2025 (6) TMI 84 - HC - Income Tax

Payments for foreign cloud computing services are not taxable as royalty or FTS under Income-tax Act and India-US DTAA

The Commissioner Of Income Tax - International Taxation-1 Versus Amazon Web Services, Inc.

HC held that payments for cloud computing services provided by a foreign-resident company are not taxable as royalty or FTS under the Act or the India-US ... Withholding of tax u/s 195 - royalty and fees for technical service [FTS] - Assessee is a company incorporated in the United States of America and is a tax resident of that country as received certain sums of money from Indian entities for rendering cloud computing services, which, according to the AO are chargeable to tax as royalty and fees for technical service [FTS] under the Act as well as India-US DTAA Whether the amounts received by the Assessee from Indian entities for providing its services are taxable under the Act? - HELD THAT:- The services offered by the Assessee does not entail transferring of any skill, knowledge, technology or process to its customers. The cloud computing models indicate that the Assessee has developed an infrastructure and permits the customers to access the hardware and software for developing their own content. There is no cavil that the customers do not control the cloud computing hardware or software. They also have no right to commercially exploit the same. The expression “use” or “right to use” as mentioned in Article 12 (3) of the India-US DTAA is to be used in a narrow manner. The scope of royalties under Article 12 (3) of the India-US DTAA does not extend to cover charges for services, which are delivered by an assessee by use of scientific equipment. In the present case, it is clear that the cloud computing hardware and software are used by the Assessee to render its services which are availed by its customers. AO’s conclusion that the provision of such service would amount to grant of the ‘right to use’ scientific equipment and therefore, the payments made were covered under the definition of ‘royalty’ under the Act as well as u/s 12 (4) (a) of the India-US DTAA is erroneous. Assessee grants access to standard and automated services, which are available online. Customers can select from the services offered according to their needs. As explained by the Assessee, cloud computing provides an effective alternative for customers to use cloud computing services instead of buying, owning and maintaining their own data centres and servers. After examining the Agreement and appreciating the scope of services, the learned Tribunal found that the Assessee’s customers are granted only a non-exclusive and non-transferable license to access the standard automated services offered by the Assessee. Further, the Assessee does not provide the source code of the licensed software to the customers. The Assessee’s customers have no right to exploit the Assessee’s IPR. Whether payments for cloud computing are taxable as royalty under the Act and the relevant Double Taxation Avoidance Agreement has been the subject matter of various decisions? - We find no merit in the contention that the amount received by the Assessee for providing services would be taxable as equipment royalty. As noted before, the Assessee’s customers do not acquire any right of using the infrastructure and software of the Assessee for the purposes of commercially exploitation. The charges paid by the Assessee’s customers are for availing services, which the Assessee provides by using its proprietary equipment and other assets. No part of its equipment or IPRs are alienated by the Assessee in favour of its customers for their use. Therefore, the payments received cannot be considered as royalties within the meaning of Article 12 (3) of the India- US DTAA. No substantial question of law arises. Issues Presented and ConsideredThe core legal questions considered by the Court in this matter are:1. Whether the payments received by the Assessee from Indian customers for cloud computing services constitute 'royalty' income under Article 12(3) of the India-US Double Taxation Avoidance Agreement (DTAA) and Section 9(1)(vi) of the Income Tax Act, 1961 (the Act).2. Whether the Assessee's provision of cloud computing services, which involve use of hardware and infrastructure such as servers, software, data storage, networking equipment, and databases, amounts to 'use of equipment' that attracts royalty taxation under the Act and DTAA.3. Whether the payments received by the Assessee qualify as 'fees for technical services' (FTS) or 'fees for included services' (FIS) under Section 9(1)(vii) of the Act and Article 12(4) of the India-US DTAA, including the question of whether the Assessee makes available technical knowledge, experience, skill, know-how, or processes to its customers.4. Whether the 'make available' clause under Article 12(4)(b) of the India-US DTAA and Explanation 2 to Section 9(1)(vii) of the Act is fulfilled by the Assessee's cloud computing services, thereby rendering the payments taxable as FTS/FIS.5. Whether the Tribunal erred in holding that the payments received by the Assessee are not taxable in India, given the nature of the services and the contractual terms.Issue-wise Detailed AnalysisIssue 1 & 2: Taxability of Payments as 'Royalty' under Article 12(3) of the India-US DTAA and Section 9(1)(vi) of the ActLegal Framework and Precedents: Article 12(3) defines 'royalties' to include payments for the 'use of, or the right to use' copyrights, patents, trademarks, designs, secret formulas, processes, or industrial, commercial, or scientific equipment. Section 9(1)(vi) of the Act similarly taxes income by way of royalties. The relevant question is whether cloud computing services amount to 'use of equipment' or 'right to use equipment' attracting royalty taxation.Court's Interpretation and Reasoning: The Court examined the contractual terms between the Assessee and its customers, noting that the Assessee grants only a limited, revocable, non-exclusive, non-transferable license to access its cloud services and associated content. The customers do not acquire any intellectual property rights (IPR) or the right to commercially exploit the Assessee's software or infrastructure. The hardware and software remain under the Assessee's control, and customers merely access these services remotely.The Court emphasized that the phrase 'use' or 'right to use' in Article 12(3) must be interpreted narrowly. The cloud computing infrastructure is used by the Assessee to render services rather than being placed at the exclusive disposal of the customers. The payments are for services, not for the right to use scientific equipment.Key Evidence and Findings: The Agreement's clauses confirm that customers have no rights to modify, reverse engineer, or sublicense the software or infrastructure. The Assessee provides support and access but does not transfer any proprietary rights. The Tribunal's findings were that the prerequisites for royalty income were not met, as customers receive only a non-exclusive license to use standard automated services.Application of Law to Facts: The Court applied the narrow interpretation of 'royalty' and found that the payments do not fall within the definition of royalty under the DTAA or the Act. The cloud computing services are standardised services, and the customers' access does not amount to 'use of' or 'right to use' equipment in the royalty sense.Treatment of Competing Arguments: The Revenue argued that the payments were for use of equipment and thus taxable as royalty. The Court rejected this, relying on the contractual terms and precedents that clarify that mere access to services without transfer of rights does not constitute royalty.Conclusion: The payments for cloud computing services do not constitute royalty income under Article 12(3) of the India-US DTAA or Section 9(1)(vi) of the Act.Issue 3 & 4: Taxability as Fees for Technical Services (FTS) or Fees for Included Services (FIS)Legal Framework and Precedents: Article 12(4) of the India-US DTAA defines FIS as payments for technical or consultancy services that (a) are ancillary and subsidiary to the enjoyment of rights or property for which royalties are paid, or (b) make available technical knowledge, experience, skill, know-how, or processes. Section 9(1)(vii) of the Act similarly taxes fees for technical services.Court's Interpretation and Reasoning: The Court considered whether the Assessee 'makes available' technical knowledge or skill to its customers. The Tribunal found that the services do not transfer any skill, knowledge, or know-how; instead, the Assessee provides support limited to enabling customers to use the cloud platform. The support includes answering queries and guidance but does not extend to transferring technical knowledge or processes.Key Evidence and Findings: The AO's reliance on the 'AWS Support' documentation was scrutinized. The Court noted that the support provided is incidental and ancillary to the service and does not amount to making available technology or technical expertise as defined under the DTAA or the Act.Application of Law to Facts: The Court applied the 'make available' test and found no fulfillment of this criterion. The services rendered are standardised and automated, without transfer of technical knowledge or processes that would justify FTS or FIS taxation.Treatment of Competing Arguments: The Revenue argued that the technical support and access to APIs and other service offerings amounted to making available technology, thus taxable as FTS/FIS. The Court rejected this, emphasizing that mere access and incidental support do not satisfy the 'make available' requirement.Conclusion: The payments do not constitute fees for technical services or fees for included services under the Act or India-US DTAA.Issue 5: Whether the Tribunal Erred in Holding the Payments Non-TaxableLegal Framework and Precedents: The Tribunal's decision was evaluated in light of authoritative Supreme Court and High Court precedents, including Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, CIT (International Taxation) v. Salesforce.com Singapore Pte. Ltd., and Commissioner of Income-tax (International Taxation) v. MOL Corporation.Court's Interpretation and Reasoning: The Court found that the Tribunal's conclusions were consistent with settled law. The precedents establish that access to cloud-based software or services does not amount to royalty or FTS unless there is transfer of intellectual property rights or technical knowledge. The Court also noted that the Revenue did not allege any permanent establishment of the Assessee in India, which would have otherwise attracted business profits taxation.Key Evidence and Findings: The Court relied on detailed examination of the contractual terms, the nature of cloud computing services, and the absence of transfer of proprietary rights or technical know-how. The Court also noted that the Revenue's reliance on 'equipment royalty' was misplaced as the customers do not have exclusive or proprietary use of any equipment.Application of Law to Facts: The Court applied the principles from the cited precedents to the facts, affirming that the payments are for services and not for royalty or FTS. The Tribunal's order allowing the Assessee's appeals was upheld.Treatment of Competing Arguments: The Court addressed the Revenue's arguments regarding the nature of the services and the applicability of the 'make available' clause, rejecting them based on the contractual and factual matrix and judicial precedents.Conclusion: The Tribunal did not err in holding that the payments received by the Assessee are not taxable as royalty or fees for technical services under the Act or India-US DTAA.Significant Holdings'The expression 'use' or 'right to use' as mentioned in Article 12(3) of the India-US DTAA is to be used in a narrow manner. The scope of royalties under Article 12(3) of the India-US DTAA does not extend to cover charges for services, which are delivered by an assessee by use of scientific equipment. In the present case, it is clear that the cloud computing hardware and software are used by the Assessee to render its services which are availed by its customers.''The fact that the Assessee lends certain support and assistance to its customers for availing of the services does not in any manner support the view that the Assessee makes available technology or technical skills, know-how or the other process to its customers within the scope of Article 12(4)(b) of the India-US DTAA.''The Assessee grants access to standard and automated services, which are available online. Customers can select from the services offered according to their needs. There is no material to establish that grant of such service entails transfer of any technical know-how, skill, knowledge or process.''The payments made by Indian entities to the Assessee for cloud computing services would not constitute 'royalty' as the customers do not acquire any right to commercially exploit the Assessee's intellectual property rights.''The Tribunal's decision that the payments for cloud computing services do not constitute royalty or fees for included services under the India-US DTAA is consistent with the Supreme Court's ruling in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT and other authoritative precedents.''No substantial question of law arises for consideration, and the appeals are accordingly dismissed.'