Non-resident data storage charges and export deduction claims turn on treaty taxability, withholding liability, and statutory approval requirements.

Data storage space charges paid to a non-resident were treated as business income outside Indian tax net where the recipient had no permanent establishment in India and the payment was not shown to be consideration for use of equipment, royalty, or fees for technical services; on that basis, disallowance under section 40(a)(i) for failure to deduct tax at source was deleted. On the exemption issue, section 10B relief was held to require approval as a hundred per cent export-oriented undertaking by the competent statutory Board, and STPI approval alone was insufficient. The alternative claim under section 10A was not examined below, so the matter was remitted for fresh consideration of section 10B and, if necessary, section 10A.

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Issues: (i) Whether data storage space charges paid to a non-resident were liable to disallowance under section 40(a)(i) for failure to deduct tax at source. (ii) Whether the assessee was entitled to deduction under section 10B, and whether the alternative claim under section 10A required examination.

Issue (i): Whether data storage space charges paid to a non-resident were liable to disallowance under section 40(a)(i) for failure to deduct tax at source.

Analysis: The payment was for storage space hosted on servers outside India and was not shown to be consideration for the use of equipment, royalty, or fees for technical services. The recipient had no permanent establishment in India, and the payments were held to be business income not taxable in India under the relevant treaty provisions. The record also did not show any finding by the Assessing Officer establishing that the payment fell within the withholding provisions invoked for disallowance.

Conclusion: The disallowance under section 40(a)(i) was rightly deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the assessee was entitled to deduction under section 10B, and whether the alternative claim under section 10A required examination.

Analysis: Deduction under section 10B is available only to a hundred per cent export-oriented undertaking approved by the Board appointed under section 14 of the Industries (Development and Regulation) Act, 1951. The assessee had STPI approval, but no material was produced to show approval by the statutory Board required for section 10B. The matter was also not examined below on the alternative plea under section 10A, though the assessee had raised it.

Conclusion: The finding allowing section 10B relief was set aside and the matter was remitted to the Assessing Officer to examine eligibility under section 10B and, if necessary, the alternative claim under section 10A.

Final Conclusion: The substantive disallowance on tax deduction at source was upheld in the assessee's favour, while the exemption issue was restored for fresh adjudication, leaving the proceedings only partly concluded.

Ratio Decidendi: A payment for server or data storage space, absent use of equipment or technical know-how and where the recipient has no permanent establishment in India, is not to be disallowed under section 40(a)(i); and deduction under section 10B is confined to undertakings approved as hundred per cent export-oriented undertakings by the competent Board under the governing statute.

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