The Income Tax Appellate Tribunal (ITAT), Mumbai bench held that cloud hosting services provided by Rackspace USA to that Indian customers are not covered under the definition of ‘royalties’ as per India-US Tax Treaty.
The assessee did not file any return of income for the A.Y.2010-11 and certain transactions were seen in the NMS database available in 1- Taxnet System based on which the AO recorded reason to believe in accordance with provisions of Section 147 of the Income Tax Act that the income has escaped taxation.
During the year under consideration, the assessee earned income from cloud services including cloud hosting and other supporting and ancillary services provided to Indian Customers. The assessee filed the 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 do not operate the equipment or have physical access to or control over the equipment used by the assessee to provide cloud support services and do not make available technical knowledge, experience, skill, know-how etc., to its Indian Customers and the cloud support services are not in the nature of managerial, technical or consultancy services and consequently do not constitute fees for included services within the meaning of Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA).
The assessee claimed that revenues earned on account of cloud hosting services constitute 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 the assessee and in accordance with the direction of the DRP, the receipt in sum of Rs.17,12,52,670 was considered as ‘Royalty’ and held to be 10% taxable as per India USA DTAA prescribed taxation rate.
The coram headed by the Vice President Pramod Kumar clarified that the amendments in the domestic tax law cannot be read into the tax treaty as there is no change in the definition of ‘royalties’ under the India-USA Tax Treaty.
The ITAT said that the retrospective amendment in the royalty definition under the Act does not impact the definition of ‘royalties’ in the India-USA Tax Treaty. The tribunal held that the services provided by Rackspace USA to that Indian customers are not covered by the above definition of ‘royalties’ provided in the India USA Tax Treaty since Rackspace USA is providing hosting services to the Indian customers and does not give any equipment or control over the equipment.
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