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TMI Blog2008 (1) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific equipment in the Contracting State in which they arise and according to the laws of that State but the same could not be taxed in India up to assessment year 2001-02 as clause (iva) of Explanation 2 to section 9(1)(vi) was inserted with effect from 1-4-2002. Under the new procedure, the revenue can recover the tax along with interest, if any, from the assessee in a case the tax authorities later on find that short or no deduction of tax at source was made. The assessee is also liable for penalty prosecution for the default committed by him. Thus CBDT with effect from 18-11-1997 prescribed a new procedure for the purposes of the remittance of payments under which issue of No Objection under section 195(2) by the income-tax authorities has been dispensed with. However under section 195(2) the person responsible for paying any such sum, other than salary, chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make application to the Assessing Officer to determine, by general or special order, the appropriate portion of such sum so chargeable, and upon such determination, tax shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench in the case of Herbalife International India (P.) Ltd.[ 2006 (2) TMI 220 - ITAT DELHI-D] . To sum up, the payments made on account of rentals for hosting of web sites on servers are not in nature of interest or royalties or fee for technical services or other sum chargeable to tax in India. CBDT has revised the procedure for deduction of tax at source on remittances made out of the country. The provisions of DTAA are also in favour of the assessee. Accordingly, the assessee was not required to deduct tax at source under section 195 of the Act while making payments outside India. We decide this issue in favour of the assessee. In the result, the appeal filed by the assessee is partly allowed. - Member(s) : N. K. KARHAIL., K. D. RANJAN. ORDER Per K.D. Ranjan, Accountant Member .-This appeal by the assessee for assessment year 2001-02 arises out of order of CIT(A)-IX, New Delhi. 2. The first issue for consideration relates to sustaining of disallowance of Rs. 3,26,386 under section 40(a)(i) of the Act. The facts of the case stated in brief are that during the year under consideration, the assessee incurred total expenditure of Rs. 5,01,183 for domain regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom abroad and no income was chargeable to tax within the meaning of section 195 of the Act. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 wherein it was held that the obligation to deduct tax at source would be required to fulfil only in relation to income portion of the sum embedded in the gross amount and therefore it would be wrong to expect the deduction of tax at source on the gross sum regardless of income element therein. It was also pleaded that since payments were made through credit cards no remittance was made from India and accordingly, provisions of section 195 of the Act were inapplicable. The decision of ITAT Hyderabad Bench in the case of Cheminor Drugs Ltd. was not applicable to the facts of the case as in that case remittance was made from India and services were rendered in India and accordingly, the amount was chargeable to tax in India. 4. On appeal Ld. CIT(A) after considering the submissions observed that the domain name registration provided customer support, account management tool, domain security features and a service level agreement with domain name register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not available in India at the relevant time. For this purpose the assessee took servers on lease and paid rentals to non-resident entities through credit card Ld. AR of the assessee referring to OECD (Organization of Economic Co-operation and Development) Model Tax Convention submitted that none of the parties to whom lease rentals have been paid, had permanent establishment in India. Therefore, the lease rentals paid to them do not relate to business operations carried on by those parties. The assessee had hosted websites on the servers which could be visited by the interested persons to mine the electronic data. The assessee had not made payment on account of technical services provided by non-resident resulting in accrual or arising of income in India in terms of provisions of section 9(1)(vii) of the Income-tax Act, 1961. However rentals paid could be treated as royalties for the use of servers owned by the non-resident persons for the purpose of hosting the websites. He further submitted that clause (iva) of Explanation 2 to section 9(1)(vi) was inserted by the Finance Act, 2001 with effect from 1-4-2002. Therefore, the amount paid, as rentals cannot be treated as royalty ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of technical services by the non-resident parties to the assessee. He placed reliance on the decision of Hon'ble Madras High Court in the case of Skycell Communication Ltd. v. Dy. CIT [2001] 119 Taxman 496 wherein it has been held that payment for providing cellular mobile telephone services were not capable of being regarded as technical services and could not become so when used by firms and companies. He also placed reliance on the decision of ITAT Delhi Bench in the case of Dy. CIT v. Panamsat International Inc. [2006] 9 SOT 100. In this case payment made for use of transponder capacity could not be taxed as royalty. Placing reliance on the decision of Authority for Advance Ruling in the case of Cargo Community Network (P.) Ltd., In re. [2007] 289 ITR 355 it has been submitted that under Agreement of Avoidance of Double Taxation between India and USA, the payment of royalty is assessable to tax in India. However for assessment year 2001-02, clause (iva) of Explanation 2 was not in the Statute and therefore the lease rental paid by the assessee will be assessable as business income in USA. For this proposition he placed reliance on the memorandum explaining the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of fact that the whole amount. may not be the income or profits of the recipients. It is statutory obligation of the assessee to deduct tax at source. He placed reliance on the