TaxTMI 
TaxTMI 
2026 (6) TMI 729
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....n the USA and is a tax resident of the USA. The assessee is engaged in the business of providing web hosting services through its data centre in the USA. The Assessing Officer received information that, during the assessment year 2013-14, the assessee had received remittance to the tune of Rs. 3,68,54,80,601/- and had TDS credit to the extent of Rs. 3,81,67,984/-. The Assessing Officer further noticed that the assessee had received web hosting charges from M/s ZOHO Corporation Pvt. Ltd (Zoho India). The Assessing Officer, therefore, had reason to believe that income chargeable to tax had escaped assessment and, accordingly, reopened the assessment by issue of notice under Section 148 of the Act. The assessee, in response, filed the return of income on 30.04.2021. The assessee, in response to the show-cause notice issued by the Assessing Officer, submitted that the assessee is engaged in providing web hosting services through data centers in the USA and does not have physical presence or permanent establishment in India. The assessee further submitted that the web hosting service fees received by the assessee are not taxable either under Section 9(1)(vi) of the Act or under Article ....
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.... Appellant service provider and not with the service recipient. Possession and control of the equipment by the user is a prerequisite so as to fall under 'Royalties' under the DTAA and this is absent in case of Webhosting services. b) Webhosting services provided by the appellant is a standard facility and does not tantamount to use or right to use any equipment and hence not 'Royalty' as per Section 9(1)(vi) of the Act or DTAA. c) In the absence of 'use or right to use any equipment in a webhosting service, the insertion of Explanation 5 to Section 9(1)(vi) of the Act is of no relevance. d) Zoho India accesses the server and the data centre for the purpose of storage, data processing etc via the internet. e) The appellant did not grant Zoho India any rights in the respective software nor was any copyright transferred. f) Web hosting services do not make available any technical knowledge, skill, know how or process to Zoho India so as to fall within the purview of Article 12 of the India- US Treaty. 5.7 In Akamal Technologles Inc. [2018] 93 taxmann.com 471 (AAR - New Delhi), the AAR, in the context of the Ind....
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....cility does not constitute the provision of a technical service. e) The payment to Amazon Web Services, USA towards web hosting services is only for using 'information technology facilities' and not Royalties under the India-USA DTAA. 5.9 In Rackspace US Inc vs DCIT in ITA No. 1634/Mum/2016 dated 29/5/2019, it was held that income earned by Rackspace, US Inc. (assessee) did not qualify as Royalty or Fee for Technical Services (FTS) but business income, not taxable in India in the absence of Permanent Establishment (PE) of assessee in India, under the provisions of the Income Tax Act, 1961 and India-USA tax treaty (tax treaty) since the payment was for rendition of cloud hosting services being in the nature of standard services, performed in view of the terms of a service agreement. Further, the provisions of tax treaty, being more beneficial to the assessee would prevail, thereby keeping it outside the ambit of taxation in India. The Honourable Tribunal analysed the amended provisions of section 9(1)(vi) of the Act and explanations thereto and held that as per the provisions of Section 90(2) of the Act, the assessee can opt to be governed by the provisions....
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....framed under section 143(3) r.w.s. 144C and section 147 r.w.s. 144C for various assessment years, treated the receipts from web hosting services as royalty under section 9(1)(vi) of the Act and Article 12(3)(b) of the DTAA on the ground that the customers were allegedly using the servers and equipment maintained by the assessee. Alternatively, the receipts were also sought to be assessed as fees for technical services. 4. The ld. AR further submitted that the CIT(A), after examining the terms of the web hosting agreement and the judicial precedents cited before him, held that the receipts were neither royalty nor fees for technical services. Reliance was placed on the judgment of the Hon'ble Karnataka High Court in CIT v. Urban Ladder Home Décor Solutions (P.) Ltd., [2025] 171 taxmann.com 549 (Karnataka), wherein it was held that payments made for web hosting facilities amounted merely to use of information technology services and not use of equipment so as to constitute royalty. The ld. AR submitted that, the customer neither had possession nor control over the servers and that merely availed a standard facility. Reliance was also placed on the judgment of the Hon'ble Ma....
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....ty to treaty situations. The ld. AR therefore contended that the receipts from web hosting services could not be taxed either as royalty or as fees for technical services under the Act or the DTAA. 7. Without prejudice, the ld. AR submitted that even if the receipts were treated as royalty, the entire receipts could not be brought to tax in India in view of section 9(1)(vi)(b) of the Act, since the services were utilised for earning income from sources outside India. It was contended that appropriate relief ought to be granted to the extent the services related to income earned outside India. Reliance was also placed on the dismissal of the Revenue's appeal by the Hon'ble Supreme Court in CIT v. MOL Corporation (2024 (4) TMI 890), wherein cloud subscription charges were treated as covered by the ratio laid down in Engineering Analysis. The ld. AR further submitted that the review petition filed by the Revenue against Engineering Analysis was also dismissed by the Hon'ble Supreme Court. Accordingly, it was prayed that the orders passed by the CIT(A) be upheld and the appeals filed by the Revenue be dismissed. 8. The ld. DR also made counter submissions, which is summarized a u....
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.... 10. Vide para 12.7.10, the High Court concludes that the Supreme Court has held that the explanation added vide Finance Act 2012 cannot be treated as clarificatory and they are substantive. Vide para 12.7.11, the Honourable High Court says "The aforesaid communication of law is applicable in the present case because the assessments in question are in relation to taxability pertaining to financial years prior to introduction of Finance Act 2012". 11. Para 12.8.3: The High Court holds that the explanation via Finance Act 2012 was made applicable retrospectively in the case of Verizon Communications Singapore Private Limited, and to that extent only that decision stands overruled. 12. Para 12.9: This point is reiterated by quoting the judgment: "But for the application of newly inserted Explanation 4, 5, and 6 under Finance Act 2012, the payment made in the present case by the assessee to Sprint USA would not constitute royalty". Whereas, in the present case, the AYs are subsequent to the amendment. 13. Thus, it is submitted that the view taken by the Honourable High Court in the case of Cognizant Technology Solutions, which is being relied upon by the ass....
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.... in the case of Cognizant Technology Solutions, relied upon by the AR, has no applicability to the present case because it relates to AYs before the introduction of Finance Act 2012, and secondly, it does not relate to the issue of taxability of the receipt in the hands of the recipient. In facts also, the judgement has no application in the present case. Thus, it is prayed that this order of the CIT (A) may kindly be reversed and that of the AO restored." 9. We have carefully considered the rival submissions and perused the material available on record, including the Web Hosting Services Agreement entered into between the assessee and Zoho India. The undisputed factual position emerging from the agreement is that the assessee merely provided standard web hosting facilities comprising server space, internet connectivity and related infrastructure support. The agreement specifically excludes any transfer of possessory rights, control or dominion over the equipment to the customer. Zoho India had neither physical access nor operational control over the servers maintained by the assessee. Zoho India was only permitted a limited right of inspection for security verification purposes....
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....mann.com 106 (Mum-Trib). The Mumbai Bench explained the concept of use of scientific equipment whether would amount to royalty or not by observing as follows: "9. We have noted that the very basis of the impugned addition is Assessing Officer's finding that the receipts in question were on account of use of scientific equipment, and, for that reason, giving rise to an income taxable under section 9(l)(vi] of the Act as also article 13[1)(» of the Indo US tax treaty. This finding, however, proceeds on the fallacy that when a scientific equipment is used by the assessee for rendering a service, the receipt will be construed as a receipt for use of scientific equipment. Undoubtedly, when the assessee receives an income on account of allowing a customer to use a scientific equipment, it does become taxable for the reason of its being characterized as such, but the use of a scientific equipment by the assessee, in the course of giving a service to the customer, is something very distinct from allowing the customer to use a scientific equipment. The true test is in finding out the answer to the fundamental question- is it the consideration for rendition of services, ev....
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....um/2017 order dated 29.5.2019 followed the earlier decision rendered in the case of American 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 in the context of right to use material in the form of journal,. The Tribunal held that the cloud hosting company creates / maintains information online and grants 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. The terms of the agreement between the cloud host and the customer proider that the customer gets right to search, view and display the articles (whether online or by taking a print) and reproducing or exploiting the same in any manner for personal use. The customers do not get any rights to the journal or articles therein. It was held that there was 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 p....
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....Technology Solutions India Pvt. Ltd.(supra), where it is held that amendments introduced by the Finance Act, 2012 cannot be imported into Article 12 of the DTAA in the absence of corresponding treaty amendment. It is relevant to note that the Hon'ble High Court has considered the subsequent law declared by the Hon'ble Supreme Court and has also distinguished the decision relied on by the revenue in the case of Verizon Communications Singapore Pte Ltd(supra). The definition of Royalty as per Article 12(3) of India USA DTAA is - 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with 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 right or property which are contingent on the productivity, use, or disposition thereof ; ....