The Supreme Court has directed the Income Tax department to freshly decide whether private telecom players Bharti Airtel and Vodafone can deduct TDS from the revenues they share with BSNL for accessing its network.

Bharti and Vodafone have an interconnection agreement with the state-owned telecom player and pay a share of their revenue to BSNL as interconnect charges, port fee.


A bench comprising Chief Justice S H Kapadia and Justice K S Radhakrishnan directed the Income Tax department (I-T)to decide on the issue with the help of technical experts within four months.

The apex court also said that the I-T department would not any levy penalty and interest on the telcos till it decides the cases afresh.

The dispute is whether TDS (Tax Deductible at Source was deductible by Bharti and Vodafone when it paid interconnect charges/access/port charges to BSNL.

The I-T department has contended that interconnection was not a technical service but a "managerial and consultancy services" as human intervention is required in the process of interconnection between the two networks.

"The problem which arises in these cases is that there is no expert evidence from the side of I-T Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa.

"If, let us say, Bharti has no network in Nainital whereas it has a network in Delhi, the Interconnect Agreement enables Bharti to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case.

During the traffic of such call whether there is any manual intervention, is one of the points which requires expert evidence," the bench said.

Moreover, the apex court also held that telcos were not at fault in this case as the question of human intervention was never raised by the I-T department at earlier stage.

On the issue of penalty imposed by the government on the telcos, the apex court said, "we are of the view, that in the facts and circumstances of the case, it would not be justified .... the question involved in the present cases is the moot question of law, which is yet to be decided".

"Once the issue gets settled, IT department would be entitled to levy both penalty and interest but, as far as the facts and circumstances of the present cases are concerned, we are of the view that the interest is not justified at this stage. Consequently, there will be no levy of penal interest prior to the date of fresh adjudication order," the court said.