Delhi High Court rules in favour of Amazon in cloud services taxation matter

The Delhi High Court on Thursday held that payments made by Indian entities to foreign cloud service providers for availing standardised cloud computing services cannot be treated as royalty or fees for technical services (FTS) under the Income Tax Act, 1961 or the India–United States Double Taxation Avoidance Agreement (DTAA) [Commissioner of Income Tax - International Taxation v. Amazon Web Services]..A Division Bench of Justices Vibhu Bakhru and Tejas Karia passed the ruling in a batch of appeals filed by the Commissioner of Income Tax (International Taxation) against Amazon Web Services (AWS), a US-based cloud service provider.The Court, however, clarified that the ruling has broader implications for the taxation of standard cloud services in India. The Bench rejected the Revenue's stand that AWS’ receipts from Indian clients were taxable as royalty or FTS merely because the services involved access to servers, APIs, or data infrastructure.“The customers do not acquire any right or title or any IPR that would entitle them to exploit or commercially monetize the said assets on its own,” the Court said, upholding the Income Tax Appellate Tribunal’s (ITAT) findings in favour of the assessee..The dispute arose out of reassessment proceedings initiated against AWS for AYs 2014–15 and 2016–17. The Assessing Officer had alleged that AWS’ earnings from Indian customers, including Snapdeal, were liable to be taxed as royalty or FTS in India.The Department argued that the services offered by AWS involved the use of scientific equipment, software and infrastructure, and that the consideration received qualified as equipment royalty or technical fees under Section 9 of the Income Tax Act and Article 12 of the India-US DTAA.However, AWS contended that it merely offered standardised, automated cloud computing services on a self-service basis through pre-determined contracts and interfaces, without transferring any technical know-how, IP, or right to use its infrastructure.The ITAT had accepted AWS' contention, leading to the present appeal..The Court held that the essential character of AWS’ services was that of “standard and automated” cloud computing, offered remotely without human involvement or transfer of proprietary rights. It noted that:Customers were granted only limited, non-exclusive, non-transferable access to the AWS platform;There was no transfer of technical know-how or skills;The infrastructure was not placed at the disposal of customers;The services were consumed online and the software’s source code was never shared.“There is no material to establish that grant of such service entails transfer of any technical know-how, skill, knowledge or process… The customers of the assessee do not acquire any right to commercially exploit any of the assessee’s IPRs,” the Court observed.The Bench also rejected the Revenue’s claim that AWS support services amounted to technical or consultancy services making available technology to customers.“The fact that the assessee lends certain support and assistance to its customers… does not in any manner support the view that the assessee makes available technology or technical skills.".Citing Supreme Court and High Court decisions, the Court ultimately held,“The issue involved in the present appeal is also covered in favour of the assessee…We find no merit in the contention that the amount received by the assessee for providing services would be taxable as equipment royalty.".Senior Standing Counsel Ruchir Bhatia appeared for the Revenue along with Advocates Anant Mann, Aditi Sabharwal and Abhishek Anand..Senior Advocate Porus Kaka appeared for AWS, briefed by Advocates Rohit Jain, Aniket D Agrawal, Manish Kanth and Manisha Sharma..[Read Judgment]