Racksapce Us, Inc. Vs DCIT (ITAT Mumbai)
Conclusion: Cloud hosting services provided USA company to its Indian customers were not covered under the definition of ‘royalties’ as per India-US Tax Treaty as the agreement was to provide hosting services simpliciter and was not for the purpose of giving the underlying equipment on hire or lease and accordingly, it could not be said as royalty within the meaning of Explanation (2) to Section 9(1)(vi) as well as Article 12(3)(b) of the Indo-USA Data by AO and DRP.
Held: Assessee was a company incorporated in and a tax resident of USA. It earned income from cloud services including cloud hosting and other supporting and ancillary services provided to Indian Customers. It filed return of income and the notes stating therein that the cloud hosting services was not taxable as ‘royalties’ under Article 12 of the India-US tax treaty as the customers did not operate the equipment or have physical access to or control over the equipment used by assessee to provide cloud support services and did not make available technical knowledge, experience, skill, know-how etc., to its Indian Customers and the cloud support services were not in the nature of managerial, technical or consultancy services and consequently same did not constitute fees for included services within the meaning of Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA). Assessee claimed that revenues earned on account of cloud hosting services constituted business profits and since it did not have Permanent Establishment (PE) in India under Article 5 of the DTAA, the same would not be subject to tax in India under the provisions of Article 7(1) of the DTAA. There was a mismatch of receipts as per 26AS and as per party-wise receipts furnished by assessee, therefore, the notice was also issued. After the reply of assessee and in accordance in the direction of the DRP, the receipt in sum of Rs.17,12,52,670/- was considered as ‘Royalty’ and held to be taxable @ 10% as per IndiaUSA DTAA prescribed taxation rate. Feeling aggrieved, assessee filed the present appeal. It was held that the agreement between assessee and its customers was for providing hosting and other ancillary services to the customers and not for the use of leasing any equipment. The data centre and the infrastructure therein used to provide these serves belonged to assessee. The customers were not having physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with assessee. The agreement was to provide hosting services simpliciter and was not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in data centre, web mail, websites etc. Accordingly, it could not be said as royalty within the meaning of Explanation (2) to Section 9(1)(vi) as well as Article 12(3)(b) of the Indo-USA Data by AO and DRP. Moreover, there was no PE of assessee in India and hence, no income could be taxed in India in term of Indo-US DTAA.
FULL TEXT OF THE ITAT JUDGEMENT
1. This appeal, filed by the assessee, calls into question the correctness of the order dated 24th June 2019 passed by the Assessing Officer under section 143(3) r.w.s. 147 of the Income Tax Act, 1961, for the assessment year 2011-12.
2. Grievances raised by the appellant are as follows:
Ground no. 1: Income from cloud hosting services is erroneously held as royalty within the meaning of explanation 2 to section 9(l)(vi) of the Income Tax Act, 1961 (the Act) as well as Article 12(3)(b) of the India – US tax treaty
1.1. On the facts and circumstances of the case and in law, the learned AO, pursuant to the directions of the Hon’ble DRP erred in holding that cloud hosting system is combination of hardware, software and networking elements that constitutes industrial / commercial / scientific equipment and the income of INR 19,93,10,915 earned by the Appellant from cloud hosting services is for use of or right to use industrial / commercial / scientific equipment which would constitute royalty under section 9(l)(vi) of the Act.
1.2. On the facts and circumstances of the case and in law, the learned AO, pursuant to the directions of the Hon’ble DRP, erred in holding that the income earned by the Appellant is for use of or right to use industrial / commercial / scientific equipment and constitutes royalty under Article 12(3)(b) of the India – US tax treaty.
1.3. On the facts and circumstances of the case and in law, the learned AO, pursuant to the direction of the Hon’ble DRP, erred in holding that the definition of royalty under the Act (as retrospectively amended by Finance Act, 2012) can be applied even for the purposes of determination of royalty income under Article 12 of the India – US tax treaty in the absence of any corresponding amendment in the India – US tax treaty.
1.4. On the facts and circumstances of the case and in law, the learned AO, pursuant to the directions of the Hon’ble DRP, erred in holding that the Aopellant is providing license to clients for use of third party software and the income earned therefrom is also royalty under the Act as well as the India – US tax treaty.
1.5. Without prejudice to aforesaid, the learned AO erred in holding that the amendment to the definition of ‘royalty’ under Section 9(l)(vi) of the Act made by Finance Act, 2012 is retrospective in nature and the same has only clarified the meaning of the term ‘royalty’ under the Act.
Ground no. 2: Income from cloud hosting services is also erroneously held as fees for technical services within the meaning of section 9(1)(vii) of the Act as well as fees for included services under Article 12(4)(a) of the India – US tax treaty
2.1 On the facts and circumstances of the case, the learned AO further erred in holding that the income from cloud hosting services is in the nature of Fees for Technical Services within the meaning of explanation (2) to clause (vii) of subsection (1) of section 9 of the Act.
2.2 On the facts and circumstances of the case, the learned AO erred in holding that the income from cloud hosting services also qualifies as fees for included services within the meaning of Article 12(4)(a) of the India-US tax treaty.
Ground no. 3: Erroneous levy of interest under section 234A of the Act
3.1 On the facts and circumstances of the case and in law, the learned AO erred in levying interest of INR 53,65,910 under section 234A of the Act.
Ground no. 4: Erroneous levy of interest under section 234B of (he Act
4.1 On the facts and circumstances of the case and in law, the learned AO erred in levying interest of INR 68,10,606 under section 234B of the Act.
Ground no. & Erroneous levy of interest under section 234Cof the Act
5.1 On the facts and circumstances of the case and in law, the learned AO erred in levying interest of INR 3,47,407 under section 234C of the Act.
3. As learned representatives fairly agree, the issues raised in this appeal are covered in favour of the assessee, by the decision of coordinate bench dated 28th November 2019, in assessee own cases for the assessment years 2010-11 & 2015-16, wherein the coordinate bench has inter alia observed as follows:-
