Because the facts in the order of CIT(A) were not verified, the matter was remanded

Fact and issue of the case

This appeal preferred by the assessee emanates from order of the ld. CIT(A) -1, Pune, dated 14-10-2016 for A.Y. 2013-14 as per the following grounds of appeal.

“1) On the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in confirming the order of the A. O. by dismissing the appeal of the assessee holding that after amendment of the provisions of S. 9(1)(v),(vi) and (vii) the applicability of the provisions of S. 195 and S. 40(a)(i) is not dependent upon whether Non-resident had a PE in India or not and the income of the Non-resident is taxable in India. The decision of the Ld. CIT(A) is contrary to the provisions of law in the matter. The order of the Ld. CIT(A) be set aside.

2) On the facts and circumstances of the case and in law the provisions of S. 9(1)(v), (vi), (vii) are not applicable to the facts of the case and any payment made to non-resident whose income is not taxable in India in view of particular DTTA with the said country outside India, the provisions: of S. 40(a)(i) become inapplicable. The Ld. CIT(A) was not justified in dismissing the appeal of the assessee on this issue: The order of the Ld. CIT(A) be set aside.

The relevant facts in this case are that the assessee is a domestic company in which public is not substantially interested and the assessee is engaged in the business of providing web hosting, mailing solutions, server collection, providing virtual dedicated servers, cloud computing, server management and server security, etc. That, on verification of expenses, it was found by the ld. A.O that the assessee has incurred an amount of Rs. 30,90,448/- against payment for the following services received.

Name of the party	Nature of payment	Amount paid
Softlayer Dutch Holdings BV	Hosting charges	2610173.95
McAfee	Email Defence services	338601.15
Alt-N-Technologies Inc.	Email server software	141674.28

Observation by the tribunal

The tribunal has heard the rival contentions, analyzed the facts and circumstances and have perused the relevant materials on record. The ld. A.O has brought in the chargeability of sec. 9, clause (vi) read with Explanation 5, in particular Explanation 5, clause (c) and has held that sec. 9 which deals with income deemed to accrue or arise in India and as per clause (vi) the payment made to a nonresident entity has to be subjected to TDS whether or not such non-resident has any P.E. in India or not. The ld. A.O was of the opinion that the server charge which is paid by the assessee is also a type of service where right to use the server is inherent and thus falls in the definition of royalty. There is no requirement of having P.E in India for applicability of TDS and since the assessee has received services in India and the TDS has not been deducted u/s 195 of the Act therefore, such payment was inadmissible u/s 40(a) of the Act. In the order of the ld. A.O he mentions that the use of server by the assessee is inherent in the business of the assessee and therefore, the server charge is also a type of service and thus it is nothing but royalty. In holding so, the ld. A.O should have also looked into the provisions of DTAA between India and Netherland and should have specifically brought out the business functions of the assessee and analyzed such business functions vis-à-vis the applicability of the said DTAA and the Income-tax Act, while adjudicating the issue. In this case, the ld. A.O holds the payment made by the assessee as royalty and fees for technical services and makes it chargeable to tax as per sec. 9 clause (vi) read with Explanation 5 clause (c) of the Act but does not discusses the provisions of the DTAA and its applicability to the business of the assessee. If the genesis of assessee’s business functions provides for applicability of DTAA then it shall over-ride the provisions of the Act. We further observe that the ld. CIT(A) in his findings is absolutely silent about the applicability of provisions of DTAA between India and Netherland to the transaction of the assessee. The ld. CIT(A) simply upheld the findings of the ld. A.O on the basis of the provisions of the Act but whether the assessee’s transaction is covered under the definition of royalty or fees for technical services as per Article 12 of the relevant DTAA, the ld. CIT(A) has not given any finding in this regard. The order of ld. CIT(A) suffers from lack of verification of facts and applicability of legal provisions in the subject matter of the case. Neither the ld. A.O nor the ld. CIT(A) has given a categorical finding regarding the nature of business of the assessee and what facts, verification are conducted in determining the transaction of the assessee, nothing has been brought on record. The ld. A.O has stated in his order that there is inherent use of the server and therefore, the service charge paid will amount to royalty but what is this inherent use and how the business of the assessee is working so far as the use of server is concerned. these detailed examination and results has not been brought out in the order. Most important whether the provision of the relevant DTAA regarding royalty and fees for technical services are applicable in the case of the assessee or not has to be re-examined. Even the ld. .D.R has submitted specifying the agreement of Softlayer Technologies Inc. and therein it has been clearly spelt out regarding use of trademark that such trademark ownership is exclusively with Softlayer Technologies Inc. and that the assessee has right only to use such trademark. If it is the right to use trademark, then that is covered within the definition of royalty as per Article 12 of the relevant DTAA. Therefore, this agreement (supra) also has to be looked into along with the provisions of DTAA. The ld. A.O shall come out with a speaking order on all these aspects after due verification. In view thereof, we set aside the order of the ld. CIT(A) and remand the matter to the file of the ld. A.O for re-adjudication as per law after complying with principles of natural justice. The grounds are allowed for statistical purposes.