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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri R.K. Panda & Shri K. Narasimha Chary
ITA No 2028 of 2017 Reasoning Global E-Application Ltd Hyderabad
आयकर अपील�य अ�धकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad Before Shri R.K. Panda, Accountant Member AND Shri K. Narasimha Chary, Judicial Member ITA No.2028/Hyd/2017 Assessment Year: 2012-13 Reasoning Global E- Vs. Dy. C.I.T. Application Ltd, Hyderabad Circle 3(1) PAN:AADCR6701P Hyderabad (Appellant) (Respondent) Assessee by: Shri Swapnil Deshmukh, CA Revenue by: Shri Rohit Mujumdar, DR Date of hearing: 07/06/2022 Date of pronouncement: 23/08/2022 ORDER Per R.K. Panda, A.M This appeal filed by the assessee is directed against the order dated 27.09.2017 of the learned CIT (A)-3, Hyderabad relating to A.Y.2012-13.
Facts of the case, in brief, are that the assessee company is engaged in the business of providing IT enabled electronic commerce services. It filed its return of income for the A.Y 2012-13 on 30.09.2012 declaring loss of Rs.9,52,71,232/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee has debited an amount of Rs.1,02,18,116/- towards web hosting charges. From the bills/invoices produced for the expenditure so claimed, the
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Assessing Officer noted that the said expenditure includes the payment towards AWS Data Transfer, Amazon Simple Storage Services, AWS Premium Support, Amazon Elastic Compute Could etc., He therefore, asked the assessee to furnish a note on the business carried on by the assessee.
After going through various details furnished by the assessee, the Assessing Officer noted that the assessee company is providing software platform to other business entities for carrying e-commerce by those entities. The assessee company charges fee for providing services to its customers subject to TDS. The assessee company has developed computer software facilities for e-commerce. The Assessing Officer further observed that the assessee was incorporated as a private limited company in India in accordance with the provisions of the Companies Act, 1956 on 14th May, 2007 with the primary objective of conducting software development and providing data management and solutions for various e-commerce applications. The company facilitates business in developing their online channels and managing them easily. The Platform that makes it possible is ‘Mart jack’. The company is also into benefiting business, which have huge consumer base, in terms of monetizing their existing revenue channels further through ‘Mart Jack Exchange’ – a solution that enables any business to build an e-commerce website leveraging merchandize, payment processing and logistics solutions offered as a ready to use service. It is a one stop solution which connects suppliers and publishers with each other.
He noted that for rendering the above services, the assessee company makes use of technology of Amazon Web Services for imparting of information concerning, for the working Page 2 of 19
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of, or use of, technology; or concerning technical industrial, commercial, or scientific knowledge. He noted that rendering services in connection with the activities in connection with the above. i.e., the activities of the ‘use’ or ‘right to use’ or in respect of patent, trademark, technology, or copyright is defined as ‘Royalty’ under explanation 2 to section 9(1)(vi) of the I.T. Act. The Assessing Officer also referred to Article 12(3) of the DTAA between India & US. He noted that the assessee is utilizing the services of Amazon Web Services for ‘data transfer’ storage services etc. and these functions are related to process. The expression ‘process’ includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. He noted that the term ‘Royalty’ in its ambit also includes consideration for the use of any patent, invention, model, design secret formula or process or trademark or similar property.
From the copies of the invoices raised by Amazon Web Services, USA which have been filed during the course of assessment proceedings, the Assessing Officer observed that all those invoices have been raised in favour of the assessee company. On the top of the invoice, it is mentioned that ‘an electronic invoice for your use of AWS services’. It is mentioned below the billing table that ‘All web services are sold by Amazon Web Services LLC’. According to the Assessing Officer, by acquiring those software licenses, the assessee has got the right to use the same in India. Even though the assessee has supplied/provided that software, later on, to different Indian companies, the assessee was having right to use the same in India. Page 3 of 19
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Referring to the provisions of section 195, the provisions of DTAA between India and US, the Assessing Officer held that the TDS provisions would be applicable to the assessee. Relying on various decisions, the Assessing Officer made disallowance of Rs.1,02,18,116/- u/s 40(a)(ia) of the Act by concluding as under: “4.19 As narrated by the assessee, by acquiring those software licenses, the assessee has got the right to use the same in India. Even though the assessee has supplied/provided those software, later on, to different Indian companies, the assessee was having right to use the same in India. This right to use the software was in turn transferred to its clients. It was also clarified that the clients have made the TDS on the payments made to the assessee company. Thus, it is evident that the payments made by the assessee in respect of these software/licenses are in the nature of ‘royalty’ within the meaning of section 9(1)(vi) of the Income Tax Act. These payments were made to US, which is a foreign company. Hence, tax was deductible on the said payments in accordance with the provisions of section 195 of the Act. However, the assessee did not withhold tax in full while making payments. For this reason, the expenditure of Rs.1,02,18,116/- relating non-withholding of tax is hereby disallowed u/s 40(a)(ia) of the Act”.
The Assessing Officer also made various other additions. However, the same are not in dispute for which we are not concerned with the same. Thus, the Assessing Officer determined the total loss of the assessee at Rs.8,13,59,117/- as against returned loan of Rs.9,52,71,232/-.
In appeal, the learned CIT (A) dismissed the appeal filed by the assessee.
So far as the disallowance of Rs.1,02,18,116/- u/s 40(a)(ia) of the Act, the learned CIT (A) upheld the action of the Assessing Officer by observing as under: “The factual matrix the instant case was Considered. The appellant is utilizing services from Amazon Web services from USA as brought out
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in the submissions of the appellant and also extracted in the assessment order. From the invoices raised by the Amazon Web Services from USA it is noted that the Invoices raised in favour of the appellant company. Below the billing table it is stated that all web services are sold by Amazon web services LLC. Clearly the purchases are in the nature of licenses for use of copy righted software. The provisions of Section 195 of the Income Tax Act are attracted for such payments. However, the appellant did not withhold taxes in full while making payments. The findings in the assessment order are quite self- explanatory. In this context, it is worthwhile to extract certain relevant paras from the assessment order. “4.11 When it was brought to the notice of the AR of the assessee, the AR vide his letter dated 28. 10.2014 submitted that the assessee company has paid Web Hosting charges to Amazon Web Services LLC, a USA based company and the payments are not subject to Indian withholding taxes. Under the US India Treaty, payments for the Web Hosting services are neither Royalties or Fees for included services. He further submitted that the payments are not in the nature of 'Royalties as the payments are neither for intangible property i.e. copy rights, licenses etc., nor for a right to use such property. Further, the payments are not fees for included services, because they are not, as required under the treaty, ancillary to the application or enjoyment of a right, technical property, or similar information and are not for making available any technical knowledge, experience, skill, know how or processes. 4.12 When it was argued by the assessee that the said amount paid to US is not taxable under the provisions of India-USA, DTAA, the assessee was asked to submit an agreement entered with the US entity to show whether the payments made to US company are subject to Indian withholding taxes or not. In this regard, the assessee filed a letter received from the Amazon Web Services, which is as under: "AWS Indian customers frequently ask whether payments they make to Amazon Web Services LLC (AWS) a US Company are subject to Indian withholding taxes. AWS position is that the answer is no. Payments made to AWS are not subject to Indian withholding taxes. Under the US Indian Treaty payments from Indian customers for A WS services are neither Royalties or Fees for included Services both of which are defined for purposes of the treaty, which are payment types generally subject to withholding”. 4.13 From the said letter, it is also mentioned at page 4 that Indian AWS customers are free to withhold taxes, however, should they do so they must remit to AWS the Jull amount of the service fees originally Page 5 of 19
