Income Tax Appellate Tribunal - Delhi
Quasar Media Private Limited, New Delhi vs Acit Circle-20(2), New Delhi on 10 March, 2023
THE INCOME TAX APPELLATE TRIBUNAL
DELHIBENCH 'D', NEW DELHI
Before Sh. Kul Bharat, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 7088/Del/2019: Asstt. Year: 2015-16
Quasar Media Pvt. Ltd, Vs. ACIT,
B-17, Maharani Bagh, New Circle-20(2),
Delhi110065 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACQ1247Q
Assessee by : Sh. Anil Bhalla, CA
Revenue by : Sh. Sanjay Kumar, Sr. DR
Date of Hearing: 07.03.2023 Date of Pronouncement: 10.03.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of the ld CIT(A)-44, New Delhi dated 22.07.2019 for AY 2015-16.
2. The assessee has raised the following grounds of appeal:-
"1. The learned Com missioner o f Inco me Tax Rs (Appeals) has erred bo th on facts and in law in confirming the action o f assessing officer in disallo wing cloud hosting se rvices fees amounting to Rs.19,25,586/- paid to NTT America and Dimensio n Data Cloud So lutions Inc, which co mpanies are tax reside nt of USA by wro ngly conside ring the said payments as Ro yalty unde r section 9(1)( vi) read with sectio n 5 of the Income Tax Act,1961 and also inco rre ctly interpre ting Article 12 of Double Tax Avoidance Agreem ent (DTAA) with USA and consequently ho lding that the appellant company was liable to de duct TDS on the said payments unde r section 195 of the Act and therefo re the said payments are liable to be disallowe d under sectio n 40(a) (i) of the Act for no n-de duction of TDS under sectio n 195 of the Act. 1.1 Witho ut prejudice to above the learned OEM Commissioner of Income Tax (Appeals) has erred both on facts and in law in 2 ITA No. 7088/Del/2019 Quasar Media Pvt. Ltd confirming the action of assessing office r in rej ecting the appe llant company's contention that the said payments fo r cloud hosting se rvices being Business Pro fits are co vere d by Article 7 of India USA Double Taxatio n Avo idance Agreement (DTAA) and there fore the said payments are not taxable in India. 1.2 Witho ut prej udice to above the learned Commissioner of Income Tax(Appe als) has erred both on facts and in law in confirming the incorrect interpretation o f assessing office r in holding that the payments fo r cloud hosting services are royalty payments taxable in India base d upon NEM RAZA pro position put forward by Assessing Officer that after its intro duction Explanation 5 to section 9(1)( i) of the Act overrides the provisio n of Article 12 o f India USA DTAA and there fore Article 12 as appe aring in the treaty stands diluted and has to be read with the Explanatio n 5 to Section 9( 1)(b) of the Act."
3. The assessee company incurred various expenses which were payable to foreign entities (non-residents) which includes payment to NTT America of Rs. 4,49,570.30 and Dimension Data Cloud Solutions, Inc. of Rs. 14,76,016.35,there by totaling Rs. 19,25,586/- on account of server services. Assessee company also submitted Form 15CA/15CB for payments released to these 2 entities.
4. The details of payments are as under:-
a. Nature of remittance: Server Lease Line Rent, Server Lease Line b. Taxability in India: Under Section 5 read with Section 195 c. Tax liability in India: 41.2% d. Basis of determining taxable income and tax liability:
Business Income DTAA: between India & USA f. Relevant Article of DTAA: Business Income Article 7 3 ITA No. 7088/Del/2019 Quasar Media Pvt. Ltd g. Basis of arriving at the rate of deduction of tax: No PE in India
5. The assessee submitted that the payments are not covered u/s 9(1) as "Royalty".
6. The AO held that the payments are covered explanation 2 and 5 to section 9(1)(1)(vi). The AO held as under:-
"5. First of all, assessee has himself accepted that NTTA and Dimension have business connection in India in terms of section 9(1)(i) of the Act and hence amounts paid to them are taxable in India. 6. Secondly, assessee's contention that said payments are not covered up by the provisions of section 9(1)(vi) of the Act is not tenable.
a. Assessee company has interpreted definition of royalty provided under Explanation 2 to Section 9(1)(vi) without making any reference to further explanations to section 9(1)(vi) specially Explanation 5 which reads as follows:
"For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not-
(a) the possession or control of such right, property or information is with the payer: (b) such right, property or information is used directly by the payer: (c) the location of such right, property or information is in India."
b. After introduction of Explanation 5, it is very clear that payment for use of servers located outside India tantamounts to Royalty under the Act and accordingly shall be chargeable to tax.
