2020 (2) TMI 63 - AT - Income Tax

Income accrued in India - Indo-USA Data - income from cloud hosting services - PE in India - HELD THAT - Agreement between the assessee and its customers is for providing hosting and other ancillary services to the customers and not for the use of leasing any equipment. The data centre and the infrastructure therein used to provide these serves belongs to the assessee. The customers are not having physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with the assessee. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in data centre, web mail, websites etc. Accordingly, it cannot be said as royalty within the meaning of Explanation (2) to Section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA Data by the AO and DRP. Moreover, there is no PE of the assessee in India and hence, no income can be taxed in India in term of Indo-US DTAA. The facts are not distinguishable in this order also. Therefore, the finding above is quite applicable to the facts of the present case. Accordingly, we find that the issue is squarely covered by the decision of Hon ble ITAT in the assessee s own case hence, we decide these issues in favour of the assessee against the revenue. Income from cloud hosting services as fee for technical services within the meaning of Section 9(1)(vii) of the Act as well as fee for included services under Article 12(4)(a) of the IndoUS DTAA - HELD THAT - On the basis of the finding given while deciding the issue no. 1 in which the income was not treated as royalty within the meaning of Explanation-2 to Section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA DTAA tax treaty. Accordingly, by following the decision of co-ordinate bench, the present issue is decided in favour of the assessee against the revenue. Direct the AO not to charge interest under section 234B - See NGC NETWORK ASIA LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT

Summary

Issues Involved:

1. Classification of income from cloud hosting services as "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12(3)(b) of the India-US tax treaty.
2. Classification of income from cloud hosting services as "fees for technical services" under Section 9(1)(vii) of the Income Tax Act and Article 12(4)(a) of the India-US tax treaty.
3. Levy of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue Nos. 1.1 to 1.5: Classification of Income as Royalty

The core issue was whether income from cloud hosting services should be classified as "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12(3)(b) of the India-US tax treaty. The assessee argued that the issue was covered by previous ITAT rulings in its favor for earlier assessment years. The ITAT noted that under the provisions of Section 9(1)(vi) of the Act, royalty is taxable in India if the payer is an Indian resident. However, the definition of royalty under Article 12(3) of the India-USA Tax Treaty is exhaustive and does not include payments for cloud hosting services where the payer does not have control or possession over the equipment. The ITAT concluded that the income from cloud hosting services does not fall within the definition of "royalty" as per the India-USA Tax Treaty. Consequently, the retrospective amendment to the definition of royalty under the Act does not impact the treaty definition. The ITAT reversed the lower authorities' orders, deciding in favor of the assessee.

Issue No. 2: Classification of Income as Fees for Technical Services

The second issue was whether income from cloud hosting services should be classified as "fees for technical services" under Section 9(1)(vii) of the Act and Article 12(4)(a) of the India-US tax treaty. The ITAT referred to its earlier decision on the royalty issue, noting that since the income was not treated as royalty, it could not be taxed as fees for technical services either. The ITAT upheld the decision of the DRP, which had held this issue as infructuous. The ITAT decided this issue in favor of the assessee.

Issue No. 3: Levy of Interest under Section 234B

The third issue concerned the levy of interest under Section 234B of the Act. The assessee argued that it was not liable to pay interest under Section 234B as the duty to withhold tax at source under Section 195 lay with the payer. The ITAT referred to the decision of the Bombay High Court in the case of DIT(IT) vs. Ngc Network Asia LLC, which held that when the duty is cast on the payer to deduct and pay the tax at source, no interest under Section 234B can be imposed on the payee assessee. The ITAT directed the AO not to charge interest under Section 234B, deciding this issue in favor of the assessee.

Conclusion:

The ITAT allowed the appeals filed by the assessee, deciding all issues in its favor and reversing the orders of the lower authorities. The income from cloud hosting services was not classified as royalty or fees for technical services, and no interest under Section 234B was levied.