TMI Blog2021 (9) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... y and since in the light of the subsequent pronouncement in the case of Engineering Analysis [ 2021 (3) TMI 138 - SUPREME COURT] overruling the decision of Samsung Electronics Co.Ltd. (supra) and since the analysis of the EULA is necessary to come to a conclusion regarding the nature of the right that is given to the user of the software and since this exercise has not been carried out by the authorities below, we deem it fit and appropriate to remit the issue to the AO for consideration afresh. Payments towards webhosting charges - As in the case of EPRSS Prepaid Recharge Services India Pvt.Ltd. [ 2018 (10) TMI 1434 - ITAT PUNE] held that payments made for use of cloud space does not amount to payment of royalty. Cloud computing/cloud hosting charges - The concept of Cloud computing is the delivery of different services through the Internet, including data storage, servers, databases, networking, and software. Cloud-based storage makes it possible to save files to a remote database and retrieve them on demand. Traditionally we store our data in our computer and can access the data only if the computer is available. In cloud computing the data is store in a server and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operators outside India to the assessee cannot be taxed on the basis that the end consumers are in India; The conclusions with regard to payment for right to use software and the overriding effect of DTAA over the Act, will equally apply to these payments also and the AO will examine the issue afresh as directed while remanding the issue with regard to payments for right to use software in the light of the agreement between the parties. Payments towards consulting fees, legal fees, professional fees, training fees, certification fees and sub-contracting charges - Once the payment for use of software, access to online etc., is regarded as not in the nature of royalty, these payments should also be regarded not in the nature of royalty and hence not liable to TDS - another conclusion of the revenue authorities was that the payments were in the nature of Fees for Technical Services (FTS) cannot be sustained because the applicable DTAA regarding taxation of FTS have not been considered - issue needs re-examination by the income tax authorities in the light of the applicable DTAA provisions. Assessee appeal allowed for statistical purpose. - IT(IT)A Nos.116 to 130/Bang/2021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er arrangement, the tax deductible on any income under Section 195 of the Act, is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income. In terms of Sec.249 (2)(a) of the Act, such appeal shall be presented within thirty days from the date of payment of the tax. The Assessee filed one appeal for payments made in a month. For example in ITA 116/Bang/2021, the Assessee has made 1 payment to a non-resident in respect of software licenses in the month of April, 2017 and that payment was subject matter of appeal by the Assessee u/s.248 of the Act before the first appellate authority, viz., the CIT(A). In an appeal u/s.248 of the Act, there would be no order passed by Income tax authority against which appeal is being filed because the appeal is filed only for a declaration that no tax is payable on the sum paid to the non-resident in the hands of the non-resident in India. The Hon ble Karnataka High Court in the case of Jindal Thermal Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not the definition of Royalty under the Act, and concluded as follows: The appellant's claim: The transaction of sale of software and allowing the use of software does not fall within the definition of Royalty under respective treaties. 49. The appellant has argued that the transaction of purchase of software and allowing the use of software does not fall within the definition of Royalty under respective treaties. I have examined the same.. Various treaties are examined alongwith the payments made[supra]. I find that the term royalties is defined as payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. I find that the appellant's contentions are not correct. I hold that the consideration paid by the appellant for the use of, or the right to use of the software is royalty as per various treaties and need to be taxed in India. The claim: The Appellant has not received any right in terms of section 14 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is rejected. 9. The final conclusion of the CIT(A) on the issue is in paragraph 76 of his order which reads thus: In view of the above, the argument of the appellant that consideration paid for purchase of software, subscriptions, access to various databases and e-commerce platforms, access of hardware overseas through software, access to online software training, training and membership fees etc. [involving transfer of the right to use the software] is not royalty is not acceptable. The grounds n this respect are therefore dismissed. The claim the payment made by Appellant towards bandwidth charges does not constitute Royalty The Claim There is no use of or right to use of equipment and thereby no royalty. Analysis of internet and telecommunications networks and the types of switching and circuits. (2) Bandwidth charges or connectivity charges 10. Thereafter the CIT(A) examined the question whether payment of Data Connectivity Charges and Data Centre Racks and Links Fees are in the Royalty from paragraph 332 of the impugned order. In paragraph 77 to 95 of the impugned order, the CIT(A) has detailed as to how interne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as as follows: 117. Thus, the payments made by Appellant in respect of towards connectivity charges between various countries is held as Royalty. It is also held that it is also for use of software, patented processes as well as for use of or right to use of equipments. The appellant has rightly deducted TDS on the same. The arguments are rejected. 12. In Paragraph 102 to 115 of the impugned order, the CIT(A) has primarily discussed and placed reliance on decision of Hon ble Madras High Court in the case of Verizon Communications Singapore Pvt.Ltd. Vs. ITO, ITA No. 147 to 149 of 2011 and 230 of 2012 dated 7.11.2003 wherein the provisions of Explanation 4 and 5 inserted by the Finance Act, 2012 w.r.e.f. 1.6.1976 were introduced to the definition of royalty u/s.9(1)(vi) of the Act. (4) legal fees, professional fees, certification fees etc. 13. Thereafter the CIT(A) identified payment to various payees towards consulting fees, training fees etc., and concluded that these payments are in the nature of fees for technical services rendered . The following were the conclusions of the CIT(A) in this regard: Legal fees, professional fees, training fees, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India : .. Explanation 2.-For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of DTAA shall apply. He pointed out that the CIT(A) in the impugned order has come to a conclusion that the payments in question are in the nature of royalty and hence taxable in the hands of the nonresident in India by placing reliance on the decision of the decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 in favour of the revenue and against the Assessee. He submitted that the said decision of the Hon ble Karnataka High Court, now stand overruled by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Taxmann.com 42 (SC). The court envisaged 4 situations in which software could be subject matter of agreements between the supplier/licensor of software and distributors/end-users: Purchase of computer software directly by a resident from a non-resident supplier or manufacturer; Purchase of software by a resident Indian company acting as a distributor or reseller and reselling to Indian end-users; Purchase of software by a non-resident distributor from a non-resident supplier and reselling to Indian distributors or end-users; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prietary interest on the licensee, does not involve parting with any copyright. It said this is different from a license issued under section 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is licensed by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by endusers and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon ble Karnataka High Cour in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon ble Supreme Court. It was submitted by the learned counsel for the Assessee that the case of the Assessee in the present appeals falls under the first category and the ratio laid down by the Hon ble supreme Court as above will be applicable to the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore these arguments and reference to the terms of the EULA which have not been considered at all, may not be appropriate before the tribunal. 21. With regard to the payments towards webhosting charges and cloud computing/cloud hosing charges, the learned counsel for the Assessee submitted that those charges are paid to get access to cloud space wherein the payer can store his data, applications, software etc. The payer is given an user id and password to use the storage space provided on cloud. It is a payment made for infrastructure service. The payer gets access to use software/processes which are copyrighted by the owner. He brought to our notice some of the terms of the agreement between the Assessee and Amazon Web Services Inc. And Virtusgreat Inc. and highlighted that on similar terms of agreement between another Assessee and Amzon Web Services Inc., the Pune Bench of ITAT in the case of EPRSS Prepaid Recharge Services India Pvt.Ltd. Vs. ITO (2018) 100 taxmann.com 52(Pune-Trib.) held that payments made for use of cloud space does not amount to payment of royalty. He highlighted the fact that the Pune Bench placed reliance on decision of Hon ble Delhi High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it was submitted that the conclusion that the payments were in the nature of Fees for Technical Services (FTS) cannot be sustained because the applicable DTAA regarding taxation of FTS need to be considered. According to him therefore the issue needs re-examination by the income tax authorities in the light of the applicable DTAA provisions. 24. The learned counsel for the Assessee also made a prayer for grant of refund together with interest u/s.244A of the Act and in this regard placed reliance on CBDT Circular No.11/2016. 