2018 (8) TMI 853 - AT - Income Tax

Accrual of income in India - managed hosting services - Royalty and / or Fees for Included Services under section 9(i)(vi) / (vii) - India- USA Double Taxation Avoidance Agreement ( DTAA ). - CIT(A) observed that, the income earned by the Appellant from customers for providing managed hosting services constituted consideration for use or right to use equipment. Held that - A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it. In the present case also, what the assessee is providing is essentially web hosting service, though with the help of sophisticated scientific equipment, in the virtual world. The scientific equipment used by the assessee enable rendition of such a service, and such a use, which is not even by the Indian entity, is not an end in itself. In this view of the matter, even though the services rendered by the assessee to the Indian entities may involve use of certain scientific equipment, the receipts by the assessee cannot be treated as consideration for the use of, or right to use of, scientific equipment which is a sine qua non for taxability under section 9(l)(vi) read with Explanation 2 (iva) thereto. The income is not taxable in India - Decided in favor of assessee.

Summary

Issues:
1. Challenge to orders of Commissioner of Income Tax (Appeals) under sections 144, 143(3), and 250 of the Income-tax Act, 1961.
2. Taxability of income received for managed hosting services.
3. Interpretation of provisions under the India-USA Double Taxation Avoidance Agreement.
4. Consideration of income earned from managed hosting services.
5. Application of precedent from the Tribunal's decision for Assessment Year 2009-10.

Analysis:

Issue 1:
The appeals by the assessee were directed against the orders of the Commissioner of Income Tax (Appeals) for the assessment years 2010-11 & 2011-12. The challenge was based on the assertion that the orders were bad in law and contrary to the facts and circumstances of the case.

Issue 2:
The primary contention revolved around the taxability of the sum received by the assessee for managed hosting services as income chargeable to income tax in India. The dispute encompassed whether the amount constituted 'Royalty' or 'Fees for Included Services' under relevant sections of the Income-tax Act and the India-USA Double Taxation Avoidance Agreement.

Issue 3:
Further scrutiny was directed towards the interpretation of the income earned by the assessee from customers for providing managed hosting services as consideration for the use or right to use equipment, in line with the provisions of the Act and the DTAA.

Issue 4:
The Assessing Officer's conclusion that the customers used know-how, technology, and software provided by the assessee, leading to tax liability under specific provisions, was a key aspect. The core transaction of providing access to data/applications, without granting rights or licenses to the client, was pivotal in determining the nature of the income.

Issue 5:
A significant aspect was the reference to the Tribunal's decision for Assessment Year 2009-10, where the taxability of income earned from managed hosting services was addressed. The Tribunal's findings in the earlier case were crucial in the present appeal, emphasizing the importance of precedent and consistency in decision-making.

In the final judgment, the Tribunal considered the precedent and the distinct nature of the services provided by the assessee. The Tribunal upheld the conclusions of the Commissioner of Income Tax (Appeals) and declined to interfere in the matter. The decision was based on the fundamental distinction between consideration for services rendered and consideration for the use of equipment, ultimately ruling in favor of the assessee based on the established legal principles and factual analysis.

This detailed analysis encapsulates the key issues, arguments, and the Tribunal's decision in the legal judgment, providing a comprehensive understanding of the case and its implications.