02Direct Tax

November , 2018 – Volume 99NEWSFLASH

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Pune tribunal holds web hosting charges paid to Amazon Web Services is not ‘royalty’

IDEXNEWSFLASHNovember, 2018 – Volume 99

Pune Tribunal holds web hosting charges paid to Amazon web services is not ‘royalty’

BRIEF FACTS:

❖ EPRSS Prepaid Recharge Services India P.Ltd (hereinafter referred to as “EPRSS” or“Assessee”) is a Private Limited Companyengaged in the distribution of rechargepens of various DTH providers to its otherdistributors via online network.

❖ The Assessee did not have the facilityavailable with it of high technologyequipment i.e. servers. So, in order to carryon its activity of distributorship of rechargepens, it used web hosting facility ofAmazon for which it paid web hostingcharges.

❖ Under the pretext that, since they wereonly using the service and not having anyrights over the property, during the subjectAY, the Assessee had furnished return ofincome declaring Nil income, followingwhich Assessee’s case came up forscrutiny.

❖ The Ld. Assessing Officer (“AO”) noted thatassessee was given a “Limited License‟ bymeans of a “Right to Use” agreement andgranted site access to the AWS website forconduct of its activities, for which theassessee was being charged by AWS on amonthly basis. Ld. AO held that thesecharges were in the nature of use ofcommercial equipment within the meaningof amended section 9(1)(vi) read withExplanation 2 and Explanation 5 havingretrospective effect and thus partook thenature of royalty. Resultantly, it disallowedthe deduction u/s 40(a)(i) on account ofnon-deduction of TDS on the saidpayments.

❖ Upon Further appeal, CIT (A) upheldthe order of AO. Aggrieved of which,the assessee filed an appeal beforePune ITAT. Hence the present appeal.

❖ Question under consideration:

i. Whether Assessee is liable todeduct TDS on payments madefor Web Hosting Charges?

ii. Whether retrospectiveamendment in the act wouldoverride the treaty laws where noamendment has been made?

iii. Whether charges paid for Webhosting are in the nature ofroyalty?

ASSESSEE’S CONTENTION:

❖ That there was no obligation on its partto deduct withholding tax on thepayment as the said payment did notfall either in the category of FTS orRoyalty.

❖ The fees paid was for use oftechnology and cannot be said to befor use of royalty.

❖ That retrospective amendment cannotlead to retrospective TDS obligation,and the amendment was made underthe Income Tax act but not to treatylaw.

❖ That, Assessee paid monthly charges toAmazon for such services, which keptfluctuating.

IDEXNEWSFLASHNovember, 2018 – Volume 99

❖ There was no basic fixed price and the billingwas segregated into various services, hence itdoesn’t not attract the provision of Royalty.(not fixed but variable)

❖ That, Amazon was only providing computingplatform but it was not the owner of theroyalty, it only made such services availableand no any rights were ever obtained by theAssessee.

❖ Relying on the Maxim “Lex non cogit adimpossibillia” i.e. law does not compel a manto do what he cannot possibly perform, so itis not possible to comply with a provision notin force at a relevant time but introducedlater by retrospective amendment.

DEPARTMENTS CONTENTIONS:

❖ That the agreement between Assessee andAmazon points out that it was “Use” of entireservice offerings and hence will attractprovisions of amended section 9.

❖ That this is a case of “Deemed accrual” as theAssessee is using servers/equipments ofAmazon as because it couldn’t use high endtechnology equipments i.e. servers. In this eraof evolving technology, the thing which has tobe seen is that what the Assessee is availing.

ITAT’s ORDER:

❖ That any amendment, to the scope of royaltywith retrospective effect cannot fasten theassessee with liability to withhold tax for theyears which have already been closed prior toinsertion of amendment. Hence, the assesseehas not defaulted in not deductingwithholding tax and for such non acts.

❖ That, where the assessee does not possessand does not have any control over the serveror servers space, being deployed by Amazon,while providing e-services, then the chargespaid to Amazon could be described as royalty.

❖ Further, htat the Assessee made monthlypayments to Amazon for using its services,which were not regular, fluctuating andthere was no fixed basic price which is aprecondition for royalty, hence the webhosting charges are not in the nature ofroyalty.

❖ That, the payment made by assessee forweb hosting services is not taxable underDTAA and the same cannot be held to betaxable, only because there wasretrospective amendment to section 9(1)(vi)of the Act.

❖ Assessee is not paying for any rights but isonly paying for the services, hence it wasonly for use of technology and cannot besaid to be for use of royalty.

❖ Even if the retrospective amendment is heldto be applicable, the case of Assessee ofpayment to amazon is outside the scope ofexplanation 2(iva) of section 9(1)(vi), cannotmake the Assessee liable to deduct TDS.

NANGIA’S TAKE:

In conjunction with many other judicialprecedents in the same context, Pune tribunalhas made its mark by elaborating itsconclusion on the ever disputed topic ofapplicability of retrospective amendments inthe Act and in our view has correctly held thatretrospective amendments can not be used tofasten TDS liability on a taxpayer on paymentsalreadymade in the past.

On the issue of taxability, it is a welcomedecision of the Tribunal, wherein in this age ofdigital transactions and ever increasing scopeof technological services such as web hosting,cloud computing, etc., the Tribunal hasconcluded that the use of technologicalservices cannot be held to be ‘royalty’. It hasbeen sonorously held that mere use of servicecannot be confused with use of right inproperty or right to use.

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