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2018 (10) TMI 1434 - AT - Income TaxTDS u/s 195 - Disallowance of payment made towards web hosting charges to Amazon Web Services LLC (USA) - Indo-US DTAA - whether the assessee is liable to deduct withholding tax out of such payments made to Amazon on account of web hosting charges? - retrospective amendment - Held that - Disallowance of expenditure under section 40(a)(i) could only be made if the payment was royalty in terms of Explanation 2 to section 9(1)(vi) but where the payment was not royalty in terms of said Explanation, then no disallowance of expenditure under section 40(a)(i) could be made in the present facts. Accordingly, we hold that amendment, if any, to the scope of royalty by an amendment in 2012 by Finance Act with retrospective effect cannot fasten the assessee with liability to withhold tax for the years which have already been closed prior to insertion of amendment. Hence, the assessee has not defaulted in not deducting withholding tax and for such non acts, the payment made cannot be disallowed as provisions of section 40(a)(i) of the Act are not attracted. Whether retrospective amendment in Income Tax would override the Treaty Laws where no amendment has been made? - Held that - There is no merit in holding that the assessee was liable to deduct withholding tax out of such payments made to Amazon and for such non-deduction or withholding of tax, the assessee can be held to be at default and the payment made by assessee being not allowed as deduction in its hands, in view of provisions of section 40(a)(i). We reverse the orders of authorities below in this regard. We are not going into the issue raised by assessee that Amazon is not having PE in India and hence, no liability to deduct tax in India. Whether charges paid to Amazon for various services provided by it are in the nature of royalty, if any, or not? - Held that - In the facts of present case, looking at the documentation, the billing is segregated into various services i.e. AWS services, storage services, etc. and the assessee before us has filed a chart of summary of services availed. The first such services are on account of service charges for Elastic Compute Cloud. As per clause 1, it is on account of use of service provider Linux; as per clause 1.2, Windows and as per clause 1.3, Windows & SQL Server stanard and clause 1.4 of Bandwidth. The total service charges for Elastic Compute Cloud are USD 40,253.17. The month-wise details of said payments made by assessee from September, 2009 to March, 2010 reflected that in the first month, charges totaled to USD 4269.02, in October at USD 5599.36 and there on. Main provisions of section 9(1)(vi) are not attracted as the payment made by assessee is not in the nature of royalty. In any case, Explanation 2(iva) of section 9(1)(vi) covers cases of royalty i.e. consideration paid for the use or right to use any industrial, commercial or scientific equipment but not including the amount referred to in section 44BB of the Act. The assessee in the present case did not use or acquire any right to use any industrial, commercial or scientific equipment while using the technology services provided by Amazon and hence, the payment made by assessee cannot be said to be covered under clause (iva) to Explanation 2 of section 9(1)(vi) of the Act. Even if the retrospective amendment is held to be applicable, the case of assessee of payment to Amazon being outside the scope of said Explanation 2(iva) to section 9(1)(vi) cannot make the assessee liable to deduct tax at source. The assessee is not liable to deduct withholding tax and such non deduction of withholding tax does not render the assessee in default and consequently, no disallowance of amount paid as web hosting charges is to be made in the hands of assessee for such non deduction of withholding tax and hence, provisions of section 40(a)(i) of the Act are not attracted. The grounds of appeal raised by assessee are thus, allowed.
Issues Involved:
1. Disallowance of payment towards web hosting charges to Amazon Web Services LLC (USA) under section 40(a)(i) of the Income-tax Act, 1961. 2. Applicability of Indo-USA DTAA on the payment towards web hosting charges. 3. Retrospective amendment to section 9(1)(vi) of the Income-tax Act and its impact on TDS obligation. 4. Nature of payments made to Amazon Web Services LLC (USA) – whether they constitute 'royalty' or not. Issue-wise Detailed Analysis: 1. Disallowance of Payment towards Web Hosting Charges: The assessee, a Private Limited Company, engaged in the distribution of recharge pens, made payments to Amazon Web Services LLC (AWS) for web hosting charges. The Assessing Officer disallowed these payments under section 40(a)(i) of the Income-tax Act, 1961, on the grounds that they constituted 'royalty' as per the amended Explanation-2 to section 9(1)(vi) of the Act. The CIT(A) upheld this disallowance, leading to the appeal by the assessee. 2. Applicability of Indo-USA DTAA: The assessee argued that AWS did not have a Permanent Establishment (PE) in India, and therefore, its income was not taxable in India under the Indo-USA DTAA. The assessee contended that the DTAA overrides the provisions of the Income-tax Act, and as per the DTAA, no income accrues in India in the absence of a PE. 3. Retrospective Amendment to Section 9(1)(vi) and TDS Obligation: The assessee contended that the retrospective amendment to section 9(1)(vi) of the Act, which redefined 'royalty', could not impose a retrospective TDS obligation. The Tribunal agreed, citing the principle that law does not compel a person to perform an impossible act. The Tribunal referenced the decision of the Hon’ble Bombay High Court in CIT Vs. M/s. NGC Networks (India) Pvt. Ltd., which held that a party cannot be required to comply with a provision not in force at the relevant time but introduced later by retrospective amendment. 4. Nature of Payments to AWS – Royalty or Not: The Tribunal examined the nature of payments made to AWS. The assessee used AWS's servers for web hosting without acquiring any right to use or control over the servers. The Tribunal noted that the payments were for services and not for the use of any industrial, commercial, or scientific equipment. The Tribunal referenced the Hon’ble High Court of Madras in Skycell Communications Ltd. & Anr. Vs. DCIT, which held that web hosting charges are not in the nature of royalty. Consequently, the Tribunal concluded that the payments did not constitute 'royalty' under section 9(1)(vi) of the Act. Conclusion: The Tribunal held that the retrospective amendment to section 9(1)(vi) could not impose a retrospective TDS obligation on the assessee. The payments made to AWS were for services and did not constitute 'royalty'. Therefore, the assessee was not liable to deduct tax at source, and the disallowance under section 40(a)(i) was not warranted. Both appeals by the assessee were allowed.
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