ITAT rules web hosting payment not "royalty" under IT Act

The ITAT upheld the CIT(A)'s decision in favor of the assessee, ruling that the payment for web hosting charges to a US company did not amount to "royalty" under Section 9(1)(vi) of the Income Tax Act. Consequently, the assessee was not obligated to deduct tax at source under Section 195, and the addition by the AO under Section 40(a)(ia) was removed. The revenue's appeals for the assessment years 2007-08 to 2010-11 were dismissed.

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Issues Involved:

1. Whether the payment of web hosting charges to a US company constitutes "royalty" under Section 9(1)(vi) of the Income Tax Act.
2. Whether the assessee was liable for deduction of tax under Section 195 of the Income Tax Act on the payment of web hosting charges.
3. Applicability of Section 40(a)(ia) regarding the addition made by the Assessing Officer for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Whether the payment of web hosting charges to a US company constitutes "royalty" under Section 9(1)(vi) of the Income Tax Act:

The primary issue before the ITAT was whether the web hosting charges paid by the assessee to its US subsidiary and other companies should be classified as "royalty" under Section 9(1)(vi) of the Income Tax Act. The Assessing Officer (AO) had classified these payments as royalty based on clause (iva) of Explanation-2 to Section 9(1)(vi), which defines royalty as "the use or right to use any industrial, commercial, or scientific equipment." The AO relied on the decision of ITAT Delhi in the case of M/s Millennium Infocom Technologies Ltd. (117 ITD 114).

However, the CIT(A) and the ITAT found that the assessee did not have possession or control over the equipment used for web hosting services, nor did it use the equipment solely for its own purposes. The ITAT cited several precedents, including the cases of M/s Standard Chartered Bank and M/s Atos Origin IT Services Singapore (P) Ltd., where it was held that payments for such services do not constitute "royalty" as the assessee merely made use of the facility provided by the service provider without having any control over the equipment.

2. Whether the assessee was liable for deduction of tax under Section 195 of the Income Tax Act on the payment of web hosting charges:

The AO contended that the assessee should have deducted tax under Section 195 on the payments made for web hosting services, as these payments were considered royalty. However, the CIT(A) and the ITAT disagreed. They noted that the services were rendered outside India by a non-resident and were also paid outside India. Therefore, the provisions of Section 195 did not apply.

The ITAT referred to several decisions, including the case of Dell International Services (India) Pvt. Ltd., where it was held that payments for bandwidth services do not constitute royalty or fees for technical services. The ITAT concluded that since the service provider was located outside India and the server was also outside India, the income was not taxable in India, and hence, no tax was required to be deducted under Section 195.

3. Applicability of Section 40(a)(ia) regarding the addition made by the Assessing Officer for non-deduction of tax at source:

The AO had made an addition under Section 40(a)(ia) for non-deduction of tax at source on the web hosting charges. However, since the ITAT concluded that the payments were not in the nature of royalty and were not taxable in India, the provisions of Section 195 did not apply. Consequently, the addition made under Section 40(a)(ia) was deleted.

Conclusion:

The ITAT upheld the order of the CIT(A) in favor of the assessee, concluding that the payment of web hosting charges did not constitute royalty under Section 9(1)(vi) of the Income Tax Act. Therefore, the assessee was not liable to deduct tax at source under Section 195, and the addition made by the AO under Section 40(a)(ia) was deleted. All the appeals by the revenue for the assessment years 2007-08 to 2010-11 were dismissed.

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