Court: AWS Cloud Services Not Taxable as Royalty or FIS under India-US DTAA
The US-based company, Amazon Web Services, Inc. (AWS), was assessed by the Indian tax authorities for AYs 2014-15 and 2016-17. The Assessing Officer initiated proceedings under Section 147 of the Income Tax Act, contending that payments received by AWS from Indian clients for cloud computing services were taxable in India as “royalty” or “fees for included services” (FIS) under Section 9 of the Act and Article 12 of the India-US DTAA. The AO argued that the cloud services involved access to AWS’s infrastructure and proprietary software, thereby constituting the use of equipment and technical services.
AWS averred that the services were automated and offered standard cloud-based access without transferring technical expertise or the right to use intellectual property for profit. Additionally, it claimed that since it lacked a Permanent Establishment (PE) in India, the receipts were exempt from DTAA taxation. The assessee appealed to the ITAT after being dissatisfied with the reassessment order that the DRP had confirmed.
Issue Raised: Whether payments made by a non-resident entity (in this case AWS) for standard cloud computing services may be taxed in India as “royalty” or “fees for included services” under the Income Tax Act and the India-US DTAA, in the absence of a PE.
Court’s Decision: The Delhi High Court, while deciding the appeal, upheld the ITAT’s ruling that AWS’s cloud computing services did not qualify as “royalty” or “fees for included services” (FIS) under Indian tax law or the India-US DTAA. The court further clarified that the services rendered did not involve the transfer of technical expertise, know-how, or skill. Furthermore, AWS did not give its clients any permission to use, duplicate, or profit from its intellectual property. Users were only allowed to use standard cloud-based services, and their access was restricted, non-exclusive, and revocable. Additionally, the use of equipment or infrastructure was not separately licensed to users; rather, it was merely incidental to the delivery of cloud services.
The Hon’ble Court ruled that AWS only offered cloud service access, not technical knowledge transfer or software/equipment licensing, according to Article 12 of the India-US DTAA. The court, citing earlier decisions, reiterated that automated, standardised services are not considered technical or royalties. As a result, the revenue’s appeals were denied, and the reassessment orders were deemed null and void.
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