7. Whatever, whether server lease line payments tantamounts to royalty or not under the Act does not matter because the assessee company has itself accepted the same payments are taxable in India under the Act, whatever the provision may be.
8. Now assessee's contention that said payments for server lease line are covered up by Article 7 and not by Article 12 is not tenable.
9. It is without any debate that if a particular payment qualifies to be covered up by Article 12, then Article 7 cannot be resorted to.
10. Article 12 of the India USA DTAA uses the following words:
"3. The term "royalties" as used in this Article means:
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or 4 ITA No. 7088/Del/2019 Quasar Media Pvt. Ltd scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8."
(Emphasis supplied)
11. The assessee company's contention that access to secure servers of NTTA and Dimension was not exclusively to the assessee company but it was one out of many, does not matter whether a particular consideration is royalty or not.
12. Further, assessee company's contention that possession (whether actual or constructive) of the equipment is must to treat the amount to be royalty is also not tenable.
13. The judgments relied upon by the assessee company pertains to assessment years preceding introduction of Explanation 5 to Section 9(1)(vi) of the Act.
a. The Article 12 uses the words "for the use of, or the right to use" without making any reference to location of that particular right or property.
b. In absence of Explanation 5 to Section 9(1)(vi) of the Act, the judicial authorities interpreted to held that possession is must. c. After introduction of Explanation 5 (supra), the domestic law is ample clear that server lease line payments tant amounts to Royalty but Article 12 of India-USA is silent on aspect of location. d. It is also well established fact that if on a particular aspect, treaty is silent, then provisions of domestic law will be referred to. e. Explanation 5 (supra) does not define royalty so as to be in conflict with definition provided in Article 12 but it clarifies a particular aspect in relation to possession, direct/indirect use and location.
f. When treaty is silent in relation to possession, direct/indirect use and location, whereas domestic law is ample clear, saying that possession is must to make it equal to "use" would not be right.
5 ITA No. 7088/Del/2019Quasar Media Pvt. Ltd
14. Thus it can be concluded that payments made by the assessee company to NTTA and Dimension amounting to Rs. 19.25L constitutes royalty under the Act as well as under the Article 12 of India-USA treaty.
15. Considering the same conclusion and further facts that assessee has not deducted TDS u/s 195 in respect of these expenses, same shall be disallowed in view of provisions of section 40(a)(i) of the Act. Onus to file correct and accurate particulars of income always lies on the assessee."
7. Aggrieved the assessee filed appeal before the ld CIT(A), who in totality confirmed the order of the AO. The ld CIT(A) held that the said payments are for the use of or the right to use any industrial, commercial or scientific equipment or any patent, trade-mark, design model etc. and hence, constitute royalty in terms of Article 12 of India-USA DTAA. It was further held that when a particular payment is covered by Article 12 of the DTAA under reference, then Article 7 would not apply and also held that the payment made by the appellant to NTTA and Dimension constitutes royalty under the Act as well as under Article 12 of Indo-USA DTAA.
8. During the hearing before us, it was submitted that the issue of payments to services for availing cloud services and server leasing are not treated as "royalties" under India-US DTAA. This matter stands adjudicated by the orders of ITAT in the following cases:-
i. Microsoft Regional Sales Pte Ltd (145 taxmann.com 29 Del Trib.) ii. Salesforce.com Singapore Pte. V. DDIT (137 taxmann.com 3) (ITAT Delhi) iii. Microsoft Regional Sales Pte. Ltd. v. DCIT (140 taxmann.com 70) (ITAT Delhi) 6 ITA No. 7088/Del/2019 Quasar Media Pvt. Ltd iv. MOL Corporation v. ACIT (140 taxmann.com 121 (Del TRIB) v. OVID Technologies Inc. v. DCIT (138 taxmann.com 229) (ITAT Delhi)
9. For the sake of ready reference the relevant portion of the order in the case of Microsoft Regional Sales Pte. Ltd. v. DCIT (145 taxmann.com 29) (ITAT Delhi) is reproduced as under:-
"7. Next coming to Ground no 1 re ad with Ground no 3 with its sub gro unds. I t can be obse rve d that in assessee's o wn case fo r AY 2012- 13, vide ITA no 1553/De l/2016 the issue has culminate d in favo ur o f assessee by following rele vant findings;
"7 I t was subm itte d for the assessee that Ld. Tax Authorities belo w have failed to appreciate the functional aspects of Clo ud base service while holding the subscription to cloud base se rvice as royalty. In this conte xt, the co- ordinate bench judgment in M/s. S alesfo rce .com Singapo re Pte . Vs. Dy. D.I .T. Circle 2(2) ITA No. 4915/DEL/2016 [A.Y 2010- 11] with six other connected was relie d to contend that subscription to the clo ud com puting se rvices do not give rise royalty income. The Ld DR suppo rte d the findings of Tax authorities below.
