TaxTMI 
TaxTMI 
2021 (8) TMI 1457
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.... data, bandwidth, link connectivity as also various services such as legal, professional, training, certification, consulting, consulting and sub-contracting etc., from persons who are nonresidents. In terms of Sec. 195(1) of the Income Tax Act, 1961 (Act), the Assessee as a person responsible for paying to a non-resident, any sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. In terms of Sec. 195A of the Act, where under an agreement or other arrangement, the tax chargeable on any income is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. 3. There is no dispute in these appeals tha....
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....ss through software, access to online software training, membership fees, subscription of RSA token involving the tright of right to use the software. (2) Data connectivity charges (also known as Network connectivity charges, LAN connectivity charges, Link connectivity charges, Link charges etc., (3) consulting fees connected and interlinked with software or cloud services; (4) Legal fees, professional fees, training fees, certification fees, subcontracting charges etc., (1) Payments for software licence fee, access to various online databases, web hosting, could computing, cloud space hiring, access of hardware access through software, access to online software training, membership fees, subscription of RSA token involving the tright of right to use the software. 6. The CIT (A) first identified same payees each month for the aforesaid period and for identical services. This exercise has been carried out by the CIT (A) in paragraphs 9 to 193 of the impugned common order and in paragraph-194 of the impugned order, the CIT (A) has summarized the nature of payments to the non-residents as follows: "194. In the payments listed above, the majority of the payments are cons....
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....7 1[14. Meaning of copyright - For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely:- 1[14. Meaning of copyright - For the purposes of this Act, "copyright" means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely:-" (a) in the case of a literary, dramatic or musical work, not being a computer programme, - (i) to reproduce the work in any material form including the Storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate ii to the public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi)to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work, any of the ....
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....hms etc. to appellant. Although the issue of physical possession of the equipment has been raised by the appellant, it is seen that physical possession of the equipment is not possible either by payee or by the payer i.e. the appellant. In fact, the payee also does not have the possession of many of the equipment which are actually lying in the ocean. It is the constructive possession which is material here. 249. Further, this is a transaction in the nature of right to use of a part of the capacity as dedicated capacity for the customer. If the payee owns or has a right over a part of the equipment and process, it is giving to the appellant [payer] a right to use a part of that part owned or leased by it for one year or more depending on the agreement. 250. Thus, the appellant is making payments as a consideration for the use of equipment as well as several processes (many of which are secret and patented). These payments are for commercial utilisation of such equipment and such processes while transferring the data. Such use is squarely covered by definition of Royalty in the tax treaty. 251. Thus, I hold that the amount paid by the appellant is taxable ....
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....tc., certification fees, sub-con charges - FTS 269. I find that most of legal fees, professional fees, certification fees and sub-con charges etc. are related to purchase of software, online training, online subscription etc. Therefore, it is not possible to accept the appellant's requests that TDS is not deductible on the same. 270. In some payments the appellant has failed to furnish evidences regarding nature of payments, agreements (legal fees, professional fees, and training fees) usage of such services outside the country etc. Therefore, it is not possible to agree to the contention of the appellant that these services were received outside India and therefore, are exempt under sec. 9(1)(vii)(b) [FTS]. The DTAA of respective nations recognizes these payments as to be taxable in the contracting state. Hence, the liability of TDS naturally arises." 14. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeals before the Tribunal. 15. The learned counsel for the Assessee on the issue of payment for software license fees submitted that the question whether a payment to a non-resident is in the nature of royalty or not has to ....
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....f any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and(v). Explanation 3.-For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right....
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....ent supplier and reselling to Indian distributors or end-users; and * Computer software bundled with hardware sold by non-resident suppliers to resident Indian distributors or end-users. The revenue taxed payments as royalties under the Income Tax Act and relevant DTAA on the belief that the transactions involved a transfer of copyright. Taxpayers, however, were claiming the payments as business income. 17. The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon'ble Court took the view that a transfer of copyright would occur only w....
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.... ratio laid down by the Hon'ble supreme Court as above will be applicable to the case of the Assessee. 19. On the question whether the provisions of the Act can override the provisions of the DTAA, the Hon'ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012 to clarify that the "transfer of all or any rights" in respect of any right, property, or information included and had always included the "transfer of all or any right for use or right to use a computer software". The court ruled that Explanation 4 to section 9(1)(vi) expanded the scope of royalty under Explanation 2 to section 9(1)(vi). Prior to the aforesaid amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or other similar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of 'royalties' will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term 'copyright' has to be understood in the context of the Copyright Act. T....
