TaxTMI 
TaxTMI 
2025 (6) TMI 84
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....d by the Assessing Officer [AO] under Section 147 read with Section 144C (13) of the Act in respect of AYs 2014-15 and 2016-17. 2. The Assessee is a company incorporated in the United States of America and is a tax resident of that country. The Assessee had 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 "the Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and Prevention of Fiscal evasion with respect to taxes on income" [India-US DTAA]. 3. The Assessee contends to the contrary and claims that its receipts are for providing standard cloud computing services, which are not chargeable to tax either as royalties or as FTS. Therefore, the Assessee had not filed its return of income. The Assessee's customers that had remitted the charges to the Assessee for services had not withheld any tax under Section 195 of the Act for the same reason. 4. The Revenue had initiated proceedings under Section 201/201 (1A) of the Act in cas....
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....of the case, the Ld. ITAT has erred in holding that the payments received by the assessee from customers is not royalty income without appreciating the fact that receipts from customers in India are on account of 'use of equipment' as specified under clause (iva) of Explanation 02 to section 9 (1) (vi) of the Act read with Explanation 5 to section 9 (1) (vi) of the Act as well as Article 12 (3) of the India-USA DTAA? 2.4 Whether on the facts and in the circumstances of the case, the Ld. ITAT has erred in holding that the payments received by the assessee on account of cloud computing is not royalty income without considering the fact that even if an argument is made that assessee receives service income, then also it would be treated as fees for included services (FIS) as per article 12 (4) (a) of the India USA DTAA being ancillary and subsidiary to the application or enjoyment of the right property or information in the form of a online cloud computing for which it is entitled to royalty? 2.5 Whether the Ld. ITAT has erred in holding that the payments received by the assessee from its customers did not constitute 'fee for technical service' as defined under section 9 (1) (vii)....
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....vision for support services to be rendered by the Assessee. 11. The AO proceeded to hold that the Assessee was providing technical support to its customers and also making available technology and therefore, the fees received by it was taxable as FTS under the Act as well as FIS under Article 12 of the India-US DTAA. Additionally, the AO held that the Service Offering also covered trademarks, service marks and concluded that the Assessee was providing copyright and trademark services to its customers for commercial exploitation. The AO reasoned that; therefore, the income of the Assessee would qualify as royalty. 12. The AO examined the cloud computing models and found that the amounts paid to the Assessee were also in the nature of right to use scientific equipment and therefore, were covered under the definition of 'royalties' under the India-US DTAA. 13. It is material to note that it is not the Revenue's case that any part of the amounts received by the Assessee are taxable as business income attributable to the Assessee's permanent establishment [PE] in India. There is no allegation that the Assessee has a PE in India. Thus, essentially, the controversy that arises in the p....
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.... resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties referred to in subparagraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in subparagraph (b) of this paragraph): (i) during the first five taxable years for which this Convention has effect, (A) 15 percent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political subdivision or a public sector company; and (B) 20 percent of the gross amount of the royalties or fees for included services in all other cases, and (ii) during the subsequent years, 15 percent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred....
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....al institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting States, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. 7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, or a resident of....
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....d use the Services solely in accordance with this Agreement; and (ii) cow and use the AWS Content solely in connection with your permitted use of the Services. Except as provided in this Section 8.4, you obtain no rights under this Agreement from us or our licensors to the Service Offerings, including any related intellectual property rights. Some AWS Content may be provided to you under a separate license, such as the Apache Software License or other open source license. In the event of a conflict between this Agreement and any separate license, the separate license will prevail with respect to that AWS Content. 8.5 License Restrictions. Neither you nor any End User may use the Service Offerings in any manner or for any purpose other than as expressly permitted by this Agreement. Neither you nor any End User may, or may attempt to, (a) modify, alter, tamper with, repair, or otherwise create derivative works of any software included in the Service Offerings (except to the extent software included in the Service Offerings are provided to you under a separate license that expressly permits the creation of derivative works), (b) reverse engineer, disassemble, or decompile t....
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....n appropriate security, protection and backup of Your Content, which may include use of encryption technology to protect Your Content from unauthorized access and routine archiving Your Content. AWS log-in credentials and private keys generated by the Services are for your internal use only and you may not sell, transfer or sub-license them to any other entity or person, except that you may disclose your private key to your agents and subcontractors performing work on your behalf." 23. As noted earlier, the AO had taken note that "Service Offerings" mean the AWS content, the AWS Marks, the AWS Site and other services provided under the Agreement. 24. In addition, the AO had also noted the definition of 'AWS Content' and 'AWS Mark', which is noted below: "AWS Content" means Content we or any of its affiliates make available in connection with the Services or on the AWS Site to allow access to and use of the Services, including WSDLs; Documentation; sample code; software libraries; command line tools; and other related technology. AWS Content does not include the Services. "AWS Marks" means any trademarks, service marks, service or trade names, logos, and other designations of ....
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.... knowledge and expertise. AWS Support helps you stay agile with architectural guidance as you build applications and solutions. Have a question or need help? Just ask - our cloud support engineers and subject matter experts are here with answers and guidance. They are looking around the corner to identify new ways AWS can help your business. Highly-trained engineers, large network of subject-matter experts At AWS, we hire smart Cloud Support Engineers that are well versed in DevOps technologies, automation, infrastructure orchestration, configuration management and continuous integration, and who are not constrained by how "things are usually done". Cloud Support Engineers held to same standard for technical aptitude as AWS software development organization. We also have a vast network of subject-matter experts ranging from Solutions Architects to product managers that can come off the bench to help you as needed Engineers empowered to help you achieve your goals At AWS, Cloud Support Engineers do not simply follow a run-book. Rather, AWS engineers stay with Support cases from the start all the way through to resolution. This model avoids the need for escalation paths typical....
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.... Assessee makes available various technologies to its customers on noting the definition of AWS Content, which include documentation and sample code and also the following extract from the support page: "We are determined to make our customers successful on their cloud journey and address requests that range from answering best practices questions, guidance on configuration, all the way to break-fix and problem resolution. AWS Support helps you stay agile with architectural guidance as you build applications and solutions." 29. 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 also addresses various requests of its customers including answering best practice questions, guidance of configuration amongst others only as a support for availing of its services. 30. The AO had observed that there are following three major models for delivering cloud computing services to business: "1. Infrastructure ....
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....hardware and software resources were costly, capital intensive, required large amount of space and were used in limited capacity by such companies. For e.g., a company may have a complex Enterprise Resource Planning (ERP) system, which would need large storage and processing capability to run, for which it may need to buy large and expensive servers to host the ERP only. - With development of public internet and capability of web-based access, companies began to innovate and found ways to provide computing resources as a service to customers remotely, flexibly and on an on-demand basis i.e., provision of computing resources without the need for customers to make capital-intensive investments in physical computer resources / hardware. Further, companies were able to develop technology which enabled the same computing resources to be used simultaneously for multiple users remotely, without any intermingling of data. - The Company was one of the first companies to develop web services for computing infrastructure requested by customers. The Company provides quick and easy ways for customers to access flexible, low-cost and on-demand cloud computing services according to their spec....
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....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. The findings of the Tribunal to the aforesaid effect, as set out in the impugned order, are reproduced below: "13. On perusal of the terms of the above Customer Agreement, Trademark Guidelines and Support Services Guidelines, it is clearly evident that the prerequisites for the impugned receipts to be treated as royalty income in terms of Article 12 (3) of the India-USA DTAA are not met as the customer do not receive any right to use the copyright or other IP involved in AWS Service; the customers are granted only a non-exclusive and non-transferable licence to access the standard automated services offered by the assessee without the source code of the licence being shared with the customer, the customers have no right to use or commercially exploit the IP; there is no equipment of any nature or at any time placed at the disposal of the customers by the assessee. Fur....
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....re addressed on the anvil of Section 9 of the Act. This issue, in any case, stands conclusively settled bearing in mind the pertinent observations which were rendered by the Supreme Court in Engg. Analysis Centre of Excellence (P) Ltd. v. CIT [Engg. Analysis Centre of Excellence (P) Ltd. v. CIT, (2022) 3 SCC 321 : (2021) 432 ITR 471] and have been noticed in Relx Inc. case [CIT v. Relx Inc., (2024) 3 HCC (Del) 229 : (2024) 470 ITR 611] and have been reproduced hereinabove. 12. We deem it appropriate to additionally observe that the right of subscription to a cloud-based software cannot possibly be said to be equivalent to the "use" or "right to use" any industrial, commercial or scientific equipment. This more so since the respondents sought to place the consideration received under Article 12 (4) (b) and which is specifically excluded from sub- article (3) (b). 13. The argument based upon Article 12 (4) (a) also cannot sustain since the same pertains to payments received as consideration for managerial, technical or consultancy services and which are ancillary or subsidiary to enjoyment of the right, property or information referable to Para 3. This again would be founded upon....
