Cloud hosting receipts not royalty or technical fees; treaty definitions and TDS-based 234B interest protection applied.

Cloud hosting receipts were treated as service income, not royalty, because customers had no physical possession, control, or dominion over the servers or infrastructure, and a domestic retrospective amendment could not expand the India-US treaty definition without a corresponding treaty change. The same receipts were also not taxable as fees for technical services or fees for included services on the same factual and legal matrix. Interest under section 234B was held not leviable on a non-resident recipient where tax was deductible at source by the payer. The assessee succeeded on all issues.

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Issues: (i) Whether income from cloud hosting services constituted 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 income constituted fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961 and fees for included services under Article 12(4)(a) of the India-US tax treaty; (iii) Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Issue (i): Whether income from cloud hosting services constituted 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 cloud hosting arrangement was held to be a service arrangement and not a lease, hire, or grant of use or right to use any industrial, commercial, or scientific equipment. The customers did not have physical possession, control, or dominion over the servers or infrastructure, and the domestic retrospective amendment to the definition of royalty could not be read into the treaty in the absence of a corresponding treaty amendment.

Conclusion: The issue was decided in favour of the assessee.

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

Analysis: Once the receipts were held not taxable as royalty on the same factual and legal matrix, they could not be brought to tax as fees for technical services or fees for included services. The issue was treated as covered by the earlier decision and followed accordingly.

Conclusion: The issue was decided in favour of the assessee.

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

Analysis: Interest under section 234B was held not leviable where the tax was required to be deducted at source by the payer and the failure to deduct could not be visited upon the non-resident recipient as advance-tax default.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The assessee's receipts from cloud hosting services were held not taxable as royalty or fees for technical services, and the levy of interest under section 234B was unsustainable.

Ratio Decidendi: Cloud hosting receipts are not royalty where the customer merely avails a service without possession or control of equipment, and a retrospective amendment to domestic law does not alter the treaty definition absent a corresponding treaty change; interest under section 234B is not leviable on a non-resident recipient where tax was deductible at source by the payer.

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