Payments Made To AWS For Cloud Computing Services Not Taxable: Delhi High Court
The Delhi High Court has held that payments made to Amazon Web Services (AWS) for cloud computing services do not qualify as “royalty.” The bench, comprising Justice Vibhu Bakhru and Justice Tejas Karia, upheld the Income Tax Appellate Tribunal's (ITAT) decision which held that such payments are not taxable as royalties or fees for technical services (FTS). The Court referred...
The Delhi High Court has held that payments made to Amazon Web Services (AWS) for cloud computing services do not qualify as “royalty.” The bench, comprising Justice Vibhu Bakhru and Justice Tejas Karia, upheld the Income Tax Appellate Tribunal's (ITAT) decision which held that such payments are not taxable as royalties or fees for technical services (FTS). The Court referred to earlier judgments to emphasize the difference between transferring intellectual property rights and simply giving access to standardized digital services. It dismissed the appeal, highlighting the key distinction between access to digital resources and ownership or control over them
Background
The case arose when Amazon Web Services received payments from Snapdeal for rendering cloud services. The Assessing Officer assessed the payment made as royalty and fees for technical services (FTS) under Explanation 2(iv) to section 9(1)(vi) of the Income Tax Act and the Assessing Officer (AO) viewed these sums as chargeable to tax in India as royalty and fees for technical services (FTS) under the Income Tax Act, 1961 (the Act) and "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). The assessment authorities contended that Snapdeal and other customers of Amazon Web Services (assessees) were utilizing high-end computing infrastructure, which constitutes the use of industrial equipment or copyrighted software and the transfer of technical knowledge, bringing the transaction under Article 12(4)(b) make available test of the DTAA. The Income tax tribunal when the case was brought before it held that The amounts received by AWS from Indian entities for providing cloud computing services were neither in the nature of royalties nor fees for included services (FIS), and thus, were not chargeable to tax under the Income Tax Act, 1961 read with the India-US Double Taxation Avoidance Agreement (DTAA) which and dismissed the case promopting the current appeal.
Submission by the Assessee
The counsel for the Assessee contended that the service rendered by them were merely providing cloud computing to it's customers which is an ancillary service and could not be charged as royalties under the Income Tax Act. The assessee operates a cloud computing platform that includes both hardware and software components. Customers use this platform to build, develop, and manage their own content. Access to the platform is governed by a standardized electronic contract. These services enable customers to remotely access computing resources in a flexible, on-demand manner, eliminating the need for capital-intensive investments in physical hardware or infrastructure. Furthermore the counsel argued that the nature of work also cannot be classified does not meet the definition of FIS under Article 12, particularly under the "make available" test in clause 4(b), and therefore should not be taxed as such in India.
Observation by the Court
The Court agreed with the Tribunal's conclusion that the amounts received by the Assessee were neither in the nature of royalties nor fees for included services (FIS), and thus, were not chargeable to tax under the Income Tax Act. The court observed that bare access to a software's features would not amount to a transfer of intellectual rights which is necessary for a payment to be characterized as royalty. Furthermore the services provided by Amazon Web Services were basic and automated, and did not involve transferring to customers any technology, skills, or special knowledge as required under Article 12(4)(b) of the DTAA. The assistance given to customers like setup advice or troubleshooting was just basic support and didn't count as sharing technical knowledge. The Court also rejected the argument that these payments were linked to royalty under Article 12(4)(a), because customers didn't get any rights to use AWS's technology or property. The bench affirmed this position and dismissed the Revenue's claim that the payments qualified as equipment royalty. The Court emphasized that AWS maintained full control over its infrastructure at all times, and customers only accessed the resources remotely via the internet, without acquiring any physical possession or control. This absence of “possession or control” meant there was no “use of, or right to use” equipment, as required under Explanation 2(iv) to Section 9(1)(vi) of the Income Tax Act. The court also referred to its earlier ruling in CIT (International Taxation) v. Salesforce.com Singapore Pte. Ltd, where it held that merely granting access to a platform for data input and analytics does not constitute "making available" technical knowledge under Article 12(4)(b).The court while dealing with of Article 12(4)(a), which refers to services being ancillary and subsidiary to the enjoyment of a right or property for which royalty is paid, the court held that this argument was unsustainable. It reasoned that such a claim would rely on the payment qualifying as royalty in the first the court had already rejected. The court dismissed the a plea filed by the department l finding no scope of substantial question.
Case Title:THE COMMISSIONER OF INCOME TAX vs AMAZON WEB SERVICES