TaxTMI 
TaxTMI 
2018 (10) TMI 1434
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.... facts in confirming the learned AO's decision of disallowing payment towards web hosting charges to Amazon Web Services LLC (USA) amounting to Rs. 18,61,207/- u/s 40(a)(i) of ITA, 1961, on the analogy that, the payment is in the nature of royalty as per newly inserted Explanation-2 to section 9(1)(vi) of ITA, 1961, having retrospective effect. 2. The learned CIT(A)-1, Pune & the learned AO erred in law and on facts in holding that payment towards web hosting charges to Amazon Web Services LLC (USA) amounting to Rs. 18,61,207/- accrues as taxable income of the said party in India, without dealing with the applicability of Indo-USA DTAA. The learned I-T authorities ought to have appreciated that the DTAA overrides the provisions of ITA, 1961 anyway and as per DTAA, no any such income accrues in India in absence of PE. 4. The issue raised in the present appeal is against disallowance of payment made towards web hosting charges to Amazon Web Services LLC (USA) (hereinafter referred to as 'AWS') by invoking provisions of section 40(a)(i) of the Act on the analogy that payment was in the nature of royalty as per newly inserted Explanation-2 to section 9(1)(vi) of the Act having ....
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....nical Services'. The assessee further relied on the ruling of the AAR in the case of Bharti Axa General Insurance Company dated 06.05.2010 for the proposition that the payment did not fall in the category of royalty. The Assessing Officer however, referred to subsequent amendment to section 9 of the Act by Finance Act, 2012 and observed that payment made by assessee towards web hosting charges was the payment towards royalty, in view of Explanation-2 to section 9(1)(vi) of the Act. The Assessing Officer observed that it was apparent that the assessee was using servers of AWS through Right to Use Agreement vide which a limited licence had been granted to it. Thus, servers were essential to the assessee's business and exigent factor for entering into such an agreement with AWS, was lack of skilled manpower in maintaining such servers. He made reference to explanation given by the assessee in this regard. In view thereof, the assessee was held to have made payment by way of web hosting charges for use of servers, which as per the Assessing Officer was nothing but charges paid for use of commercial equipments within meaning of section 9(1)(vi) read with Explanation 2 and Explanation 5 ....
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....t that in order to avail services, it was logging on to the portal, using services offered which were technologically driven services. On the other hand, the charge of Assessing Officer was that the assessee was using servers/equipment of Amazon. He stressed that the assessee was trader of recharge pens and could not use high end technology equipments i.e. servers. So in this regard, he drew our attention to an example that when any person is making calls, then he has only to use services and not high end technology provided by service provider. Another example drawn by him was that when any person is watching BBC / CNN, then he is using services but not technology behind it. In this era of evolving to technology, he stressed that the thing to be seen is that what the assessee is availing. Referring to Explanation 5 to section 9(1)(vi) of the Act, he pointed out that it refers to deemed accrual. He stressed that Explanation 2 to section 9(1)(via) of the Act was not relevant, wherein Explanation (iv) and (v) were inserted by Finance Act, 2012. The Assessing Officer had applied Explanation 2(iva) r.w.s. Explanation (v) to section 9(1)(via) of the Act. He further referred that when th....
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.... that what was charged was as per Annexure-1 to Synopsis i.e. total of servers made available. In the case of royalty, it was any 'service' which was to be used 'individually', used by it. In respect of Explanation 2(iva) of section 9 of the Act, the learned Authorized Representative for the assessee pointed out that first I should avail in the earlier realm and then provisions of said section can be applied, which in any case has not been applied by authorities below. 11. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in respect of charges paid by assessee to AWS. The assessee was engaged in sale of recharge pens and did not have the facility available with it of high technology equipments i.e. servers. So, in order to carry on its activity of distributorship of recharge pens, it used servers of Amazon, for which it paid web hosting charges. Before using the services available of Amazon online, it entered into an agreement, under which fees structure was provided. Copy of agreement is placed at pages 3 to 22 of Paper Book. The agreement is called AWS Customer Agreement, which contains the terms and conditions that gover....
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....o allow access to and use of the Services, including WSDLs; Documentation; sample code; software libraries; command line tools; and other related technology. AWS Content does not include the Services. "AWS Marks" means any trademarks, service marks, service or trade names, logos, and other designations or AWS and its affiliates that we may make available to you in connection with this Agreement." 13. The assessee has used services and has made monthly payments to Amazon. The assessee has attached sample invoice of Amazon at pages 23 to 41 of Paper Book and ledger extract of Amazon in its books at pages 1 and 2 of Paper Book. The assessee had filed submissions before the Assessing Officer giving detailed note on web hosting charges, which was as under:- "Web Hosting Charges: a) Primarily EPRSS requires servers to run the various online recharges. Due to this there is a very high requirement of Servers. Since 'purchase/maintenance of servers and its upkeep require skilled manpower, BPRS does not have the same. Hence servers are taken on hire from Amazon, in is cloud units. Ledger copy attached Extract of web agreement also attached." 14. Further, the assessee has also poi....
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....n which he cannot perform. The assessee had made payments to foreign party i.e. Amazon. The payments have already been made in financial years 2009-10 and 2010-11 and once the payments have already been released or shown to have accrued to the said party, then under the garb of retrospective amendment, such payments which are due to the person or which has already been paid, cannot be withdrawn. There is no merit in the orders of authorities below in holding otherwise. 16. In this regard, we find support from the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. M/s. NGC Networks (India) Pvt. Ltd. (supra). The Hon'ble High Court applied the ratio laid down by the Hon'ble Bombay High Court itself in CIT Vs. Cello Plast (2012) 209 Taxmann 617 (Bom), wherein the legal maxim lex non cogit ad impossibillia (law does not compel a man to do what he cannot possibly perform) was applied and upheld the order of Tribunal, wherein it was held that a party cannot be called upon to perform an impossible act i.e. to comply with a provision not in force at the relevant time but introduced later by retrospective amendment. The Hon'ble High Court noted that amendment by introduction of Ex....
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....the meaning of royalty as per DTAA, then we have to consider the possibility of position and control of server / server space, which admittedly, is not possessed by the assessee. Hence, as per Treaty Laws, the assessee cannot be held to have paid royalty to Amazon. Consequently, the payment made by assessee for web hosting services is not taxable in accordance with DTAA and the same cannot be held to be taxable, only because there was retrospective amendment to section 9(1)(vi) of the Act. In any case, the Courts have held that when there is no amendment to the Treaty Laws, then the said Treaty Laws would override the amendment, if any, whether retrospective or otherwise to the Income Tax Act. Such a view has been taken in DDIT Vs. New Skies Satelite BV & Other (supra). Consequently, there is no merit in holding that the assessee was liable to deduct withholding tax out of such payments made to Amazon and for such non-deduction or withholding of tax, the assessee can be held to be at default and the payment made by assessee being not allowed as deduction in its hands, in view of provisions of section 40(a)(i) of the Act. We reverse the orders of authorities below in this regard. We....