Managed web hosting receipts are not royalty where customers lack any independent right to use the underlying equipment.

Receipts from managed web hosting services were not royalty because the customers obtained only service access, not an independent right to use the servers, hardware, software or related infrastructure. Use of equipment by the service provider in delivering backup, maintenance, security and uninterrupted hosting remained incidental to the service and did not amount to use of scientific equipment by the payer. The consideration therefore did not fall within section 9(1)(vi) read with Explanation 2(iva), and the tax addition was deleted.

---

---

Issues: Whether receipts from managed web hosting services, with backup, maintenance, security and uninterrupted services, constitute royalty for use of scientific equipment and are taxable under section 9(1)(vi) of the Income-tax Act, 1961.

Analysis: The receipts were for provision of web hosting services, and the use of servers, hardware, software and related infrastructure was only incidental to rendering those services. A payment is taxable as consideration for use of scientific equipment only where the customer has an independent right to use the equipment; mere use of equipment by the service provider in the course of providing a service does not satisfy that test. Since the Indian entities did not obtain use or control of the equipment itself, the consideration could not be characterised as royalty under the statutory provision.

Conclusion: The receipts were not taxable as royalty under section 9(1)(vi) read with Explanation 2(iva), and the addition was rightly deleted.

---