ITAT Pune rules in favor of Private Limited Company on Web hosting payment dispute

The ITAT Pune overturned the disallowance of a payment made by a Private Limited Company to Amazon for Web hosting charges under section 40(a)(i) of the Income-tax Act, 1961. The Tribunal held that since the payment was made before the retrospective insertion of Explanation 5 to section 9(1)(vi), no tax deduction at source was required. It was also noted that there was no corresponding amendment in the Double Tax Avoidance Agreement, concluding that Amazon was not liable to tax in India for the charges. The appeal was allowed, and the disallowed amount of &8377;46,28,457/- was deleted.

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Issues: Disallowance of payment under section 40(a)(i) of the Income-tax Act, 1961 for failure to withhold tax on Web hosting charges paid to Amazon.

Analysis:
The appeal before the ITAT Pune concerned the disallowance of a payment made by the assessee to Amazon for Web hosting charges under section 40(a)(i) of the Income-tax Act, 1961. The assessee, a Private Limited Company engaged in the distribution of recharge pens of DTH providers, claimed a deduction for the amount paid to Amazon. The Assessing Officer (AO) treated the payment as 'Royalty' under section 9(1)(vi) and disallowed the amount for non-withholding of tax at source. The CIT(A) upheld the disallowance.

Upon review, the ITAT noted that similar disallowances were made in preceding assessment years, which were subsequently overturned by the Tribunal. The Tribunal highlighted that Explanation 5 to section 9(1)(vi) was inserted with retrospective effect, and since the payment was made before this provision, no tax deduction at source was required. Additionally, it was observed that there was no corresponding amendment in the Double Tax Avoidance Agreement (DTAA) between the countries involved. The Tribunal concluded that Amazon was not liable to tax in India for the Web hosting charges. The Tribunal also determined that the payment was not in the nature of royalty itself.

In light of the preceding judgments and the similarity of facts, the ITAT overturned the impugned order and directed the deletion of the disallowed amount. Consequently, the appeal was allowed, and the addition of &8377; 46,28,457/- was set aside. The order was pronounced in open court on 5th December 2018.

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