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2018 (10) TMI 1434 - AT - Income TaxTDS u/s 195 - Disallowance of payment made towards web hosting charges to Amazon Web Services LLC (USA) - Indo-US DTAA - whether the assessee is liable to deduct withholding tax out of such payments made to Amazon on account of web hosting charges? - retrospective amendment - Held that:- Disallowance of expenditure under section 40(a)(i) could only be made if the payment was royalty in terms of Explanation 2 to section 9(1)(vi) but where the payment was not royalty in terms of said Explanation, then no disallowance of expenditure under section 40(a)(i) could be made in the present facts. Accordingly, we hold that amendment, if any, to the scope of royalty by an amendment in 2012 by Finance Act with retrospective effect cannot fasten the assessee with liability to withhold tax for the years which have already been closed prior to insertion of amendment. Hence, the assessee has not defaulted in not deducting withholding tax and for such non acts, the payment made cannot be disallowed as provisions of section 40(a)(i) of the Act are not attracted. Whether retrospective amendment in Income Tax would override the Treaty Laws where no amendment has been made? - Held that:- There is no merit in holding that the assessee was liable to deduct withholding tax out of such payments made to Amazon and for such non-deduction or withholding of tax, the assessee can be held to be at default and the payment made by assessee being not allowed as deduction in its hands, in view of provisions of section 40(a)(i). We reverse the orders of authorities below in this regard. We are not going into the issue raised by assessee that Amazon is not having PE in India and hence, no liability to deduct tax in India. Whether charges paid to Amazon for various services provided by it are in the nature of royalty, if any, or not? - Held that:- In the facts of present case, looking at the documentation, the billing is segregated into various services i.e. AWS services, storage services, etc. and the assessee before us has filed a chart of summary of services availed. The first such services are on account of service charges for Elastic Compute Cloud. As per clause 1, it is on account of use of service provider Linux; as per clause 1.2, Windows and as per clause 1.3, Windows & SQL Server stanard and clause 1.4 of Bandwidth. The total service charges for Elastic Compute Cloud are USD 40,253.17. The month-wise details of said payments made by assessee from September, 2009 to March, 2010 reflected that in the first month, charges totaled to USD 4269.02, in October at USD 5599.36 and there on. Main provisions of section 9(1)(vi) are not attracted as the payment made by assessee is not in the nature of royalty. In any case, Explanation 2(iva) of section 9(1)(vi) covers cases of royalty i.e. consideration paid for the use or right to use any industrial, commercial or scientific equipment but not including the amount referred to in section 44BB of the Act. The assessee in the present case did not use or acquire any right to use any industrial, commercial or scientific equipment while using the technology services provided by Amazon and hence, the payment made by assessee cannot be said to be covered under clause (iva) to Explanation 2 of section 9(1)(vi) of the Act. Even if the retrospective amendment is held to be applicable, the case of assessee of payment to Amazon being outside the scope of said Explanation 2(iva) to section 9(1)(vi) cannot make the assessee liable to deduct tax at source. The assessee is not liable to deduct withholding tax and such non deduction of withholding tax does not render the assessee in default and consequently, no disallowance of amount paid as web hosting charges is to be made in the hands of assessee for such non deduction of withholding tax and hence, provisions of section 40(a)(i) of the Act are not attracted. The grounds of appeal raised by assessee are thus, allowed.
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