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invoiced. Withhold taxes must be separately compute and remitted. Original amounts invoiced by AWS cannot be reduced for the amount of the withholding tax. 4.14 Prom the above, it can be concluded that the US entity of the assessee Company agrees to withhold taxes because according to Income Tax Act, the Services provided by them are subject to tax at India. However, due to the condition of the US entity, the assessee has not deducted the tax while making the payment and tried to cover the issue under DTAA. 4.16 Further, Section 195 of the I.T.Act reads as under: (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force. Explanation 2 reads as under: "For the removal of doubts, it is hereby clarified that the obligation to comply with sub section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non- resident, whether or not the non-resident person has …. (xi) A residence or place of business or business connection in India or (xii) Any other presence in any manner whatsoever in India. 4.16 On a reading of the above provisions, it is amply clear that even in the case of non-resident, the TDS provisions would be applicable under sec. 195(1), whether or not it has a permanent establishment or any business activity in India. Therefore, the decision of the Hon'ble ITAT in the case of M/s. Nidhi Exports and also M/s. Divis Laboratories Limited on which the A.R of the assessee relied upon, would not be applicable in view of such amendment. Admittedly, the amounts have been paid to certain foreign entities, who are stated to have no business activity/presence in India. But the amendment brought out vide the Finance Act, 2012 renders the earlier criterion of having a permanent establishment in India as inapplicable, in so far as the taxability of non- residents is concerned. It is therefore evident that even though the nonresident organization is not having any place of business in India, the provisions of sec. 195 are applicable and the assessee is liable to deduct tax while making any payments to a nonresident.
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4.17 In the case of Head Start Business Solutions P Ltd. 285 ITRT 530 (AAR), Transmission corporation of AP 239 1TR 587 (SC)- IMT Labs 287 ITR 450 (AAR) it was held that irrespective of the taxability of the same in the hands of foreign enterprise, it was legal obligation on the part of the assessee to deduct tax u/s. 195/1) of the Act. 4.18 The Hon'ble ITAT Hyderabad in the case of Frontline Soft Limited Vs. DCIT vide its order in 1TA Nos. 1080 & 1081/Hyd/2003 dated 3.8.2007 for A. Ys. 2002- 03 and 2003-04 held that purchase of software tantamount to payment of royalty and that purchase of software is not an asset. Therefore, withholding tax is liable on such purchases. 4.19 As narrated by the assessee by acquiring those software licenses, the assessee has got the right to use the same n India Even though the assessee has supplied provided those software later on, to different Indian companies, the assessee was having right to use the same in India This right to use the software as n tum transferred to its clients. It was also clarified that the clients have made the TDS on the payments made to the assessee company. Thus, it is evident that the payments made by the assessee in respect of these software 7 licenses are in the nature of royalty within the meaning of section 195 of the income Act. These payments were made to US which is a foreign company. Hence, tax was deductible on the said payments in accordance with the provisions of sec 195 of the Act. However, the assessee dd not withhold tax in full while making payments. For this reason, the expenditure of Rs 1,02,18,116/- relating non withholding of tax is hereby disallowed u/s. 40(a/ia) of the Act. A plain reading of Section 195 of the Income Tax Act in this context is relevant It would be pertinent to say that plain words need no explanation or elucidation In this case the observations of Rowlatt, J in the case of Cape Brandy Syndicate vs Indian Revenue Commission are relevant. "In a taxing statute one has to look at what is clearly said Nothing is to be read in, nothing is The Supreme to be implied Orne can only look fairly on the language used." The Supreme Court in the case of CIT vs Ajax Products Ltd, (55 ITR 741) refers to this judgment. After examination of the matrix of issues it is noted that so long as there is no ambiguity in the statutory language, resort to any interpretative The supposed process to unfold the legislative intent becomes impermissible. intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise clear. In the case of CIT vs TV Sundaram lyengar |101 1TR 764] (SC), the Apex Court observed that .. ….if the language of the statue is clear and unambiguous, and if two interpretation are reasonably possible, it would be wrong to discard the plain meaning of the words used in order to meet a possible injustice. Further, in the case of Keshavji Ravji && Co. Vs CIT |49 Taxman-87] (SC the Apex Curt observed that……. “as long as there is no ambiguity in
