TaxTMI 
TaxTMI 
2019 (5) TMI 1724
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....d hosting services as royalty within the meaning of explanation 2 to section 9(1)(vi) of the Act. As the issue is exactly identical in all the assessment years i.e. AY 2012-13 to 2014-15, we take up the issue from AY 2012-13 and will decide the issue for all the appeals. For this assessee has raised the following grounds:- "Ground no. I: Income from cloud hosting services is erroneously held as royalty within the meaning of explanation 2 to section 9(I)(vi) of the Income Tax Act. 1961 (the Act) as well as Article 12(3)(b) of the India-US tax treaty. 1.1. On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income- tax (International tax) - 4(1)(1) ("AO") pursuant to the directions of the 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 / scientific equipment and the income of Rs. 29,49,01.258/- 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(1)(vi) of the Act. ....
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....t the income from cloud hosting services as royalty within the meaning of section 9(1)(vi) of the Act as well as under Article 12(3)(b) of Indo-US DTAA, by observing as under: - "3.4 Discussion and directions of DRP: 3.4.1 We have perused the submissions made by appellant as above. The case of the appellant primarily hinges upon the assumption that since the agreement is for service and not for leasing or hiring of equipment and since the customer has no physical control/ possession over the equipment, no right to use of an industrial, commercial or scientific equipment has been granted by the assessee and that the assessee and that the services rendered by the appellant are in the nature of standard facilities extended to the payers. The AO has discussed in great details the nature of services rendered by appellant to its customers in Para 5.5. of the assessment order which clearly suggest that the services provided by appellant are under contractual agreements with certain rights and restrictions for both parties. The appellant provides rack space in its data centers situated outside India which host the customer's data/ applications. The data center house highl....
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....by Madras High court in case of Verizon Communication Singapore Pte 361 ITR 575 (Mad). The High court further observed in the context of DTAA with Singapore that the definition of 'royalty' under tax treaty and the Act are in pan - materia. The provisions of Royalty under DTAA with USA are similarly worded as that of Singapore and hence the observations of High court shall equally apply to present case also. 3.4.2 Even otherwise, the Finance Act 2012 has clarified that the payment for use of right, property or information would be considered as royalty irrespective of whether the possession and control of the right, property or information is with the payer, whether it is actually used by the control of the right, property or information is with the payer, whether it is actually used by the Prayer or whether the location of such right, property or information is in India. This amendment further strengthens the contention that such amount is taxable as Royalty under Indian domestic tax law even in situations where the customer arguably does not possess or control the right, property an information. The Madras high court in Verizon Communication Singapore Pt....
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....or contention of appellant is that the amendment in the Act cannot he read into the treaty to determine the nature of payment as Royalty under the DTAA. We have considered the decisions relied by appellant in support of this contention including the decision of jurisdictional high court in case of Siemens Aktiengesellschaft 310 ITR 320(3om). It is noted that the retrospective amendment in explanation 5 has only clarified the meaning of Royalty. It has not a: all expanded the scope of royalty. The clarification was made to remove the conflicting views on effect of location/possession/control/delivery/use of the royalty rights etc. by the user in India without bringing any fresh item to be taxable s royalty. It is for this reason the amendment is retrospective and starts with clause "for removal of doubt it is clarified". Hence by amendment it is not that the definition of Royalty is being enlarged. It is also not a case where items not taxable under DTAA are being now taxed under the Act. Definition of Royalty in DTAA and Act are Pari material as recently held by Madras High court also in case of Poompuhar Shipping 360 ITR 257 and Verizon Communication Singapore Pte 361 ITR 474 (Mad....
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....e only as industrial or commercial profits (business income) only to the extent it was attributable to PE. Article III of the DTAA applicable at that time read as under: Article III (1) Subject to the provision of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment of the said enterprise situated in the first mentioned territory. If profits are so derived, tax may be levied in the first mentioned territory on the profits attributable to the said permanent establishment. (2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory, the industrial or commercial profits which it might be expected to derive in that other territory if ti were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is the permanent establishment. In any case where the correct amount of profits attributable t....
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....ision for taxing the Royalty of any nature under DTAA. It was in the back ground of these provisions of the IYFAA with Germany which existed at that time that the court held that definition of Royalty as per Act could not be imported to DTA.A. Hence the decision of High court in Siemens Aktiengesellschaft (supra) cannot be applied to the cast where the definition/taxing rights for royalty has been specifically provided under the applicable DTAA also. Based on above decisions of Siemens Akticngcscilschaft, the contention that unless the definition of Royalty is changed. the amendments brought by Finance Act 2012 have no implication was also also argued by assessee in case of Viacom 18 Media Pvt. Ltd(supra) wherein ITAT has upheld the above argument of the revenue in Para 7,10,12 of its order dated 28/03.2014 and subsequently in case of Reuters transactions services Ltd. (supra) in para 10 of its order dated 14/07/2014, which was also under the USA treaty. 3.4.6 In view of the above discussions, the order of the AO treating the amounts paid as Royalty under the Act as well under the DTAA is upheld." 4. Further, the assessee raised objection with regard to the findings of ....
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....the activity note was filed before the AO and DRP. He stated that the assessee is carrying out two types of hosting services that are customer typical purchase. He referred from the note which is as under: - "Public Cloud Hosting: Public Cloud customers sign up online and agree to standard terms and conditions but do not sign actual written contracts. Public Cloud hosting is provided as a service over the Internet. The customer's applications are hosted by the cloud service provider. The core infrastructure is shared by several organizations but each organization's data and application usage is segregated by permitting access to specific data applications only to authorized users. Public Cloud is typically billed based on usage (pay-as-you-go model) so the customer does not have a long term commitment. It is a month-to-month service with no actual commitment from the customer to use it in any volume for any length of time. Dedicated/ Managed hosting: The services rendered under to Dedicated' Managed Hosting customers is largely similar to the services rendered under to Public Cloud customers. The identified core infrastructure is used only for....
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....lutions to that party and services provided by the assessee to the said party was under litigation before the AO for non-deduction of TDS and hence, the AO passed the order under section 201(1) and 201(1A) of the Act and the Tribunal finally held that the payment is neither royalty under section 9(1)(vi) of the Act nor as per Article 12 of Indo-US DTAA and Rackspace, the assessee, being having no PE in India not liable to tax in India, there is no requirement of TDS on these services. The Tribunal finally considered the agreement clauses and decided the issue vide para 7 to 9 as under:- "7 We have considered the rival contention as well as the relevant material on record. We find that the payments in question were made by the assessee to Rackspace in pursuant to the contract/agreement between the parties. The CIT(A) has extracted the relevant contents/clauses of the serviced level agreement between the assessee and Rackspace in pars 10 & 10.1 of the impugned order as under; "10. I have gone through the issue. The appellant is the owner of the popular website Shaadi.com. To maintain its website, the appellant has entered into a contract with Rackspace who provides ....
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....icket is opened to the time the problem is resolved and the server is powered back on. Rackspace Guarantee: Upon experiencing downtime, Rackspace will credit the customer 5% of the monthly fee for each 30 minutes of downtime (up to 100% of customer's monthly fee for the affected server). Hardware Rackspace guarantees the functioning of all hardware components and will replace any failed component at no cost to the customer. Hardware is defined as the Processor(s), RAM, hard disk(s), motherboard. NIC Card and other related hardware includes with the server. This guarantee excludes the time required to rebuild a RAID array and the reload of certain operating systems and applications. Hardware replacement will begin once Rackspace identifies the cause of the problem, hardware replacement is guaranteed to be complete within one hour of' problem identification. Rackspace Guarantee: In the event that it takes us more than one your to replace faulty hardware, packspace will credit the customer 5% of the monthly fee per additional hour of downtime (up to 100% of customer's monthly fee for the affected server)" 10.1 Details about Rackspa....
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....ace and situated outside India. When the assessee could not operate or even have no physical excess to the equipments system providing service, then the assessee would not be using the equipments but only availing the services provided by Rackspace. 8 The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (supra) while deciding a similar issue on the point of royalty has held in paras 58 to 60 as under: "In the light of our discussion explaining Explanation 2 to section 9(1)(vi) of the Act, let us proceed to apply these principles on the facts of the case. The starting point has to be the nature of services provided by the appellant to its customers as per the agreement arrived at between them. Keeping in view the aforesaid operation of the satellites, we revert back to the agreement entered into between the appellant and its customers. It is clear from various clauses of the agreement (and noticed above), the appellant is the operator of the satellites. It also remains in the control of the satellite. It had not leased out the equipment to the customers. On this basis, it is argued by the appellant that the equipment is used by the....
