Per K.D. Ranjan, Accountant Member: This appeal by assessee for assessment year 2001-02 arises out of order of CIT(A)-IX, New Delhi. 2. first issue for consideration relates to sustaining of disallowance of Rs. 3,26,386 under section 40(a)(i) of Act. facts of case stated in brief are that during year under consideration, assessee incurred total expenditure of Rs. 5,01,183 for domain registration. After capitalizing amount of Rs. 1,74,797 for website launched in year, amount of Rs. 3,26,386 was claimed as revenue expenditure. assessee paid these amounts through credit cards. It was explained by assessee that since payments were made to non-resident foreign companies and provisions of section 195 were not applicable to foreign/non-resident companies, assessee was not statutorily liable to deduct tax at source. Assessing Officer relying on provisions of section 195 held that TDS provisions were applicable both to non-companies and foreign companies. Assessing Officer followed decision of ITAT Hyderabad Bench in case of Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37 wherein it was held that wherever remittances abroad were made, it was duty of assessee to apply for nil deduction or deduction at lower rate under section 195(2) and if payer remitted same without TDS or without certificate there was liability on payer to pay tax. Reliance was also placed on decision in case of Fertilizer & Chemicals Travancore Ltd. v. CIT [2002] 255 ITR 449 (Ker.) wherein Indian company was held to be liable to deduct tax at source under section 195(1) on payments made to foreign collaborator. He, accordingly, disallowed amount of Rs. 3,26,386 under section 40(a)(i) of Act. 3. On appeal it was explained that assessee paid Rs. 59,037 to Bulk Register LLC, Maryland and Rs. 6,662 to Network Solution, Inc. Virginia on internet through credit card for registering of domain name for particular period. Further sum of Rs. 1,53,343 was paid to Rackspace Com. Texas and Rs. 1,07,643 to Hostme Bethlehem on account of server charges for launching o f different websites through internet. These companies were located outside India and did not have any office in India. assessee-company did not have copies of agreement with Bulk Register, Network Solution Inc., Hostme Bethlehem. However, copy of agreement with Rackspace Com. was made available. In view of these facts, it was pleaded that since websites could be viewed from India, amount paid on account of server charges for purpose of hosting websites did not amount to rendering of any services by these companies in India. No tax was deducted at source as, no income accrued in India since services were rendered from abroad and no income was chargeable to tax within meaning of section 195 of Act. Reliance was also placed on decision of Hon'ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587 wherein it was held that obligation to deduct tax at source would be required to fulfil only in relation to income portion of sum embedded in gross amount and therefore it would be wrong to expect deduction of tax at source on gross sum regardless of income element therein. It was also pleaded that since payments were made through credit cards no remittance was made from India and accordingly, provisions of section 195 of Act were inapplicable. decision of ITAT Hyderabad Bench in case of Cheminor Drugs Ltd. (supra) was not applicable to facts of case as in that case remittance was made from India and services were rendered in India and accordingly, amount was chargeable to tax in India. 4. On appeal Ld. CIT(A) after considering submissions observed that domain name registration provided customer support, account management tool, domain security features and service level agreement with domain name register. hiring of server and providing of web-hosting services were in nature of technical services. Thus, payments made by assessee were for technical services in terms of section 9(1)(vii) of Act, which represented income, deemed to accrue or arise in India of recipient. She also observed that payments made to non-residents also fell within ambit of section 9(1)(vi) of Act as these were in nature of royalties as defined in Explanation 2 to section 9(1)(vi) of Act. Consideration for domain registration amounted for use of property similar to trademark referred to in clause (iii) of said Explanation 2 and hiring of server implied use of processes of server and hence also fell within clause (iii) of said Explanation 2. 4.1 She further observed that authority for advance ruling held that if 4.1 She further observed that authority for advance ruling held that if payment is made for services which are utilized in business or profession carried on by payer in India or for purpose of making any income from source in India, they will be deemed to accrue or arise in India. authority affirmed that if services are utilized in business in India then irrespective of place where services are rendered amounts should be deemed to accrue or arise in India. Since websites were accessible from India, usage was in India and hence payments represented income arising in India of recipient. 4.2 As regards for non-deduction of tax at source she placed reliance on decision of Hon'ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. (supra). She held that in absence of determination by Assessing Officer that particular sum was not chargeable to tax in case of recipient, tax must be deducted at source. She upheld stand taken by Assessing Officer relying on decision of ITAT, Hyderabad Bench decision in case of Cheminor Drugs Ltd. (supra). Since assessee had not obtained concurrence of Assessing Officer under sub-section (2) of section 195 of Act, amount was not deductible under section 40(a)(i) of Act. 5. Before us Ld. AR of assessee Sh. Sharat Dev Kapila submitted that facts of case are not in dispute assessee is engaged in business of setting up of websites for purposes of E-Commerce. For hosting of websites, assessee required servers, which were not available in India at relevant time. For this purpose assessee took servers on lease and paid rentals to non-resident entities through credit card Ld. AR of assessee referring to OECD (Organization of Economic Co-operation and Development) Model Tax Convention submitted that none of parties to whom lease rentals have been paid, had permanent establishment in India. Therefore, lease rentals paid to them do not relate to business operations carried on by those parties. assessee had hosted websites on servers which could be visited by interested persons to mine electronic data. assessee had not m d e payment on account of technical services provided by non-resident resulting in accrual or arising of income in India in terms of provisions of section 9(1)(vii) of Income-tax Act, 1961. However rentals paid could be treated as royalties for use of servers owned by non-resident persons for purpose of hosting websites. He further submitted that clause (iva) of Explanation 2 to section 9(1)(vi) was inserted by Finance Act, 2001 with effect from 1-4-2002. Therefore, amount paid, as rentals cannot be treated as royalty chargeable to tax in India for assessment year 2001-02 under consideration. Consequently provisions of section 195(1) are not applicable. It has further been submitted that once assessee denies application of section 195(1), provision of section 195(2) will not be applicable requiring him to apply to Assessing Officer for permission for non-deduction or lower deduction of tax at source. Assessing Officer had relied on decision of Hon'ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. (supra) which in fact supports case of assessee. Assessing Officer has also placed reliance on decision of ITAT Hyderabad Bench in case of Cheminor Drugs Ltd. (supra) wherein it has been held that wherever there is remittance abroad, it was duty of assessee to apply for nil deduction or deduction at lower rate under section 195(2) of Act. provisions of section 195(2) are not penal provisions. These are machinery provisions. It has been further submitted that ITAT Hyderabad Bench had not considered decision of Hon'ble Andhra Pradesh High Court in case of CIT v. Superintending Engineer, Upper Sileru [1985] 152 ITR 753 which was available at relevant time. Revenue had accepted part of decision of Hon'ble Andhra Pradesh High Court holding that only portion of amount, which represented income, or profit was liable for deduction of tax at source. As at that point of time decision of Hon'ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. (supra) was not available, decision of ITAT Hyderabad Bench in case of Cheminor Drugs Ltd. (supra) without considering decision of jurisdictional High Court is per incurium. Since amount paid as lease rental is not in nature of income, decision of ITAT Hyderabad Bench in case of Cheminor Drugs Ltd. (supra) is not applicable to facts of case. latter decision of ITAT Delhi Bench in case of Lufthansa Cargo India (P.) Ltd. v. Dy. CIT [2004] 91 ITD 133 should have been taken into account. 5.1 Further, Ld. CIT(A) in Para 10 of his order had treated hiring of servers for purpose of web hosting services in nature of technical services. This view of Ld. CIT(A) is not correct as there was no supply of technology to assessee. assessee had taken space in servers on rent which cannot be treated as transfer of technology or providing of technical services by non-resident parties to assessee. He placed reliance on decision of Hon'ble Madras High Court in case of Skycell Communication Ltd. v. Dy. CIT [2001] 119 TAXMAN 496 wherein it has been held that payment for providing cellular mobile telephone services were not capable of being regarded as technical services and could not become so when used by firms and companies. He also placed reliance on decision of ITAT Delhi Bench in case of Dy. CIT v. Panamsat International Inc. [2006] 9 SOT 100. In this case payment made for use of transponder capacity could not be taxed as royalty. Placing reliance on decision of Authority for Advance Ruling in case of Cargo Community Network (P.) Ltd., In re. [2007] 289 ITR 355 it has been submitted that under Agreement of Avoidance of Double Taxation between India and USA, payment of royalty is assessable to tax in India. However for assessment year 2001-02, clause (iva) of Explanation 2 was not in Statute and therefore lease rental paid by assessee will be assessable as business income in USA. For this proposition he placed reliance on memorandum explaining provisions of Finance Bill, 2001 reported in 248 ITR 200 (St). Ld. AR of assessee further submitted that Ld. CIT(A) had not made out any case against assessee. It has further been submitted that article 26(3) of DTAA between India and USA protects assessee. He placed reliance on decision of ITAT Delhi Bench in case of Herbalife International India Ltd. v. Asstt. CIT [2006] 101 ITD 450. Ld. AR of assessee further submitted that article 24(4) of OECD Model Convention provides that royalties and other disbursements paid by enterprise of Contracting State to resident of other Contracting State shall, for purpose of determining taxable profits of such enterprise be deductible under same conditions as if they had been paid to resident of first mentioned State. On basis of above arguments it has been pleaded that provisions of section 195 are not attracted in case of assessee. 6. On other hand Ld. D.R. submitted that provisions of section 195(1) statutorily cast responsibility on assessee to deduct tax at source at time of payment or credit into account of payee. Section 195 provides for deduction of tax at source subject to regular assessment to be made later on. determination of nature and income is to be done at time of regular assessment. Placing reliance on decision of Hon'ble Supreme Court in case of Transmission Corporation of A.P. Ltd. (supra), he submitted that by deduction of tax at source at time of payment made to non-resident, rights of parties are not, in any manner, adversely affected. rights of recipients are fully safeguarded under sections 195(2), 195(3) and 197 of Act. only thing which is required to be done is to file application for determination by Assessing Officer that such sum would not be chargeable t o tax in case of recipients, or for determination of appropriate portion such sum so chargeable, or for grant of certificate authorizing recipients to receive amount without deduction of tax, or deduction of income-tax at any lower rate. On such determination, tax at appropriate rate could be deducted at source. If such application is not filed, Income-tax on gross sum is to be deducted at source and it is statutory obligation of person responsible for paying such sum to non-resident irrespective of fact that whole amount may not be income or profits of recipients. It is statutory obligation of assessee to deduct tax at source. He placed reliance on decision of ITAT in case of HNS India VSAT Inc. v. Dy. CIT [2005] 95 ITD 157 (Delhi). He further submitted that Ld. CIT(A) was not called upon to decide nature of income, i.e., income was in nature fees for technical services or royalty. To determine nature of payments was not issue before Ld. CIT(A) nor is issue before ITAT. decision of Hon'ble Madras High Court in case of Skycell Communication Ltd. (supra) relied upon by assessee is not applicable to fact of case as in that case issue related end-users and not case of relating to technical services. He further submitted that facts of case of Panamsat International Systems (supra) are also not applicable to facts of case of assessee. In this case assessee was service provider whereas in instant case, assessee had borrowed services of non-residents. According to Ld. AR of assessee, payments are in nature of royalties and not fees for technical services and hence liable to be assessed under Act. He further submitted that in case of Herbalife International India (P.) Ltd. (supra), payments were made by subsidiary company to parent company whereas in case of assessee payments have been by resident to foreign companies. Therefore, provisions of DTAA are not applicable to facts of case. provisions of DTAA are applicable when income of non-resident is taxable either in USA or in India. Article 26(3) can be invoked in such situation and hence not applicable. Ld. DR also placed reliance on decision of Authority for Advance Ruling in case of Timken India Ltd., In re. [2005] 273 ITR 67 (New Delhi) and Headstart Business Solution (P.) Ltd., In re. [2006] 285 ITR 530. 7. In rejoinder Ld. AR of assessee submitted that provisions of section 195 are substantive in nature and Assessing Officer is duty bound to exercise his powers judiciously for finding out defaults committed by assessees. If there was no default committed by assessee, order passed under sections 201(1) and 40(a)(i) will be bad in law. expression 'sum chargeable to tax' has to be read contextually. He placed reliance on decision of Hon'ble Supreme Court in case of CIT v. Sun Engg. (P.) Ltd. [1992] 198 ITR 297. As per verdict of Hon'ble Andhra Pradesh High Court, nature of income has to be determined under section 195 of Act in order t o determine tax payable at time of remittance to non-resident. second part of this decision relating to determination of nature of income has been accepted by department. Therefore, it is incorrect on part of Department to raise issue now that nature of income is not required to be determined under section 195 of Act at time of remittance of amount to non-resident. He also submitted that decision of Authority for Advance Ruling in cases of Timken India (P.) Ltd. (supra) and Headstart Business Solution (P.) Ltd. (supra) are not binding on ITAT. decision in case of Timken India Ltd. (supra) relates to fee for technical services whereas decision in case of Headstart Business Solution (P.) Ltd. (supra) relates to gross receipts to be charged to tax. In HNS India V. SAT Inc.'s case (supra) ITAT has determined nature of income. He further submitted that decision of ITAT Delhi Bench in case of Lufthansa Cargo India (P.) Ltd. (supra) has not been distinguished. decision of Hon'ble Madras High Court in case of Skycell Communications Ltd. (supra) will be applicable to facts of case. Finally it has been submitted that after issue of Circular No 759 on 18- 11-1997, rigours of section 195 has been reduced and RBI is authority to take action in case of any violation. 8. We have heard both parties and perused material available on record. facts of case are not in dispute. assessee had paid Rs. 3,26,386 to four non-resident companies for launching of different websites on their servers located in USA. No tax was deducted while making remittance on ground that amount was not chargeable to tax in India. assessee claimed deduction in respect of said amount as revenue expenditure. Assessing Officer disallowed amount under section 40(a)(i) on ground that assessee did not deduct any tax at source at time of remittance to non-resident. Under section 40(a)(i) relevant to assessment year 2001-02, in case of any assessee, any interest (not being interest on loan issued for public subscription before 1-4-1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India on which tax has not been paid or deducted under Chapter XVII-B shall not be deducted in computing income chargeable under head 'Profits and gains of business or profession'. Proviso to sub-clause further says that where in respect of such sum tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as deduction in computing income of previous year in which such tax has been paid or deducted. Sub-clause (ia) which contains identical provisions in respect of payments made to resident has been inserted by Finance (No. 2) Act, 2004 with effect from 1-4-2005. In this sub-clause words 'rent, royalty' have been inserted with effect from 1-4-2006. Provisions of sub-clause (i) deals with payments made outside India or to non-resident whereas sub-clause (ia) deals with payments made to residents. Thus, with effect from 1-4-2005 payments made to resident on account of interest, or fee for technical services and royalty with effect from 1-4-2006 will also not be allowed as deduction unless tax at source has been deducted. From language employed in sub-clause (i) it is clear that payments made outside India or to non-resident on account of any interest, royalty, fee for technical services or other sum should be chargeable to tax in India. In case of assessee, payments have been made to non-residents on account of rentals for hosting websites on their servers located in USA. Thus, we have examine nature of payments made whether they are in nature of interest or royalty or fee for technical services or other sum chargeable to tax in India. Admittedly, payments made are not in nature of interest as these are not relatable to any loan/trade advances. 8.1 expression 'Fees for technical services' is defined in Explanation 2 to section 9(1)(vii) and reads thus:- ' For purposes of this clause, 'fee for technical services' means any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by recipient or consideration which would be income of recipient chargeable under head 'Salaries'.' This definition shows that consideration paid for rendering of any managerial, technical or consultancy services, as also consideration paid for provision of services of technical or other personnel, would be regarded as fees paid for 'technical services'. definition excludes from its ambit consideration paid for construction, assembly, or mining or like project undertaken by recipient, as also consideration which would constitute income of recipient chargeable under head 'Salaries'. 8.2 Hon'ble Madras High Court in case of Skycell Communication Ltd. (supra) had occasion to examine scope of term 'technical services'. It has been held as under:- ' Thus while stating that 'technical service' would include managerial and consultancy service, Legislature has not set out with precision as to what would constitute 'technical' service to render it 'technical service'. meaning of word 'technical' as given in New Oxford Dictionary is adjective 1. of or relating to particular subject, art or craft or its techniques; technical terms (especially of book or article) requiring special knowledge to be understood: technical report, 2. of involving, or concerned with applied industrial sciences: important technical achievement, 3. resulting from mechanical failure: technical fault, 4. according to strict application or interpretation of law or rules: arrest was technical violation of treaty. Having regard to fact that term is required to be understood in context in which it is used, 'fee for technical services' could only be meant to cover such things technical as are capable of being provided by way of service for fee. popular meaning associated with 'technical' is 'involving or concerning applied and industrial science'. 5. In modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is result of scientific and technological development. Every instrument or gadget that is used to make life easier is result of scientific invention or development and involves use of technology. On score, every provider of every instrument or facility used by person cannot be regarded as providing technical service. When person hires taxi from one place to another, he uses product of science and technology, viz., automobile. It cannot on that ground be said that taxi driver who control vehicle, and monitors its movement is rendering technical service to person who uses automobile. Similarly when person travels by train or in airplane it cannot be said that railways to airlines is rendering technical services to passenger and, therefore, passenger is under obligation to deduct tax at source on payment made to railways or airline for having used it for travelling from one destination to another. When person travel by bus, it cannot be said that undertaking which owns bus services is rendering technical service to passenger and, therefore, passenger must deduct tax at source on payment made to bus service provider, for having used bus. electricity to consumer cannot, on ground that generators are used to generate electricity, transmission lines to carry power, transformers to regulate follow of current, meters to measures that consumption be regarded as amounting to provision of technical services to consumer resulting in consumer having to deduct that at source on payment made for power consumed and remit same to revenue. ** ** ** Installation and operation of sophisticated equipments with view to earn income by allowing customers to avail of benefits of user of such equipments does not result in provision to technical service to customer for fee.' On applying above stated reasoning to facts of case before us it can be safely concluded that providing of space on servers by non- residents for purpose of hosting of website will not result in provision to technical service to assessee for fee. Therefore, payments were not made for fees for technical services liable to be taxed in India. 8.3 Now we have to examine whether payment of rentals for hosting of websites on servers amounts to royalty. Explanation to section 40(a)(i) states that for purposes of sub-clause (i) 'royalty' shall have same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9. Explanation 2 to clause (vi) of section 9(1) for and up to assessment year 2001-02 read as under:- ' Explanation 2. For purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be income of recipient chargeable under head 'Capital gains') for-(i) transfer of all or any rights (including granting of licence) in respect of patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) imparting of any information concerning working of, or use of, patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) transfer of all or any rights (including granting of licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for sale, distribution or exhibition of cinematographic films; or (vi) rendering of any services in connection with activities referred to in sub-clauses (i) to (v).' From above-mentioned definition of 'royalty' one can find that none of clauses of Explanation take into its ambit consideration paid for renting of space for hosting of websites on servers. However, clause (iva) to Explanation 2 was inserted by Finance Act, 2001, with effect from 1-4-2002 which reads as under:- ' (iva) use or right to use any industrial, commercial or scientific equipment but not including amounts referred to in section 44BB.' 8.4 Thus, with effect from 1-4-2002, consideration for use or right to use industrial, commercial or scientific equipment is royalty. As per OECD (Organization of Economic Co-operation and Development) Model Tax Convention server on which website is stored and through which it is accessible is piece of equipment having physical location. OECD Model Tax Convention is applicable between two developed countries whereas UN Model Tax Convention is applicable between developed and developing countries. However, wording of OECD Model Tax Convention and UN Model Tax Convention is identical. Thus, nature of rent paid for hosting of website on servers being commercial and scientific equipment is to be treated as royalty. 8.5 legislative intention for insertion of clause (iva) to Explanation 2 to section 9(1)(vi) can be traced from memorandum explaining provisions of Finance Bill, 2001- [2001] 248 ITR 200 and is reproduced as below:- ' Under existing provisions contained in clause (vi) of sub-section (1) of section 9, income by way of royalty payable is deemed to accrue or arise in India subject to certain conditions. term 'royalty' has been defined in Explanation 2 to this clause. definition of term 'royalty' as used in Double Taxation Avoidance Agreements entered into by India includes inter alia payments 'for use of' or right to use, industrial, commercial or scientific equipment'. Presently, these payments are not included in definition of royalty in aforesaid Explanation. result is that income from leasing of industrial, commercial or scientific equipment becomes taxable in source country as business income only. Consequently, there is no withholding tax on such payments as taxpayer takes shelter under definition of term 'royalty' as provided in Income-tax Act since same is more beneficial to him. It is therefore, proposed to amend section 9 so as to widen scope of term 'royalty' as provided in Explanation 2 of clause (vi) of sub-section (1) of section 9 so as to include in its ambit consideration for use of, or right to use, industrial, commercial or scientific equipment. proposed amendment will take effect from 1-4-2002 and will accordingly, apply in relation to assessment year 2002-03 and subsequent assessment years. [Clause 4]' From plain reading of memorandum explaining provisions of Finance Bill, 2001, it is clear that prior to amendment, consideration for use of, or right to use, industrial, commercial or scientific equipment was not included in definition of 'royalty' in Explanation 2 and consequently income from leasing of industrial, commercial or scientific equipment became taxable in source country as business income from assessment year 2002- 03 and onwards. 8.6 As per paragraph 1 of Article 12 of Double Taxation Avoidance Agreement between India and United States of America dated 20-12-1990, royalties and fees for included services arising in Contracting State and paid to resident of other Contracting State may be taxed in that other State. However, as per paragraph 2 of article 12 such royalties and fees for included services may also be taxed in Contracting State in which they arise and according to laws of that State; but if beneficial owner of royalties or fees for included services is resident of other Contracting State, tax so charged shall not exceed specified percentage mentioned in this Article. We also find that paragraph 3(b) of article 12 takes into its ambit payments of any kind received as consideration for use of, or right to use any industrial, commercial or scientific equipment other than equipments relating to Shipping and Air Transport described in paragraph 2(c) or 3 of Article 8. Though DTAA between India and USA provides for taxing of royalties for use of, or right to use any industrial, commercial or scientific equipment in Contracting State in which they arise and according to laws of that State but same could not be taxed in India upto assessment year 2001-02 as clause (iva) of Explanation 2 to section 9(1)(vi) was inserted with effect from 1-4-2002. 8.7 Central Board of Direct Taxes in their Circular No. 759, dated 18-11- 1997 in F. No. 500/152/96-FTD dispensed with requirement of no objection certificate to be obtained from Assessing Officer at time of remittance outside India. Circular No 759 is reproduced as under:- ' Sub: Remittance to non-resident - Deduction of tax at source - Submission of No Objection Certificate - Dispensing with - Regarding. 1. Section 195 of Income-tax Act, 1961 provides that any person responsible for paying to non-resident any sum chargeable under Act shall, at time of credit of such income to account of payee or at time of payment thereof in cash or by cheque or draft or any other mode, whichever is earlier, deduct income-tax thereon at rates in force. 2. Reserve Bank of India have provided in their Office Manual that no remittance shall be allowed unless No Objection Certificate has been obtained from Income-tax Department. It has since been decided that henceforth remittances may be allowed by Reserve Bank of India without insisting upon No Objection Certificate from Income-tax Department and on person making remittance furnishing undertaking (in duplicate) addressed to Assessing Officer accompanied by certificate from accountant (other than employee) as defined in Explanation below section 288 of Income-tax Act, 1961 in form annexed to this circular. person making remittance shall submit undertaking alongwith said certificate of accountant to Reserve Bank of India, who in turn shall forward copy thereof to Assessing Officer. 3. contents of this circular may be brought to notice of all officers working in your charge.' 8.8 undertaking to be filed by assessee reads as under:- 'UNDERTAKING To.....................(Designation of Assessing Officer) I/We..........................(name, address & Permanent Account Number) propose to make remittance of..........(Amount) being...................(nature of payment) to....................(name & complete address of person................................. .......................................................to whom remittance has been made) after deducting sum of Rs. .........being tax at rate of..........,which is appropriate rate of tax deductible at source on said amount of remittance. 2. certificate from accountant as defined in Explanation below section 288 of Income-tax Act certifying nature and amount of income, amount of tax payable and amount actually paid, is also annexed. 3. In case it is found that tax actually payable on amount of remittance made has either not been paid or has not been paid in full, I/we undertake to pay said amount of tax alongwith interest found due in accordance with provision of Income-tax Act. 4. I/we will also be subject to provisions of penalty and prosecution for said default as per Income-tax Act. 5. I/we also undertake to submit requisite documents etc. for enabling Income-tax Department to determine nature and amount of income and tax, interest, penalty etc. payable thereon. tax, interest, penalty etc. payable thereon. (Name and Signature) Date: Place: (The Undertaking shall be signed by person authorised to sign return of income of person making payment).' 8.9 certificate from Chartered Accountant to be filed alongwith undertaking is reproduced as under:- 'CERTIFICATE I/we have examined books of account of M/s. .................................... (Name, address and Permanent Account Number of person making remittance) for ascertaining nature of remittance, of......................(amount of remittance) to................................(Name and complete address of person t o whom remittance is being made) and rate at which tax is deductible at source thereon and hereby certify that sum of Rs. .........has been deducted as tax at appropriate rate and has been paid to credit of Government. Accountant Place: Date:.............' 8.10 From Circular No. 759, dated 18-11-1997 it can be noted that at tim e of remittance, only requirement on part of assessee (the remitter) is to file undertaking alongwith certificate of accountant to Reserve Bank of India, who in turn shall forward copy thereof to Assessing Officer. CBDT in Circular No. 767, dated 22-5-1998 reiterated requirements to be fulfilled as in earlier Circular No. 759, dated 18-11-1997. However in Para 4 of this circular it has been clarified that Circular No. 759 will cover those remittances for which RBI had prescribed production of No Objection Certificate from income-tax authorities under Exchange Control Manual. Further, if order under section 195(2) has been obtained by person responsible for deducting tax, new procedure of filing undertaking alongwith Certificate prescribed in Circular No. 759would not be applicable. Nothing has been produced before us by revenue that No Objection Certificate from income-tax authorities was required to be filed by assessee. Again CBDT in Circular No. 10/2002, dated 9-10-2002 reiterated submitting of undertaking alongwith Certificate from Chartered Accountant before RBI at time of remittances to non-residents. In this Circular new formats o f undertaking by assessee and Certificate from Accountant have been prescribed. In undertaking furnished before RBI (a copy thereof to be forwarded to Assessing Officer by RBI), assessee has to undertake responsibility: 1. to pay tax alongwith interest found due in accordance with provision of Income-tax Act, in case it is found that tax actually payable on amount of remittance made has either not been paid or has not been paid in full; and will also be subject to provisions of penalty and prosecution for said default as per Income-tax Act. 2. to submit requisite documents etc. for enabling Income-tax Department to determine nature and amount of income and tax, interest, penalty, etc., payable thereon. From format of certificate to be issued by chartered accountant, we also find that he is duty bound to examine books of account for ascertaining nature of remittance. certificate contains amount of remittance; name and complete address of person to whom remittance to be made; rate at which tax is to be deducted at source; amount of tax deducted and credited to Government. Under new procedure, revenue can recover tax alongwith interest, if any, from assessee in case tax authorities later on find that short or no deduction of tax at source was made. assessee is also liable for penalty/prosecution for default committed by him. Thus CBDT with effect from 18-11-1997 prescribed new procedure for purposes of remittance of payments under which issue of N o Objection under section 195(2) by income-tax authorities has been dispensed with. 8.11 However under section 195(2) person responsible for paying any s u c h sum, other than salary, chargeable under Act to non-resident considers that whole of such sum would not be income chargeable in case of recipient, he may make application to Assessing Officer to determine, by general or special order, appropriate portion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on that proportion of sum which is chargeable. Hon'ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. (supra) upheld decision of Hon'ble Andhra Pradesh High Court by observing as under:- ' In this view of matter, answers given by High Court that (i) assessee who made payments to three non-residents was under obligation to deduct tax at source under section 195 of Act in respect of sums paid to them under contracts entered into; and (ii) obligation of respondent-assessee to deduct tax under section 195 is limited only to appropriate proportion of income chargeable under Act, are correct.' Hon'ble Supreme Court has clearly laid down principle that obligation of assessee to deduct tax under section 195 is limited only to appropriate proportion of income chargeable under Act. This leaves no doubt in our mind that at time of making payments of any sums to non-residents, nature of remittance has to be determined for purposes of deduction of tax at source. CBDT in three Circulars, i.e., Circular No. 759, dated 18-11- 1997; No. 767, dated 22-5-1998, and No. 10/2002, dated 9-10-2002 have entrusted this task to chartered accountant. Only in cases where person responsible for paying any such sum, other than salary, chargeable under Act to non-resident considers that whole of such sum would not b e income chargeable in case of recipient, he is obliged to make application to Assessing Officer under section 195(2) to determine appropriate portion of such sum so chargeable and tax shall be deducted under sub-section (1) only on that proportion of sum which is chargeable. Even in cases where lower tax has been deducted or no tax deducted, assessee by filing undertaking before RBI (addressed to Assessing Officer) has made himself liable not only for payment of tax on such remittances but also for penalty and prosecution for defaults committed by him for non-deduction or lower deduction of tax at source. contention of Ld. DR by placing reliance on decision of Hon'ble Supreme Court in case of Transmission Corpn. of A.P. Ltd. (supra) that assessee was under obligation to make application to Assessing Officer under section 195(2) of Act for determination of income and tax to be deducted, in our view, holds no water, as it runs contrary to Circulars issued by CBDT. 8.12 Thus as discussed above payments made to non-residents are neither in nature of interest nor fee for technical services or royalty. sums are not chargeable to tax under Act as business income on ground that none of payee had permanent establishment in India. memorandum explaining Finance Bill, 2001 makes it clear that prior to amendment, consideration for use of, or right to use, industrial, commercial or scientific equipment was liable to be assessed as business income in source country. Since payment for use of space in servers is in nature of royalty and income arising on use of, or right to use, industrial, commercial or scientific equipment was not royalty before amendment by Finance Act, 2001 with effect from 1-4-2002, within meaning of provisions of Explanation 2 to section 9(1)(vi) of Act, same was to be assessed in other Contracting State i.e., USA as per paragraph 1 of article 12 of DTAA and not in India. 8.13 Another contention of ld. AR of assessee is that assessee is protected under article 26(3) of DTAA. Article 26 of India-US DTAA deals with 'Non-discrimination'. Article 26(1) states that nationals of one Contracting State shall not be subject-ted in other Contracting State to any taxation or any requirement connected therewith which is much more burdensome than it is on t h e nationals of that other Contracting State. Article 26(2) provides against discrimination in context of permanent establishment in other Contracting State. Article 26(3) is general clause providing for indirect discrimination against non-resident. It reads as below:- ' Article 26(3). Except where provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for Included Services) apply, interest, royalties, and other disbursements paid by resident of Contracting State to resident of another Contracting State shall for purposes of determining taxable profits of first mentioned resident, be deductible under same conditions as if they had been paid to resident of first mentioned State.' 8.14 Apparently provisions of paragraph 1 of article 9 (Associated Enterprises) and paragraph 7 of article 11 (Interest) of DTAA are not applicable to facts of case of assessee. Paragraph 8 of article 12 (Royalties and Fees for Included Services) deals with situation where, by reason of special relationship between payer and beneficial owner or between them and some other person, excess payment is made on account of royalties and fees for included services, such excess payment will be taxed according to laws of e c h Contracting State having due regard to other provisions of Convention. In case before us parties are neither related nor is issue relating to excess payment involved. Thus assessee's case also does not fall under paragraph 8 of article 12 (Royalties and Fees for Included Services). 8.15 provisions of section 40(a)(i) as it stood prior to its amendment by Finance (No. 2) Act, 2004 with effect from 1-4-2005 applied to payments by assessee outside India to non-resident only. Sub-clauses (i), (ia) and (ib) of clause (a) of section 40 were substituted for sub-clause (i) by Finance (No. 2) Act, 2004 with effect from 1-4-2005. While sub-clause (i) still applies to payments by assessee outside India to non-resident but sub-clause (ia) applies payments made to resident assessee. terms 'rent, royalty' were inserted in sub-clause (ia) of clause (a) of section 40 by Taxation Laws (Amendment) Act, 2006 with retrospective effect from 1-4-2006. Thus with effect from 1-4-2005, provisions of section 40(a) apply equally both in case of resident and non-resident except payments for rent and royalty which are applicable with effect from 1-4-2006. In this appeal, we are concerned with assessment year 2001-02. Therefore, payment of royalty by assessee is of nature contemplated by provisions of article 26(3). 8.16 Now question arises as to whether resident assessee could take advantage of provisions of article 26(3) of DTAA. As already observed by us, provisions of section 40(a)(i) as it existed prior to its amendment by Finance (No. 2) Act, 2004, with effect from 1-4-2005 and subsequent amendment by Taxation Laws (Amendment) Act, 2006 with retrospective effect from 1-4-2006, provided for disallowance of payments made to non-resident only where tax is not deducted at source at time of remittance. However, similar payment to resident does not result in disallowance in event of non-deduction of tax at source. Thus, non-resident left with choice of dealing with resident or non-resident in business would opt to deal with resident owing to provisions of section 40(a)(i) of Act. To this extent non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on same condition as if payment is made to resident. Thus, this clause in DTAA neutralizes rigour of provisions of section 40(a)(i) of Act. In this regard it would be relevant to refer to provisions of section 90(2) of IT Act, 1961. It reads thus:- ' 90(2) Where Central Government has entered into agreement with Government of any other country outside India under sub-section (1) for granting relief of tax, or as case may be, avoidance of double taxation, then, i n relation to assessee to whom such agreement applies, provisions of this Act, shall apply to extent they are more beneficial to that assessee.' Hence by virtue of provisions of section 90(2), law which is beneficial to assessee to whom DTAA applies, should be followed. This view is supported by decision of Hon'ble Supreme Court in case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. Hon'ble Supreme Court held as under:- ' No provision of Double Taxation Avoidance Agreement can possibly fasten tax liability where liability is not imposed by Act, Agreement m y be restored to for negativing or reducing it; and, in case of difference between provisions of Act and agreement, provisions of Agreement would prevail over provisions of Act and can be enforced by appellate authorities and court. Section 90 is specifically intended to enable and empower Central Government to issue notification for implementation of terms of Double Taxation Avoidance Agreement. provisions of such Agreement, with respect to cases to which they apply, would operate even if inconsistence with provisions of Income-tax Act. If it was not intention of Legislature to make departure from general principles of chargeability to tax under section 4 and general principle of ascertainment of taxable income under section 5, then there was no purpose in making those sections 'subject to provisions of Act'. Section 90 was brought into statute book prescribed to enable executive to negotiate Double Taxation Avoidance Agreement and quickly implement it. Even accepting that powers exercised by Central Government under section 90 are delegated powers of legislation, there is no reason why delegatee of legislative power, in all cases, has no power to grant exemption. delegate of legislative power can exercise power of exemption in fiscal statute. When requisite notification has been issued under section 90, provisions of sub-section (2) of section 90 spring into operation and assessee who is covered by provisions of Double Taxation Avoidance Agreement is entitled to seek benefits thereunder, even if provisions of Double Taxation Avoidance Agreement are inconsistent with those of Act.' 8.17 We therefore hold that in view of provision of article 26(3) of DTAA, Assessing Officer cannot seek to invoke provisions of section 40(a)(i) of Act for deduction while computing profits and gains of business or profession. similar view was taken by ITAT Delhi Bench in case of Herbalife International India (P.) Ltd. (supra). To sum up, payments made on account of rentals for hosting of websites on servers are not in nature o f interest or royalties or fee for technical services or other sum chargeable to tax in India. Central Board of Direct Taxes has revised procedure for deduction of tax at source on remittances made out of country. provisions of DTAA are also in favour of assessee. Accordingly, assessee was not required to deduct tax at source under section 195 of Act while making payments outside India. We decide this issue in favour of assessee. 9. to 11. [These paras are not reproduced here as they involved minor issues.] 12. In result, appeal filed by assessee is partly allowed. *** MILLENNIUM INFOCOM TECHNOLOGIES LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX