We are a proprietary firm in India, create and host websites for our clients located in India,receive payment in Indian rupees only. we host these websites on computers located in data center (large building several computers with high speed internet connection) in USA. We remit payment in US dollars to the company who provides us these servers.This company has nothing whatsoever to do with India - no permanent establishment in India.My question is -- is such payment in US dollars made to this foreign company liable to tds in India.rajesh_mahadevan@.......com

According to section 195 of the I T Act , tax is required to be deducted from payment of "any sum " to any non resident. However, the TDS provision is applicable only when the income on which tax is to be deducted at source is taxable under I.T Act.(Act after this) Therefore, it is of importance to see that if the payment made by you to the company based in USA is taxable under I T Act.

Scope of total income is defined under section 5 of the Act.Section 5(2) of the Act states total income in case Non resident as under :

"(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which

• (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
• (b) accrues or arises or is deemed to accrue or arise to him in India during such year"

Section 9 of the Act provides nature of incomes which are deemed to to accrue or arise in India.Clause b of Section 9(1)(vi) states royalty paid by a Resident to a Non Resident is deemed to accrue or arise in India if the business of Resident is not carried out of India. The exact wording of said provision is as under:

(vi) income by way of royalty payable by

(a) ..................

(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

....."

In your case , you are carrying out business in India and paying the foreign company the payment for use of server and their technology or equipments .Hence , the payments for server or equipments falls within the definition of Royalty , such payments shall fall within the scope of total income for non resident taxable under I T Act. That will make the payment liable to TDS u/s 195 of the Act.

The meaning of Royalty is given in Explanation 2 of the section 9(1)(vi) which contains among many meaning , following , effective from 1/4/2002

"(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;"

A plain reading of the meaning as given in aforesaid explanation 2(iva) , shows that the server you hire or server along with all the software required for hosting the website , shall come within the purview of royalty.Which means the payment for web hosting shall deem to accrue or arise in India. Which makes the payment taxable under I T Act even in case of Non Resident. Therefore, payment in that case is subject to TDS .

Before I conclude, a decision of Authority of Advance Ruling in case of IMT Labs Pvt Ltd 287 ITR 450[2006] worth mentioning. The question raised by IMT Lab before AAR was :

“Whether periodical payments made to the non-resident person, having no office/establishment in India, in connection with the use of software developed by him on internet are subject to tax deduction at source under the Double Taxation Avoidance Agreement with the USA ?”

The applicant(IMT lab) pointed out that the payments to US companies are covered under Article 7 as the US company has no permanent establishment in India and not under Article 12 of Double Taxation Avoidance Agreement between India and USA. However, the AAR found that if Article 12 is applicable , Article 7 is inapplicable and on facts of the case it was found that royalty definition under Article 12 of DTAA is similar to royalty definition given under I T Act. Therefore , in ultimate analysis , AAR gave the ruling that payment made by IMT lab to US company having no PE in India ,for use of software is subject to TDS.

Therefore, in your case also , you should deduct the tax at source u/s 195 of the I T Act on the payment to US company even if same has no PE in India.