Interconnect service payments not ‘royalty’ — Supreme Court sustains Karnataka HC

The Supreme Court sustained the Karnataka High Court’s conclusion that interconnect service payments between telecom operators do not constitute “royalty” under the Income-tax Act. The ruling examines the nature of interconnect charges — payments for network access/termination — and holds that such payments do not involve transfer of copyright, know-how or use of intellectual property in a manner envisioned by the statutory royalty definition or relevant DTAA provisions. The judgment carries important cross-border tax implications because classification as “royalty” attracts withholding tax obligations and can engage DTAA protections/exemptions. By focusing on transactional substance, contractual terms and the absence of IP transfer, the Court limits revenue’s scope to recast commercial telecom charges as royalties. Telecom companies, payors and non-resident recipients must reassess withholding practices, treaty positions and retrospective exposure. Transfer-pricing and treaty counsel will find the decision useful while structuring arrangements and advising on tax characterisation for recurring interconnect and carriage payments.