decision of ITAT in the case of HNS India VSAT Inc. v. Dy. CIT [2005] 95 ITD 157 (Delhi). He further submitted that Ld. CIT(A) was not called upon to decide the nature of income, i.e., the income was in the nature fees for technical services or royalty. To determine the nature of the payments was not an issue before Ld. CIT(A) nor is an issue before ITAT. The decision of Hon'ble Madras High Court in the case of Skycell Communication Ltd. relied upon by the assessee is not applicable to the fact of the case as in that case the issue related the end-users and not a case of relating to technical services. He further submitted that the facts of the case of Panamsat International Systems are also not applicable to the facts of the case of the assessee. In this case the assessee was a service provider whereas in the instant case, the assessee had borrowed the services of non-residents. According to Ld. AR of the assessee, the payments are in nature of royalties and not fees for technical services and hence li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Lufthansa Cargo India (P.) Ltd. has not been distinguished. The decision of Hon'ble Madras High Court in the case of Skycell Communications Ltd. will be applicable to the facts of case. Finally it has been submitted that after issue of Circular No 759 on 181997, the rigours of section 195 has been reduced and RBI is the authority to take action in case of any violation. 8. We have heard both the parties and perused the material available on record. The facts of the case are not in dispute. The assessee had paid Rs. 3,26,386 to four non-resident companies for launching of different websites on their servers located in USA. No tax was deducted while making the remittance on the ground that the amount was not chargeable to tax in India. The assessee claimed deduction in respect of the said amount as revenue expenditure. The Assessing Officer disallowed the amount under section 40(a)(i) on the ground that the assessee did not deduct any tax at source at the time of remittance to non-resident. Under section 40(a)(i) relevant to assessment year 2001-02, in the case of any assessee, any interest (not being interest on a loan issued for public subscription before 1-4-1938), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h would be income of the recipient chargeable under the head 'Salaries'." This definition shows that consideration paid for rendering of any managerial, technical or consultancy services, as also the consideration paid for the provision of services of technical or other personnel, would be regarded as fees paid for 'technical services'. The definition excludes from its ambit the consideration paid for construction, assembly, or mining or like project undertaken by the recipient, as also consideration which would constitute income of the recipient chargeable under the head 'Salaries'. 8.2 Hon'ble Madras High Court in the case of Skycell Communication Ltd. had an occasion to examine the scope of term 'technical services'. It has been held as under:- "Thus while stating that 'technical service' would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute 'technical' service to render it 'technical service'. The meaning of the word 'technical' as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art or craft or its techniques; technical terms (especially of a book or article) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of technical services to the consumer resulting in the consumer having to deduct that at source on the payment made for power consumed and remit the same to the revenue. Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefits of the user of such equipments does not result in the provision to technical service to the customer for a fee." On applying the above stated reasoning to the facts of case before us it can be safely concluded that providing of space on the servers by the non-residents for the purpose of hosting of the website will not result in the provision to technical service to the assessee for a fee. Therefore, the payments were not made for fees for technical services liable to be taxed in India. 8.3 Now we have to examine whether payment of rentals for hosting of websites on the servers amounts to royalty. Explanation to section 40(a)(i) states that for the purposes of sub-clause (i) 'royalty' shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9. Explanation 2 to clause (vi) of section 9(1) for and up to assessment year 2001-02 read as under:- "Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Convention is identical. Thus, the nature of the rent paid for hosting of the website on the servers being commercial and scientific equipment is to be treated as royalty. 8.5 The legislative intention for insertion of clause (iva) to Explanation 2tosection 9(1)(vi) can be traced from the memorandum explaining the provisions of the Finance Bill, 2001-[2001] 248 ITR 200 and is reproduced as below:- "Under the existing provisions contained in clause (vi) of sub-section (1) of section 9, income by way of royalty payable is deemed to accrue or arise in India subject to certain conditions. The term 'royalty' has been defined in Explanation 2 to this clause. The definition of the term 'royalty' as used in the Double Taxation Avoidance Agreements entered into by India includes inter alia payments 'for the use of' or the right to use, industrial, commercial or scientific equipment'. Presently, these payments are not included in the definition of royalty in the aforesaid Explanation. The result is that income from the leasing of industrial, commercial or scientific equipment becomes taxable in the source country as business income only. Consequently, there is no withholding tax on suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up to assessment year 2001-02 as clause (iva) of Explanation 2 to section 9(1)(vi) was inserted with effect from 1-4-2002. 8.7 Central Board of Direct Taxes in their Circular No. 759, dated 18-11-1997 in F. No. 500/152/96-FTD dispensed with the requirement of no objection certificate to be obtained from the Assessing Officer at the time of remittance outside India. Circular No. 759 is reproduced as under:- " Sub: Remittance to a non-resident - Deduction of tax at source (Submission of No Objection Certificate - Dispensing with - Regarding. 