M/s UNBXD Software Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-7(1)(1), Bangalore

ITA 2535/BANG/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 4282 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 10-08-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 06-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Business income; Double taxation relief; Permanent establishment; TDS
• Section: 6; 142(1); 40(a)(ia); 195; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.2535/BANG/2018 ASSESSMENT YEAR : 2015-16 UNBXD SOFTWARE PVT. LTD., #377, 5 TH MAIN, 6 TH SECTOR, HSR LAYOUT, BENGALURU-560102. PAN AABCU 4222 E VS. THE DY.CIT, CIRCLE-7(1)(1), BENGALURU. APPELLANT RESPONDENT ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A REVENUE BY : SMT. SUPRIYA RAO, JCIT (DR) DATE OF HEARING : 10-08-2021 DATE OF PRONOUNCEMENT : 30-09-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGA INST ORDER DATED 06/07/2018 PASSED BY THE LD.CIT(A)-7, BANGALORE FOR ASSESSMENT YEAR 2015-16 ON FOLLOWING GROUNDS OF APP EAL: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, UNBXD SOFTWARE PRIVATE LIMITED (HEREINAFTER - REFERRED TO AS 'UNBXD INDIA' OR THE 'COMPANY' OR THE 'APPELL ANT'), RESPECTFULLY PREFERS AN APPEAL UNDER SECTION 253 OF THE INCOME-TAX ACT, 1961 (ACT') AGAINST THE ORDER PASSE D BY THE COMMISSIONER OF INCOME- TAX (APPEALS) 7, BANGALORE [LEARNED CIT(A)'] DATED 06 JULY 2018 (RECEIVED BY T HE APPELLANT ON 11 JULY 2018), ON THE FOLLOWING GROUND S: 1. GROUND 1: GENERAL PAGE 2 OF 12 ITA NO.2535/BANG/2018 1.1 THE IMPUGNED ORDER OF THE LEARNED CIT(A) IS BAS ED ON AN INCORRECT INTERPRETATION OF LAW AND THEREFORE IS BAD IN LAW. 1.2 THE ORDER PASSED BY THE LEARNED CIT(A) IS ERRON EOUS AND BAD IN LAW TO THE EXTENT IT WRONGLY UPHELD THE ORDE R PASSED BY THE ASSESSING OFFICER ('LEARNED AO') BY CONSIDER ING THE SERVER STORAGE FEES PAID TO NON-RESIDENTS AS BEING ROYALTY IN NATURE AND ACCORDINGLY UPHOLDING THE DISALLOWANCE M ADE BY THE LEARNED AO UNDER SECTION 40(A)(I) OF THE ACT ON ACCOUNT OF NON-WITHHOLDING OF TAXES. GROUND 2: TREATMENT OF SERVER STORAGE FEES PAID TO NON- RESIDENTS AS ROYALTY AND DISALLOWANCE OF SUCH PAYME NTS UNDER SECTION 40(A)(I) OF THE ACT 2.1 THE LEARNED CIT(A) AND AO HAVE ERRED IN LAW AND IN FACT, BY CONSIDERING THE SERVER STORAGE FEES PAID TO NON- RESIDENTS AS BEING ROYALTY IN NATURE WITHOUT CONSIDERING THE TECHNICAL SUBMISSIONS FILED BY THE APPELLANT 2.2 THE LEARNED CIT(A) AND AO FAILED TO APPRECIATE THAT THE SERVICES THAT ARE AVAILED BY THE COMPANY ARE IN THE NATURE OF A STANDARD FACILITY WHICH DOES NOT TANTAMOUNT TO THE USAGE OF TECHNOLOGY, MODEL OR PROCESS AND/ OR SCIEN TIFIC OR COMMERCIAL