Cloud hosting receipts not royalty or technical fees; treaty limits and withholding principles barred tax and interest.

Cloud hosting receipts were held not to be royalty because customers obtained only access to hosting services, while the servers and related infrastructure remained under the service provider's control; the treaty definition of royalty was treated as exhaustive, so the domestic retrospective expansion could not enlarge the India-US treaty charge. The same receipts were also not taxable as fees for technical services or fees for included services, as they arose from standard hosting arrangements and no separate technical or consultancy service was established. Interest under section 234B was deleted because the recipient was a non-resident and, if tax was payable, it was deductible at source by the payer.

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Issues: (i) Whether income from cloud hosting services was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3)(b) of the India-US tax treaty; (ii) Whether the same receipts were taxable as fees for technical services / fees for included services under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12(4)(a) of the India-US tax treaty; (iii) Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): Whether income from cloud hosting services was taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3)(b) of the India-US tax treaty.

Analysis: The services were found to be hosting and ancillary services, with the servers, data centre infrastructure and related equipment remaining under the control and possession of the service provider. The customers did not acquire physical possession, operational control, or a right to use the equipment, but only received access to a hosting service. The treaty definition of royalty was treated as exhaustive, and the domestic retrospective expansion could not be read into the treaty for enlarging the tax charge under Article 12.

Conclusion: The receipts were not royalty and the issue was decided in favour of the assessee.

Issue (ii): Whether the same receipts were taxable as fees for technical services / fees for included services under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12(4)(a) of the India-US tax treaty.

Analysis: Once the receipts were held not to be royalty, the same characterisation could not be sustained as fees for technical services on the facts found. The receipts arose from standard hosting arrangements and not from a separate technical or consultancy service within the treaty sense, and the issue did not survive independently after the royalty finding.

Conclusion: The receipts were not taxable as fees for technical services / fees for included services and the issue was decided in favour of the assessee.

Issue (iii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The recipient was a non-resident and the tax obligation, if any, was to be discharged by withholding at source by the payer. In such a case, where tax was deductible at source, the payee could not be fastened with interest for default in advance tax.

Conclusion: Interest under section 234B was not leviable and the issue was decided in favour of the assessee.

Final Conclusion: The additions treating cloud hosting receipts as royalty or fees for technical services were reversed and the levy of interest under section 234B was deleted, resulting in full relief to the assessee.

Ratio Decidendi: Cloud hosting services do not amount to royalty unless the customer obtains possession, control, or a right to use the underlying equipment, and the domestic retrospective expansion of royalty cannot enlarge a treaty definition that remains narrower.

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