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Section 9 of the Act, Article 12 of India-USA DTAA – the payment for providing web hosting services (though involving use of scientific equipment) does not qualify as “consideration for the use of or right to use of, scientific equipment”; hence, not taxable either u/s. 9(1) (vi) or Article 12 of India-USA DTAA .
Facts
The Taxpayer, an American company, was engaged in providing information technology solutions, including web hosting services. During the relevant year, the Taxpayer had earned income from provision of managed hosting services to entities in India. The Taxpayer claimed that the income was not taxable in India in terms of Articles 12 and 7 of India-USA DTAA .
According to the AO, web hosting company provides space on a server (whether owned or leased) for use by client. The server is not owned by the client. The hosting contract is for limited period. Hence, the AO concluded that the payment received by the Taxpayer was for granting right to use scientific equipment and therefore, it was royalty in terms of Explanation 2(iva) to section 9(1) (vi) of the Act.
Held
The AO proceeded on the fallacy that when scientific equipment is used by the Taxpayer for rendering service, the receipt should be construed as receipt for use of scientific equipment.
If the Taxpayer receives income by allowing customer to use scientific equipment, it is taxable as royalty. However, use of scientific equipment by the Taxpayer, in the course of giving a service to the customer, is distinct from allowing the customer to use a scientific equipment.
The true test is: whether the consideration is for rendition of service (though involving use of scientific equipment), or whether the consideration is for use of equipment simplicitor by the Taxpayer. If it is former, consideration is not taxable and if it is latter, consideration is taxable as royalty for use of equipment.
If the person making payment does not have independent right to use equipment or have physical access to it, the payment cannot be said to be consideration for use of scientific equipment.
Accordingly, the receipt was not “consideration for the 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.
