2021 (2) TMI 33 - AT - Income Tax

Income accrued in India - Income from cloud hosting services as royalty within the meaning of explanation 2 to section 9(1)(vi) - India-USA DTAA - retrospective amendment in the royalty definition - PE in India - HELD THAT - As decided in own case 2020 (2) TMI 63 - ITAT MUMBAI Services provided by Rackspace USA to that Indian customers are not covered by the definition of royalties provided in the India USA Tax Treaty since Rackspace USA is providing hosting services to the Indian customers and does not give any equipment or control over the equipment. Equipments are not used by the customers and the same are used by Rackspace USA to provide service to the customers. The services provided by the Rackspace USA are in the nature of cloud hosting, data warehousing services etc. which are standard services provided to customers. There is no agreement to hire or lease out any equipment but only a service level agreement. We are of the view that the amendments in the domestic tax law cannot be read into the tax treaty as there is no change in the definition of royalties under the India-USA Tax Treaty. Therefore, the retrospective amendment in the royalty definition under the Act does not impact the definition of royalties in the India-USA Tax Treaty. The agreements entered into the service level agreements. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on higher or lease. The customer is not even aware of the specific location of the server in the Data Centre where the customer application, web mail, websites etc. In view of these facts, we are of the view that income from cloud hosting services has erroneously held 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 by the AO and DRP. Even otherwise, there is no PE of the assessee in India and hence, no income can be taxed in India in term of Indo-US DTAA. - Decided in favour of assessee

Summary

Issues Involved:
1. Income from cloud hosting services classified as royalty.
2. Income from cloud hosting services classified as fees for technical services.
3. Erroneous levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Income from Cloud Hosting Services Classified as Royalty:
The appellant contested the classification of income from cloud hosting services as royalty under Explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961, and Article 12(3)(b) of the India-US tax treaty. The Assessing Officer (AO), following the Dispute Resolution Panel (DRP) directions, held that cloud hosting services involve the use of industrial, commercial, or scientific equipment, thus constituting royalty. The appellant argued that their customers do not operate, possess, or control the equipment used to provide the services, which are owned and managed by the appellant. The Tribunal referenced prior decisions, including the appellant's own cases for previous assessment years, which established that such services do not fall under the definition of royalty as per the India-US tax treaty. The Tribunal concluded that the amendments in the domestic tax law do not affect the definition of royalties under the tax treaty, and thus, the income from cloud hosting services does not qualify as royalty.

2. Income from Cloud Hosting Services Classified as Fees for Technical Services:
The appellant also challenged the classification of income from cloud hosting services 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 AO, following DRP's directions, had classified the income as such. The Tribunal, referencing its earlier rulings, noted that the services provided do not involve the transfer of technical knowledge, experience, skill, or know-how to the customers. Consequently, the income from cloud hosting services does not qualify as fees for technical services under the tax treaty. The Tribunal upheld this view, consistent with its earlier decisions, and ruled in favor of the appellant.

3. Erroneous Levy of Interest under Section 234B:
The appellant contended the levy of interest under section 234B of the Act, arguing that the issue was already covered in their favor by previous Tribunal decisions. The Tribunal referenced the Bombay High Court's decision in DIT(IT) vs. Ngc Network Asia LLC, which held that when the duty to deduct tax at source is on the payer, and the payer fails to do so, interest under section 234B cannot be imposed on the payee. Following this precedent, the Tribunal directed the AO not to charge interest under section 234B, ruling in favor of the appellant.

Conclusion:
The Tribunal allowed the appeal, ruling that the income from cloud hosting services does not constitute royalty or fees for technical services under the India-US tax treaty, and that interest under section 234B should not be levied. The decision was based on consistent precedents from the appellant's own cases and relevant high court rulings.