2016 (4) TMI 1444 - AT - Income Tax

TDS u/s 195 - payment of web hosting charges to US company - addition under section 40(a)(ia) - CIT-A deleted addition - CIT-A deleted addition - As per DR clause (iva) to Explanation-2 to Section 9(1)(vi) the use or right to use any industrial, commercial or scientific instrument would fall within the definition of royalty , therefore, ld. CIT(Appeals) should not have deleted the addition - HELD THAT - The word 'use' or 'right to use' in clause (iva) of Explanation-2 below Section 9(1)(iva) of of the Act is regarding use of equipment in actual sense. In the present case, it was found that assessee had nothing to do with the equipments and had only made use of facilities created by the service provider who were the owners of entire infrastructure and related equipments. The assessee company is neither in possession of equipments nor it uses the equipment solely for its own purpose. The equipments are used by the Non Resident Inc to provide service to the assessee and others, therefore, assessee has no control over the equipments as well as operating system. When the payments are not in the nature of 'Royalty as per Explanation-II (via) of Section 9(1)(vi) of the Act, then recipient of the said payments, being non resident, having no PE in India, is not liable to tax in India. Therefore, payments in the hands of M/s Pugmarks Inc Others are not taxable in India and consequently, no tax required to be deducted under section 195 on such payment/remittance by the assessee. Such payments, therefore, cannot be termed as 'royalty' - as found that services are rendered outside India by non-resident and paid outside India, then the provisions of Section 195 do not apply in case of such payments. As the company who had provided web hosting services, was located outside India and the server was also located outside India, income that had arisen is not taxable in India. We find that the issue is also covered in favour of the assessee by judgements in the case of People Interactive (I) Pvt.Ltd. 2012 (2) TMI 534 - ITAT MUMBAI , Yahoo India Pvt. Ltd. 2011 (6) TMI 162 - ITAT, MUMBAI and decision in the case of Dell International Services (India) Pvt. Ltd. 2008 (7) TMI 9 - AUTHORITY FOR ADVANCE RULINGS No infirmity in the order of the ld. CI T(Appeal s) have been pointed out. - Decided agaianst revenue.

Summary

Issues Involved:

1. Whether the payment of web hosting charges to a US company constitutes "royalty" under Section 9(1)(vi) of the Income Tax Act.
2. Whether the assessee was liable for deduction of tax under Section 195 of the Income Tax Act on the payment of web hosting charges.
3. Applicability of Section 40(a)(ia) regarding the addition made by the Assessing Officer for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Whether the payment of web hosting charges to a US company constitutes "royalty" under Section 9(1)(vi) of the Income Tax Act:

The primary issue before the ITAT was whether the web hosting charges paid by the assessee to its US subsidiary and other companies should be classified as "royalty" under Section 9(1)(vi) of the Income Tax Act. The Assessing Officer (AO) had classified these payments as royalty based on clause (iva) of Explanation-2 to Section 9(1)(vi), which defines royalty as "the use or right to use any industrial, commercial, or scientific equipment." The AO relied on the decision of ITAT Delhi in the case of M/s Millennium Infocom Technologies Ltd. (117 ITD 114).

However, the CIT(A) and the ITAT found that the assessee did not have possession or control over the equipment used for web hosting services, nor did it use the equipment solely for its own purposes. The ITAT cited several precedents, including the cases of M/s Standard Chartered Bank and M/s Atos Origin IT Services Singapore (P) Ltd., where it was held that payments for such services do not constitute "royalty" as the assessee merely made use of the facility provided by the service provider without having any control over the equipment.

2. Whether the assessee was liable for deduction of tax under Section 195 of the Income Tax Act on the payment of web hosting charges:

The AO contended that the assessee should have deducted tax under Section 195 on the payments made for web hosting services, as these payments were considered royalty. However, the CIT(A) and the ITAT disagreed. They noted that the services were rendered outside India by a non-resident and were also paid outside India. Therefore, the provisions of Section 195 did not apply.

The ITAT referred to several decisions, including the case of Dell International Services (India) Pvt. Ltd., where it was held that payments for bandwidth services do not constitute royalty or fees for technical services. The ITAT concluded that since the service provider was located outside India and the server was also outside India, the income was not taxable in India, and hence, no tax was required to be deducted under Section 195.

3. Applicability of Section 40(a)(ia) regarding the addition made by the Assessing Officer for non-deduction of tax at source:

The AO had made an addition under Section 40(a)(ia) for non-deduction of tax at source on the web hosting charges. However, since the ITAT concluded that the payments were not in the nature of royalty and were not taxable in India, the provisions of Section 195 did not apply. Consequently, the addition made under Section 40(a)(ia) was deleted.

Conclusion:

The ITAT upheld the order of the CIT(A) in favor of the assessee, concluding that the payment of web hosting charges did not constitute royalty under Section 9(1)(vi) of the Income Tax Act. Therefore, the assessee was not liable to deduct tax at source under Section 195, and the addition made by the AO under Section 40(a)(ia) was deleted. All the appeals by the revenue for the assessment years 2007-08 to 2010-11 were dismissed.