EQUIPMENT 2.3 THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT BY OBSERVING THAT THERE IS IMPARTING OF INFORMATION CO NCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNO WLEDGE AND THUS ERRED IN CONCLUDING THAT THE PAYMENTS ARE IN T HE NATURE OF ROYALTY 2.4 THE LEARNED CIT(A) AND AO HAVE FAILED TO APPREC IATE THAT FOR A PAYMENT TO QUALIFY AS 'ROYALTY' (BEING INDUST RIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT), PHYSICAL POSSE SSION, CONTROL OR CUSTODY OF EQUIPMENT IS A PRE-REQUISITE (WHICH HAS BEEN UPHELD BY VARIOUS JUDICIAL RULINGS AND INTERNA TIONAL TAX COMMENTARIES) AND THEREFORE THE ACTION OF THE LEARN ED CIT(A) AND AO ARE NOT TENABLE UNDER LAW 2.5 THE LEARNED CIT(A) HAS DISREGARDED VARIOUS JUDI CIAL PRECEDENTS RELIED UPON BY THE APPELLANT AND PROCEED ED TO PLACE RELIANCE ON THOSE RULINGS WHICH ARE DISTINGUISHABENACTS AND LAW FROM THE INSTANT CASE. PAGE 3 OF 12 ITA NO.2535/BANG/2018 2.6 THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT BY ALLEGING THAT THE PROVISION OF SERVICES (I.E. SERVE R STORAGE FEE) TANTAMOUNT TO SERVICE PERMANENT ESTABLISHMENT (PE) STATING THAT SERVICE PE DOES NOT INCLUDE PE AND THAT THE PH YSICAL PRESENCE OF PERSONNEL IS NOT A PRE-REQUISITE FOR CR EATION OF A SERVICE PE. SUCH ACTION OF THE LEARNED CIT(A) IS CO NTRARY TO THE PROVISIONS OF THE CONVENTIONS OF THE APPLICABLE DOUBLE TAXATION AVOIDANCE AGREEMENT, RELEVANT JUDICIAL RUL INGS AND INTERNATIONAL TAX COMMENTARIES ON THE SUBJECT. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, VA RY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEA L AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL , SO AS TO ENABLE THE HON'BLE TRIBUNAL TO DECIDE ON THE APPEAL IN ACCORDANCE WITH THE LAW. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF PROVIDING SITE SEARCH AND PERSONALISATION PLATFORM SOLUTION TO E- COMMERCE COMPANIES. IT FILED ITS RETURN OF INCOME F OR YEAR UNDER CONSIDERATION ON 23/09/2015 DECLARING LOSS OF RS.3, 87,26,300/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED TO ASSESSEE ALONG WITH NOTICE UNDER SECTION 142(1) OF THE ACT. REPRESENTATIVE OF ASSESS EE APPEARED BEFORE THE LD.AO AND CALLED FILED REQUISITE DETAILS AS CALLED FOR. 2.1 DURING THE ASSESSMENT PROCEEDINGS, THE LD.AO OB SERVED THAT, ASSESSEE HAD MADE CERTAIN PAYMENTS TO NONRESI DENTS UNDER THE SAID SERVER STORAGE FEES IN FOREIGN CURRENCY. A SSESSEE WAS CALLED UPON TO PROVIDE THE LIST OF PARTIES ALONG WI TH THE TDS DETAILS, VIDE ORDER SHEET DATED 24/10/2017. FROM TH E DETAILS FILED BY ASSESSEE, THE LD.AO OBSERVED THAT PAYMENTS WERE MADE TO PAGE 4 OF 12 ITA NO.2535/BANG/2018 AMAZON WEBSERVICES ON WHICH TDS WAS NOT DEDUCTED. T HE DETAILS