In a significant ruling on the taxability of cross-border cloud computing services, the Delhi High Court has held that payments made to Amazon Web Services (AWS) for rendering cloud services to Indian customers do not constitute ‘royalty’ under the Income Tax Act or Article 12(3) of the India–US Double Taxation Avoidance Agreement (DTAA).
A Division Bench comprising Justice Vibhu Bakhru and Justice Tejas Karia examined the scope of the expression “use” or “right to use” scientific equipment as referenced in Article 12(3) of the DTAA. The Court held that while AWS may utilize its own hardware and software infrastructure to provide cloud computing services, it does not grant any right to use such scientific equipment to its customers. Consequently, the consideration received cannot be characterised as ‘equipment royalty’.
The Court also rejected the Revenue’s classification of the payments as ‘fees for technical services’ (FTS) under Article 12(4)(b) of the Treaty. It observed that mere support and assistance provided by AWS to its customers does not equate to making available any technical knowledge, experience, or know-how. Justice Bakhru, writing for the Bench, noted that AWS merely offered a non-exclusive, non-transferable license to access its standard, automated cloud platform—without disclosing any source code or intellectual property to its users.
In the present case, AWS, a tax resident of the United States, received payments from Indian entities for the use of its cloud services. The Revenue had sought to tax these receipts as royalty/FTS and treated AWS as a defaulter under Section 201 of the Income Tax Act for non-deduction of tax at source under Section 195. The Income Tax Appellate Tribunal (ITAT) had earlier ruled in AWS’s favour, concluding that the services rendered did not fall within the scope of royalty or FTS under the Act or the Treaty.
Upholding the ITAT’s ruling, the High Court emphasized that AWS’s customers had not acquired any rights to exploit its infrastructure or intellectual property and had no title or license to commercially monetize any part of the platform.
Accordingly, the Court concluded that the consideration paid to AWS does not fall within the ambit of ‘royalty’ as defined under Article 12(3) of the India–US DTAA, nor does it qualify as FTS. The ruling provides further clarity on the tax treatment of payments for automated digital services provided by foreign tech companies.
Appearances:
Advocates Ruchir Bhatia, Anant Mann, Aditi Sabharwal, and Abhishek Anand, for the Appellant
Senior Advocate Porus Kaka, a/w Advocates Rohit Jain, Aniket D. Agrawal, Manish Kanth, and Manisha Sharma, for the Respondents