7.1 Giving thoughtful consideration to the matter on re cord, the bench is o f co nside red view that the clo ud base se rvices do not ITA No. 312/ Del/ 2021 Micro soft Regional Sales Pte Ltd. New De lhi 9 invo lve any transfer o f rights to the customers in any process. The grant of right to install and use the software included with the subscription do es not include pro viding any copy o f the said so ftware to the customer. The assessee's clo ud base services are though based o n pate nts / copyright but the subscribe r do es not get any right o f repro duction. The services are provide d online via data centre located o utside India. The Cloud services merely facilitate the flo w of user data fro m the front end use rs through inte rnet to the provide r's system and back. The ld. AO has fallen in error in interpre ting it as licensing of the right to use the above Cloud Computing Infrastructure and Software (para 10.5 of the Ld. AO order). Thus the subscriptio n fee is not royalty but merely a conside ratio n fo r online access o f the clo ud computing 7 ITA No. 7088/Del/2019 Quasar Media Pvt. Ltd services for process and sto rage of data or run the applications.
7.2 While dealing with similar que stion in regard to the case of M/s. Salesforce.com Singapo re Pte . (supra) whe re the said assessee was pro vide r of comprehensive customer relatio nship management servicing to its customer by using Cloud Computing Services / Web Casting Service s, the Bench in its o rde r date d 25.03.2022 held as under :
"28. Conside ring the facts of the case in totality, in light o f the Maste r Subscription Agreement, we are of the considere d view that the custo mers do not have any access to the process o f the se rvice provider i.e. the assessee, and the assessee does no t ITA No . 312/De l/2021 Microsoft Regio nal S ales Pte Ltd. Ne w Delhi 10 have any access exce pt o therwise pro vided in the master subscription agreement to the data of the subscribe r.
29. In our conside red opinio n, all the equipments and machines re lating to the service provided by the assessee are under its contro l and are outside India and the subscribers do no t have any physical access to the e quipment providing system se rvice which means that the subscribers are only using the service s provide d by the assessee."
7.3 The Mumbai Tribunal in the case of DDIT v S avvis Communication Corporation [ 2016] 69 taxmann.co m 106 (Mumbai - T rib.) has he ld that payment rece ived for providing web ho sting services though invo lving use of certain scie ntific equipment cannot be tre ate d as 'conside ration fo r use o f, or right to use o f, scientific equipment' which is a sine qua non for taxability unde r section 9( 1)(vi), read with Explanation 2 (iva) there to as also article 12 of Indo-US DTAA. T he Chennai Tribunal in the case o f ACIT v Vishwak Solutions Pvt. Ltd ITA No. 1935 & 1936/MDS/ 2010 date d 30.01.2015 has upheld the findings of CIT(A) that "the amount paid to the nonresident is towards hiring of storage space." The afore said square ly covers the contro versy in regard to the prese nt assessee also . In the light aforesaid, the Be nch is o f considere d vie w that the ld. Tax Authorities below had fallen in e rror in conside ring the subscriptio n received towards Cloud Service s to be ro yalty income."
8 ITA No. 7088/Del/2019Quasar Media Pvt. Ltd No distinction on facts o r law could be pointe d by Ld. DR. Therefo re, ITA No. 312/ Del/ 2021 Microso ft Regio nal Sales Pte Ltd. New Delhi 11 following afo resaid findings in favo r of the assessee these grounds are determined in favour o f the assessee .
8. Accordingly the gro unds no 1 to 3 in appeal are allowed and the remaining gro unds being consequential in nature follow the event. The appe al is allowe d and the impugned final assessment order is se t aside . The TDS cre dits shall be allowed in accordance with law.
10. Since, the facts in the instant case are similar, following the laid down juris, the appeal of the assessee is hereby allowed.
Order Pronounced in the Open Court on 10/03/2023.
Sd/- Sd/-
(Kul Bharat) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 10/03/2023
*Ajay Kumar Keot, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR