Website hosting charges paid to American company is not royalty either u/s.9(1)(vi) or under India-US DTAA as the payer had no physical access or right to operate equipment, which was situated outside India.
Once an amount is not taxable as royalty, the same would be taxable as business income but in the absence of PE, such income will not be liable to tax in India.
Facts:
The taxpayer, an Indian company (ICO), was owner of a matrimonial website where individuals can register and exchange relevant information for matrimonial alliance on payment of appropriate subscription amount. This facility was available to residents as well as nonresidents.
ICO availed an ‘advanced dedicated hosting solution services’ from a US-based company (FCO) to host and run its matrimonial site more effectively across the globe.
FCO provided dedicated servers and services of support team, bandwidth and connectivity, high level of security for the data stored on the servers including backups, restorations, firewalls, etc. Fees for such services were charged monthly by FCO depending on the type of server (low-end/ top-end) opted for by ICO.
CO made payment to FCO without deducting tax at source on the ground that remittance was towards business income of FCO which in absence of PE in India, was not taxable.
The Tax Department contended that the payment made for hosting of website and use of servers would be taxable as ‘royalty’ as it amounts to use of industrial, commercial and scientific equipment.
Held:
Payments were made for providing web hosting services with backup, security, maintenance and uninterrupted services. All equipments and machines relating to services provided to ICO were under control of FCO and situated outside India. ICO could not operate or even have physical access to the equipments system providing service. Hence, ICO did not ‘use’ the equipments but only availed services from FCO.
Reliance was placed on the Delhi HC ruling in the case of Asia Satellite Telecommunications Co. Ltd.4 to contend that when equipments were not operated, used or under the control of ICO, payments made for availing services of FCO could not be termed as ‘Royalty’. When payments are not in the nature of royalty as per Income-tax Act or DTAA, if the non-resident recipient has no PE in India, he is not liable to tax in India. Consequently, no tax is required to be deducted at source u/s.195 of the Income-tax Act.
