M/S UNBXD SOFTWARE PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-7(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.2535/Bang/2018 Assessment Year : 2015-16

UNBXD Software Pvt. Ltd., The Dy.CIT, #377, 5th Main, 6th Sector, Circle-7(1)(1), HSR Layout, Bengaluru. Bengaluru-560102. Vs.

PAN – AABCU 4222 E APPELLANT RESPONDENT

Assessee by : Shri Padamchand Khincha, C.A Revenue by : Smt. Supriya Rao, JCIT (DR)

Date of Hearing : 10-08-2021 Date of Pronouncement : 30-09-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 06/07/2018 passed by the Ld.CIT(A)-7, Bangalore for assessment year 2015-16 on following grounds of appeal: “Based on the facts and circumstances of the case and in law, UNBXD Software Private Limited (hereinafter - referred to as "UNBXD India" or the "Company" or the "Appellant"), respectfully prefers an appeal under Section 253 of the Income-tax Act, 1961 (Act") against the Order passed by the Commissioner of Income- tax (Appeals) —7, Bangalore [learned CIT(A)"] dated 06 July 2018 (received by the Appellant on 11 July 2018), on the following grounds: 1. Ground 1: General

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1.1 The impugned order of the learned CIT(A) is based on an incorrect interpretation of law and therefore is bad in law. 1.2 The order passed by the learned CIT(A) is erroneous and bad in law to the extent it wrongly upheld the order passed by the Assessing Officer ('learned AO") by considering the server storage fees paid to non-residents as being royalty in nature and accordingly upholding the disallowance made by the learned AO under Section 40(a)(i) of the Act on account of non-withholding of taxes. Ground 2: Treatment of server storage fees paid to non- residents as royalty and disallowance of such payments under Section 40(a)(i) of the Act 2.1 The learned CIT(A) and AO have erred in law and in fact, by considering the server storage fees paid to non-residents as being royalty in nature without considering the technical submissions filed by the Appellant 2.2 The learned CIT(A) and AO failed to appreciate that the services that are availed by the Company are in the nature of a standard facility which does not tantamount to the usage of technology, model or process and/ or scientific or commercial equipment 2.3 The learned CIT(A) has erred in law and in fact by observing that there is imparting of information concerning technical, industrial, commercial or scientific knowledge and thus erred in concluding that the payments are in the nature of Royalty 2.4 The learned CIT(A) and AO have failed to appreciate that for a payment to qualify as "Royalty" (being industrial, commercial or scientific equipment), physical possession, control or custody of equipment is a pre-requisite (which has been upheld by various judicial rulings and international tax commentaries) and therefore the action of the learned CIT(A) and AO are not tenable under law 2.5 The learned CIT(A) has disregarded various judicial precedents relied upon by the Appellant and proceeded to place reliance on those rulings which are distinguishabenacts and law from the instant case.

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2.6 The learned CIT(A) has erred in law and in fact by alleging that the provision of services (i.e. server storage fee) tantamount to Service Permanent Establishment (PE) stating that Service PE does not include PE and that the physical presence of personnel is not a pre-requisite for creation of a Service PE. Such action of the learned CIT(A) is contrary to the provisions of the conventions of the applicable Double Taxation Avoidance Agreement, relevant judicial rulings and international tax commentaries on the subject. The Appellant submits that each of the above grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. Brief facts of the case are as under: 2. The assessee is a company engaged in the business of providing site search and personalisation platform solution to e- commerce companies. It filed its return of income for year under consideration on 23/09/2015 declaring loss of Rs.3,87,26,300/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued to assessee along with notice under section 142(1) of the Act. Representative of assessee appeared before the Ld.AO and called filed requisite details as called for. 2.1 During the assessment proceedings, the Ld.AO observed that, assessee had made certain payments to nonresidents under the said server storage fees in foreign currency. Assessee was called upon to provide the list of parties along with the TDS details, vide order sheet dated 24/10/2017. From the details filed by assessee, the Ld.AO observed that payments were made to

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Amazon webservices on which TDS was not deducted. The details of payment made by assessee are as under:

2.2 The Ld.AO after perusing various submissions filed by assessee was of the opinion that services availed by assessee from the non-resident was in the nature of usage of technology, model or process, and/or equipment and the same was covered by section 9(1)(vi), Explanation 2(iii) and/or section 9(1)(vi) Explanation 2(iva). The Ld.AO thus held that the payments were in the nature of royalty on which TDS was applicable and therefore sum of Rs.28,39,76/- was disallowed under section 40(a)(ia) of the Act. 2.3 Aggrieved by the order of Ld.AO, assessee preferred appeal before the Ld.CIT(A). 2.4 Before the Ld.CIT(A) assessee submitted that it had entered into service agreement with non-resident service providers like

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Amazon Webservices, USA, HETZNER online, Germany and Microsoft Azure, USA to avail the data Centre services for website hosting, Data storage, processing and related services as applicable. It was submitted that the key attributes of such services were: • the platform of the company would be hosted on the server of the service provider; • the company does not have the possession of the servers of the service providers; an activity in relation to provision of services take place in India. 2.5 It was submitted that the company was of the bona fides belief that the web hosting charges paid to the nonresidents are not taxable in India under Indo - US DTAA or Indo-Germany DTAA. And that the requirement to deduct tax at source on payments made to non-resident were not applicable. The Ld.CIT(A) upon verifying various details of assessee held as under: “4.9 It is observed that the service/information provided by the NR parties were in the nature of expert knowledge and experience acquired by these companies relating to industrial and commercial purposes. Thus imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill is nothing but in the nature of royalty. The nature of services of web hosting or cloud storage that is availed by the assessee from the nonresident parties is usage of technology, model or process and/or scientific or commercial equipment. In view of above, the payment made by the appellant to NR parties is for the activities which were covered under the Royalty clause of DTAA. Hence the payment being in the nature of royalty is taxable in India under Clause 12 of the DTAA between India and USA. In the case of Verizon Communications Singapore Pte Ltd. Income Tax Officer, International TaxationI2014J 361 ITR 55 (Madras), the Honorable High Court has held that the consideration paid for the use and the right to

