TMI Blog2019 (5) TMI 1724X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty within the meaning of explanation 2 to section 9(I)(vi) of the Income Tax Act. 1961 (the Act) as well as Article 12(3)(b) of the India-US tax treaty. 1.1. On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income- tax (International tax) - 4(1)(1) ( AO ) pursuant to the directions of the Hon'ble Dispute Resolution Panel (DRP) erred in holding that cloud hosting system is combination of hardware, software and networking elements that constitutes industrial / commercial / scientific equipment and the income of ₹ 29,49,01.258/- earned by the appellant from cloud hosting services is for use of or right to use industrial commercial scientific equipment which would constitute royalty under section 9(1)(vi) of the Act. 1.2. On the facts and circumstances of the case and in law, the learned AO pursuant to the directions of the Hon'ble DRP erred in holding that the income earned by the appellant is for use of or right to use industrial I commercial / scientific equipment and constitutes royalty under Article 12(3)(b) of the India-US tax treaty. 1.3. On the facts and circumstances of the case and in law, the learned AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of equipment and since the customer has no physical control/ possession over the equipment, no right to use of an industrial, commercial or scientific equipment has been granted by the assessee and that the assessee and that the services rendered by the appellant are in the nature of standard facilities extended to the payers. The AO has discussed in great details the nature of services rendered by appellant to its customers in Para 5.5. of the assessment order which clearly suggest that the services provided by appellant are under contractual agreements with certain rights and restrictions for both parties. The appellant provides rack space in its data centers situated outside India which host the customer s data/ applications. The data center house highly confidential and privileged data of various customers and hence needs robust fool proof security systems in place. The appellant is as availability of live assistance twenty-four hours per day, seven days per week, year round by Rackspace employees with training and experience relative to the Services and any additional level of assistance offered by Rackspace for the specific Services ordered by clients. Para 19 of the Rac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even otherwise, the Finance Act 2012 has clarified that the payment for use of right, property or information would be considered as royalty irrespective of whether the possession and control of the right, property or information is with the payer, whether it is actually used by the control of the right, property or information is with the payer, whether it is actually used by the Prayer or whether the location of such right, property or information is in India. This amendment further strengthens the contention that such amount is taxable as Royalty under Indian domestic tax law even in situations where the customer arguably does not possess or control the right, property an information. The Madras high court in Verizon Communication Singapore Pte (supra) also observed that after the amendment was introduced in Section 9(1)(vi) of the Act in the year 2012, irrespective of possession, control with the payer or use by the payer or the location in India, the consideration would nevertheless be treated as royalty'. The decisions relied by the appellant in case of People Interactive (I) P Ltd delivered on 29/2/2012 is therefore distinguishable as it has based its decision mainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. It has not a: all expanded the scope of royalty. The clarification was made to remove the conflicting views on effect of location/possession/control/delivery/use of the royalty rights etc. by the user in India without bringing any fresh item to be taxable s royalty. It is for this reason the amendment is retrospective and starts with clause for removal of doubt it is clarified . Hence by amendment it is not that the definition of Royalty is being enlarged. It is also not a case where items not taxable under DTAA are being now taxed under the Act. Definition of Royalty in DTAA and Act are Pari material as recently held by Madras High court also in case of Poompuhar Shipping 360 ITR 257 and Verizon Communication Singapore Pte 361 ITR 474 (Mad). Art 3(2) of DTAA stipulates that any term not defined shall have meaning as assigned under Act. As per section 90(2), provisions of DTAA shall apply if they are more beneficial in case there is conflict between DTAA and Act. There can be no dispute that for tax liability of any item beneficial provision has to be given preference. But there it is not a case of conflict of brining a new item of taxation or creating a fresh tax liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anent establishment of the said enterprise situated in the first mentioned territory. If profits are so derived, tax may be levied in the first mentioned territory on the profits attributable to the said permanent establishment. (2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory, the industrial or commercial profits which it might be expected to derive in that other territory if ti were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm s length with the enterprise of which it is the permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination, or the ascertainment thereof presents exceptional difficulties, the profits attributable to the establishment may be estimated on a reasonable basis. (3) For the purposes of this Agreement the term Industrial or commercial profits: shall not include income in the form of rents, royalties, interest dividends, management charges, remuneration for labour or personal services or income from the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions of Siemens Akticngcscilschaft, the contention that unless the definition of Royalty is changed. the amendments brought by Finance Act 2012 have no implication was also also argued by assessee in case of Viacom 18 Media Pvt. Ltd(supra) wherein ITAT has upheld the above argument of the revenue in Para 7,10,12 of its order dated 28/03.2014 and subsequently in case of Reuters transactions services Ltd. (supra) in para 10 of its order dated 14/07/2014, which was also under the USA treaty. 