2016 (5) TMI 635 - AT - Income Tax

Taxability of royalty - payment received for providing web hosting services, with all back up, maintenance, security and uninterrupted services - Indo US tax treaty - Held that - When a scientific equipment is used by the assessee for rendering a service, the receipt will be construed as a receipt for use of scientific equipment. Undoubtedly, when the assessee receives an income on account of allowing a customer to use a scientific equipment, it does become taxable for the reason of its being characterized as such, but the use of a scientific equipment by the assessee, in the course of giving a service to the customer, is something very distinct from allowing the customer to use a scientific equipment. The true test is in finding out the answer to the fundamental question- is it the consideration for rendition of services, even though involving the use of scientific equipment, or is it the consideration for use of equipment simplictor by the assessee? In the case of former, the consideration is not taxable, in the case of the latter, the consideration is taxable. 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(1)(vi) read with Explanation 2 (iva) thereto. - Decided against revenue

Summary

Issues:
Challenge to order dated 13th September 2012 passed by CIT(A) regarding the taxability of payment received for providing web hosting services under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009-10.

Analysis:
The appellant, a US-based company, provided managed hosting services to Indian entities during the relevant financial period. The appellant claimed that the income earned from these services was not taxable in India based on the provisions of the India USA Double Taxation Avoidance Agreement. However, the Assessing Officer disagreed, stating that the services provided by the appellant were essentially limited period contracts for hosting data and applications on data centers maintained by the appellant outside India. The Assessing Officer considered the receipts as taxable in India under specific provisions of the Income Tax Act and the tax treaty.

The CIT(A) held that the services provided by the appellant did not amount to royalty under the provisions of the Act or the tax treaty. The CIT(A) concluded that the payments received were for providing managed web hosting services, including backup, maintenance, security, and uninterrupted use of services, and not for the use of equipment. The addition of the disputed amount was deleted by the CIT(A).

The appellant appealed the CIT(A)'s decision, challenging the relief granted. The Tribunal noted that the issue raised was academic as the relief under the tax treaty provisions would still hold even if the appellant's grievance under the Act was upheld. The Tribunal further analyzed the basis of the Assessing Officer's addition, emphasizing the distinction between consideration for services and consideration for the use of equipment. The Tribunal cited a previous case to support its conclusion that the receipts by the appellant were not taxable as consideration for the use of scientific equipment.

Based on the discussions and considering the entirety of the case, the Tribunal upheld the CIT(A)'s conclusions and dismissed the appeal, affirming that the receipts from the appellant's services were not taxable as consideration for the use of scientific equipment under the relevant tax provisions.

In conclusion, the Tribunal dismissed the appeal, affirming the decision of the CIT(A) regarding the taxability of the payment received for providing web hosting services under the Income Tax Act for the assessment year 2009-10.