2022 (8) TMI 1025 - AT - Income Tax

TDS u/s 195 - DTAA between India and US - disallowance u/s 40(a)(ia) - Royalty - expenditure includes the payment towards AWS Data Transfer, Amazon Simple Storage Services, AWS Premium Support, Amazon Elastic Compute Could etc - HELD THAT - The assessee is utilizing the services of Amazon Web Services for data transfer, storage services which are related to process contained in the definition of royalty. According to him, the expression process includes transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology and also including use of any patent, invention, model, design, secret formula or process or trademark or similar property. The assessee acquired the right to use the said services/ servers. The right to use server was in turn transferred to its clients. The end user clients have made TDS on the payments made to appellant company. The payments thus fell under the definition of royalty liable for TDS and since the assessee has not deducted any tax from the payments so made, the AO invoked the provisions of section 195 and made disallowance u/s 40(a)(ia). We find the CIT (A) upheld the action of the AO, the reason of which have already been reproduced in the preceding paragraph. It is the submission of the assessee that the charges paid to Amazon for various services provided by it are not under the nature of royalty. According to him, these are monthly charges which are fluctuating from month to month and there is no regular payment being made to Amazon. Further, the assessee did not acquire any right from Amazon for which the payments have been made but the payments have been made on the basis of services done by Amazon. Therefore, the payments so made do not fall under the category of Royalty and therefore, the assessee is not liable to deduct any tax from such Royalty. We find some force in the above argument of the assessee. From the various clauses of the agreement which are already reproduced in the preceding paragraphs and the copies of invoices raised, it can be safely concluded that cloud base services do not involve any transfer of rights to the assessee in any process. The grant of right to install and use the software included with the subscription does not include providing any copy of the said software to the assessee. The assessee in the instant case does not get any right of reproduction. The services, in our opinion, merely facilitate the flow of user data from the front run user through internet to the providers system and back. Therefore, the subscription fee in our opinion is merely a consideration for the online access of the cloud computing services for process and storage of data or run the applications but cannot be considered as Royalty within the meaning of section 9(1)(vi) of the Act. We find an identical issue had come up before in the case of EPRSS Prepaid Recharge Services India (P) Ltd 2018 (10) TMI 1434 - ITAT PUNE where the Tribunal following the decision of the Hon'ble Madras High Court in the case of Skycell Communications Ltd. 2001 (2) TMI 57 - MADRAS HIGH COURT held that the amount paid to Amazon for various service provided by it are not in the nature of royalty and hence provisions of section 40(a)(ia) are not applicable. We are of the considered opinion that the payments made by the assessee company towards the services used relating to data storage, transfer etc., from Amazon Web Services are not in the nature of royalty within the meaning of section 9(1)(vi) of the I.T. Act. Therefore, the provisions of section 195 of the I.T. Act are not applicable and accordingly, the assessee, in our opinion, is not required to deduct any TDS from payments so made. Therefore, the disallowance made by the Assessing Officer u/s 40(a)(ia) of the Act and sustained by the learned CIT (A) is directed to be deleted. Grounds raised by the assessee are accordingly allowed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Nature of payments made to Amazon Web Services (AWS) and their classification as "Royalty."
2. Applicability of Section 195 of the Income Tax Act regarding withholding tax.
3. Validity of disallowance under Section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Nature of Payments Made to AWS and Their Classification as "Royalty":
The primary issue was whether the payments made by the assessee to AWS for web hosting services, data transfer, storage services, etc., could be classified as "Royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-USA DTAA. The Assessing Officer (AO) and the CIT (A) held that these payments were in the nature of royalty because they involved the use of technology, which falls under the definition of "Royalty" as per the Income Tax Act and the DTAA. The AO noted that the services provided by AWS included the use of software and other technological services, which were considered as imparting information concerning technical knowledge, thus fitting the definition of "Royalty."

However, the Tribunal found that the payments were not for acquiring any rights in the software or technology but were merely for the use of services provided by AWS. The Tribunal concluded that cloud-based services do not involve any transfer of rights in the process or technology to the assessee. The payments were based on the volume of services used and fluctuated monthly, indicating that they were for services rendered and not for the use of any intellectual property.

2. Applicability of Section 195 of the Income Tax Act Regarding Withholding Tax:
Section 195 mandates the deduction of tax at source on payments made to non-residents if such payments are chargeable under the Income Tax Act. The AO and CIT (A) held that the payments to AWS were subject to withholding tax under Section 195 as they were classified as royalty. The CIT (A) emphasized that the provisions of Section 195 apply irrespective of whether the non-resident has a business connection or permanent establishment in India, citing amendments and various judicial precedents.

The Tribunal, however, disagreed with this interpretation, stating that since the payments were not in the nature of royalty, Section 195 was not applicable. The Tribunal relied on the agreements and invoices, which indicated that the payments were for services and not for the use of any intellectual property or technology.

3. Validity of Disallowance Under Section 40(a)(ia) of the Income Tax Act:
The AO disallowed the expenditure of Rs.1,02,18,116/- under Section 40(a)(ia) due to non-deduction of TDS, classifying the payments as royalty. The CIT (A) upheld this disallowance, reiterating that the payments were subject to withholding tax under Section 195.

The Tribunal overturned this disallowance, holding that the payments were not royalty and, therefore, not subject to TDS under Section 195. Consequently, the disallowance under Section 40(a)(ia) was not justified. The Tribunal cited similar cases where payments for cloud-based services were not considered royalty and thus not subject to withholding tax.

Conclusion:
The Tribunal concluded that the payments made by the assessee to AWS for web hosting and related services were not in the nature of royalty. Therefore, the provisions of Section 195 regarding withholding tax were not applicable, and the disallowance under Section 40(a)(ia) was unwarranted. The appeal filed by the assessee was allowed, and the disallowance made by the AO and sustained by the CIT (A) was directed to be deleted.