The assessee is a owner/ host of website www.shaadhi.com where individuals can register and exchange the relevant information for matrimonial alliances on payment of appropriate subscription amount. The facility is available to the resident as well as non residents. Vide service order dated 14.6.2004, the assessee availed the service of Rack space. The said contract was extended and modified on 1.1.2007. The Rack space offered advanced type of dedicated hosting solution to the assessee. The services provided by Rackspace to the assessee are stated by the Assessing Officer in the order u/s 201(1) and 201(1A) in para 3 as under:
Server Management: Rack space has provided dedicated servers for assessee and dedicated support team with an account manager and business development consultant. It also provides direct and unlimited access to live expert and guarantees 100% network up time and hardware replacement guarantee.
Bandwidth & connectivity : As assessee has millions of users across the globe who access its website, Rack space provides an aggregate bandwidth of 100 GB per server which is increased based on the usage rate.
Rack Security: space provides very high level of security for the data stored on the servers including backups and restorations, firewalls, intrusion detection, protection from Trojans, worms etc.
Charges: USD 25 for low end servers and upto USD 82 for top end servers. The monthly charges varies as per the servers opted, by the customer.
It is manifest from the agreement that the payments have been made for providing web hosting services with all backup, security, maintenance and uninterrupted services. There is no dispute that all the equipments and machines relating to the services provided to the assessee are under the control of Rack space and situated outside India. When the assessee could not operate or even have no physical excess to the equipments system providing service, then the assessee would not be using the equipments but only availing the services provided by Rackspace.
In view of the decision of the Hon’ble Delhi High Court when the equipments were not operated, used or under the control of the assessee, then the payments made for availing the services of Rack space cannot be said as royalty. When the payments are not in the nature of royalty as per Indo-USA DTAA as well as per Explanation 2 (via) of Sec. 9(1) of the IT Act, then recipient of the said payments being non-resident having no PE is not liable to tax in India. Therefore, the payments in the hands of Rack space are not taxable in India and consequently, no tax required to be deducted u/s 195 on such payment/remittance by the assessee as held by the Hon’ble Supreme Court in the case of GE India Technology Centre P. Ltd. v. Commissioner of Income-tax reported in 327 ITR 456.
We further note that for AY 2006-07, the Assessing Officer disallowed the payments made by the assessee to Rack space for hosting charges u/s 40(a)(ia) for the reason of non deduction of tax at source while passing the assessment order u/s 143(3).
On appeal, the CIT(A) allowed the claim of the assessee vide order dated 29.1.2009. Consequently, the Assessing Officer passed a giving effect order dated 3.12.2010 u/s 154 and accepted the claim of the assessee in respect of the expenditure for hosting charges paid to Rack space. Thus, it is clear that the Assessing Officer while passing the order dated 3.12.2010 u/s 154 accepted that the payment is not in the nature of royalty.
In view of the admitted position as the Assessing Officer has accepted the claim of the assessee regarding the expenditure on account of web hosting paid to Rack space as well as the facts and circumstances of the case and legal position on the point as discussed above, we do not find any reason to interfere with the impugned order of the CIT(A) for the respective assessment years. Accordingly, the appeals filed by the revenue are dismissed.