- In Millennium Infocom Technologies Ltd v. Asstt. CIT (2009) 309 ITR (AT) 18 (Del.) the assessee incurred expenditure by way of payment of Rs.5.01 lakhs towards domain registration and website launch expenses. The payments were expenses through credit cards to a foreign company without deduction of tax at source. The assessee claimed Rs.3.26 lakh as revenue expenditure and capitalized the balance of Rs.1.75 lakh. The AO disallowed the expenditure for the reason that the assessee had not deducted at source on payment to non-resident company by applying section 40(a)(i) of the Act read with section 195. The AO applied the tribunal decision in the case of Cheminor Drugs Ltd v. ITO (2001) 76 ITD 37 for disallowing the expenditure. The tribunal held that the payment does not fall within expression ‘fees for technical services’ defined in Explanation 2 to section 9(1)(vii). However, the tribunal found that it falls within definition of the term ‘royalty’ as per clause (iva) to Explanation 2 to section 9(1) which is ‘the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB’.
- The tribunal held that the clause (iva) to Explanation 2 defining the term ‘royalty’ was inserted by the Finance Act, 2001 w.e.f. 01.04.2002 and is applicable hence from the assessment year 2002-03 onwards. Therefore the payment did not fit into the definition of the term ‘royalty’.
- Section 40(a)(i) was amended by Finance (No.2) Act, 2004 w.e.f. 01.04.2005 and it applies to payments by an assessee outside India to a non-resident only. The term ‘rent’ and ‘royalty’ were inserted in section 40(a)(ia) by the Taxation Laws (Amendment) Act, 2006 w.e.f. 01.04.2006. Since subject matter of appeal related to assessment year 2001-02 these changes could not be applied to uphold the disallowance. The tribunal then went on to analyse the provisions of article 26(3) of DTAA between India and US which neutralized the rigour of section 40(a)(i) and the decision was rendered in favour of the assessee.
- Readers may note that Article 26(3) of the DTAA between India and USA however will not be insulating the taxpayers against disallowance as the law has been changed to keep both residents and non-residents on equal footing by prescribing section 40(a)(i) applicable for non-residents and section 40(a)(ia) applicable for residents.
http://practiceproblems.blogspot.com/2009/04/tds-on-expenditure-for-domain.html
"A journey of a thousand miles begins with a single step."
