TaxTMI 
TaxTMI 
2020 (2) TMI 63
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....Hon'ble Dispute Resolution Panel ("DRP") erred in holding that cloud hosting system is combination of hardware, software and networking elements that constitutes industrial / commercial I scientific equipment and the income of Rs. 17,12,52,670 earned by the appellant from cloud hosting services is for use of or right to use industrial / commercial / scientific equipment which would constitute royalty under section 9(l)(vi) of the Act. 1.2. On the facts and circumstances of the case and in law, the teamed AC). pursuant to the directions of the Hon'ble DRP, erred in holding that the income earned by the appellant is lOr use of or right to use industrial / commercial I scientific equipment and constitutes royalty under Article 12(3)(b) of the India-US tax treaty. 1.3. On the facts and circumstances of the case and in law, the learned AO, pursuant to the direction of the Hon'ble DRP, erred in holding that the definition of royalty under the Act (as retrospectively amended by Finance Act. 2012) can be applied even for the purposes of determination of royalty income under Article 12 of the India - US tax treaty in the absence of any corresponding amendment in the India-US t....
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.... recording the reasons for reopening of the assessment dated 31.03.2017, notice u/s 148 of the Act was issued and served upon the assessee. Thereafter, the notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee is a company incorporated in and a tax resident of USA. During the year under consideration, the assessee earned income from cloud services including cloud hosting and other supporting and ancillary services provided to Indian Customers. The assessee filed the return of income and the notes stating therein that the cloud hosting services was not taxable as 'royalties' under Article 12 of the India-US tax treaty as the customers do not operate the equipment or have physical access to or control over the equipment used by the assessee to provide cloud support services and do not make available technical knowledge, experience, skill, know-how etc., to its Indian Customers and the cloud support services are not in the nature of managerial, technical or consultancy services and consequently same do not constitute fees for included services within the meaning of Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA). The asse....
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....rted an amendment in the definition of royalty whereby the definition of royalty was expanded by inserting Explanation 4, 5 and 6 to section 9(1)(vi) of the Act (with retrospective effect from I June 1976). Explanation of section 9(I)(vi) of the Act reads as under: "For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India." 11. The above amendment clarified that any payments made for the 'use of equipment would be classified as 'royalties' irrespective of the possession or control of the equipment with the payer or use by the payer or the location of the equipment being in India. But, under the provisions of section 90(2) of the Act, an assesse can opt be governed by the provisions of the tax treaty to the extent they are more beneficial than the provisions of the Act. We noted the fact that Rackspacc U....
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....ight granted to the Indian customers over the servers and other equipment used to provide cloud hosting services. The equipments are not used by the customers and the same are used by Rackspace USA to provide service to the customers. The services provided by the Rackspace USA are in the nature of cloud hosting, data warehousing services etc. which are standard services provided to customers. There is no agreement to hire or lease out any equipment but only a service level agreement. 15. In the light of the above, we are of the view that the amendments in the domestic tax law cannot be read into the tax treaty as there is no change in the definition of 'royalties' under the India-USA Tax Treaty. Therefore, the retrospective amendment in the royalty definition under the Act does not impact the definition of 'royalties' in the India-USA Tax Treaty. Further, the identical issue has been decided by the co-ordinate Bench of this Tribunal in the case of Americal Chemical Society vs. DCIT in ITA No. 6811/Mum/2017 for the AY 2014-15 vide order dated 30.04.2019, wherein identical issue was decided by Para 17 to 19 as under: - "17. We have heard the rival submissions and perused....
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....deration paid is not royalty, but for purchase of a product. In the instant case too, what is acquired by the customer is a copyrighted article, copyrights of which continue to lie with assessee for all purposes. lt is a well settled law that copyrighted article is different from a copyright, and that consideration for the former, i.e. a copyrighted article does not qualify as royalties. 19. Thus, the principles noted by us in the earlier part of this order in the context of the income earned by way of CAS fee are squarely applicable to the subscription revenue received from customers of PUBS division for sale of journal also, and accordingly PUBS fee also does not qualify as 'Royalty' in terms of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA." 16. From the above facts and circumstances, we are of the view that the agreement between the assessee and its customer is for providing hosting and other ancillary services to the customer and not for the use of / leasing of any equipment. The Data Centre and the Infrastructure therein is used to provide these services belong to the assessee. The customers do not have physical control or possession over the s....
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....services as fee for technical services within the meaning of Section 9(1)(vii) of the Act as well as fee for included services under Article 12(4)(a) of the IndoUS DTAA. The Ld. Representative of the assessee has also argued that this issue is also covered by the decision of the Hon'ble ITAT in the assessee's own case for the A.Y. 2012-13 in ITA. No.1634/M/2016, ITA. No.1075/M/2017 for the A.Y.2013-14 & ITA. No.3507/M/2017 for the A.Y.2014-15 dated 29.05.2019, therefore, in the said circumstances, the issue is liable to be decided in favour of the assessee in accordance with law. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. Before going further, we deem it necessary to advert the finding of the Hon'ble ITAT in the assessee's own case(supra) on record:- "17. The second common issue in these appeals of assessee is as regards to the order of DRP and AO holding the income from cloud hosting services as fee for technical services within the meaning of section 9(1)(vii) of the Act as well as fee for included services under Article 12(4)(a) of the Indo-US DTAA. For this assessee has raised the following ground No. 2: - ....
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....e Bombay High court in the case of DIT(IT) vs. Ngc Network Asia LLC [2009] 313 ITR 187 (Bombay), wherein it is held that when a duty is cast on payer to deduct and pay the tax at source, on payer's failure to do so interest under section 234B of the Act cannot be imposed on payee assessee. Hon'ble High Court held as under: - "5. Under the provisions of the present Act, the issue had come for consideration in the case of CIT v. Sedco Forex International Drilling Co. Ltd. [2004] 186 CTR (Uttaranchal) 144 : [2003] 264 ITR 320 (Uttaranchal). One of the questions was, as to whether interest could be levied on the assessee under s. 234B of the Act in respect of tax which was not liable to be deducted at source. A learned Bench of the Uttaranchal High Court, after considering the provisions, held as under : "Secondly, although s. 191 of the Act is not overridden by ss. 192, 208 and 209(1)(a)/(d ) of the Act, the scheme of ss. 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his current income and calculate the tax on such income by applying the rates in force. That under s. 209(1)(d) the incometax calcula....