1. Section 195 of the Income-tax Act, 1961 provides that any person responsible for paying to a non-resident any sum chargeable under the Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by cheque or draft or any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. 2. The Reserve Bank of India have provided in their Office Manual that no remittance shall be allowed unless a No Objection Certificate has been obtained from the Income-tax Department. It has since been decided that henceforth remittances may be allowed by the Reserve Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent): 8.9 The certificate from the Chartered Accountant to be filed alongwith the undertaking is reproduced as under:- " CERTIFICATE I/we have examined the books of account of M/s............... (Name, address and Permanent Account Number of person making the remittance) for ascertaining the nature of the remittance, of............ (amount, of remittance) to ..................... (Name and complete address of the person to whom the remittance is being made) and the rate at which the tax is deductible at source thereon and hereby certify that a sum of Rs............ has been deducted as tax at the appropriate rate and has been paid to the credit of the Government. Accountant Place: Date: ............." 8.10 From Circular No. 759, dated 18-11-1997 it can be noted that at the time of remittance, the only requirement on the part of the assessee (the remitter) is to file an undertaking alongwith a certificate of the accountant to the Reserve Bank of India, who in turn shall forward a copy thereof to the Assessing Officer. CBDT in Circular No. 767, dated 22-5-1998 reiterated the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for the default committed by him. Thus CBDT with effect from 18-11-1997 prescribed a new procedure for the purposes of the remittance of payments under which issue of No Objection under section 195(2) by the income-tax authorities has been dispensed with. 8.11 However under section 195(2) the person responsible for paying any such sum, other than salary, chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make application to the Assessing Officer to determine, by general or special order, the appropriate portion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is chargeable. Hon'ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. upheld the decision of Hon'ble Andhra Pradesh High Court by observing as under:- "In this view of the matter, the answers given by the High Court that (i) the assessee who made the payments to the three non-residents was under obligation to deduct tax at source under section 195 of the Act in respect of sums paid to them under the contracts entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the use of, or the right to use, industrial, commercial or scientific equipment was liable to be assessed as business income in the source country. Since the payment for use of space in servers is in nature of royalty and income arising on use of, or the right to use, industrial, commercial or scientific equipment was not royalty before the amendment by the Finance Act, 2001 with effect from 1-4-2002, within the meaning of provisions of Explanation 2 to section 9(1)(vi) of the Act, the same was to be assessed in other Contracting State i.e., USA as per paragraph 1 of article 12 of DTAA and not in India. 8.13 Another contention of ld. AR of the assessee is that the assessee is protected under article 26(3) of DTAA. Article 26 of India-US DTAA deals with 'Non-discrimination'. Article 26(1) states that nationals of one Contracting State shall not be subjected in other Contracting State to any taxation or any requirement connected therewith which is much more burdensome than it is on the nationals of that other Contracting State. Article 26(2) provides against discrimination in the context of a permanent establishment in the other Contracting State. Article 26(3) is a general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06. In this appeal, we are concerned with assessment year 2001-02. Therefore, the payment of royalty by the assessee is of the nature contemplated by the provisions of article 26(3). 8.16 Now question arises as to whether the resident assessee could take advantage of provisions of article 26(3) of DTAA. As already observed by us, the provisions of section 40(a)(i) as it existed prior to its amendment by the Finance (No. 2) Act, 2004, with effect from 1-4-2005 and subsequent amendment by the Taxation Laws (Amendment) Act, 2006 with retrospective effect from 1-4-2006, provided for disallowance of payments made to a non-resident only where tax is not deducted at source at the time of remittance. However, a similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus, a non-resident left with a choice of dealing with a resident or a non-resident in business would opt to deal with a resident owing to the provisions of section 40(a)(1) of the Act. To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to grant exemption. The delegate of a legislative power can exercise the power of exemption in a fiscal statute. When the requisite notification has been issued under section 90, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the Double Taxation Avoidance Agreement is entitled to seek the benefits thereunder, even if the provisions of the Double Taxation Avoidance Agreement are inconsistent with those of the Act." 8.17 We therefore hold that in view of the provision of article 26(3) of DTAA, the Assessing Officer cannot seek to invoke the provisions of section 40(a)(i) of the Act for deduction while computing the profits and gains of business or profession. A similar view was taken by ITAT Delhi Bench in the case of Herbalife International India (P.) Ltd. To sum up, the payments made on account of rentals for hosting of web sites on servers are not in nature of interest or royalties or fee for technical services or other sum chargeable to tax in India. Central Board of Direct Taxes has revised the procedure for deduction of tax at source on remittances made out of the country. The provisions of DTAA are a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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