Amount paid towards domain name registration, server charges for web hosting are not payment towards technical services

12 M/s. Millenium Infocom Technologies Ltd.
v. ACIT

The issue in appeal was disallowance u/s.40(a)(i) for alleged
failure of the assessee of not deducting tax at source in respect of amounts
remitted for registration of domain name and for server charges. The assessee
had remitted the amounts after obtaining requisite certificate of a Chartered
Accountant.

The AO was of the view that the services obtained by the
assessee in the form of domain registration and in the nature of access to
server space were technical services chargeable to tax in India u/s. 9(1)(vii)
of the Act.

Before the Tribunal, the assessee contended that the amount
paid towards server space was in the nature of lease rental and was not for
obtaining any services. The assessee himself had contended that the amount would
be equipment royalty if regard be had to amendment made to the definition of
royalty effective from A.Y. 2002-03.

The assessee also relied on provisions of non-discrimination
Article of the Treaty to contest disallowance u/s.40(a)(i). In the view of the
assessee, Article 26(3) of India-USA Treaty did not permit disallowance of
expenses in respect of payment made to US resident merely because of failure of
the payer (assessee) to deduct tax at source, since parallel payment made to
resident without deduction of tax at source would not have triggered
disallowance for the payer.

The assessee also claimed that since remittance was supported
by suitable NIL TDS certificate of CA obtained in terms of procedure laid down
in CBDT Circulars, it was not imperative for it to have obtained prior NOC
u/s.195(2).

The Tribunal accepted the contentions of the assessee and
held as under :

Relying on the decision of the Madras High Court in
Skycell Communications Ltd. v. DCIT, (2001) (251 ITR 53) (Mad.), it was held
that payment made for hosting of website and access of server was not fees for
technical services.

Referring to Model commentaries, it was concluded that the
server on which the website is stored and through which it is accessible is a
piece of industrial equipment. Having noted that, the Tribunal referred to
amended definition of royalty u/s.9(1)(vi) (as applicable from A.Y. 2002-03) and
concluded that rent paid for hosting of website on servers was for use of
commercial and scientific equipment and was therefore royalty. The Tribunal
noted that the amended definition was applicable from the subsequent year and
hence the amount was not chargeable as royalty income for the year under
reference.

The Tribunal noted in detail self-certification procedure
laid down by various CBDT Circulars which replaced the need of obtaining
authorisation of the AO for making remittance to a non-resident. Having noted
the contents of various CBDT Circulars and after referring to the decision of
Supreme Court in the case of Transmission Corporation of AP Ltd. v CIT,
(1999) (239 ITR 587) (SC), the Tribunal concluded as under :