TMI Blog2021 (2) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... to 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. 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 - ITA No. 5250/Mum/2019 - - - Dated:- 29-1-2021 - Pramod Kumar (Vice President) And Saktijit Dey (Judicial Member)] Nitesh Joshi for the appellant Sanjay Singh for the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 erred 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 qualifies as fees for included services within the meaning of Article 12(4)(a) of the India-US tax treaty. Ground no. 3: Erroneous levy of interest under section 234B of the Act 3.1 On the facts and circumstances of the case and in law, the learned AO erred in levying interest of INR 24,29,388 under section 234B of the Act. 3. As learned representatives fairly agree, the issues raised in this appeal are covered in favour of the assessee, by the decision of coordinate bench dated 28th November 2019, in assessee own cases for the assessment years 2010-11 2015-16, wherein the coordinate bench has inter alia observed as follows:- 3. The brief facts of the case are that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of the Hon ble ITAT in the assessee s own case for the A.Y. 2012-13 in ITA. No.1634/M/2016, ITA. No.1075/M/2017 for the A.Y.2013-14 ITA. No.3507/M/2017 for the A.Y.2014-15 dated 29.05.2019, therefore, in the said circumstances, the issues are liable to be decided in favour of the assessee in accordance with law. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. Before going further, we deem it necessary to advert the finding of the Hon ble ITAT in the assessee s own case(supra) on record: - 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation ('concerning industrial, commercial or scientific experience including gains derived from the alienation of any such rig/it 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 Racks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strictly prohibited. Further, the customers do not get any rights to the journal or articles therein. They can only view the article in the journal that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and allow this issue of assessee s appeal. 5. On appraisal of the above mentioned finding, we find that the agreement between the assessee and its customers is for providing hosting and other ancillary services to the customers and not for the use of leasing any equipment. The data centre and the infrastructure therein used to provide these serves belongs to the assessee. The customers are not having physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with the assessee. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in data centre, web mail, websites etc. Accordingly, it cannot be said 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 Data by the AO and DRP. Moreover, there is no PE of the assessee in India and hence, no income can be taxed in India in term of Indo-US DTAA. The facts are not distinguishable in this order also. Therefore, the finding above is quite applicable to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneously held as royalty, on the same reasoning, the income from cloud hosting services cannot be taxed as fee for technical services and this issue has been decided by the DRP against Revenue by holding the same as infructuous. For this Revenue is not in appeal. 7. The facts are not distinguishable at this stage. The Hon ble ITAT has treated this issue as in fructuous on the basis of the finding given while deciding the issue no. 1 in which the income was not treated 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 tax treaty. Accordingly, by following the decision of co-ordinate bench, the present issue is decided in favour of the assessee against the revenue. ITA. No. 3 8. Under this issue the assessee claimed that the assessee was not entitled to pay the interest u/s 234B of the Act. At the very outset, the Ld. Representative of the assessee has argued that the issue has also been covered in favour of the assessee in view of the decision of the Hon ble ITAT in the assessee s own case(supra), therefore, the assessee was not liable to pay the interest u/s 234B of the Act. However, on the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, we direct the AO not to charge interest under section 234B of the Act in the given facts and circumstances of the case. 9. By following the decision of the ITAT in the Assesses own case, we are of the view that the assessee was not under obligation to pay the interest. In the said decision ITAT has decided the matter in view of the decision of the Hon ble Bombay High Court in the case of DIT(IT) Vs. Ngc. Network Asia LLC (2009) 313 ITR 187 (Bom). Since the issue is squarely covered by the decision of Hon ble Bombay High Court, therefore present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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