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5. Before the Assessing Officer, the assessee contested that above payment was made to non-resident person for web hosting charges for availing dedicated space on servers stationed outside India, under the control of USA company and since the assessee did not have control or even physical access to the systems providing services, therefore, said charges cannot be treated as royalty and no income deemed to accrue or arise in India as per the Act. The assessee also submitted that the payment are not in the nature of 'royalty' or 'FTS' even as per the Indo-USA Double Taxation Avoidance Agreement (DTAA) and thus, the recipient being non-resident, having no PE in India, is not liable to tax in India. However, according to the Ld. Assessing Officer, M/s Rackspace has provided not only web space, but a host of technical services through their dedicated support team to the assessee as well as to the persons, to whom the assessee resold the web space providing high level of security for data stored on the servers, including backups and restoration, firewalls, intrusion detection, protection from Trojans, worms etc. In view of the Assessing Officer the services provided are in the nature of Fee for Technical Services (FTS). The Ld. Assessing Officer relied on the explanation to the section 9 inserted by the Finance Act, 2010, according to which even if the non-resident has no business connection in India or has not rendered any service in India, then also the payment received deemed to accrue or arising India. This explanation has been made effective retrospectively from 01/06/1976. Since, no tax was deducted by the assessee on the said payment of Rs.12,62,929/-, the Assessing Officer disallowed the said expenditure in terms of section 40(a)(i) of the Act. The Ld. CIT(A) deleted the addition observing as under:

6. Before us, the Ld. DR relied on the order of the Assessing Officer and referred the relevant explanation to section 9 of the Act to support the ground raised.

7. On the contrary, the Ld. counsel of the assessee filed a paperbook containing pages 1 to 244 and submitted that the payment in the hands of the non-resident recipient are in the nature of rent paid towards the space taken on server, which could be business profit and not taxable as fee for technical services (FTS) either under the provisions of the Act or under the DTAA. The Ld. counsel drawn our attention to copy of agreement dated 29/08/2012 between M/s Reckspace India Ltd and the assessee (available on page 209 to 215 of the paper book), copy of ledger account of web hosting purchase along with sample invoices (available on page 152 to 166 of the paper book) copy of ledger account of email mailing charges along with sample sale invoices (available on page 167 to 208 of the paper book) etc. The Ld. counsel submitted that the assessee is reseller of web hosting space and no services either of the nature of technical or consultancy has been availed by the assessee. According to him, the payment made to non-resident company was in the nature of rent paid for webspace, which could only be taxed as business profit in the hands of non-resident, but in absence of any permanent establishment of the non-resident company, said payment cannot be taxed as business profit. He alternatively submitted that even if the payment is considered as fee for technical services, then, even according to the article 12 of DTAA between the USA and the India, for falling the service under fee for included services (FIS), the service should 'make available' knowledge or know-how to the assessee so as it could independently provide such technical services to its customers. According to the Ld. counsel, no such technical knowledge or technical know-how has been provided to the assessee by the non-resident and only webspace has been rented, which the assessee has further resold to its Indian customers, and thus the said payment cannot fall under fee for included services under the DTAA between the USA and the India. He further submitted that in case of the non-resident, if the treaty provisions are more beneficial as compared to the provisions of the Act, then treaty provisions would apply.

7.2.3 Further, the hosting services and hosted systems are defined in the said agreement as under:

"Hosting Services" means Raekspace's commercially available services as described on the Rackspace website www.racksnace.com. including: (i) Dedicated Hosting Services; (ii) Cloud Hosting Services (Cloud servers TM, Cloud Sites™, Cloud Tiles™ and Rackspace Cloud Drive™ (JungleDisk®)); and (iii) Email Hosting Services and application services (Rackspace® Ernaik Hosted Microsoft® Exchange and Microsoft® SharePoint®).

"Hosted System" means, for Dedicated Hosting Services, a combination of hardware, software and networking elements that comprise an information- technology-system. The Hosted System may consist of a dedicated system, the right to use certain parts of a shared system that Rackspace maintains for many customers or a combination of some dedicated etemcnts and some shared elements.

7.2.4 From the above agreements, it is evident that the assessee has purchased web space on server of non-resident, which included dedicated hosting services, cloud hosting, email hosting services and application. The web space purchased has been further sold to Indian customers. Thus, actually the assessee is buyer and seller of the web space of non-residents alongwith commercial services and no services have been availed by the assessee. The assessee has purchased web space from the foreign companies for the purpose of reselling the same and it should not be confused with the word "services" which have been used by the foreign companies for selling the products like web hosting. The assessee has purchased dedicated server space with a view to resale the same to Indian customers. Thus the income in the hand of the non-resident falls in the category of business profit and therefore the payment cannot be classified as fee for technical services under the provisions of the Act. 7.2.5 The combination hardware, software and networking elements controlled by the non-resident are not stationed in India. The systems are located outside India and the assessee has been provided right to use certain parts of the system over the Internet. In such circumstances, in absence of any permanent establishment of the non-resident, the income from payment is not taxable in the hands of non-resident in India. 7.2.6 Further, the Ld. Counsel has argued without prejudice that even if income from payment to the non-resident is considered as Fee from Technical Services (FTS) within the provisions of the Act, it is not taxable under the provisions of the DTAA as no knowledge or know-how has been provided to the assessee in respect of the webspace hosting. The relevant article of the India USA DTAA is reproduced as under: