Delhi high court holds payments for standardised cloud services are neither royalty nor fees for technical services under indian tax law

New Delhi, August 31, 2023 — In a landmark ruling, the Delhi High Court has held that payments made by Indian entities to foreign cloud service providers for standardized cloud computing services do not constitute royalty or fees for technical services (FTS) under the Income Tax Act, 1961, or the India–United States Double Taxation Avoidance Agreement (DTAA). The judgment was delivered in the consolidated appeals of Commissioner of Income Tax (International Taxation) v. Amazon Web Services.

A Division Bench comprising Justices Vibhu Bakhru and Tejas Karia adjudicated the appeals filed by the Commissioner of Income Tax (International Taxation) against Amazon Web Services (AWS), a US-based cloud services provider.

The Court’s ruling, which affirms the decision of the Income Tax Appellate Tribunal (ITAT), holds significant implications for the taxation framework governing cross-border digital services in India. The Bench repudiated the Revenue’s contention that AWS’ receipts from Indian customers, derived from access to servers, application programming interfaces (APIs), or data infrastructure, are taxable as royalty or FTS.

The Court observed that Indian customers do not acquire any proprietary rights, title, or intellectual property rights in the AWS platform that would entitle them to independently exploit or commercially monetize such assets.

Factual Matrix

The dispute originated from reassessment proceedings concerning assessment years 2014–15 and 2016–17. The Assessing Officer contended that AWS’ revenues from Indian clients, including Snapdeal, constituted income taxable in India as royalty or FTS.

The Revenue’s position was predicated on the premise that the services provided involved the use of scientific equipment, software, and technological infrastructure, thereby attracting provisions of Section 9 of the Income Tax Act and Article 12 of the India-US DTAA relating to royalties and fees for technical services.

AWS maintained that it offered standardized, automated cloud computing services remotely on a self-service basis, pursuant to pre-defined contractual terms, without transferring any technical know-how, intellectual property, or rights to use its infrastructure.

The ITAT upheld AWS’ contentions, leading to the present appeal.

Judicial Reasoning

The Delhi High Court emphasized that the fundamental character of AWS’ services is that of standardized, automated cloud computing delivered without human intervention or the transfer of proprietary rights. The Court noted the following salient points:

• Customers are granted limited, non-exclusive, non-transferable access to AWS’s platform;

• There is no transfer of technical know-how, skill, or knowledge;

• AWS’ infrastructure remains under its control and is not placed at customers’ disposal;

• The services are consumed online, and the software’s source code is never disclosed.

The Court held,

“There is no material to establish that the grant of such service entails the transfer of any technical know-how, skill, knowledge or process… Customers of the assesses do not acquire any right to commercially exploit any of the assesses intellectual property rights.”

The Bench further dismissed the Revenue’s assertion that AWS’ ancillary support and assistance amounted to technical or consultancy services making available technology or technical skills.

“The fact that the assesses provides certain support and assistance to its customers does not, in any manner, imply that technology or technical skills are made available,” the Court concluded.

Relying on precedents from the Supreme Court and other High Courts, the Bench reiterated that payments for such services do not qualify as equipment royalty.

Conclusion

The Delhi High Court’s decision provides critical clarity on the tax treatment of cloud computing services, underscoring that standardized, automated digital services without transfer of proprietary rights or human involvement fall outside the ambit of royalty and FTS provisions.

This judgment is poised to influence the taxation of digital and cloud services by multinational enterprises operating in India, aligning tax jurisprudence with evolving technological realities.