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....that the Pune Bench placed reliance on decision of Hon'ble Delhi High Court in the case of DIT Vs. New Skies Satellite BV (2016) 68 taxmann.com 8 (del) to a come to a conclusion that web hosing charges are not in the nature of royalty. 22. With regard to payments towards Data Connectivity Charges (also known as Network Connectivity charges, Lan Connectivity charges, Bandwidth Charges, Link Connectivity charges, Link Charges etc., the learned counsel highlighted the fact that the CIT (A) after discussing the technical facts and the workings involved in data or bandwidth connectivity concluded that payment is for use of equipment as well as several processes which are secreted and patented and hence in the nature of "royalty" under the DTAA and therefore liable to TDS u/s. 195 of the Act. He relied on the decision of the Hon'ble Delhi High Court in the case of New Skies Satellite BV (2016) 68 taxmann.com 8 (Delhi) wherein it was held that income from providing data transmission services by lease of transponders would not be regarded as "royalty" under the DTAA. It was also held that the retrospective amendments by way of introduction of Expln. 4 to 6 to Sec. 9(1)(vi) of the Act by....
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....ourt in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC). The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon'ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, 1957(Copyright Act). The Court noted that the End User License Agreements (EULA) of the software do not transfer or assign the copyright over the software. The "license" that is granted vide the EULA, is....
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....taka High Court in the case of Samsung Electronics Co.Ltd. (supra) and since the analysis of the EULA is necessary to come to a conclusion regarding the nature of the right that is given to the user of the software and since this exercise has not been carried out by the authorities below, we deem it fit and appropriate to remit the issue to the AO for consideration afresh in the light of the principles laid down by the Hon'ble Supreme Court in the case of Engineering Analysis (supra). The AO will afford opportunity of being heard to the Assessee in the set aside proceedings. 29. With regard to the payments towards webhosting charges, the Pune Bench of ITAT in the case of EPRSS Prepaid Recharge Services India Pvt. Ltd. Vs. ITO (2018) 100 taxmann.com 52(Pune-Trib.) held that payments made for use of cloud space does not amount to payment of royalty. The Pune Bench placed reliance on decision of Hon'ble Delhi High Court in the case of DIT Vs. New Skies Satellite BV (2016) 68 taxmann.com 8 (del), which decision has been approved by the Hon'ble Supreme Court in the case of Engineering Analysis (supra), to a come to a conclusion that web hosing charges are not in the nature of royalty....
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.... it. In the present case also, what the assessee is providing is essentially web hosting service, though with the help of sophisticated scientific equipment, in the virtual world. The scientific equipment used by the assessee enable rendition of such a service, and such a use, which is not even by the Indian entity, is not an end in itself. In this view of the matter, even though the services rendered by the assessee to the Indian entities may involve use of certain scientific equipment, the receipts by the assessee cannot be treated as "consideration for the use of, or right to use of, scientific equipment" which is a sine qua non for taxability under section 9(l)(vi) read with Explanation 2 (iva) thereto." 30. With regard to cloud computing/cloud hosting charges, the concept of Cloud computing is the delivery of different services through the Internet, including data storage, servers, databases, networking, and software. Cloud-based storage makes it possible to save files to a remote database and retrieve them on demand. Traditionally we store our data in our computer and can access the data only if the computer is available. In cloud computing the data is store in a server an....
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....the Data Centre where the customer application, web mail, websites etc. The tribunal therefore held that income from cloud hosting services was not 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. 31. The conclusions with regard to payment for right to use software will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties. 32. With regard to payments towards Data Connectivity Charges (also known as Network Connectivity charges, Lan Connectivity charges, Bandwidth Charges, Link Connectivity charges, Link Charges etc., the revenue authorities concluded that payment is for use of equipment as well as several processes which are secreted and patented and hence in the nature of "royalty" under the DTAA and therefore liable to TDS u/s. 195 of the Act. The Hon'ble Delhi High Court in the case of New Skies Satellite BV (2016) 68 taxmann.com 8 (Delhi) has held that income from providing data transmission services by lease of transponders would not ....
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....mpanies or other companies who desire to utilize the transponder capacity available on the appellant's satellite to relay their signals. The customers have their own relaying facilities, which are not situated in India. From these facilities, the signals are beamed in space where they are received by a transponder located in the appellant's satellite. The transponder receives the signals and on account of the distance the signals have travelled, they are required to be amplified. The amplification is a simple electrical operation. Thereafter, the frequency on which the signals are to be downlinked is changed only in order to facilitate the transmission of signals so that there is no distortion between the signals that are being received and the signals that are being relayed from the transponder. The transponder operations are commonly known, which are carried out not only in satellite transmission but also in the case of terrestrial transmission. There is no change in the content of the signals whatsoever that is carried out by the assessee in the transponder. Thereafter, the signals leave the transponder and are relayed over the entire footprint area where they can be rec....