25. The learned DR relied on the order of the CIT(A). 26. We have given a careful consideration to the rival submissions. It is clear from a perusal of the conclusions of the CIT(A) that the CIT(A) has primarily placed reliance on the decision of the Hon ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 in favour of the revenue and against the Assessee. As rightly submitted by the learned counsel for the Assessee, the said decision of the Hon ble Karnataka High Court, now stand overruled by the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t they are more beneficial to the assessee and not otherwise. Where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessee, have no application. The decision of the Hon ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Karn.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon ble Supreme Court. 28. Since the revenue authorities primarily relied on the decision of Hon ble Karnataka High Court in the case of Samsung Electronics Co.Ltd. (supra) in holding that the payment in question was in the nature of royalty and since in the light of the subsequent pronouncement of the Hon ble Supreme Court in the case of Engineering Analysis (supra) overruling the decision of the Hon ble Karnataka High Court in the case of Samsung Electronics Co.Ltd. (supra) and since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion- is it the consideration for rendition of services, even though involving the use of scientific equipment, or is it the consideration for use of equipment simpUctor by the assessee? In the case of former, the consideration is not taxable, in the case of the latter, the consideration is taxable. In the case of Kotak Mahindra Primus Ltd Vs DDIT [(2007) 11 SOT 578 (Bom)], a coordinate bench, dealing with a situation in which the mainframe computer and the specialized software was used for rendering data processing services to an Indian entity, held so and observed that, No part of this payment can be said to be for the use of specialized software on which data is processed or for the use of mainframe computer because the Indian company does not have any independent right to use the computer or even physical access to the mainframe computer, so as to use the mainframe computer or the specialized software. A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it. In the present case also, what the assessee is providing is essentially web hosting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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. The tribunal thereafter applied the ratio to the case of the Assessee Rackspace, US Inc. and held that the 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. The tribunal therefore held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement between the parties. 33. With regard to payments towards transponder capacity, bandwidth, the concept has been explained by the Hon ble Delhi High Court in the case of Asia Satellite Telecommunications Co Ltd. Vs. DIT (2011) 197 Taxman 263 (Delhi) The assessee in that case viz., Asia Satellite Telecommunications Co. Ltd., was a company incorporated in Hong Kong and carries on business of private satellite communications and broadcasting facilities. The Assessee launched two satellites and placed them in a geostationary orbit in orbital slots, which initially were allotted by the International Telecommunication Union to UK, and subsequently handed over to China. These satellites neither use Indian orbital slots nor are they positioned over Indian airspace. The footprints of the satellite extended over four continents, viz., Asia, Australia, Eastern Europe and Northern Africa. The footprint is that area of the earth's surface over which a signal relayed from the assessee's satellite can be received. The Assessee enters into an agreement with TV channels, communication companies or other companies who desire to utilize the transponder capacity available on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used by the assessee for providing services to its customers. There is a wellknown distinction between lease of equipment and use of equipment . The Court held that there was no use of a process by the TV channels when no such purported use has taken place in India as the assessee and its customers are situated outside India. The agreements were executed abroad. The transponder was in orbit and merely because its footprint was on India did not mean that the process had taken place in India . The Court held that since the end consumers i.e. persons watching TV in India are paying the cable operators who in turn are paying the TV channels, the flow of fund is traced to India and therefore the sum is taxable in India was held to be a far-fetched argument and ignores the fact that the income which is generated in India has been subjected to tax in India in the hands of the telecast operators. The payment by the telecast operators outside India to the assessee cannot be taxed on the basis that the end consumers are in India ; 34. The conclusions with regard to payment for right to use software and the overriding effect of DTAA over the Act, will equally apply to these ..... X X X X Extracts X X X X X X X X Extracts X X X X
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