OF PAYMENT MADE BY ASSESSEE ARE AS UNDER: 2.2 THE LD.AO AFTER PERUSING VARIOUS SUBMISSIONS FI LED BY ASSESSEE WAS OF THE OPINION THAT SERVICES AVAILED B Y ASSESSEE FROM THE NON-RESIDENT WAS IN THE NATURE OF USAGE OF TECHNOLOGY, MODEL OR PROCESS, AND/OR EQUIPMENT AND THE SAME WAS COVERED BY SECTION 9(1)(VI), EXPLANATION 2(III) AND/OR SECT ION 9(1)(VI) EXPLANATION 2(IVA). THE LD.AO THUS HELD THAT THE PA YMENTS WERE IN THE NATURE OF ROYALTY ON WHICH TDS WAS APPLICABL E AND THEREFORE SUM OF RS.28,39,76/- WAS DISALLOWED UNDER SECTION 40(A)(IA) OF THE ACT. 2.3 AGGRIEVED BY THE ORDER OF LD.AO, ASSESSEE PREFE RRED APPEAL BEFORE THE LD.CIT(A). 2.4 BEFORE THE LD.CIT(A) ASSESSEE SUBMITTED THAT IT HAD ENTERED INTO SERVICE AGREEMENT WITH NON-RESIDENT SERVICE PR OVIDERS LIKE PAGE 5 OF 12 ITA NO.2535/BANG/2018 AMAZON WEBSERVICES, USA, HETZNER ONLINE, GERMANY AN D MICROSOFT AZURE, USA TO AVAIL THE DATA CENTRE SERVI CES FOR WEBSITE HOSTING, DATA STORAGE, PROCESSING AND RELATED SERVI CES AS APPLICABLE. IT WAS SUBMITTED THAT THE KEY ATTRIBUTE S OF SUCH SERVICES WERE: THE PLATFORM OF THE COMPANY WOULD BE HOSTED ON THE SERVER OF THE SERVICE PROVIDER; THE COMPANY DOES NOT HAVE THE POSSESSION OF THE SER VERS OF THE SERVICE PROVIDERS; AN ACTIVITY IN RELATION TO P ROVISION OF SERVICES TAKE PLACE IN INDIA. 2.5 IT WAS SUBMITTED THAT THE COMPANY WAS OF THE BO NA FIDES BELIEF THAT THE WEB HOSTING CHARGES PAID TO THE NON RESIDENTS ARE NOT TAXABLE IN INDIA UNDER INDO - US DTAA OR INDO-G ERMANY DTAA. AND THAT THE REQUIREMENT TO DEDUCT TAX AT SOU RCE ON PAYMENTS MADE TO NON-RESIDENT WERE NOT APPLICABLE. THE LD.CIT(A) UPON VERIFYING VARIOUS DETAILS OF ASS ESSEE HELD AS UNDER: 4.9 IT IS OBSERVED THAT THE SERVICE/INFORMATION PR OVIDED BY THE NR PARTIES WERE IN THE NATURE OF EXPERT KNOWLEDGE AND EXPERIENCE ACQUIRED BY THESE COMPANIES RELATING TO INDUSTRIAL AND COMME RCIAL PURPOSES. THUS IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL IS NOT HING BUT IN THE NATURE OF ROYALTY. THE NATURE OF SERVICES OF WEB HOSTING OR C LOUD STORAGE THAT IS AVAILED BY THE ASSESSEE FROM THE NONRESIDENT PARTIE S IS USAGE OF TECHNOLOGY, MODEL OR PROCESS AND/OR SCIENTIFIC OR C OMMERCIAL EQUIPMENT. IN VIEW OF ABOVE, THE PAYMENT MADE BY THE APPELLANT TO NR PARTIES IS FOR THE ACTIVITIES WHICH WERE COVERED UNDER THE ROYALTY CLAUSE OF DTAA. HENCE THE PAYMENT BEING IN THE NATURE OF ROYALTY IS TAXABLE IN INDIA UNDER CLAUSE 12 OF THE DTAA BETWEEN INDIA AND USA. IN THE CASE OF VERIZON COMMUNICATIONS SINGAPORE PTE LTD. INCOME TA X OFFICER, INTERNATIONAL TAXATIONI2014J 361 ITR 55 (MADRAS), T HE HONORABLE HIGH COURT HAS HELD THAT THE CONSIDERATION PAID FOR THE USE AND THE RIGHT TO PAGE 