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Income Tax Appellate Tribunal, DELHIBENCH ‘D’, NEW DELHI
Before: Sh. Kul BharatDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of the ld CIT(A)-44, New Delhi dated 22.07.2019 for AY 2015-16.
The assessee has raised the following grounds of appeal:- “1. The learned Commissioner of Income Tax Rs (Appeals) has erred both on facts and in law in confirming the action of assessing officer in disallowing cloud hosting services fees amounting to Rs.19,25,586/- paid to NTT America and Dimension Data Cloud Solutions Inc, which companies are tax resident of USA by wrongly considering the said payments as Royalty under section 9(1)(vi) read with section 5 of the Income Tax Act,1961 and also incorrectly interpreting Article 12 of Double Tax Avoidance Agreement (DTAA) with USA and consequently holding that the appellant company was liable to deduct TDS on the said payments under section 195 of the Act and therefore the said payments are liable to be disallowed under section 40(a) (i) of the Act for non-deduction of TDS under section 195 of the Act. 1.1 Without prejudice to above the learned OEM Commissioner of Income Tax (Appeals) has erred both on facts and in law in
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confirming the action of assessing officer in rejecting the appellant company's contention that the said payments for cloud hosting services being Business Profits are covered by Article 7 of India USA Double Taxation Avoidance Agreement (DTAA) and therefore the said payments are not taxable in India. 1.2 Without prejudice to above the learned Commissioner of Income Tax(Appeals) has erred both on facts and in law in confirming the incorrect interpretation of assessing officer in holding that the payments for cloud hosting services are royalty payments taxable in India based upon NEM RAZA proposition put forward by Assessing Officer that after its introduction Explanation 5 to section 9(1)(i) of the Act overrides the provision of Article 12 of India USA DTAA and therefore Article 12 as appearing in the treaty stands diluted and has to be read with the Explanation 5 to Section 9(1)(b) of the Act.”
The assessee company incurred various expenses which were payable to foreign entities (non-residents) which includes payment to NTT America of Rs. 4,49,570.30 and Dimension Data Cloud Solutions, Inc. of Rs. 14,76,016.35,there by totaling Rs. 19,25,586/- on account of server services. Assessee company also submitted Form 15CA/15CB for payments released to these 2 entities.
The details of payments are as under:-
a. Nature of remittance: Server Lease Line Rent, Server Lease Line b. Taxability in India: Under Section 5 read with Section 195 c. Tax liability in India: 41.2% d. Basis of determining taxable income and tax liability: Business Income DTAA: between India & USA f. Relevant Article of DTAA: Business Income Article 7
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g. Basis of arriving at the rate of deduction of tax: No PE in India 5. The assessee submitted that the payments are not covered u/s 9(1) as “Royalty”.
The AO held that the payments are covered explanation 2 and 5 to section 9(1)(1)(vi). The AO held as under:- “5. First of all, assessee has himself accepted that NTTA and Dimension have business connection in India in terms of section 9(1)(i) of the Act and hence amounts paid to them are taxable in India. 6. Secondly, assessee's contention that said payments are not covered up by the provisions of section 9(1)(vi) of the Act is not tenable. a. Assessee company has interpreted definition of royalty provided under Explanation 2 to Section 9(1)(vi) without making any reference to further explanations to section 9(1)(vi) specially Explanation 5 which reads as follows: "For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer: (b) such right, property or information is used directly by the payer: (c) the location of such right, property or information is in India." b. After introduction of Explanation 5, it is very clear that payment for use of servers located outside India tantamounts to Royalty under the Act and accordingly shall be chargeable to tax. 7. Whatever, whether server lease line payments tantamounts to royalty or not under the Act does not matter because the assessee company has itself accepted the same payments are taxable in India under the Act, whatever the provision may be. 8. Now assessee's contention that said payments for server lease line are covered up by Article 7 and not by Article 12 is not tenable. 9. It is without any debate that if a particular payment qualifies to be covered up by Article 12, then Article 7 cannot be resorted to. 10. Article 12 of the India USA DTAA uses the following words:
"3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or
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scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof and (b) payments of any kind received as consideration for the use of, or the 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) 11. The assessee company's contention that access to secure servers of NTTA and Dimension was not exclusively to the assessee company but it was one out of many, does not matter whether a particular consideration is royalty or not. 12. Further, assessee company's contention that possession (whether actual or constructive) of the equipment is must to treat the amount to be royalty is also not tenable. 13. The judgments relied upon by the assessee company pertains to assessment years preceding introduction of Explanation 5 to Section 9(1)(vi) of the Act. a. The Article 12 uses the words "for the use of, or the right to use" without making any reference to location of that particular right or property. b. In absence of Explanation 5 to Section 9(1)(vi) of the Act, the judicial authorities interpreted to held that possession is must. c. After introduction of Explanation 5 (supra), the domestic law is ample clear that server lease line payments tant amounts to Royalty but Article 12 of India-USA is silent on aspect of location. d. It is also well established fact that if on a particular aspect, treaty is silent, then provisions of domestic law will be referred to. e. Explanation 5 (supra) does not define royalty so as to be in conflict with definition provided in Article 12 but it clarifies a particular aspect in relation to possession, direct/indirect use and location. f. When treaty is silent in relation to possession, direct/indirect use and location, whereas domestic law is ample clear, saying that possession is must to make it equal to "use" would not be right.