3.4.6 In view of the above discussions, the order of the AO treating the amounts paid as Royalty under the Act as well under the DTAA is upheld. 4. Further, the assessee raised objection with regard to the findings of the AO in regard to the receipt of cloud hosting services of technical services within the meaning of explanation (2) to clause (vii) of sub-section (1) of section 9 of the Act and Article 12(4)(a) of Indo-USA DTAA. But the DRP again affirmed the action of the AO by observing in para 4.3 as under: - 4.3 Discussion and Direction of DRP 4.3.1 Since in earlier Para 4.24 we have already held that the payments are in nature of Royalty under 9(1)(vi) of the Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce provider. The core infrastructure is shared by several organizations but each organization's data and application usage is segregated by permitting access to specific data applications only to authorized users. Public Cloud is typically billed based on usage (pay-as-you-go model) so the customer does not have a long term commitment. It is a month-to-month service with no actual commitment from the customer to use it in any volume for any length of time. Dedicated/ Managed hosting: The services rendered under to Dedicated' Managed Hosting customers is largely similar to the services rendered under to Public Cloud customers. The identified core infrastructure is used only for one customer wherein the customer would have remote access to the servers through the internet, but no access to the firewalls, load balances and network devices which are critical for the assessee to provide services to its customers. For Dedicated Hosting, the customer signs a contract which typically has a duration of 12-36 months. It may be noted that a new contract is not signed every year. In addition, when a contract term ends, the customer can continue their dedicated servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered the agreement clauses and decided the issue vide para 7 to 9 as under:- 7 We have considered the rival contention as well as the relevant material on record. We find that the payments in question were made by the assessee to Rackspace in pursuant to the contract/agreement between the parties. The CIT(A) has extracted the relevant contents/clauses of the serviced level agreement between the assessee and Rackspace in pars 10 10.1 of the impugned order as under; 10. I have gone through the issue. The appellant is the owner of the popular website Shaadi.com. To maintain its website, the appellant has entered into a contract with Rackspace who provides the hosting services. There is a master, service agreement which defines IT hosting service and it means the information technology hosting services described in a service order and Service Level Agreement plus support. Details about the Service Level Agreement are extracted below: Service Level Agreement. Choosing a hosting provider is never easy and it seems to be risky when your site is at stake. We know that the availability of your site is of utmost importance and entrusting your website to Rackspace is so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee excludes the time required to rebuild a RAID array and the reload of certain operating systems and applications. Hardware replacement will begin once Rackspace identifies the cause of the problem, hardware replacement is guaranteed to be complete within one hour of problem identification. Rackspace Guarantee: In the event that it takes us more than one your to replace faulty hardware, packspace will credit the customer 5% of the monthly fee per additional hour of downtime (up to 100% of customer s monthly fee for the affected server) 10.1 Details about Rackspace Service Levels is extracted below; No matter the size of your business, you will always get the kind of support the goes for beyond the ordinary. It s truly Fanatical Support and since different businesses have different needs, we offer you two service levels - Managed and Intensive. So you can determine what kind of support works best for you, instead of us deciding for you. Regardless of which service level you go with, you ll always get all of the following, without exceptions: Fanatical Support any time, anywhere, any way. You dedicated Support Team with an Account Manager a td Business Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scussion explaining Explanation 2 to section 9(1)(vi) of the Act, let us proceed to apply these principles on the facts of the case. The starting point has to be the nature of services provided by the appellant to its customers as per the agreement arrived at between them. Keeping in view the aforesaid operation of the satellites, we revert back to the agreement entered into between the appellant and its customers. It is clear from various clauses of the agreement (and noticed above), the appellant is the operator of the satellites. It also remains in the control of the satellite. It had not leased out the equipment to the customers. On this basis, it is argued by the appellant that the equipment is used by the appellant and it is only providing and rendering services to its customers and not allowing the customers to use the process. In the case of ISRO [2008] 307 ITR 59 (AAR), the AAR has narrated in detail the process of the operation of a satellite and the role played by the transponder therein. The following features of the agreement entered into by the appellant with its clients need to be highlighted at this stage: (a) The appellant is a foreign company incorporated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) has observed in paras 62 to 64 as under: It is also clear from the above that the aspect of amplification of data by the transponder is taken only as additional factor, but the judgment is not entirely rested on that. This ruling further categorically demonstrates that in a case like this, services are provided which is integral part of the satellite, remains under the control of the satellite/transponder owner (like the appellant in this case) and it does