Receipts from Web Hosting Services to Indian Entities can’t be treated as FTS under Indo-US Tax Treaty: ITAT [Read Order]
The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the income earned from the web hosting services cannot be treated as fee within the meaning of Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and US.
In the instant case, the assessee, M/s. Savvis Communications Corporation rendered hosting services to Malayala Manorama Co Ltd and Cybermedia India Online Ltd. while filing the income tax returns for the relevant period, the assessee claimed that the services rendered by it do not make available technical knowledge, experience, skill, know how or processes to its customers and consequently these do not constitute fee for included services within the meaning of Article 12 of India US DTAA. It claimed that the amount represented business income of the assessee and since it did not have any permanent establishment (PE) in India under Article 5 of the treaty, the income was not liable to tax under Article 7(1) of the DTAA.
However, the Assessing Officer rejected the claim and noted that apart from the use of telecommunication equipment, the customers also used various know-how, technology and software provided by the assessee which was either owned by the assessee or were available to the assessee under the license agreement with the third party. According to him, the use of such know-how, technology and software were found to be covered by the provisions of section 9(l)(vi) of the Act as well as Article 12 of India-US DTAA.
The Tribunal noted that in an earlier case of the assessee, a similar issue had been concluded in favour of the assessee. In that case, the Tribunal held that a payment cannot be said to be the consideration for use of scientific equipment when the person making the payment does not have an independent right to use such an equipment and physical access to it.
“In the present case also, what the assessee is providing is essentially web hosting service, though with the help of sophisticated scientific equipment, in the virtual world. The scientific equipment used by the assessee enable rendition of such a service, and such a use, which is not even by the Indian entity, is not an end in itself. In this view of the matter, even though the services rendered by the assessee to the Indian entities may involve use of certain scientific equipment, the receipts by the assessee cannot be treated as “consideration for the use of, or right to use of, scientific equipment” which is a sine qua non for taxability under section 9(l)(vi) read with Explanation 2 (iva),” the bench said.
