Online platform and cloud hosting payments are not royalty where no copyright or proprietary right is transferred.

Payments for access to online advertising, bulk email marketing and cloud hosting were held not to be royalty because the arrangements did not transfer any right in the underlying copyright or proprietary rights; mere use of a platform or facility was insufficient under the treaty definition. As no income chargeable to tax arose in India on these facts, the obligation to deduct tax at source under section 195 did not arise. The foundation for treating the payer as an assessee in default under sections 201(1) and 201(1A) therefore failed, and the consequential demand and interest were unsustainable.

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Issues: Whether payments made to Facebook, MailChimp and Amazon Web Services for online advertising, bulk email marketing and cloud hosting were royalty, whether tax was deductible at source under section 195, and whether the assessee could be treated as an assessee in default under sections 201(1) and 201(1A).

Issue (i): Whether the payments to the three non-resident service providers constituted royalty.

Analysis: The payments were examined in the light of the agreements and the applicable DTAA provisions. The facilities provided by Facebook and MailChimp enabled the assessee to place advertisements and send bulk emails, while AWS supplied cloud infrastructure and hosting facilities. The arrangements did not confer any interest in, or right to use, the underlying copyright or proprietary rights in the software and platforms. The Court applied the principle that mere use of a facility or service, without transfer of copyright or proprietary rights, does not amount to royalty under the treaty definition.

Conclusion: The payments were not royalty.

Issue (ii): Whether the assessee was required to deduct tax at source under section 195 and was liable to be treated as an assessee in default with consequential interest.

Analysis: Since the payments were held not to be royalty and no alternative basis of chargeability in India was established, no income chargeable to tax arose in the hands of the non-resident recipients on these facts. In the absence of taxability, the obligation to deduct tax at source did not arise, and the foundation for treating the assessee as an assessee in default for non-deduction of tax also failed. The consequential interest demand could not survive independently.

Conclusion: The assessee was not liable to deduct tax at source and could not be treated as an assessee in default.

Final Conclusion: The demands raised under sections 201(1) and 201(1A) were unsustainable and had to be deleted for all the years under consideration.

Ratio Decidendi: Payments for access to online advertising platforms or cloud infrastructure do not constitute royalty unless the payer acquires a right in the underlying copyright or proprietary right; where no income is chargeable in India, section 195 is not attracted.

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