6 OF 12 ITA NO.2535/BANG/2018 USE OF THE PROCESS, IS 'ROYALTY'. THE I HIGH COURT EVEN OBSERVED THAT AFTER THE INSERTION OF EXPLANATION 5 POSSESSION, CONTROL OF SUCH RIGHT, PROPERTY OR INFORMATION USAGE DIRECTLY BY THE PAYER, LOCATIO N OF THE RIGHT ARE NOT MATTERS OF CONCERN IN DECIDING THE CHARACTER OF PAY MENT AS 'ROYALTY' AND BUT FOR THE USE OF THE CONNECTIVITY BY THE PAYER, T HE SERVICE AGREEMENT ITSELF HAS NO MEANING. THE DECISIONS RELIED BY THE APPELLANT ARE DISTINGUISHABLE OIL CONSIDERING ABOVE, THE DISALLOW ANCE OF THE PAYMENT U/S 40(A)(I) FOR NONCOMPLIANCE OF TDS PROVISION IS CORRECT AND THE ACTION OF THE A.O IS UPHELD. 4.10 WITHOUT PREJUDICE TO ABOVE, IT IS OBSERVED THA T FURNISHING OF SERVICES BY THE NRS TO THE APPELLANT DURING THE YEAR FULFILL S THE PREREQUISITE OF SERVICE FE AS SERVICE FE DOES NOT REQUIRE PERMANENT ESTABLISHMENT. IN THE PRESENT DIGITAL AGE SERVICES CAN BE PROVIDED TH ROUGH EMAIL, INTERNET, VIDEO CONFERENCE, REMOTE ACCESS TO COMPUT ERS ETC WITHOUT THE PHYSICAL PRESENCE OF MANPOWER. THEREIBRE, THE ARGUM ENT OF ABSENCE OF PERMANENT ESTABLISHMENT (FE) ORFIXED PLACE OF BUSIN ESS IS IRRELEVANT. HENCE, I AM OF THE CONSIDERED OPINION THAT THE SERV ICE PROVIDER IS HAVING SERVICE PE IN INDIA AND ACCORDINGLY THE PAYMENT IS TAXABLE IN INDIA AS BUSINESS INCOME. CONSEQUENTLY NON DEDUCTION OF TAX WILL MAKE THE PAY MENT LIABLE FOR DISALLOWANCE U/S. 40 (A) (I) OF THE ACT. 2.6 AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS IN APPEAL BEFORE US NOW. 2.7 BEFORE US, THE LD.AR SUBMITTED THAT, PLATFORM O F THE ASSESSEE WOULD BE HOSTED ON THE SERVERS OF THE SERV ICE PROVIDER AND THAT THE US COMPANY DO NOT HAVE THE POSSESSION OF THE SERVERS OR THE SERVICE PROVIDER AND NO ACTIVITY IN RELATION TO THE PROVISION OF SERVICES TAKES PLACE IN INDIA. HE SUBM ITTED THAT AS PER THE PROVISIONS OF SECTION 195 OF THE ACT TAXES ARE REQUIRED TO BE WITHHELD ONLY IF THE PAYMENTS MADE TO THE NON-RE SIDENT IS CHARGEABLE TO TAX IN INDIA. IN SUPPORT HE PLACED RE LIANCE ON THE DECISION OF HONBLE SUPREME COURT IN CASE OF TRANSMISSION CORPORATION OF APA LTD. & ANR. VS CIT REPORTED IN 239 ITR 587. PAGE 7 OF 12 ITA NO.2535/BANG/2018 2.8 HE ALSO PLACED RELIANCE ON DECISION OF HON BLE DELHI HIGH COURT IN CASE OF ASIA SATELLITE TELECOMMUNICATIONS CO. LTD. VS DDIT (2011) 332 ITR 340 WHEREIN IT WAS HELD THAT ; USE OF EQUIPMENT MEANS IN THE CONTEXT OF SECTION 9 (1)(VI) TO HAVE CONTROL, DOMAIN AND POSSESSION OVER STATEMENT. USE OF FACILITY CANNOT BE EQUATED WITH USE OF EQUIPMENT . 