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2019 (5) TMI 1724 - AT - Income TaxIncome accrued in India - Income from cloud hosting services as royalty within the meaning of explanation 2 to section 9(1)(vi) - India-USA - retrospective amendment in the royalty definition - PE in India - HELD THAT:- Services provided by Rackspace USA to that Indian customers are not covered by the definition of ‘royalties’ provided in the India USA Tax Treaty since Rackspace USA is providing hosting services to the Indian customers and does not give any equipment or control over the equipment. The term ‘use’ or ‘right to use’ for the purpose of the tax treaty entails that the prayer has a possession/ control over the property and/ or the said property is at its disposal. There is no privilege or right 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. 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. See AMERICAN CHEMICAL SOCIETY VERSUS DCIT (IT) -1 (1) (1) , MUMBAI [2019 (4) TMI 1818 - ITAT MUMBAI] 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 servers and right to operate and manage this infrastructure / servers vest solely with the assessee. The agreements entered into the service level agreements. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on higher or lease. The customer is not even aware of the specific location of the server in the Data Centre where the customer application, 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. - Decided in favour of assessee Chargeability of interest under section 234B - HELD THAT:- Not to charge interest under section 234B - Hon’ble Bombay High court in the case of DIT(IT) vs. Ngc Network Asia LLC [2009 (1) TMI 174 - BOMBAY HIGH COURT] 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
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