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the statutory language, resort to any interpretative process to unfold the legislative intent The supposed intention of the legislature cannot he becomes impermissible. appealed to whittle down the statutory language which is otherwise unambiguous. If the amendment is not in the words used, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do manifest the intention of the legislature. The provisions of Section 195 are applicable and the appellant is liable to deduct tax by making any payment to a non-resident. The appellant s reliance On a specific provision as defined in Indo-USA DTAA does not hold merit as the provisions of the Income Tax Act are quite clear in this context. Keeping in view the facts, issue and circumstances of the instant case, it is held that Ground No.2 in appeal is dismissed. (IX) In the result, the appeal is dismissed”
Aggrieved with such order of the learned CIT (A), the assessee is in appeal before the Tribunal by raising the following grounds: “1.0 That under the facts and circumstances of the case the orders passed u/s 143 of the I.T.Act is against the facts of the case and provisions of law. 1.1 The learned Commissioner of income tax(A) (in short CIT(A)) is not Correct in sustaining the disallowance of expenditure made by the Assessing officer u/s.40(a) (i) of the I.T.Act. 1.2 The learned CIT (A) ought to have held that the payments made by the assessee company (known as Web Hosting Charges) towards the services used relating to data storing, transfer etc. from Amazon Web Services aré not in the nature of "Royalty" within the meaning of sec.9(i) (vi) of the I.T.Act 1.3 The interpretation and the finding of the learned CIT (A) that the provisions of sec.195 of I.T. Act would automatically apply for every foreign remittance is incorrect in as much as the section would come The into play, if only, such remittance is taxable income in India. learned CIT(A) failed to examine this issue in a judicious manner. 1.4 The learned CIT (A) erred in disallowing the 'Web Hosting Charges and treat such charges as 'Royalty', completely ignoring the fact that such payments are not covered in the term "Royalty'" as defined in the India USA DTAA as well as per explanation 2(via) of sec.9 (1) of the I.T.Act hence, the assessee company is not liable for withholding taxes as per the provisions of sec.195 of the I.T.Act. . 5 The learned CIT(A) ought to have held that the case laws relied upon by the A.O. are distinguishable on facts.
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1.6 For these and other reasons that are to be urged at the time of hearing of the case, the appellant prays that the disallowance made by the AO u/s.40(a) (i) of the I.T.Act and sustained by CIT(A) is to be deleted and quashed in the interest of justice”.
The learned Counsel for the assessee strongly challenged the order of the learned CIT (A) in sustaining the disallowance made by the Assessing Officer by invoking the provisions of section 40(a)(ia) of the I.T. Act. Referring to the copy of the agreement with Amazon, copy of which is placed at Page No.31 of the Paper Book, the learned Counsel for the assessee drew the attention of the Bench to para 1.2 of the agreement which reads as under: “1.2 Your Account. To access the Services, you must create an AWS account associated with a valid e-mail address. Unless explicitly permitted by the Service Terms, you may only create one account per email address. You are responsible for all activities that occur under your account, regardless of whether the activities are undertaken by you, your employees or a third party (including your contractors or agents) and, except to the extent caused by our breach of this Agreement, we and our affiliates are not responsible for unauthorized access to your account. You will contact us immediately if you believe an unauthorized third party may be using your account or if your account information is lost or stolen. You may terminate your account and this Agreement at any time in accordance with Section 7.
Referring to para 5.1 of the agreement placed at Page No.34 of the Paper Book, the learned Counsel for the assessee drew the attention of the Bench to the same which reads as under: “5.1. Service Fees. We calculate and bill fees and charges monthly. You will pay us the applicable fees and charges for use of the Service Offerings as described on the AWS Site using one of the payment methods we support. All amounts payable under this Agreement will be made without setoff or counterclaim, and without any deduction or with holding. Fees and charges for any new Service or new feature of a Service will be effective when we post updated fees and charges on the AWS Site unless we expressly state otherwise in a notice. We may increase or add new fees and charges for any existing Services by giving you at least 30 days' advance notice. We may charge you interest at the
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rate of 1.5% per month (or the highest rate permitted by law, if less) on all late payments”.
He submitted that a perusal of the fees and payment clause would show that the payment is based on the basis of the volume of the services offered and therefore, it is not in the nature of royalty.
Referring to para 8.4 and 8.5 of the agreement placed at page No.37 of the Paper Book, he drew the attention of the Bench to the same which reads as under: “8.4 Service Offerings License. As between you and us, we or our affiliates or licensors own and reserve all right, title, and interest in and to the Service Offerings. We grant you a limited, revocable, non- exclusive. non-sublicensable, non-transferrable license to do the following during the Term: (i) access and use the Services solely in accordance with this Agreement; and (i) copy and use the AWs Content solely in connection with your permitted use of the Services. Except as provided in this Section 8.4, you obtain no rights under this Agreement from us or our licensors to the Service Offerings, including any related nonintellectual property rights. Some AWS Content may be provided to you under a separate license, such as the Apache Software License, in which case that license will govern your use of that AWS Content. 8.5 License Restrictions. Neither you nor any End User may use the Service Offerings in any manner or for any purpose other than as expressly permitted by this Agreement. Neither you nor any End User may, or may attempt to, (a) modify, alter, tamper with, repair, or otherwise create derivative works of any software included in the Service Offerings (except to the extent software included in the Service Offerings are provided to you under a separate license that expressly permits the creation of derivative works), (b} reverse engineer, disassemble, or decompile the Service Offerings or apply any other process or procedure to derive the source code of any software included in the Service Offerings, or fc) access or use the Service Offerings in a way intended to avoid incurring fees or exceeding usage limits or quotas. All licenses granted to you in this Agreement are conditional on your continued compliance this Agreement and will immediately and automatically terminate if you do not comply with any term or condition of this Agreement. During and after the Tern, you will not assert, nor will you authorize, assist, or encourage any third party to assert, against us or any of our affiliates, customers, vendors, business partners, or licensors, any patent infringement or other intellectual property infringement claim regarding any Service Offerings you have used. You may only use the AWS Marks in accordance with the Trademark Use Guidelines”.
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He submitted that Amazon has not given any rights to the assessee and it has only provided services. Therefore, under no stretch of imagination it can be construed as royalty.
Referring to the decision of the Pune Bench of the Tribunal in the case of EPRSS Prepaid Recharge Services India (P) Ltd vs. Income Tax Officer reported in (2018) 100 Taxmann.com 52, he submitted that under identical circumstances, the Pune Bench of the Tribunal has held that where an assessee is engaged in distribution of recharge pens of various DTH providers via online network and paid web hosting charges to US based company for using its servers, since assessee did not possess and did not have any control over server or severs space being deployed by said company while providing e-services as per agreement, there was no scope to conclude that e-service charges paid to US company amounted to royalty.
Referring to the Delhi Bench of the Tribunal in the case of Microsoft Regional Sales Pte Ltd reported in (TS-317-ITAT- 2022(DEL) in ITA No.1553/Del/2016 order dated 13.04.2022, he submitted that the Tribunal under identical circumstances has held that the subscription received by Microsoft Regional Sales Pte. towards Cloud base service is not royalty income in its hands. He also relied on various other decisions.
Referring to Page 44 of the Paper Book, the learned Counsel for the assessee drew the attention of the Bench to a sample invoice and submitted that the same is towards AWS Data Transfer, Amazon Simple Storage Services, AWS Premium Support, Amazon Simple Notification Services, Amazon Elastic Compute Could. He submitted that a perusal of the invoices Page 11 of 19
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would show that the charges paid to Amazon are fluctuating from month to month and there is no regular payment being paid to Amazon. He accordingly submitted that the learned CIT (A) was not justified in upholding the order of the Assessing Officer.
The learned DR, on the other hand, heavily relied on the order of the learned CIT (A). Referring to para 4.5 of the assessment order, the learned DR submitted that the assessee is utilizing the services of Amazon web services for data transfer, storage services etc. which are related to process. He submitted that the expression process' includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. He submitted that Amazon Elastic Compute Cloud makes available the technology to the clients in India. The services and capabilities found in clouds have applications such as testing and development, production workload hosting, big data analytics i.e. IAAS/PAAS etc. The above facilities provided by Amazon are the advanced technologies provided to clients in India, who would otherwise have to hire experts, purchase costly software and invest heavily in hardware coupled with the fact that the hardware gets outdated and obsolete and needs replacement in short span. Even the software updates are available for a limited period and subsequently have to be purchased anew. With attrition the norm in IT Industry, the need to retain expert also is limited. Therefore, the facilities so provided by Amazon are not in the nature of off the shelf products but are specialized services/processes which fall under the definition of royalty. He accordingly submitted that the nature of functions involved in the elastic cloud compute are complex and require processing on the Page 12 of 19
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part of the end user. As such the functions are related to the process as defined under the definition of royalty as per Article 12 of Indo US DTAA. He accordingly submitted that the order of the learned CIT (A) being in accordance with law should be upheld. He also relied on various decisions.
We have heard the rival arguments made by both the sides, perused the orders of the AO and the learned CIT (A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both sides. We find the assessee during the impugned A.Y has debited a sum of Rs.1.02 crores towards web hosting charges paid to Amazon towards AWS Data Transfer, Amazon Simple Storage Services, AWS Premium Support, Amazon Simple Notification Services, Amazon Elastic Compute Could etc., According to the Assessing Officer, these payments were in respect of software/services being in the nature of royalty within the meaning of section 9(1)(vi) of the I.T. Act. The assessee is utilizing the services of Amazon Web Services for data transfer, storage services which are related to process contained in the definition of royalty. According to him, the expression process includes transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology and also including use of any patent, invention, model, design, secret formula or process or trademark or similar property. The assessee acquired the right to use the said services/ servers. The right to use server was in turn transferred to its clients. The end user clients have made TDS on the payments made to appellant company. The payments thus fell under the definition of royalty liable for TDS and since the assessee has not deducted any tax
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from the payments so made, the AO invoked the provisions of section 195 and made disallowance u/s 40(a)(ia).
We find the learned CIT (A) upheld the action of the Assessing Officer, the reason of which have already been reproduced in the preceding paragraph. It is the submission of the learned Counsel for the assessee that the charges paid to Amazon for various services provided by it are not under the nature of royalty. According to him, these are monthly charges which are fluctuating from month to month and there is no regular payment being made to Amazon. Further, the assessee did not acquire any right from Amazon for which the payments have been made but the payments have been made on the basis of services done by Amazon. Therefore, the payments so made do not fall under the category of Royalty and therefore, the assessee is not liable to deduct any tax from such Royalty.
We find some force in the above argument of the learned Counsel for the assessee. From the various clauses of the agreement which are already reproduced in the preceding paragraphs and the copies of invoices raised, it can be safely concluded that cloud base services do not involve any transfer of rights to the assessee 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 assessee. The assessee in the instant case does not get any right of reproduction. The services, in our opinion, merely facilitate the flow of user data from the front run user through internet to the providers system and back. Therefore, the subscription fee in our opinion is merely a consideration for the online access of the cloud computing services for process and storage of data or run Page 14 of 19
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the applications but cannot be considered as Royalty within the meaning of section 9(1)(vi) of the Act.
We find an identical issue had come up before the Pune Bench of the Tribunal in the case of EPRSS Prepaid Recharge Services India (P) Ltd vs. Income Tax Officer (Supra) where the Tribunal following the decision of the Hon'ble Madras High Court in the case of Skycell Communications Ltd (Supra) held that the amount paid to Amazon for various service provided by it are not in the nature of royalty and hence provisions of section 40(a)(ia) are not applicable. Relevant portion of the said order of the Tribunal reads as under:
“19. Now, another issue which needs to be seen is whether charges paid to Amazon for various services provided by it are in the nature of royalty, if any, or not. The assessee has placed on record the copy of agreement with Amazon, which we have referred in the paras hereinabove. He has also placed on record the copies of bills raised by Amazon online. The perusal of details filed by assessee of monthly charges paid, it transpires that the same are fluctuating from month to month and there is no regular payment being made to Amazon. In case of provision of royalty to a person, then as seen from the terms and conditions of various agreements, there is fixation of price to be paid and there may be variation on account of use of certain services but first there has to be basic price fixed. However, 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 as per clause 1.3, Windows & SQL Server stanard and clause 1.4 of Bandwidth. The total service charges for Elastic Compute Cloud are USD 40,253.17. The month-wise details of said payments made by assessee from September 2009 to March 2010 reflected that in the first month, charges totalled to USD 4269.02, in October at USD 5599.36 and there on. 20. The Hon'ble High Court of Madras in Skycell Communications Ltd. & Anr. Vs. DCIT (supra) have held that Page 15 of 19
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web hosting charges are not in the nature of royalty. The said principle has further been applied in various decisions of the Tribunal as relied upon by the 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 2(iva) of section 9(1)(vi) of the Act covers cases of royalty i.e. consideration paid for the use or right to use any industrial, commercial or scientific equipment but not including the amount referred to in section 44BB of the Act. The assessee in the present case did not use or acquire any right to use any industrial, commercial or scientific equipment while using the technology services provided by Amazon and hence, the payment made by assessee cannot be said to be covered under clause (iva) to Explanation 2 of section 9(1)(vi) of the Act. In other words, even if the retrospective amendment is held to be applicable, the case of assessee of payment to Amazon being outside the scope of said Explanation 2(iva) to section 9(1)(vi) of the Act, cannot make the assessee liable to deduct tax at source. In other words, the assessee is not liable to deduct withholding tax and such non deduction of withholding tax does not render the assessee in default and consequently, no disallowance of amount paid as web hosting charges is to be made in the hands of assessee for such non deduction of withholding tax and hence, provisions of section 40(a)(i) of the Act are not attracted. The grounds of appeal raised by assessee are thus, allowed.” 24. We find the Delhi Bench of the Tribunal in the case of Microsoft Regional Sales Pte. Ltd vs. DCIT (I.T) vide ITA
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No.1553/Del/2016 dated 13.04.2022, while deciding identical issue has held that cloud base services do not involve any transfer of rights to the customers in the 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 customers. The subscriber does not get any right of reproduction. Such services merely facilitate the flow of user data from the front end user through Internet to the provider’s system and back. Accordingly, it was held that the subscription fee is not royalty but merely a consideration of online access of the cloud for process and storage of data to run the applications. The relevant observation of the Tribunal at para 7 & 8 reads as under:
“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. Circle- 2(2) with six other connected was relied on 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 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 Microsoft Regional Sales Corporation, USA 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 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
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do not have any access to the process of the service provider i.e. the assessee, and the assessee does not have any access except otherwise provided in the master subscription agreement to the data of the subscriber. 29. 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-Microsoft Regional Sales Corporation, USA 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 non-resident 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. 8. Accordingly the grounds no 1 to 3 in appeal are allowed and the impugned orders are set aside.”
In view of the above discussion and respectfully following the decisions cited (Supra), we are of the considered opinion that the payments made by the assessee company towards the services used relating to data storage, transfer etc., from Amazon Web Services are not in the nature of royalty within the meaning of section 9(1)(vi) of the I.T. Act. Therefore, the provisions of section 195 of the I.T. Act are not applicable and accordingly, the assessee, in our opinion, is not required to deduct any TDS from payments so made. Therefore, the disallowance made by the Assessing Officer u/s 40(a)(ia) of the Act and sustained by the learned CIT (A) is directed to be deleted. Grounds raised by the assessee are accordingly allowed.
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In the result, appeal filed by the assessee is allowed.
Order pronounced in the Open Court on 23rd August, 2022. Sd/- Sd/- (K. NARASIMHA CHARY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 23rd August, 2022. Vinodan/sps Copy to: S.No Addresses 1 M/s. Reasoning Global E-Applications (P) Ltd, 205, Krishna Plaza, Khairtabad, Hyderabad 500004 2 Dy. CIT, Circle 3(1) Hyderabad 3 CIT (A)-3 ,Hyderabad 4 Pr. CIT-3, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File By Order
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