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....d merely given access to a broadband with available in a transponder which can be utilized for the purpose of transmitting the signals of the customer. In that case, after taking note in depth, the operation and the functioning of transponder, the AAR emphasized on the fact that data sent by the telecast operator does not undergo any change for improvement through the media of transponder." 8.1 Further, the Hon'ble Delhi High Court, after considering the decision of Advance Authority of Ruling in the case ISRO(supra) has observed in paras 62 to 64 as under: "It is also clear from the above that the aspect of amplification of data by the transponder is taken only as additional factor, but the judgment is not entirely rested on that. This ruling further categorically demonstrates that in a case like this, services are provided which is integral part of the satellite, remains under the control of the satellite/transponder owner (like the appellant in this case) and it does not vest with the telecast operator/ television channels. The position is substantially the same in the present case as well. The Tribunal has distinguished this judgment and has opined th....
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.... the CIT(A) allowed the claim of the assessee vide order dated 29.1.2009 . Consequently, the Assessing Officer passed a giving effect order dated 3.12.2010 u/s 154 and accepted the claim of the assessee in respect of the expenditure for hosting charges paid to Rackspace. Thus, it is clear that the Assessing Officer while passing the order dated 3.12.2010 u/s 154 accepted that the payment is not in the nature of royalty. 9. In view of the admitted position as the Assessing Officer has accepted the claim of the assessee regarding the expenditure on account of web hosting paid to Rackspace as well as the facts and circumstances of the case and legal position on the point as discussed above, we do not find any reason to interfere with the impugned order of the CIT(A) for the respective assessment years. Accordingly, the appeals filed by the revenue are dismissed" 9. On the other hand, the learned CIT DR, Shri Kumar Sanjay relied on the discussion and directions of DRP on both the issues. 10. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that as per the provisions of section 9(1)(vi) of the Act royalty is taxable in....
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....the India-USA Tax Treaty, wherein the term royalties' are defined to mean: (a) 'payments of any kind received as a consideration for the list of or the right to Use', any copyright of literary, artistic or scientific work including cinematograph or work on ten, tape or other means of reproduction for use in connection it radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process, or for information ('concerning industrial, commercial or scientific experience including gains derived from the alienation of any such rig/it or property which are Contingent on the productivity, use, or disposition thereof; and (b) Payments of any kind received as consideration for the use, or right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8" (Emphasis supplied). 13. As may be observed, the definition of royalty under Article 12(3) of the India-USA Tax Treaty in respect of payment for use or right to use equipment is in pari-materia w....
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..... By granting access to the journals, the assessee neither shares its experiences, techniques or methodology employed in evolving databases with the users, nor imparts any information relating to them. As is clearly evident from the sample agreements, all that the customers get is the right to search, view and display the articles (whether online or by taking a print) and reproducing or exploiting the same in any manner other than for personal use is strictly prohibited. Further, the customers do not get any rights to the journal or articles therein. They can only view the article in the journal that they have subscribed to and cannot amend or replicate or reproduce the journal. Thus, the customers are only able to access journal/articles for personal use of the information. No 'use or right to use' in any copyright or any other intellectual property of any kind is provided by the assessee to its customers. Furthermore, the information resides on servers outside India, to which the customers have no right or access, nor do they possess control or dominion over the servers in any way. Therefore, the question of such payments qualifying as consideration for use or right to us....
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....ation, web mail, websites etc. In view of these facts, we are of the view that income from cloud hosting services has erroneously held as royalty within the meaning of explanation (2) to section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA DTAA by the AO and DRP. Even otherwise, there is no PE of the assessee in India and hence, no income can be taxed in India in term of Indo-US DTAA. We reverse the orders of the lower authorities and allow this issue of assessee's appeal. 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: - "Ground No. 2: Income from cloud hosting services is also erroneously held as fees for technical services within the meaning of section 9(1)(vii) of the Act as well as fees for included services under Article 12(4)(a) of the India-US tax treaty 2.1 On the facts and circumstances of the case, the learned AO further ....