Managed hosting receipts treated as service income, not royalty or equipment use payments under tax treaty rules.

Receipts from managed hosting services were held not to constitute royalty, fees for included services, or consideration for the use of equipment under the Income-tax Act and the India-USA DTAA. The decisive distinction was that the assessee used servers, software and related infrastructure itself to perform services, while the customer obtained no independent right to use that equipment or software. On that basis, the payment was characterised as service income rather than payment for the use of, or right to use, scientific equipment, and the earlier ruling in the assessee's own case was followed.

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Issues: Whether receipts from managed hosting services were taxable in India as royalty or fees for included services, or as consideration for the use of equipment, under the Income-tax Act, 1961 and the India-USA Double Taxation Avoidance Agreement.

Analysis: The assessee's receipts arose from rendering managed hosting services, with the use of servers, software, and related infrastructure being incidental to the service. The earlier decision in the assessee's own case held that a distinction must be drawn between a payment for allowing a customer to use equipment and a receipt earned by the service provider while itself using equipment to render services. Where the customer had no independent right to use the equipment or software, the payment could not be characterised as consideration for the use of, or right to use, scientific equipment. The same reasoning was applied here, and the prior decision was followed.

Conclusion: The receipts were not taxable as royalty, fees for included services, or consideration for use of equipment, and the issue was decided in favour of the assessee.

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