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Thus it can be concluded that payments made by the assessee company to NTTA and Dimension amounting to Rs. 19.25L constitutes royalty under the Act as well as under the Article 12 of India-USA treaty. 15. Considering the same conclusion and further facts that assessee has not deducted TDS u/s 195 in respect of these expenses, same shall be disallowed in view of provisions of section 40(a)(i) of the Act. Onus to file correct and accurate particulars of income always lies on the assessee.” 7. Aggrieved the assessee filed appeal before the ld CIT(A), who in totality confirmed the order of the AO. The ld CIT(A) held that the said payments are for the use of or the right to use any industrial, commercial or scientific equipment or any patent, trade-mark, design model etc. and hence, constitute royalty in terms of Article 12 of India-USA DTAA. It was further held that when a particular payment is covered by Article 12 of the DTAA under reference, then Article 7 would not apply and also held that the payment made by the appellant to NTTA and Dimension constitutes royalty under the Act as well as under Article 12 of Indo-USA DTAA.
During the hearing before us, it was submitted that the issue of payments to services for availing cloud services and server leasing are not treated as “royalties” under India-US DTAA. This matter stands adjudicated by the orders of ITAT in the following cases:-
i. Microsoft Regional Sales Pte Ltd (145 taxmann.com 29 Del Trib.) ii. Salesforce.com Singapore Pte. V. DDIT (137 taxmann.com 3) (ITAT Delhi) iii. Microsoft Regional Sales Pte. Ltd. v. DCIT (140 taxmann.com 70) (ITAT Delhi)
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iv. MOL Corporation v. ACIT (140 taxmann.com 121 (Del TRIB) v. OVID Technologies Inc. v. DCIT (138 taxmann.com 229) (ITAT Delhi)
For the sake of ready reference the relevant portion of the order in the case of Microsoft Regional Sales Pte. Ltd. v. DCIT (145 taxmann.com 29) (ITAT Delhi) is reproduced as under:-
“7. Next coming to Ground no 1 read with Ground no 3 with its sub grounds. It can be observed that in assessee’s own case for AY 2012- 13, vide ITA no 1553/Del/2016 the issue has culminated in favour of assessee by following relevant findings; “7 It was submitted for the assessee that Ld. Tax Authorities below have failed to appreciate the functional aspects of Cloud base service while holding the subscription to cloud base service as royalty. In this context, the co- ordinate bench judgment in M/s. Salesforce.com Singapore Pte. Vs. Dy. D.I.T. Circle2(2) ITA No. 4915/DEL/2016 [A.Y 2010-11] with six other connected was relied to contend that subscription to the cloud computing services do not give rise royalty income. The Ld DR supported the findings of Tax authorities below.
7.1 Giving thoughtful consideration to the matter on record, the bench is of considered view that the cloud base services do not ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 9 involve any transfer of rights to the customers in any process. The grant of right to install and use the software included with the subscription does not include providing any copy of the said software to the customer. The assessee’s cloud base services are though based on patents / copyright but the subscriber does not get any right of reproduction. The services are provided online via data centre located outside India. The Cloud services merely facilitate the flow of user data from the front end users through internet to the provider’s system and back. The ld. AO has fallen in error in interpreting it as licensing of the right to use the above Cloud Computing Infrastructure and Software (para 10.5 of the Ld. AO order). Thus the subscription fee is not royalty but merely a consideration for online access of the cloud computing
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services for process and storage of data or run the applications.
7.2 While dealing with similar question in regard to the case of M/s. Salesforce.com Singapore Pte. (supra) where the said assessee was provider of comprehensive customer relationship management servicing to its customer by using Cloud Computing Services / Web Casting Services, the Bench in its order dated 25.03.2022 held as under : “28. Considering the facts of the case in totality, in light of the Master Subscription Agreement, we are of the considered view that the customers do not have any access to the process of the service provider i.e. the assessee, and the assessee does not ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 10 have any access except otherwise provided in the master subscription agreement to the data of the subscriber.
In our considered opinion, all the equipments and machines relating to the service provided by the assessee are under its control and are outside India and the subscribers do not have any physical access to the equipment providing system service which means that the subscribers are only using the services provided by the assessee.” 7.3 The Mumbai Tribunal in the case of DDIT v Savvis Communication Corporation [2016] 69 taxmann.com 106 (Mumbai – Trib.) has held that payment received for providing web hosting services though involving use of certain scientific equipment cannot be treated as ‘consideration for use of, or right to use of, scientific equipment’ which is a sine qua non for taxability under section 9(1)(vi), read with Explanation 2 (iva) thereto as also article 12 of Indo-US DTAA. The Chennai Tribunal in the case of ACIT v Vishwak Solutions Pvt. Ltd ITA No. 1935 & 1936/MDS/2010 dated 30.01.2015 has upheld the findings of CIT(A) that “the amount paid to the nonresident is towards hiring of storage space.” The aforesaid squarely covers the controversy in regard to the present assessee also. In the light aforesaid, the Bench is of considered view that the ld. Tax Authorities below had fallen in error in considering the subscription received towards Cloud Services to be royalty income.”
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No distinction on facts or law could be pointed by Ld. DR. Therefore, ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 11 following aforesaid findings in favor of the assessee these grounds are determined in favour of the assessee. 8. Accordingly the grounds no 1 to 3 in appeal are allowed and the remaining grounds being consequential in nature follow the event. The appeal is allowed and the impugned final assessment order is set aside. The TDS credits shall be allowed in accordance with law.
Since, the facts in the instant case are similar, following the laid down juris, the appeal of the assessee is hereby allowed.
Order Pronounced in the Open Court on 10/03/2023.
Sd/- Sd/- (Kul Bharat) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 10/03/2023 *Ajay Kumar Keot, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR