Retrospective amendment cannot impose TDS obligation for payments to AWS not constituting royalty.

EPRSS Prepaid Recharge Services India P. Ltd. Versus The Income Tax Officer, Ward – 1 (4), Pune

EPRSS Prepaid Recharge Services India P. Ltd. Versus The Income Tax Officer, Ward – 1 (4), Pune - TMI Issues Involved:
1. Disallowance of payment towards web hosting charges to Amazon Web Services LLC (USA) under section 40(a)(i) of the Income-tax Act, 1961.
2. Applicability of Indo-USA DTAA on the payment towards web hosting charges.
3. Retrospective amendment to section 9(1)(vi) of the Income-tax Act and its impact on TDS obligation.
4. Nature of payments made to Amazon Web Services LLC (USA) – whether they constitute 'royalty' or not.

Issue-wise Detailed Analysis:

1. Disallowance of Payment towards Web Hosting Charges:
The assessee, a Private Limited Company, engaged in the distribution of recharge pens, made payments to Amazon Web Services LLC (AWS) for web hosting charges. The Assessing Officer disallowed these payments under section 40(a)(i) of the Income-tax Act, 1961, on the grounds that they constituted 'royalty' as per the amended Explanation-2 to section 9(1)(vi) of the Act. The CIT(A) upheld this disallowance, leading to the appeal by the assessee.

2. Applicability of Indo-USA DTAA:
The assessee argued that AWS did not have a Permanent Establishment (PE) in India, and therefore, its income was not taxable in India under the Indo-USA DTAA. The assessee contended that the DTAA overrides the provisions of the Income-tax Act, and as per the DTAA, no income accrues in India in the absence of a PE.

3. Retrospective Amendment to Section 9(1)(vi) and TDS Obligation:
The assessee contended that the retrospective amendment to section 9(1)(vi) of the Act, which redefined 'royalty', could not impose a retrospective TDS obligation. The Tribunal agreed, citing the principle that law does not compel a person to perform an impossible act. The Tribunal referenced the decision of the Hon’ble Bombay High Court in CIT Vs. M/s. NGC Networks (India) Pvt. Ltd., which held that a party cannot be required to comply with a provision not in force at the relevant time but introduced later by retrospective amendment.

4. Nature of Payments to AWS – Royalty or Not:
The Tribunal examined the nature of payments made to AWS. The assessee used AWS's servers for web hosting without acquiring any right to use or control over the servers. The Tribunal noted that the payments were for services and not for the use of any industrial, commercial, or scientific equipment. The Tribunal referenced the Hon’ble High Court of Madras in Skycell Communications Ltd. & Anr. Vs. DCIT, which held that web hosting charges are not in the nature of royalty. Consequently, the Tribunal concluded that the payments did not constitute 'royalty' under section 9(1)(vi) of the Act.

Conclusion:
The Tribunal held that the retrospective amendment to section 9(1)(vi) could not impose a retrospective TDS obligation on the assessee. The payments made to AWS were for services and did not constitute 'royalty'. Therefore, the assessee was not liable to deduct tax at source, and the disallowance under section 40(a)(i) was not warranted. Both appeals by the assessee were allowed.