TaxTMI 
TaxTMI 
2025 (6) TMI 84
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....ondent [Assessee] had preferred the said appeals against orders dated 27.01.2023 and 24.01.2023 passed 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 fo....
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.... constitutes 'royalty' being towards usages of equipment by the customers? 2.3 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 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 holdi....
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....reement, service offerings means Services (including associated APIs), the "AWS Content", the "AWS Marks", the "AWS Site". Further, the Agreement also includes provision 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 ....
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....ndia-US DTAA is set out below:- "ARTICLE 12 Royalties and Fees for Included Services 1. Royalties and fees for included services arising in a Contracting State and paid to a 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....
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....operty other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational 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....
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.... by the learned Tribunal is set out below: "8.4 Service Offerings License. As between you and us, we or our affiliates or licensors own and reserve all right, title, and interest in and to the Service Offerings. We grant you a limited, revocable, non-exclusive, non-sublicensable, non-transferrable license to do the following during the Term: (i) access and 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....
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....r Policies, and the law; (c) any claims relating to Your Content; and (d) properly handling and processing notices sent to you (or any of your affiliates) by any person claiming that Your Content violate such person's rights, including notices pursuant to the Digital Millennium Copyright Act. 4.2 Other Security and Backup. You are responsible for properly configuring and using the Service Offerings and taking your own steps to maintain 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....
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....ghest challenges that hold you back in your cloud journey. Sometimes that means helping you troubleshoot an issue, but more often, it involves "looking around corners" to find ways for you to better utilize AWS services, answer best practices questions, and provide guidance on configuration. We focus on helping you achieve the outcomes you need to make your business successful. It is our approach to Support that sets AWS apart. Benefits Move faster with AWS Use AWS experts to quickly build up 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". ....
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....mprove its utilization of AWS services, all while reducing costs and ensuring optimal performance. Pitney Bowes uses AWS Support for architectural guidance as it builds new applications, avoiding critical mistakes and designing for optimal performance. AWS Support helps Pitney Bowes create solutions that delight its customers. Scope of AWS Support Our AWS Technical Support tiers cover development and production issues for AWS products and services, along with other key stack components." 28. The AO reasoned that the support provided by the Assessee to its customers is highly technical. The AO also reasoned that the 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. Th....
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....the payments made for 'use', or 'right to use' scientific equipment. 34. The Assessee had furnished its explanation regarding the services rendered by it. We consider it apposite to refer to relevant extract of the Assessee's submissions, as set out in the assessment order. The same is reproduced below: "The Company provides standard and automated cloud computing services to its customers. In this regard, we have provided below a general understanding of cloud computing services: - Historically, various organizations which needed to store and process large amounts of data, invested in computing resources i.e., hardware (servers) and software (operating systems). However, such 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....
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....knowledge or process. The customers of the Assessee do not acquire any right to commercially exploit any of the Assessee's IPRs. The provision of cloud computing services does not entail placing any hardware at the exclusive disposal of the customer. The 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. 40. 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. 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....
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....ervices rendered by Salesforce. The customers, thereafter, could store and retrieve their proprietary data on the salesforce portal through a CRM application software by using the IDs and password as provided to them. The access also enabled the customers to generate reports etc. in the desired format. Whilst Salesforce reserved all rights, title and interest in and to the services, including all related intellectual property rights; its customers owned the rights, title and interest in and to all their proprietary data exclusively. In the aforesaid context, this Court concluded as under: "11. Since the copyright in the application was never transferred or came to vest in a subscriber, we fail to appreciate the contentions, which are 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 b....
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....ll or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred." 17. It becomes pertinent to observe that Explanation 4 in essence introduces a deeming fiction and includes transfer of all or any rights "for use" or "to use" a computer software including by way of a license irrespective of the medium through which such right is transferred. Significantly, the DTAA does not bring within its sweep a right for use or a right of use of a computer software. 18. We, accordingly, find that the view taken by the ITAT merits no interference. We find that the appeals raise no substantial 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 ....
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....e Ld. ITAT erred in holding that licensing of the software products of Microsoft in the territory of India by Microsoft Regional Sales Pte. Ltd. is not taxable in India as Royalty under Section 9 (1) (vi) of the Income Tax Act, 1961 read with Article 12 of the Indo-USA DTAA? B. Whether the Ld. ITAT erred in holding that licensing of computer is copyrighted article and not copyright and accordingly the sale of software is in nature of business income and not taxable as royalty under Section 9 (1) (vi) of Income Tax Act, 1961 and absence of PE in India, it is not taxable under Article 7 of India-USA DTAA? C. Whether the Ld. ITAT erred in holding that the subscription received towards Cloud Services is not taxable as Royalty income under the provisions of Income Tax Act, 1961?" 14. As would be evident the first 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 f....
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....nts in the case of Facebook and Mailchimp. In the case of AWS, the payment is made only for using of information technology infrastructure facilities on rental basis. Hence the question of transferring the copy right over those facilities does not arise at all. The agreements extracted above also make it clear that the copyright over those facilitating software is not shared with the assessee. In any case, the main purpose of making payment is to place advertisements only and not to use the facilities provided by the non-resident companies. Thus the facilities provided by the non-resident companies are only enabling facilities, which help a person to place his advertisement contents on the platform of Facebook or to use Mail Chimp facility effectively. In case of AWS, the payment is in the nature of rent payments for use of infrastructure facilities. 22. Accordingly, we are of 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 ....
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....structure facilities. The ITAT has, in paragraph No.22, has come to conclusion that the payments made to above three non-resident Companies do not fall within the meaning of 'royalty' as defined in DTAA. It may also be stated here that, in paragraph No.23, the ITAT has also referred to the judgment relied upon by the CIT(A) in the case of Samsung Electronics Co. Ltd. (supra) to hold that the decision as rendered by this Court in the above case has been over-ruled by the Supreme Court in the case of Engineering Analysis (supra). It is on that ground also, the decision rendered by the CIT(A) was set at naught. We agree with the aforesaid conclusion drawn by the ITAT. The terms of the agreement have been specified in the aforesaid paragraphs. A perusal of the agreements with the aforesaid three entities makes it clear that, copyright remained with the aforesaid three entities. The limited grounds on which the appeal has been 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 ....