not vest with the telecast operator/ television channels. The position is substantially the same in the present case as well. The Tribunal has distinguished this judgment and has opined that it is not applicable because of the reason that in ISRO [2008] 307 ITR 59 (AAR), there was any amplification of the signal whereas in the present case, signals are amplified. That, to our mind, would not make any difference insofar as ultimate conclusion is concerned, inasmuch as the ruling of the Authority for Advance Rulings is not founded on the aforesaid consideration. It becomes manifest when we take note of the question posed by the Authority for Advance Rulings before answering the same. The Authority for Advance Ruling expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eb hosting paid to Rackspace as well as the facts and circumstances of the case and legal position on the point as discussed above, we do not find any reason to interfere with the impugned order of the CIT(A) for the respective assessment years. Accordingly, the appeals filed by the revenue are dismissed 9. On the other hand, the learned CIT DR, Shri Kumar Sanjay relied on the discussion and directions of DRP on both the issues. 10. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that as per the provisions of section 9(1)(vi) of the Act royalty is taxable in India inter alia if the payer an Indian resident, except where the royalty is payable in respect of a right, property, information or service used for the payer's business outside India or for earning income outside India. Explanation 2 to section 9(1)(vi) of the Act dealing with the definition of royalty inter alia includes payment for use or right to use an industrial, commercial or scientific equipment. Considering the fact that Rackspace USA customers only avail hosting services and do not use, possess or control the equipment used for providing hosting servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or property which are Contingent on the productivity, use, or disposition thereof; and (b) Payments of any kind received as consideration for the use, or right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8 (Emphasis supplied). 13. As may be observed, the definition of royalty under Article 12(3) of the India-USA Tax Treaty in respect of payment for use or right to use equipment is in pari-materia with the pre-amendment definition of royalties in the Act. The said definition of royalties is exhaustive and not inclusive and therefore, it has to be given the meaning as contained in the Article itself and no other meaning should be looked upon. 14. From the above, it is clear that the services provided by Rackspace USA to that Indian customers are not covered by the above 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they have subscribed to and cannot amend or replicate or reproduce the journal. Thus, the customers are only able to access journal/articles for personal use of the information. 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 possess control or dominion over the servers in any way. Therefore, the question of such payments qualifying as consideration for use or right to use any equipment, whether industrial, commercial or scientific, does not arise. 18. To put a comparison, if someone purchases a book, then the consideration paid is not for the use of the copyright in the book/ article. The purchaser of a book does not acquire the right to make multiple copies for re-sale or to make derivative works of the book, i.e., the purchaser of a book does not obtain the copyright in the book. Similarly, the purchaser of the assessee's journals, articles or database access does not have the right to make copies for re-sale and does not have the right to make derivative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from cloud hosting services as fee for technical services within the meaning of section 9(1)(vii) of the Act as well as fee for included services under Article 12(4)(a) of the Indo-US DTAA. For this assessee has raised the following ground No. 2: - Ground No. 2: Income from cloud hosting services is also erroneously held as fees for technical services within the meaning of section 9(1)(vii) of the Act as well as fees for included services under Article 12(4)(a) of the India-US tax treaty 2.1 On the facts and circumstances of the case, the learned AO further cmxl in holding that the income from cloud hosting services is in the nature of Fees for Technical Services within the meaning of explanation (2) to clause (vii) of subsection (1) of section 9 of the Act. 2.2 On the facts and circumstances of the case, the learned AO erred in holding that the income from cloud hosting services also qualities as fees for included services within the meaning of Ankle 12(4)(a) of the India-US tax treaty. 18. As we have already decided the above issue that income from could hosting services is erroneously held as royalty, on the same reasoning, the income from cloud hosting se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a), a learned Bench of this Court was pleased to pass an order dt. 16th July, 2008 in IT Appeal (L) No. 1796 of 2007 in the case of the Director of IT (International Taxation) v. Morgan Guarantee International Finance Corporation, by applying the ratio of that judgment. 7. Our attention is also invited to the judgment of the Madras High Court in the case of CIT v. Madras Fertilisers Ltd. [1984] 149 ITR 703 (Mad), where the Madras High Court took the view that the amount of tax deductible at source is to be taken into consideration to determine the liability to pay the interest under s. 215. In that case, the assessee had not paid advance tax on interest income. The payer of interest had not deducted the tax. The learned Bench of the Madras High Court was of the view that levy of interest under s. 215 on assessee was not justified. 8. We are in respectful agreement with the view taken In the case of CIT v. Sedco Forex International Drilling Co. Ltd. ( supra), by the Uttaranchal High Court. We are clearly of the opinion that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee assessee. 21. In view of the above, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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