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use of the process, is 'royalty'. The I high Court even observed that after the insertion of Explanation 5 possession, control of such right, property or information usage directly by the payer, location of the right are not matters of concern in deciding the character of payment as 'royalty' and but for the use of the connectivity by the payer, the service agreement itself has no meaning. The decisions relied by the appellant are distinguishable oil Considering above, the disallowance of the payment u/s 40(a)(i) for noncompliance of TDS provision is correct and the action of the A.O is upheld. 4.10 Without prejudice to above, it is observed that furnishing of services by the NRs to the appellant during the year fulfills the prerequisite of service FE as service FE does not require permanent establishment. In the present digital age services can be provided through email, internet, video conference, remote access to computers etc without the physical presence of manpower. Thereibre, the argument of absence of permanent establishment (FE) orfixed place of business is irrelevant. Hence, I am of the considered opinion that the service provider is having service PE in India and accordingly the payment is taxable in India as business income. Consequently non deduction of tax will make the payment liable for disallowance u/s. 40 (a) (i) of the Act.” 2.6 Aggrieved by the order of Ld.CIT(A) assessee is in appeal before us now. 2.7 Before us, the Ld.AR submitted that, platform of the assessee would be hosted on the servers of the service provider and that the US company do not have the possession of the servers or the service provider and no activity in relation to the provision of services takes place in India. He submitted that as per the provisions of section 195 of the Act taxes are required to be withheld only if the payments made to the non-resident is chargeable to tax in India. In support he placed reliance on the decision of Hon’ble Supreme Court in case of Transmission Corporation of APA Ltd. & Anr. vs CIT reported in 239 ITR 587.

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2.8 He also placed reliance on decision of Hon’ble Delhi High Court in case of Asia Satellite Telecommunications Co. Ltd. vs DDIT (2011) 332 ITR 340 wherein it was held that; “Use of equipment means in the context of section 9(1)(vi) to have control, domain and possession over statement. Use of facility cannot be equated with use of equipment.” 2.9 He also placed reliance on the decision of He also submitted that this reissue in case of DDIT vs New Sky Satellite BV reported in (2016) 68 Taxmann.com 8, wherein the Hon’ble Delhi High Court followed the above ratio laid down in case of Asia Satellite Telecommunications (supra). It is also submitted that the ratio by Hon’ble Delhi High Court in case of New Sky Satellite BV (supra) has been approved by the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd. vs CIT reported in (2021) 432 ITR 471. It has been vehemently submitted by the Ld.AR that assessee did not have any control domain over the equipment as contemplated under section 9(1)(vi) of the Act. On the contrary, the Ld.CIT.DR placed reliance on observations of the Ld.CIT(A). He placed reliance on decision of Hon’ble Madras High Court in the case of Verizon Communications Singapore Pvt.Ltd. Vs. ITO in ITA No.147 to 149 of 2011 and 230 of 2012 by order dated 7.11.2003 wherein, the provisions of Explanation 4 and 5 inserted by the Finance Act, 2012 w.e.f. 1.6.1976 were introduced to the definition of royalty u/s.9(1)(vi) of the Act. He thus submitted that as these provisions are retrospectively applicable, any possession, control of such right, property or

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information usage directly by the payer, location of the right does not matter in deciding the character of payment as royalty. He thus submitted that disallowance of payment under section 40(a)(i) for non-compliance of TDS provisions is correct. 2.10 We have perused submissions advanced by both sides in light of records placed before us. 2.11 We note that that the ratio laid down Hon’ble Delhi High Court in case of New Sky Satellite BV (supra) has been approved by the Hon’ble Supreme Court in the case of Engineering Analysis (supra). It is submitted that identical issue was considered by coordinate bench of this Tribunal in case of Infosys Ltd. vs.DCIT in IT(TP)A Nos.61 to 98/Bang/2021 for assessment year 2012-13 to 2017-18 by order dated 25/08/2021. The observations and the findings of this Tribunal while adjudicating the issue are as under: “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 Amazon 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 the case of DIT Vs. New Skies Satellite BV (2016) 68 taxmann.com 8 (Del) to a come to a conclusion that web hosting charges are not in the nature of royalty.

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The tribunal therefore held that income from cloud hosting services was not 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. 31. The conclusions with regard to payment for right to use software 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.” 2.12 Respectfully following the above view, we remand this issue back to the Ld. AO to verify and examine the terms of the agreement between the cloud host and the customer. The Ld.AO is also directed to verify the issue based on principles laid down by the Hon’ble Supreme Court in case of Engineering Analysis (supra), with regard to the payments for right to use of software in the light of agreement between the parties. Accordingly these grounds raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 30th Sept, 2021 Sd/- Sd/- (B.R BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member

Bangalore, Dated, the 30th Sept, 2021.

/Vms/

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Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order

Assistant Registrar, ITAT, Bangalore

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Date Initial On Dragon 1. Draft dictated on Sr.PS 2. Draft placed before -9-2021 Sr.PS author -9-2021 3. Draft proposed & placed JM/AM before the second member -9-2021 4. Draft discussed/approved JM/AM by Second Member. -9-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS 6. -9-2021 Sr.PS Kept for pronouncement on 7. -9-2021 Sr.PS Date of uploading the order on Website 8. If not uploaded, furnish -- Sr.PS the reason 9. File sent to the Bench -9-2021 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. 13. Draft dictation sheets are No Sr.PS attached