2017 (12) TMI 1833 - AT - Income Tax

TDS u/s 195 - assessee has paid co-location charges outside the country - Assessee clarified that co-location charges is nothing but charges paid by the assessee outside the country for storage of electronic data in a manner which can be retrived by the customers outside the country the assessee has paid storage charges which is known as co-location charges - HELD THAT - From the material available on record it appears that Cinenet Communications Inc. USA is in the business of providing Data Centre Racks. The assessee has utilised racks space provided in Data Centre Racks owned and maintained by Cinenet Communications Inc USA. In case of technical issue Cinenet Communications Inc appears to have provided basic support for use of racks. Moreover payment made to Novatel Ltd. and Tata Communication (US) Inc the assessee claims before the CIT(Appeals) that the service was utilised outside the country. Therefore admittedly the payment was made to the company in USA. In the case of Verizon Communications Singapore Pvt. Ltd. 2013 (11) TMI 1058 - MADRAS HIGH COURT the payment was made to Singapore company. Therefore here we have to examine the Double Taxation Avoidance Agreement between India and USA. Both the authorities had no occasion to examine the Double Taxation Avoidance Agreement between India and USA. Moreover it is also to be examined how the electronic data was transmitted to USA. Whether the data stored in Data Centre Racks of Cinenet Communications Inc was used by any other Indian customers also needs to be examined - whether the recipient company in USA has any permanent establishment in India or whether they have any business connection in India needs to be examined in the light of Double Taxation Avoidance Agreement between India and USA. Since such an exercise was not done by both the authorities below this Tribunal is of the considered opinion that the matter needs to be re-examined. Thus Assessing Officer shall re-examine the matter in the light of the material that may be filed by the assessee and the Double Taxation Avoidance Agreement between India and USA and decide the issue afresh in accordance with law - Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of sum for non-deduction of tax by Assessing Officer.
2. Applicability of Section 195 of the Income-tax Act, 1961.
3. Interpretation of Section 9(1)(vi) and Section 40(a)(i) of the Act.
4. Double Taxation Avoidance Agreement between India and USA.

Analysis:
1. The appeal pertains to the disallowance of a sum by the Assessing Officer for non-deduction of tax. The appellant argued that the disallowed amount was for co-location charges and international call charges. The appellant contended that the provisions of Section 195 of the Income-tax Act were not applicable. The counsel further argued that the disallowance under Section 40(a)(i) was misconstrued by the authorities, and reliance on a specific judgment was misplaced.

2. The Departmental Representative contended that the payments made by the assessee were in the nature of royalty, thus requiring deduction of tax at the source. The services were provided by Cinenet Communications Inc. and Novatel Ltd., with international telecommunication services being rendered to the assessee.

3. Upon considering the submissions, it was found that the assessee utilized rack space provided by Cinenet Communications Inc. USA for data storage, with technical support also provided. Payments were made to companies in the USA, raising the need to examine the Double Taxation Avoidance Agreement between India and the USA. The authorities failed to conduct this examination, leading the Tribunal to set aside the orders and remit the issue back to the Assessing Officer for a fresh decision.

4. The Tribunal emphasized the necessity to analyze how the electronic data was transmitted to the USA and whether it was used by Indian customers. The presence of a permanent establishment or business connection in India by the recipient company in the USA needed to be assessed in light of the Double Taxation Avoidance Agreement. The Assessing Officer was directed to re-examine the matter with the relevant material and the treaty provisions, ensuring due process for the assessee.

In conclusion, the appeal by the assessee was allowed for statistical purposes, with the Tribunal ordering a fresh examination by the Assessing Officer in light of the Double Taxation Avoidance Agreement between India and the USA.