By Geeta Jani / Dhishat B. Mehta
Chartered Accountants
14. TS-623-ITAT-2018 (Pune) EPRSS Prepaid
Recharge Services India P. Ltd. vs. ITO Date of Order: 24th
October, 2018 A.Y.: 2010-11
Article
12 of India-USA DTAA; Explanation 2 to section 9(1)(vi), payment made towards
web hosting charges not taxable as royalty under the Act as well as the DTAA
Facts
The Taxpayer is a private Indian
company engaged in distribution and sale of recharge pens of various DTH
providers via online network. In order to run its business, the Taxpayer required
access to servers. Instead of purchasing servers and incurring expenditure on
its maintenance, Taxpayer hired server space under a web hosting agreement from
a foreign company (“FCo”).
The Taxpayer did not withhold
taxes while making payment to FCo for such services on the contention that
payment for web hosting services did not qualify as royalty or FTS.
AO, however, held that the
payments were made for the use of servers which amounted to use of commercial
equipment. Hence, they qualified as royalty u/s.9(1)(vi) of the Act. Aggrieved,
the Taxpayer appealed before CIT(A), who upheld the order of AO.
The Taxpayer appealed before the
Tribunal.
HELD
- As
per the terms of the agreement, the Taxpayer had made payments for use of
technology driven services of FCo and not for use of any IPR or rights owned by
FCo. The fact that payments made to FCo varied with the use of technology also
supported the fact that the payments were for availing services. Accordingly,
the payments made for web hosting services did not qualify as royalty.
- Further
while using the technology services provided by FCo, the Taxpayer did not use
or acquire any right to use any industrial, commercial or scientific equipment.
Hence, the payments made by Taxpayer cannot be said to be covered under clause
(iva) to Explanation 2 of section 9(1)(vi) of the Act. Reliance was placed on
the decision of Madras HC in Skycell Communications Ltd. & Anr
(TS-18-HC-2001).
- Thus,
the Taxpayer was not liable to withhold taxes on web hosting charges paid to
FCo.
- Without
prejudice, the definition of royalty, which was retrospectively amended to
include use of, or right to use, an equipment cannot be applied in respect of
the tax years which have elapsed before the amendment came into force.
- In
any case, since payments were made by the Taxpayer to FCo before the
retrospective amendment came into force, the Taxpayer cannot be held to be in
default for failure to withhold taxes on the basis of retrospective amendment.
- Also, retrospective
amendment to the Act cannot amend the DTAA. Thus, amended definition of
‘royalty’ under the Act cannot be read into the DTAA. Since the Taxpayer had no
control over the servers of FCo, payment for such services did not qualify as
royalty under the DTAA as well.