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....antial question of law. The appeals shall consequently stand dismissed." 43. The issue involved in the present appeal is also covered in favour of the Assessee in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT & Anr.: (2021) 432 ITR 471. 44. In Commissioner of Income Tax (International Taxation) v. MOL Corporation: [2024] 162 taxmann.com 197 (Delhi), this Court found that no substantial question of law had arisen in respect of the taxability of subscription fees received for cloud services as royalty as the said issue was concededly covered by the decision of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT & Anr. (supra). In the said case, the assessee [MOLC] was a company incorporated in the United States of America. Its ultimate parent company was Microsoft Corporation USA [MS Corp.]. MS Corp's. wholly owned subsidiary named Gracemac Corporation, merged with MOLC with effect from 02.10.2006. MS Corp. was a sole owner of the intellectual property vested in Microsoft software. At the material time, MS Corp. had granted exclusive license for manufacture and distribution of Microsoft products to its wholly owned subsidiary Gra....
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....t two questions of law [i.e., A and B] relate to income earned from licensing/sale of software while the third question [i.e., C] relates to subscription received against cloud services offered by the respondent/assessee. 15. The Tribunal has ruled that neither income earned from licensing/sale of software products nor subscription fee earned for providing cloud services, could be construed as royalty. 16. Mr Sanjay Kumar, senior standing counsel, who appears on behalf of the appellant/revenue, says that the proposed questions are covered by the judgment of the Supreme Court rendered in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT 432 ITR 471 (SC). 16.1. We are also informed by Mr Kumar that a review petition has been filed which is pending consideration." 45. The Special Leave Petition preferred by the Revenue against the said decision was also dismissed, albeit on account of delay. 46. We also consider it apposite to refer to the decision of the Karnataka High Court in Commissioner of Income-tax, International Taxation v. Urban Ladder Home Decor Solutions (P.) Ltd.: [2025] 171 taxmann.com 549 (Karnataka). The assessee in that case [Urban Ladder] had availed ....
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.... the view that the these non- resident recipients stand on a better footing than those assessees before the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd (supra). Accordingly, following the ratio laid down by Hon'ble Supreme Court, we hold that the payments made to the above said three non-resident companies do not fall within the meaning of "royalty" as defined in DTAA. The AO has not made out an alternative case that these payments are taxable as business income in India. Hence, there is no necessity for us to deal with that aspect. 23. We have noticed earlier that the Ld CIT (A) has followed the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra). In the case of Engineering Analysis Centre of Excellence Private Ltd (supra), the decision rendered by Hon'ble Karnataka High Court in the above said case has been overruled by Hon'ble Supreme Court. Hence on this reasoning also, the decision rendered by Ld CIT (A) would fail. 24. In view of the foregoing discussions, we are of the view that the payments made by the assessee to the three non-resident companies referred above can....
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....en filed, have been noted above. The conclusion drawn by the CIT(A) in favour of the Revenue was primarily by relying upon the judgment in the case of Samsung Electronics Co. Ltd. (supra) and also by holding that the payments received by assessee from two affiliates by granting user right to software is royalty and has been brought to tax in India. The said judgment has been over-ruled. In this regard, we may also refer to the judgment of the Supreme Court in the case of Engineering Analysis (supra). Paragraphs No.111 to 119 are very clear in that respect. The Supreme Court has referred to the judgments of the Delhi High Court in the case of Director of Income Tax -Vs.- Ericsson A.B. [(2012) 343 ITR 470], Director of Income Tax -Vs.- Nokia Networks OY [(2013) 358 ITR 259]. Similarly, a reference is also made to the judgments of the Delhi High Court in the case of Director of Income Tax -Vs.-Infrasoft Ltd. [(2014) 264 CTR 329] and CIT -Vs.-ZTE Corporation [(2017) 392 ITR 80] to hold in paragraphs No. 119 and 120 as under: "119. Fourthly, the High Court is not correct in referring to Section 9 (1) (vi) of the Income Tax Act after considering it in the manner that it has and then ap....