2.9 HE ALSO PLACED RELIANCE ON THE DECISION OF HE A LSO SUBMITTED THAT THIS REISSUE IN CASE OF DDIT VS NEW SKY SATELLITE BV REPORTED IN (2016) 68 TAXMANN.COM 8 , WHEREIN THE HONBLE DELHI HIGH COURT FOLLOWED THE ABOVE RATIO LAID DOWN IN CASE OF ASIA SATELLITE TELECOMMUNICATIONS (SUPRA). IT IS ALSO SUBMITTED THAT THE RATIO BY HONBLE DELHI HIGH COURT IN CASE OF NEW SKY SATELLITE BV (SUPRA) HAS BEEN APPROVED BY THE HONBLE SUPREME COURT IN CASE OF ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT.LTD. VS CIT REPORTED IN (2021) 432 ITR 471. IT HAS BEEN VEHEMENTLY SUBMITTED BY THE LD.AR THAT ASSESSEE DID NOT HAVE ANY CONTROL DOMAIN OVER THE EQUIPMENT AS CONTEMPLATED UNDER SECTION 9(1)(VI) OF THE ACT. ON THE CONTRARY, THE LD.CIT.DR PLACED RELIANCE ON O BSERVATIONS OF THE LD.CIT(A). HE PLACED RELIANCE ON DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF VERIZON COMMUNICATIONS SINGAPORE PVT.LTD. VS. ITO IN ITA NO.147 TO 149 OF 2011 AND 230 OF 2012 BY ORDER DATED 7.11.2003 WHEREIN, THE PROVISIONS OF EXPLANATION 4 AND 5 INSERTED BY THE FINANCE ACT, 2012 W.E.F. 1.6.1976 WERE INTRODUCED TO THE DEFINITION OF ROYALTY U/S.9(1)(VI ) OF THE ACT. HE THUS SUBMITTED THAT AS THESE PROVISIONS ARE RETROSP ECTIVELY APPLICABLE, ANY POSSESSION, CONTROL OF SUCH RIGHT, PROPERTY OR PAGE 8 OF 12 ITA NO.2535/BANG/2018 INFORMATION USAGE DIRECTLY BY THE PAYER, LOCATION O F THE RIGHT DOES NOT MATTER IN DECIDING THE CHARACTER OF PAYMENT AS ROYALTY. HE THUS SUBMITTED THAT DISALLOWANCE OF PAYMENT UNDER S ECTION 40(A)(I) FOR NON-COMPLIANCE OF TDS PROVISIONS IS CO RRECT. 2.10 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH S IDES IN LIGHT OF RECORDS PLACED BEFORE US. 2.11 WE NOTE THAT THAT THE RATIO LAID DOWN HONBLE DELHI HIGH COURT IN CASE OF NEW SKY SATELLITE BV (SUPRA) HAS BEEN APPROVED BY THE HONBLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS (SUPRA) . IT IS SUBMITTED THAT IDENTICAL ISSUE WAS CONSIDER ED BY COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF INFOSYS LTD. VS.DCIT IN IT(TP)A NOS.61 TO 98/BANG/2021 FOR ASSESSMENT YEAR 2012-13 TO 2017-18 BY ORDER DATED 25/08/2021. THE OBSERVATIONS AND THE FINDINGS OF THIS TRIBUNAL WHILE ADJUDICATING THE ISSUE ARE AS UNDER: 21. WITH REGARD TO THE PAYMENTS TOWARDS WEBHOSTING CHARGES AND CLOUD COMPUTING/CLOUD HOSING CHARGES, THE LEARNED C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THOSE CHARGES ARE PAID TO G ET ACCESS TO CLOUD SPACE WHEREIN THE PAYER CAN STORE HIS DATA, APPLICA TIONS, SOFTWARE ETC. THE PAYER IS GIVEN AN USER ID AND PASSWORD TO USE THE STORAGE SPACE PROVIDED ON CLOUD. IT IS A PAYMENT MADE FOR I NFRASTRUCTURE SERVICE. THE PAYER GETS ACCESS TO USE SOFTWARE/PROC ESSES WHICH ARE COPYRIGHTED BY THE OWNER. HE BROUGHT TO OUR NOTICE SOME OF THE TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND AMAZON WE B SERVICES INC. AND VIRTUSGREAT INC. AND HIGHLIGHTED THAT ON S IMILAR TERMS OF AGREEMENT BETWEEN ANOTHER ASSESSEE AND AMAZON WEB S ERVICES INC., THE PUNE BENCH OF ITAT IN THE CASE OF EPRSS PREPAID RECHARGE SERVICES INDIA PVT.LTD. VS. ITO (2018) 100 TAXMANN. COM 52(PUNE-TRIB.) HELD THAT PAYMENTS MADE FOR USE OF CLOUD SPACE DOES NOT AMOUNT TO PAYMENT OF ROYALTY. HE HIGHLIGHTED THE FACT THAT TH E PUNE BENCH PLACED RELIANCE ON DECISION OF HONBLE DELHI HIGH C OURT IN THE CASE OF DIT VS. NEW SKIES SATELLITE BV (2016) 68 TAXMANN.CO M 8 (DEL) TO A COME TO A CONCLUSION THAT WEB HOSTING CHARGES ARE N OT IN THE NATURE OF ROYALTY. PAGE 9 OF 12 ITA NO.2535/BANG/2018 .. 30. WITH REGARD TO CLOUD COMPUTING/CLOUD HOSTING CH ARGES, THE CONCEPT OF CLOUD COMPUTING IS THE DELIVERY OF DIFFERENT SER VICES THROUGH THE INTERNET, INCLUDING DATA STORAGE, SERVERS, DATABASE S, NETWORKING, AND SOFTWARE. CLOUD-BASED STORAGE MAKES IT POSSIBLE TO SAVE FILES TO A REMOTE DATABASE AND RETRIEVE THEM ON DEMAND. TRADIT IONALLY WE STORE OUR DATA IN OUR COMPUTER AND CAN ACCESS THE DATA ON LY IF THE COMPUTER IS AVAILABLE. IN CLOUD COMPUTING THE DATA IS STORE IN A SERVER AND CAN BE ACCESSED THROUGH ANY SYSTEM. THE MUMBAI TRIBUNAL IN THE CASE OF RACKSPACE, US INC. ITA NO.1634/MUM/2016 AND ITA NOS . 3507 & 1075/MUM/2017 ORDER DATED 29.5.2019 FOLLOWED THE EA RLIER DECISION RENDERED IN THE CASE OF AMERICAN CHEMICAL SOCIETY V S. DCIT IN ITA NO. 6811/MUM/2017 FOR THE AY 2014-15 VIDE ORDER DATED 3 0.04.2019, WHEREIN IDENTICAL ISSUE WAS DECIDED IN THE CONTEXT OF RIGHT TO USE MATERIAL IN THE FORM OF JOURNAL,. THE TRIBUNAL HELD THAT THE CLOUD HOSTING COMPANY CREATES / MAINTAINS INFORMATION ONL INE AND GRANTS ACCESS TO THE JOURNALS, THE ASSESSEE NEITHER SHARES ITS EXPERIENCES, TECHNIQUES OR METHODOLOGY EMPLOYED IN EVOLVING DATA BASES WITH THE USERS, NOR IMPARTS ANY INFORMATION RELATING TO THEM . THE TERMS OF THE AGREEMENT BETWEEN THE CLOUD HOST AND THE CUSTOMER P ROVIDER THAT THE CUSTOMER GETS RIGHT TO SEARCH, VIEW AND DISPLAY THE ARTICLES (WHETHER ONLINE OR BY TAKING A PRINT) AND REPRODUCING OR EXP LOITING THE SAME IN ANY MANNER FOR PERSONAL USE. THE CUSTOMERS DO NOT G ET ANY RIGHTS TO THE JOURNAL OR ARTICLES THEREIN. IT WAS HELD THAT T HERE WAS NO 'USE OR RIGHT TO USE' IN ANY COPYRIGHT OR ANY OTHER INTELLE CTUAL PROPERTY OF ANY KIND IS PROVIDED BY THE ASSESSEE TO ITS CUSTOMERS. FURTHERMORE, THE INFORMATION RESIDES ON SERVERS OUTSIDE INDIA, TO WH ICH THE CUSTOMERS HAVE NO RIGHT OR ACCESS, NOR DO THEY POSSESS CONTRO L OR DOMINION OVER THE SERVERS IN ANY WAY. THEREFORE, THE QUESTION OF SUCH PAYMENTS QUALIFYING AS CONSIDERATION FOR USE OR RIGHT TO USE ANY EQUIPMENT, WHETHER INDUSTRIAL, COMMERCIAL OR SCIENTIFIC, DOES NOT ARISE. THE TRIBUNAL THEREAFTER APPLIED THE RATIO TO THE CASE O F THE ASSESSEE RACKSPACE, US INC. AND HELD THAT THE AGREEMENT BETW EEN THE ASSESSEE AND ITS CUSTOMER IS FOR PROVIDING HOSTING AND OTHER ANCILLARY SERVICES TO THE CUSTOMER AND NOT FOR THE USE OF / L EASING OF ANY EQUIPMENT. THE DATA CENTRE AND THE INFRASTRUCTURE T HEREIN IS USED TO PROVIDE THESE SERVICES BELONG TO THE ASSESSEE. THE CUSTOMERS DO NOT HAVE PHYSICAL CONTROL OR POSSESSION OVER THE SERVER S AND RIGHT TO OPERATE AND MANAGE THIS INFRASTRUCTURE / SERVERS VE ST SOLELY WITH THE ASSESSEE. THE AGREEMENTS ENTERED INTO THE SERVICE L EVEL AGREEMENTS. THE AGREEMENT IS TO PROVIDE HOSTING SERVICES SIMPLI CITER AND IS NOT FOR THE PURPOSE OF GIVING THE UNDERLYING EQUIPMENT ON H IGHER OR LEASE. THE CUSTOMER IS NOT EVEN AWARE OF THE SPECIFIC LOCATION OF THE SERVER IN THE DATA CENTRE WHERE THE CUSTOMER APPLICATION, WEB MAI L, WEBSITES ETC. PAGE 10 OF 12 ITA NO.2535/BANG/2018 THE TRIBUNAL THEREFORE HELD THAT INCOME FROM CLOUD HOSTING SERVICES WAS NOT ROYALTY WITHIN THE MEANING OF EXPLANATION ( 2) TO SECTION 9(1)(VI) OF THE ACT AS WELL AS ARTICLE 12(3)(B) OF THE INDO-USA DTAA. 31. THE CONCLUSIONS WITH REGARD TO PAYMENT FOR RIGH T TO USE SOFTWARE WILL EQUALLY APPLY TO THESE PAYMENTS ALSO AND THE A O WILL EXAMINE THE ISSUE AFRESH AS DIRECTED WHILE REMANDING THE ISSUE WITH REGARD TO PAYMENTS FOR RIGHT TO USE SOFTWARE IN THE LIGHT OF THE AGREEMENT BETWEEN THE PARTIES. 2.12 RESPECTFULLY FOLLOWING THE ABOVE VIEW, WE REMA ND THIS ISSUE BACK TO THE LD. AO TO VERIFY AND EXAMINE THE TERMS OF THE AGREEMENT BETWEEN THE CLOUD HOST AND THE CUSTOMER. THE LD.AO IS ALSO DIRECTED TO VERIFY THE ISSUE BASED ON PRINC IPLES LAID DOWN BY THE HONBLE SUPREME COURT IN CASE OF ENGINEERING ANALYSIS (SUPRA) , WITH REGARD TO THE PAYMENTS FOR RIGHT TO USE OF S OFTWARE IN THE LIGHT OF AGREEMENT BETWEEN THE PARTIES. ACCORDINGLY THESE GROUNDS RAISED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPT, 2021 SD/- SD/- (B.R BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 30 TH SEPT, 2021. /VMS/ PAGE 11 OF 12 ITA NO.2535/BANG/2018 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 12 OF 12 ITA NO.2535/BANG/2018 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -9-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -9-2021 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -9-2021 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -9-2021 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -9-2021 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -9-2021 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -9-2021 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS