman finds disconnect in interconnection TDS
March, 11th 2009

Some of countrys top telecom companies are being accused of deducting lower amounts of tax at source on payments made to each other for roaming and interconnection charges, but the companies deny any wrongdoing.

Interconnect charges, which include call termination fees, port charges and carriage fees, account for about 30% of the tariff charged to the consumer. Roaming charges make up 10-15% of operators earnings.

A number of telecom service providers had not been deducting the actual quantum of tax that they are supposed to, Central Board of Direct Taxes member (revenue) Saroj Bala told ET. She declined to identify the companies.The quantum of tax claimed by the authorities is not known.

The income-tax department is of the view that interconnection and roaming charges are in the nature of a fee for technical services, for which tax must be deducted at source at a 10% rate.

Interconnection charges apply when voice or data originating in the network of one operator terminates with a user after going through the network of another service provider, or when an independent long-distance operator carries the STD traffic of a telco. For instance, if a Bharti Airtel (originator) subscriber calls a Vodafone (network where call terminates) user, Airtel is liable to pay 30 p per minute to Vodafone as termination charge. Similarly, if a telco does not have a long-distance network to carry its STD traffic, it pays up to 65 p per minute to a third operator as carriage fee. Another component of the interconnect charge relates to port charges. Port is the point of interconnection between the networks of mobile operators.

Telcos have come under the I-T departments scanner because of the bill-and-keep practice followed by the telecom industry which leads to lower tax deduction at source (TDS), said another official in the tax department who did not wish to be identified.

The bill-and-keep model works like this: if, say, Vodafone bills Bharti Rs 100 as termination, carriage and port charges and Bharti, in turn, bills Vodafone Rs 80 for the same services, then both telcos do not make the complete payments to each other. Here, Bharti just pays the difference of Rs 20 to Vodafone. So, while telcos are liable to deduct tax on the total amount, tax authorities have found them deducting tax only on the difference, the netting off reducing the revenue that accrues to the government. In this case, instead of TDS on Rs 180, the netting off yields only Rs 20 on which TDS is levied, tax officials argue.

A Bharti representative said that the company had received notices in some circles from the I-T department but contended that interconnection and roaming services do not require any human intervention and, hence, cannot be classified as technical services. The companys contentions have been duly upheld by the Delhi High Court and similar views have been expressed by the Madras High Court in the case of Skycell Communication. The matter is pending with the Commissioner (Appeals), the representative said.
Representatives of Bharti as well as Reliance Communications claimed that deduction of tax for interconnection is being done on the gross amount billed and payments settled on net amounts.

An executive close to Vodafone Essar said the company had received a notice from the tax authorities in one of its circles, but declined to provide a further comment arguing that the issue pertained to the entire industry.
Reliance Communications and the Tatas said they had not received notices from the tax department.

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