TMI Blog2018 (10) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of convenience. However, in order to adjudicate the issues, we are referring to the facts and issues in ITA No.1204/PUN/2016 relating to assessment year 2010-11. 3. The assessee in ITA No.1204/PUN/2016, relating to assessment year 2010-11 has raised the following grounds of appeal:- 1 . The learned CIT(A)-I, Pune erred in law and on facts in confirming the learned AO's decision of disallowing payment towards web hosting charges to Amazon Web Services LLC (USA) amounting to ₹ 18,61,207/- u/s 40(a)(i) of ITA, 1961, on the analogy that, the payment is in the nature of royalty as per newly inserted Explanation-2 to section 9(1)(vi) of ITA, 1961, having retrospective effect. 2. The learned CIT(A)-1, Pune the learned AO erred in law and on facts in holding that payment towards web hosting charges to Amazon Web Services LLC (USA) amounting to ₹ 18,61,207/- accrues as taxable income of the said party in India, without dealing with the applicability of Indo-USA DTAA. The learned I-T authorities ought to have appreciated that the DTAA overrides the provisions of ITA, 1961 anyway and as per DTAA, no any such income accrues in India in absence of PE. 4. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no obligation on its part to deduct withholding tax on the payment as the said payment did not fall either in the category of technical fees or royalty. The assessee placed reliance on the decision of the Hon ble High Court of Delhi in the case of Bharti Cellular Ltd. reported in 319 ITR 139 (Del) to support its case of payment not falling under the head Technical Services . The assessee further relied on the ruling of the AAR in the case of Bharti Axa General Insurance Company dated 06.05.2010 for the proposition that the payment did not fall in the category of royalty. The Assessing Officer however, referred to subsequent amendment to section 9 of the Act by Finance Act, 2012 and observed that payment made by assessee towards web hosting charges was the payment towards royalty, in view of Explanation-2 to section 9(1)(vi) of the Act. The Assessing Officer observed that it was apparent that the assessee was using servers of AWS through Right to Use Agreement vide which a limited licence had been granted to it. Thus, servers were essential to the assessee s business and exigent factor for entering into such an agreement with AWS, was lack of skilled manpower in main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee then referred to agreement between the assessee and Amazon, which is placed at page 3 of Paper Book and referred to services offered online by Amazon and pointed out that payment was for pack of services. He then, referred to clause 5.1 of agreement, wherein charges were raised monthly for use of services. The learned Authorized Representative for the assessee pointed out that in order to avail services, it was logging on to the portal, using services offered which were technologically driven services. On the other hand, the charge of Assessing Officer was that the assessee was using servers/equipment of Amazon. He stressed that the assessee was trader of recharge pens and could not use high end technology equipments i.e. servers. So in this regard, he drew our attention to an example that when any person is making calls, then he has only to use services and not high end technology provided by service provider. Another example drawn by him was that when any person is watching BBC / CNN, then he is using services but not technology behind it. In this era of evolving to technology, he stressed that the thing to be seen is that what the assessee is availing. Referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. He then pointed out that Assessing Officer had applied Explanation 2(iva) of section 9(1)(via) of the Act, whereas rendering of services was as per clause (vi), which was not applied by Assessing Officer. He also pointed out that there were no amendments to DTAA. 10. The learned Authorized Representative for the assessee in rejoinder referred to page 19 of agreement and pointed out that what was charged was as per Annexure-1 to Synopsis i.e. total of servers made available. In the case of royalty, it was any service which was to be used individually , used by it. In respect of Explanation 2(iva) of section 9 of the Act, the learned Authorized Representative for the assessee pointed out that first I should avail in the earlier realm and then provisions of said section can be applied, which in any case has not been applied by authorities below. 11. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in respect of charges paid by assessee to AWS. The assessee was engaged in sale of recharge pens and did not have the facility available with it of high technology equipments i.e. servers. So, in order to carry on its ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment are obtained by you (assessee) from Amazon or its licensor to the Service Offerings, including any related intellectual property rights. The terms between the parties are defined as per clause 14 and the terms which are relatable to the issue raised are as under:- AWS Conten t means Content we or any of its affiliates make available in connection with the Services or on the AWS Site to allow access to and use of the Services, including WSDLs; Documentation; sample code; software libraries; command line tools; and other related technology. AWS Content does not include the Services. AWS Marks means any trademarks, service marks, service or trade names, logos, and other designations or AWS and its affiliates that we may make available to you in connection with this Agreement. 13. The assessee has used services and has made monthly payments to Amazon. The assessee has attached sample invoice of Amazon at pages 23 to 41 of Paper Book and ledger extract of Amazon in its books at pages 1 and 2 of Paper Book. The assessee had filed submissions before the Assessing Officer giving detailed note on web hosting charges, which was as under:- Web Hosting Charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) of the Act has been made effective from 01.04.1976, whereas the years under appeal are assessment years 2010-11 and 2011-12. So, even if retrospective amendment has been made in the Income Tax Act, but such retrospective effect cannot be given to the years which had already been closed before amendment came into force. Further under the garb of retrospective amendment, the assessee cannot be fastened with an obligation which he cannot perform. The assessee had made payments to foreign party i.e. Amazon. The payments have already been made in financial years 2009-10 and 2010-11 and once the payments have already been released or shown to have accrued to the said party, then under the garb of retrospective amendment, such payments which are due to the person or which has already been paid, cannot be withdrawn. There is no merit in the orders of authorities below in holding otherwise. 16. In this regard, we find support from the ratio laid down by the Hon ble Bombay High Court in CIT Vs. M/s. NGC Networks (India) Pvt. Ltd. (supra). The Hon ble High Court applied the ratio laid down by the Hon ble Bombay High Court itself in CIT Vs. Cello Plast (2012) 209 Taxmann 617 (Bom), whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty as per DTAA, since the provisions of DTAA takes precedent over the provisions of Income Tax Act, where the assessee does not possess and does not have any control over the server or servers space, being deployed by Amazon, while providing e-services as per agreement, then there is no scope to construe that e-service charges paid to Amazon could be described as royalty. There is merit in the plea of assessee. If we construe the meaning of royalty as per DTAA, then we have to consider the possibility of position and control of server / server space, which admittedly, is not possessed by the assessee. Hence, as per Treaty Laws, the assessee cannot be held to have paid royalty to Amazon. Consequently, the payment made by assessee for web hosting services is not taxable in accordance with DTAA and the same cannot be held to be taxable, only because there was retrospective amendment to section 9(1)(vi) of the Act. In any case, the Courts have held that when there is no amendment to the Treaty Laws, then the said Treaty Laws would override the amendment, if any, whether retrospective or otherwise to the Income Tax Act. Such a view has been taken in DDIT Vs. New Skies Satelite BV Ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Authorized Representative for the assessee. 21. The aspect which needs to be seen is whether the assessee is paying consideration for getting any right in respect of any property. The assessee claims that it does not pay for such right but it only pays for the services. The claim of assessee before us was that it was only using services provided by Amazon and was not concerned with the rights in technology. The fees paid by assessee was for use of technology and cannot be said to be for use of royalty, which stands proved by the factum of charges being not fixed but variable i.e. it varies with the use of technology driven services and also use of such services does not give rise to any right in property of Amazon and consequently, Explanation under section 9(1)(vi) of the Act is not attracted. It may be pointed out herein itself that the Assessing Officer had applied Explanation 2(iva) under section 9(1)(vi) of the Act in order to hold the assessee as having defaulted for non deducting withholding tax. First of all, main provisions of section 9(1)(vi) of the Act are not attracted as the payment made by assessee is not in the nature of royalty. In any case, Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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