Businesses are increasingly integrating cloud computing models into their operations, necessitating unambiguity regarding the position of tax leviable on such transactions under the Income-Tax Act, 1961 (“IT Act”), and tax treaties. Uniformity in the tax treatment of cross-border cloud computing models has become crucial for these businesses to plan their operations and tax costs effectively. A long-standing subject of scrutiny has been whether to consider the taxation of payment for cross-border cloud services as “royalties” or “fee for technical services” (“FTS”)/ “fee for included services” (“FIS”). However, in recent rulings, Indian courts have affirmed that such standardised services would not be liable to income tax in India.
The Delhi High Court[1] (“HC”) recently dismissed an appeal by the Indian tax authorities (“Revenue Department”) against Amazon Web Services, Inc. (“AWS”), holding that payments that AWS received for cloud computing services do not constitute “royalties” or “FTS”/“FIS” under the India–United States of America Double Taxation Avoidance Agreement (“India–USA DTAA”) and the IT Act, providing further clarity on the taxation of cross-border cloud computing services.
FACTS
AWS, a company incorporated and tax resident in the United States of America, received payments from Indian entities for providing cloud computing services. On the basis of proceedings under the IT Act against Snapdeal Private Limited (formerly Jasper Infotech Private Limited) for failure to withhold taxes on foreign remittances to AWS, the Assessing Officer (“AO”) initiated reassessment proceedings under the IT Act against AWS on such payments escaping assessment for assessment years 2014–15 and 2016–17. Treating these payments as taxable in India, the AO classified them as “royalties” and “FTS”/ “FIS” under both the IT Act and the India–USA DTAA.
Subsequently, AWS appealed to the Income Tax Appellate Tribunal, which allowed the appeals and set aside the reassessment orders. The Revenue Department subsequently filed an appeal before the HC.
ISSUES AND ARGUMENTS
In its appeal, the Revenue Department raised several questions of law, primarily contending the following:
- Payments received by AWS constitute royalties under Article 12(3) of India–USA DTAA and Section 9(1)(vi) of IT Act.
- Cloud service payments amount to royalty, as they provide use of hardware, infrastructure, servers, and software.
- Receipts qualify as “use of equipment” under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the IT Act.
- Payments should be treated as FIS under Article 12(4)(a) of India–USA DTAA.
- The “make available” clause in Article 12(4)(b) of India–USA DTAA was satisfied.
The Revenue Department argued that since the cloud computing services that AWS provided fell within the categories of Infrastructure as a Service Model and/or Platform as a Service Model, the payments were essentially for the use of hardware/infrastructure and hence, taxable as “equipment royalty”. Moreover, customer assistance offered by AWS under the support guidelines entailed making available the technology to its customers, bringing such payments within the ambit of FIS under Article 12 of the India–USA DTAA.
On the other hand, AWS argued that it provides standardised and automated cloud computing services globally without transferring any skill, knowledge, technology, or process to its customers. It maintained that its customers do not control the cloud computing hardware or software or have the right to commercially exploit its infrastructure. Instead, they only receive non-exclusive, non-transferable licenses to access standard automated services without any source code or rights to exploit AWS’s intellectual property.
DECISION
The HC noted that AWS operates a cloud computing platform comprising hardware and software to provide cloud services for customers to build and develop their own content. While the HC observed that the Agreement provides customers with access to the standard and automated facilities necessary for computing needs, such as computer power, storage, data, and other services, it decided that granting such services does not involve any transfer of technical know-how, skill, knowledge, or process that would constitute “FIS” under the India–USA DTAA.
The HC also examined the service offerings license, which grants customers a set of limited, revocable, non-exclusive, non-sublicensable, non-transferable rights to access and use AWS content strictly for permitted purposes. Customers are prohibited from modifying or creating derivative works, reverse engineering, or reselling the service offerings.
Emphasising the need for a narrow interpretation of the expression “use” or “right to use” in Article 12(3) of the India–USA DTAA, the HC found that while AWS allows customers to select cloud computing services according to their needs, it does not place hardware at their exclusive disposal.
The HC determined that the cloud computing hardware and software used by AWS to render services are not transferred to its customers. Therefore, it regarded as erroneous the AO’s conclusion of the service constituting “right to use scientific equipment”.
The HC clarified that copyright in AWS’s applications is never transferred or vested in subscribers of such services. Customers do not acquire any right to use AWS infrastructure and software for commercial exploitation. Considering AWS allows its customers only access and use of its services without any proprietary rights, the HC decided that such services do not constitute “royalty” under the India–USA DTAA.
OUR ANALYSIS
The issue of taxability of cloud computing services had become highly contentious with differing views on whether payments for such services are capable of being characterised as “royalties” or “FTS” under the IT Act and relevant tax treaties.
Tax authorities’ primary argument has been that payments for such services should qualify as “royalties”, because when customers use cloud computing services, they essentially also use the equipment and software owned by the service provider. However, relying on the principles enunciated by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd.,[2] the HC clarified that customers of cloud services do not have control or possession over the hardware or software and merely access automated and standardised services without acquiring any proprietary rights over the cloud infrastructure or software.
The HC judgment is significant and welcome in that it furthers much-needed clarity and certainty to businesses offering cloud computing services. However, with similar issues pending before other High Courts, taxpayers should remain vigilant to ensure their positions align with the judicial approach in their jurisdictions.
For further information, please contact:
Kunal Savani, Partner, Cyril Amarchand Mangaldas
kunal.savani@cyrilshroff.com
[1] Commissioner of Income-tax, International Taxation -1 v. Amazon Web Services, Inc, (2025) 174 taxmann.com 1188 (Delhi High Court).
[2] Engineering Analysis Centre of Excellence (P.) Ltd. v. Commissioner of Income Tax & Another, (2021) 432 ITR 471 (Supreme Court).
