Amazon Web Services Vs ACIT (ITAT Delhi)
ITAT Delhi held that rendering cloud computing services/ Amazon Web Services (AWS Services) cannot be held to be liable to tax in India either as royalty or as Fees for Technical Services (FTS)/ Fees for Included Services (FIS).
Facts- The assessee is a foreign company and a tax resident of USA. The assessee provides ‘standard and automated’ cloud computing services /AWS services to its customers around the globe. It is alleged that payment received by the assessee from Indian customers amount to Rs. 2,47,68,23,222/- and Rs. 1007,81,05,172/- is liable to tax in India as both royalty and fee for technical/ included services (FTS/ FIS) under the provisions of Income Tax Act as well as India-USA DTAA.
Conclusion- Held that the AWS services provided by the assessee are standardised services that do not provide any technical services to its customers nor satisfy the ‘make available’ test as the customer will not be able to make use of the technical knowledge, skill, process etc. used by the assessee in providing cloud services by itself in its business or for its own benefit without recourse to the assessee in future.
Pune Tribunal in the case of M/s Sunguard Availability Services LLP (supra) and Rackspace, US Inc. has held that rendering cloud computing service cannot be held to be liable to tax in India as FTS/FIS.
Held that the impugned receipts of the assessee for AWS services/cloud computing services rendered to the customers in India are not taxable in India either as royalty or FTS/FIS.
FULL TEXT OF THE ORDER OF ITAT DELHI
The two appeals filed by the assessee are directed against the order dated 27.0 1.2023 and 24.0 1.2023 of the Ld. Assessing Officer (“AO”) passed under section 147 r.w.s.144C(13) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2014-15 and AY 2016-17 respectively. Since the issues involved in both the appeals are common, the same were heard together and are being disposed of by this common order.
2. The assessee has raised the following grounds of appeal:
AY 2014-15
“1. That on the facts and circumstances of the case and in law, the impugned order of Assessing Officer (“AO”) dated 27.01.2023, passed under section 144C read with section 147 of the Income-tax Act, 1961 (the Act), is without jurisdiction, illegal, bad in law, unsustainable and liable to be quashed
1:1 That on the facts and circumstances of the case and in law, the proceedings under section 147 of the Act (“Reassessment Proceedings) having been initiated on the basis of incorrect facts and without there being reason to believe that income of the appellant had escaped assessment, the impugned order is without jurisdiction, illegal. bad in law and liable to be quashed.
1.2 That on the facts and circumstances of the case and in law, the Reassessment Proceedings having been initiated merely on the basis of ex-parte information received, without any independent application of mind by the AO to such information and forming opinion thereof, is illegal, bad in law and liable to be quashed.
1.3 That on the facts and circumstances of the case and in law, order dated 28.02.2022 passed by the AO dismissing the legal objections to reasons for reopening of the assessment of the appellant is not sustainable in law.
1.4 That on the facts and circumstances of the case and in law, reassessment order is illegal and bad in law, since: (a) reasons recorded do not bear any Document Identification Number (DIN) and was not communicated along with the notice; and (b) proper and valid sanction for issuance of notice was not obtained under section 151 of the Act.
1.5 That on the facts and circumstances of the case and in law, the AO/DRP failed to appreciate that once proceedings under section 201 of the Act had already been initiated against the payer (Snapdeal), there was no warrant to initiate Reassessment Proceedings against the appellant for recovery of the same tax; resulting in double taxation.
On Merits-without prejudice
2. That on the facts and circumstances of the case and in tow, the AC/DRP ended in holding that payments received by the appellant from Indian customers amounting to Rs.2,47,68,23,222 is liable to sex in India as both royalty and fee for technical/included services (‘FTS/FIS’) und the provisions of the Act as well as the India-USA Double Tax Avoidance Agreement (‘Tax Treaty’)
Receipts not in the nature at FTS/FIS
2.1 That on the facts and circumstances of the case and in law, the AO/DRP erred in not appreciating that standard and automated cloud computing services are not taxable as FTS under the Act or the Tax Treaty.
2.2 That on the facts and circumstances of the case and in law, the AO/DRP erred in not appreciating that the appellant merely provides standard and automated cloud computing services to its customers which do not make available technical knowledge, know how, skill, experience, etc., to the service recipient so as to fall within the ambit of FTS/ FIS under Article 12(4) of the Tax Treaty.
Receipts not in the nature of Royalty
3. That the AO/DRP erred in holding that the payments received by the appellant from Indian customers for standard and automated services were in the nature of Royalty in terms of section 9(1)(vi) of the Act and under Article 12 of the Tax Treaty.
3.1 That the AO/DRP erred in concluding that the appellant’s receipts are towards use of hardware/ infrastructure comprising of server, software, data storage space, networking equipment, databases, etc., and hence constitutes ‘royaltyз being towards usage of equipment by the customers.
3.2 That the AO/DRP erred in concluding that the appellant’s receipts from customers in India result in ‘right to use of equipment’ as specified under clause (iva) of Explanation 2 to section 9(1)(vi) of the Act, read with Explanation 5 to section 9(1)(vi) of the Act
3.3 That on the facts and circumstances of the case and in law, the AO/ DRP failed to appreciate that the payments do not qualify as royalty under Article 12 of the Tax Treaty since the customer does not have control or possession on any hardware/ infrastructure comprising of server, software, data storage space, networking equipment, databases used by the appellant to provide the services to such customers.
3.4 That the AO/DRP erred in not appreciating that there is no equipment/ dedicated facility/ space provided by the appellant to Indian customers.
4. That the AO/DRP erred in not following this binding precedents of the Hon’ble Tribunal) [Refer: Urban Ladder Home Decor Solutions Pvt. Ltd vs ACIT (IT) TS-773-ITAT-2021(Bang), Reasoning Global E-Application Lid ITA No.2028/Hyd./201 7 (Hyderabad) and EPRSS Prepaid Recharge Services India Private Limited: [2018] 100 taxmann.com 52 (Pune)))
5. That the AO/DRP erred in not appreciating facts of the case and proceeded, on totally incorrect, perverse, erroneous basis contrary to the record, to allege that
(a) the appellant provides technical support to its customers.
(b) under the standard terms of the customer agreement the appellant is providing copyright and trademarks services to its Indian customers for commercial exploitation:
(c) the Indian customers use or obtain right to use the copyright from appellant as opposed to the Indian customers merely access standard and automated services offered by the appellant [refer Engineering Analysis Centre of Excellence (P.) Ltd vs. CIT: 432 ITR 471];
(d) the appellant provides information concerning industrial, commercial or scientific experience to Indian customers and hence constitutes royalty:
5.1 That the AO/DRP erred in levelling false and baseless allegations, on mere conjectures and surmises, by making selective reference to contents on AWS website, support plans etc., without appreciating the facts of the case.
6. That, without prejudice to the above, on the facts and circumstances of the case and in law, the AO/DRP erred in levying incorrect tax rate of 25% on payments received by the appellant from Indian customers and has failed to apply the beneficial rates.
7. That, without prejudice to the above, the impugned order of AO dated 27.01.2023, passed under section 144C read with section 147 of the Act, being barred by limitation, is bad in law and void-ab-initio
8. That, without prejudice to the above, on the facts and circumstances of the case and in law, the AO erred in charging interest under sections 234A, 234B of the Act.
9. That on the facts and circumstances of the case and in law, the AO erred in mechanically vaguely initiating penalty proceedings under section 271 (1)(c) of the Act.”
AY 2016-17
“1. That on the facts and circumstances of the case and in law, the impugned order of Assessing Officer (“AO”) dated 24.01.2023, passed under section 144C read with section 147 of the Income-tax Act, 1961 (the Act), is without jurisdiction, illegal, bad in law, unsustainable and liable to be quashed
1:1 That on the facts and circumstances of the case and in law, the proceedings under section 147 of the Act (“Reassessment Proceedings) having been initiated on the basis of incorrect facts and without there being reason to believe that income of the appellant had escaped assessment, the impugned order is without jurisdiction, illegal. bad in law and liable to be quashed.
1.2 That on the facts and circumstances of the case and in law, the Reassessment Proceedings having been initiated merely on the basis of ex-parte information received, without any independent application of mind by the AO to such information and forming opinion thereof, is illegal, bad in law and liable to be quashed.
1.3 That on the facts and circumstances of the case and in law, order dated 28.02.2022 passed by the AO dismissing the legal objections to reasons for reopening of the assessment of the appellant is not sustainable in law.
1.4 That on the facts and circumstances of the case and in law, reassessment order is illegal and bad in law, since: (a) reasons recorded do not bear any Document Identification Number (DIN) and was not communicated along with the notice; and (b) proper and valid sanction for issuance of notice was not obtained under section 151 of the Act.
1.5 That on the facts and circumstances of the case and in law, the AO/DRP failed to appreciate that once proceedings under section 201 of the Act had already been initiated against the payer (Snapdeal), there was no warrant to initiate Reassessment Proceedings against the appellant for recovery of the same tax; resulting in double taxation.
On Merits-without prejudice
2. That on the facts and circumstances of the case and in tow, the AO/DRP ended in holding that payments received by the appellant from Indian customers amounting to Rs.1007,81,05,172 is liable to sex in India as both royalty and fee for technical/included services (‘FTS/FIS’) und the provisions of the Act as well as the India-USA Double Tax Avoidance Agreement (‘Tax Treaty’)
Receipts not in the nature at FTS/FIS
2.1 That on the facts and circumstances of the case and in law, the AO/DRP erred in not appreciating that standard and automated cloud computing services are not taxable as FTS under the Act or the Tax Treaty.
2.2 That on the facts and circumstances of the case and in law, the AO/DRP erred in not appreciating that the appellant merely provides standard and automated cloud computing services to its customers which do not make available technical knowledge, know how, skill, experience, etc., to the service recipient so as to fall within the ambit of FTS/ FIS under Article 12(4) of the Tax Treaty.
Receipts not in the nature of Royalty
3. That the AO/DRP erred in holding that the payments received by the appellant from Indian customers for standard and automated services were in the nature of Royalty in terms of section 9(1)(vi) of the Act and under Article 12 of the Tax Treaty.
3.1 That the AO/DRP erred in concluding that the appellant’s receipts are towards use of hardware/ infrastructure comprising of server, software, data storage space, networking equipment, databases, etc., and hence constitutes ‘royaltyз being towards usage of equipment by the customers.
3.2 That the AO/DRP erred in concluding that the appellant’s receipts from customers in India result in ‘right to use of equipment’ as specified under clause (iva) of Explanation 2 to section 9(1)(vi) of the Act, read with Explanation 5 to section 9(1)(vi) of the Act
3.3 That on the facts and circumstances of the case and in law, the AO/ DRP failed to appreciate that the payments do not qualify as royalty under Article 12 of the Tax Treaty since the customer does not have control or possession on any hardware/ infrastructure comprising of server, software, data storage space, networking equipment, databases used by the appellant to provide the services to such customers.
3.4 That the AO/DRP erred in not appreciating that there is no equipment/dedicated facility/ space provided by the appellant to Indian customers.
4. That the AO/DRP erred in not following this binding precedents of the Hon’ble Tribunal) [Refer: Urban Ladder Home Decor Solutions Pvt. Ltd vs ACIT (IT) TS-773-ITAT-2021(Bang), Reasoning Global E-Application Lid ITA No.2028/Hyd./201 7 (Hyderabad) and EPRSS Prepaid Recharge Services India Private Limited: [2018] 100 taxmann.com 52 (Pune)))
5. That the AO/DRP erred in not appreciating facts of the case and proceeded, on totally incorrect, perverse, erroneous basis contrary to the record, to allege that
(a) the appellant provides technical support to its customers.
(b) under the standard terms of the customer agreement the appellant is providing copyright and trademarks services to its Indian customers for commercial exploitation:
(c) the Indian customers use or obtain right to use the copyright from appellant as opposed to the Indian customers merely access standard and automated services offered by the appellant [refer Engineering Analysis Centre of Excellence (P.) Ltd vs. CIT: 432 ITR 471];
(d) the appellant provides information concerning industrial, commercial or scientific experience to Indian customers and hence constitutes royalty:
5.1 That the AO/DRP erred in levelling false and baseless allegations, on mere conjectures and surmises, by making selective reference to contents on AWS website, support plans etc., without appreciating the facts of the case.
6. That, without prejudice to the above, on the facts and circumstances of the case and in law, the AO/DRP erred in levying incorrect tax rate of 15% on payments received by the appellant from Indian customers and has failed to apply the beneficial rates.
7. That, without prejudice to the above, the impugned order of AO dated 24.01.2023, passed under section 144C read with section 147 of the Act, being barred by limitation, is bad in law and void-ab-initio
8. That, without prejudice to the above, on the facts and circumstances of the case and in law, the AO erred in charging interest under sections 234A, 234B of the Act.
9. That on the facts and circumstances of the case and in law, the AO erred in mechanically vaguely initiating penalty proceedings under section 271 (1)(c) of the Act.”
3. Briefly stated, the assessee is a foreign company and a tax resident of USA. The assessee provides ‘standard and automated’ cloud computing services/AWS Services to its customers around the globe. The customers are required to enter into a standard contract electronically with the assessee. For the relevant AYs the Department received an information from the office of ITO Ward-3(1)(2), International Taxation, New Delhi that during the verification proceedings under section 201/201(1A) in the case of M/s. Snapdeal Private Limited, it is observed that the assessee had received an amount of Rs. 30,94,81,489/- without TDS thereon under section 195 even though the consideration so received is chargeable to tax both under the definition of royalty under the provisions of section 9(1)(vi) of the Act and under the provisions of the India-USA Double Taxation Avoidance Agreement (“India-USA DTAA”). M/s. Snapdeal Private Limited had made foreign remittances towards “Hosting and Bandwidth Charges” and no tax has been withheld on this remittance which clearly falls under the purview of royalty as per the Act as well as India-USA DTAA. However, neither TDS has been deducted by the remitter nor the assessee filed ITR for the relevant AYs. Accordingly, notice under section 148 of the Act was issued to the assessee on 31.03.2021 in response to which the assessee filed its return of income for both the AYs under consideration on 28.04.2021 declaring income of Rs. Nil. Thereafter statutory notices were issued to the assessee to which the assessee furnished responses from time to time.
3.1 Vide its reply dated 09.03.2022, the assessee submitted that it is based in the US and is engaged in the business of providing standard and automated cloud computing services to customers around the world. During the AY 2014-15 and AY 2016-17 the assessee received an amount of Rs. 2,47,68,23,222/- and Rs. 10,07,81,05,172/- respectively from its customers in India. These receipts relate to providing standard and automated cloud computing services to its customers.
3.2 Thereafter, a Show Cause Notice (“SCN”) dated 17.03.2022 was issued and served upon the assessee which read as under:-
“In relation to receipts from rendering cloud computing services, you are requested to show cause as to why the entire receipts from India should not be treated as royalty under the provisions of the Act, as well as the DTAA. Further, without prejudice to the above, you are requested to show cause as to why the entire receipts from India should not be treated as fee for technical services under the provisions of the Act, as well as the DTAA.”
3.3 In response to the above SCN, the assessee filed detailed submissions alleging that the receipts are neither royalty nor fee for technical services both under the Act as well as the India-USA DTAA. The submissions of the assessee were considered but not found tenable by the Ld. AO. The Ld. AO proceeded to pass the draft assessment order on 31.03.2022 proposing to tax the entire receipts of Rs. 2,47,68,23,222/- in AY 2014-15 and Rs. 10,07,81,05,172/ – in AY 2016-17 treating such receipts to be taxable in India as royalty as well as Fees for Technical Services (“FTS”)/Fees for Included Services (“FIS”) both under the Act as well as India-USA DTAA.
4. The assessee filed objections before the Ld. Dispute Resolution Panel (“DRP”) against the draft assessment order passed by the Ld. AO. The Ld. DRP upheld the initiation of re-assessment proceedings and confirmed the additions proposed in the draft assessment order.
5. Pursuant to the directions of the Ld. DRP, the Ld. AO passed the final assessment order on 27.0 1.2023 for AY 2014-15 and on 24.0 1.2023 for AY 2016-17 under section 147 r.w. section 144C(13) of the Act assessing the total income of the assessee at Rs. 2,47,68,23,222/- and Rs. 10,07,81,05,172/ – respectively being amount received as “cloud service fee” from customers in India towards cloud computing services rendered by the assessee from outside India treating the same as royalty and FTS/FIS under the provisions of the Act and the India-USA DTAA.
6. Aggrieved, the assessee is in appeal before the Tribunal challenging the final assessment order of the Ld. AO and all the grounds of appeal relate thereto.
6.1 Ground No. 1 along with its sub-grounds 1.1 to 1.5 and ground No. 7 challenging the initiation of reassessment proceedings under Act has not been pressed. In view of this, the only issue that needs to be adjudicated is whether the “cloud service fee” received by the assessee from customers in India is liable to tax in India being in the nature of royalty and FTS/ FIS under the provisions of the Act and the India-USA DTAA as well.
6.2 It is an undisputed fact that the assessee is a tax resident of USA and hence it has opted to be governed by the provisions of India-USA DTAA, being more beneficial to it in terms of section 90(2) of the Act. Accordingly, we have examined and considered the taxability of the impugned receipts in the hands of the assessee under the provisions of India-USA DTAA.
7. At the outset, the Ld. AR explained the nature of services and the manner in which the cloud computing services are provided by the assessee globally. The Ld. AR submitted that the cloud computing services provided by the assessee are merely standard and automated services. The facility of different category of cloud computing services provided by the assessee as well as pricing, are all publically available online to anyone. Customers choose from the suite of services available what they need, when they need them. Instead of buying, owning and maintaining own data centres and servers, organisations can access standard and automated facilities as compute power, storage, data basis and other services on an as-needed basis. In this context, he explained that cloud computing services offered to the customers by the assessee are all standardised and there is no customisation for any one particular customer. While providing the standard and automated services / facility, AWS group / affiliates maintains its technology infrastructure in a secure environment and businesses / customers access these standard / common facility via the internet to develop and run their own applications. Capacity can grow or shrink instantly on demand and organisations only pay for what they use as per the terms of standard subscription plans / services offered.
7.1 In order to avail cloud computing services, the customer enters into a standard AWS customer agreement which authorises the customer to access the cloud computing services they opt for. The customers themselves are responsible for the development, content, operation, maintenance and use of the customer’s content while availing the standard and automated cloud computing services. At no point, the customers have any physical access to or control over the equipment used in delivering these services.
7.2 The Ld. AR drew our attention to the findings of the Ld. AO in his final assessment order and stated that the Ld. AO has held the impugned receipts to be in the nature of royalty and FTS/FIS alleging that:-
i) the assessee is providing highly technical services and support to its customers and also ‘making available’ technology and thus the impugned receipts are taxable as FTS under the Act and FIS under Article 12 of the India-USA DTAA;
ii) the assessee is providing its copyright and trademarks/service marks to its customers for commercial exploitation and sharing information concerning industrial, commercial or scientific experience with customers which qualify as royalty under the provisions of the Act and also under the India-USA DTAA; and
iii) the assessee receives payment towards ‘cloud computing product and services’ which is essentially towards usage of hardware/infrastructure comprising of server, software, data storage space, networking equipment data basis etc. Hence the impugned receipts would qualify as ‘equipment royalty’ under the Act and the India-USA DTAA.
7.3 The Ld. AR then referred to the relevant clauses of the sample agreement entered into by the assessee with its customers (“Customer Agreement”) which is on record and submitted that the terms of the said Customer Agreement clearly shows that the assessee is primarily providing automated cloud computing services which are in the nature of standard and automated computing services and that none of the above findings/allegations of the Ld. AO stands correct in view of the following factual reasoning: –
a. The customers do not receive any exclusive or commercial right to use the copyrights or other intellectual property involved in AWS Services but, instead, only receive a right to access and use the AWS Services itself and consequently, the payments made to the assessee in relation to the AWS Services would not be consideration in exchange for right to use any copyright. [Clause 8.4 of the Customer Agreement, pages 178/ 540 of Paper Book read with clauses 3 and 17 of AWS Trademark Guidelines, pages 549 to 553 of the Paper Book]
b. The assessee only grants access to use various standard AWS Services delivered online to its customers. The customers are only granted a non-exclusive and non-transferable license to access the standard automated services offered by the assessee. The source code of the license which could provide information of the working of the applications/ software would never be shared with the customers. [Clause 8.4 and 8.5 pages 178/540 Service Offerings and License of AWS Customer Agreement, pages 540 of the Paper Book]
c. As per the Customer Agreement, the assessee has not provided any dedicated facility/ space to the customers in India. Further, the customers do not acquire any right to use any industrial commercial or scientific equipment nor take possession of or control of or otherwise deal in infrastructure used for the cloud computing services in any manner. There is no equipment of any nature or at any time placed at the disposal of the customers by the assessee.
d. The customer does not have right to use or commercially exploit the intellectual property (IP). It cannot copy, modify or create or derivate work or reverse engineer any part of the software/platform through which it inputs data and retrieves processed information. They only get an access to the standard and automated services / facility subscribed from the list of various such services available. [Clause 8.5 of the Customer Agreement, pages 178/540 of the Paper Book]
e. Under the Trademark Guidelines, the assessee has granted a limited, non-exclusive revocable, non-transferable permission to use AWS marks, to the customer, only to the limited extent to identify that the said customer is using AWS Services for their computing needs. [Clauses 3, 8, 9 of AWS Trademark Guidelines, pages 548 to 553 of the Paper Book]
f. Under the Support Services guidelines, incidental/ancillary support is provided by the assessee depending on the support plans subscribed by the customers with varied response time [AWS Support Guidelines, pages 557 to 567 of the Paper Book]
g. Under the Support Services Guidelines, support is limited to answering queries of customers and / or troubleshooting in order to utilize AWS Services subscribed by them to the fullest extent. It is pertinent to note that AWS Support is not provided to anyone else except a customer of AWS Services. The Support Services Guidelines specifically provide that the technical support provided/ included in AWS Services does not include code development, debugging, performing administrative tasks etc. [AWS Support Guidelines, pages 557 to 567 of the Paper Book]
7.4 As regards the issue of taxability of the impugned receipts by the assessee from rendering cloud services as royalty, the Ld. AR submitted that the impugned issue is covered in favour of the assessee by the decision of the Delhi Tribunal in the case of Microsoft Regional Sales Pte. Ltd./MOL Corporation which has been affirmed by the Hon’ble Delhi High Court in the case of CIT vs. MOL Corporation 99/2023 dated 16.02.2023 (Del).
7.5 He further submitted that the assessee’s case is also squarely covered by the decision of the various benches of the Tribunal wherein after examining and considering the nature of services and clauses of the same AWS’s Customer Agreement which has the identical terms, the Tribunal held that payments made by Indian customers to the assessee for usage of the same cloud computing services /AWS Services is not taxable as royalty. The following decisions were relied upon by the Ld. AR:-
i) EPRSS Prepaid Recharge Services India P. Ltd. vs. ITO (2018) 100 taxmann.com 52 (Pune-Trib)
ii) Urban Ladder Home Decor Solutions Pvt. Ltd. vs. ACIT (IT) TS-773- ITAT-2 021 (Bang); which was rendered in the context of AY 2016-17 which is also one of the AYs under consideration in the present appeal.
iii) Reasoning Global E-Application Ltd. vs. DCIT (2022) 145 taxmann.com 464 (Hyd-Trib)
8. The Ld. DR, on the other hand, filed detailed written submissions alleging that the impugned receipts are taxable as royalty both under the Act as well as India-USA DTAA which are reproduced below:-
“Royalty:
5. The service offerings of the assessee also covers AWS Marks that covers trademarks, service marks, service or trade names, logos and other designations of AWS. The Trademark use guidelines provide the customers with permission to use the AWS Marks in connection with use of the Services or in connection with software products designed to be used with the Services.
6. The above clearly shows that assessee is also providing its copyright and trademarks/ services marks to its customers for commercial exploitation. Further, the assessee is also sharing information concerning industrial, commercial or scientific experience with customers. Thus, the income received by the assessee would also qualify as Royalty under the provisions of Indian Income Tax Act, 1961 and also under Article 12 of India USA DTAA.
Equipment Royalty:
7. Further the assessee by way of providing cloud computing services provides essentially towards the usage of the hardware / infrastructure comprising of server, software, data storage space, networking equipment, databases, etc. as well as it provides tools and environment which supports the entire product development cycle right from build, operate and testing of the web applications and services.
8. Tax treatment of the Receipts for Cloud Computing Services Under the Income Tax Act, 1961 (IT Act), the definition of royalty covers both consideration paid for the right to use certain IP rights (such as copyrights, patents, secret formulae, etc.) and the right to use scientific equipment. Further the definition of royalty in India-US tax treaty [Article 12(3) (a)] inter-alia includes payments of any kind received as a consideration for the use, or the right to use, any commercial or scientific equipment.
The access to server constitutes an Equipment Royalty. The Hon’ble Madras High Court in Poompuhar Shipping Corporation Ltd. v ITO [2013] 38 taxmann.com 150 (Madras) highlighted the need for construing ‘equipment’ widely, so as to embrace every article employed by the employer for the purposes of his business. ‘Equipmentз in whatever name called either as an apparatus or as plant or machinery, so long as they are employed for the purposes of one’s income.
9. The agreement with the customers explicitly lays down that the customer /user has sole access /sole authority to use the account, Further, the assessee would not bear any responsibility in case of any unauthorized access. Furthermore, third party has a free hand to display its content to the users, signifying that the user has a significant control over the space allotted to him. Hence the payment made to the assessee for cloud computing products and services is essentially towards the usage of the hardware/infrastructure comprising of server, software, data storage space, networking equipment, databases, etc. as well as it provides tools and environment which supports the entire product development cycle right from build, operate and testing of the web applications and services. The above facts clearly point to usage of equipment by the customer- hence satisfying the definition of royalty as laid down in the IT Act as well the India-US Tax Treaty.
10. Further, in relation to ‘equipment’, Article 12(3)(a) neither defines “use of, or right to use” nor does it explicitly confine ‘use, or right to use, industrial, commercial or scientific equipment’ to cases where physical possession or control of the equipment is obtained. Also, the term ‘use’ is nowhere limited to the legal concepts of rent or lease, which do require obtaining the power to dispose over an item and to use it exclusively.
This was also the notion adopted by AAR in its ruling Dishnet Wireless Limited, AAR no. 863 of 2010 where it was seen as sufficient in order to qualify as ‘use’ to access a particular segment of a larger system and to use the capacity of this system. In fact, equipment can be used in many different ways and behind every use of equipment is the desire to use its capacity and functions. Logically, the use of equipment cannot be separated from the use of its capacity and functions. In some cases, the use of an item’s capacity and function will require physical possession of the item (e.g. in order to use a car’s transportation function, the physical possession of the car is required), but in other cases, an item and thus an item’s capacity and functions can be used without physical possession of the item, as in the case with satellites. Hence, the use of equipment’s capacity and functions equals the use of ‘equipment’. The word “use” in relation to equipment occurring in clause (iv a) of explanation 2 to section 9(1)(vi) needs to be understood in a broad sense for availing the benefit of an equipment in the present digital era. The context and combined use of the two expressions “use” and ” right to use” followed by the word equipment indicates that there must be some positive act of utilisation, application or employment of equipment for the desired purpose. Further, an interpretation of the term ‘use, or right to use, of industrial, commercial or scientific equipment” as also covering payments for the use of an equipment’s capacity and functions is consistent with the interpretation of the term ‘use, or right to use” as used throughout Article 12(3). After all, the physical possession and control of the other items covered by the provisions such as copyrights, patents, trademarks, designs or models plans, secret formulas or processes, is not key to qualifying payments for their use a royalties. In fact, the concept of physical possession and control is alien to many such items.
11. In this regard, reliance is placed on the decision of Delhi Tribunal in Asia Satellite Communication Co. Ltd. vs DCIT [2003] 85 ITD 478 (Delhi), wherein the Tribunal held follows:
“So far as applicability of section 9(1)(vi) was concerned, a view was canvassed by the assessee that the term ‘useз as contained in said provisions should be confined to physical user and as in the instant case nothing was physically used by the customers, so there was no use of any properties as referred to in the clause (iii) of Explanation 2 and resultantly the considerations paid by the customer would not be called royalty. The word ‘use’ is not defined under section 9. Under these circumstances, the meaning which is understand in common parlance should be adopted In the present age of modernization where numerous developed applications of science have become part of life and the extent of development of technology is so fast, would really be fair to restrict the meaning of the word use to only physical use The plain construction of the word use refers to the deriving advantage out of it by employing for a set purpose. That apart there was physical contact of the signals of the TV channels with the process in the transponder provided by the assessee It was only when those signals came in contact with the process in the transponder that the desired results were produced.”
12. Further, reliance is placed on the decision of AAR in Cargo Community Network (P.) Ltd. [2007] 289 ITR 355 (AAR), wherein the assessee, a non-resident company having its registered office at Singapore, was engaged in business of providing access to an Internet- based Air cargo portal. The agents could clarify doubts through the help desk support in India. The income was generated for the assessee by way of subscriptions made by the agents for the use of the portal to book tickets. The assessee contended that the use of equipment involves some degree of domain or control over the equipment. However, the AAR ruled that since the portal is displayed on the computer screen of the cargo agent through which he can access various airlines for booking of cargo, and the acceptance of the concerned airline is conveyed in India and it, thus, it amounts to the use of the scientific equipment in India. Relevant extract of the judgement has been reproduced below:
“The system connect fee that includes training charges (for 2 persons), monthly subscription fee for concurrent access, fee for additional access and helpdesk charges are all payments essentially being made by a cargo agent in India for use of the Ezycargo portal developed by the applicant and hosted on his server in Singapore. Portal is displayed on the computer screen of the Cargo agent through which he can access various airlines for booking of cargo, and the acceptance of the concerned airlines is conveyed in India. Therefore, it would be correct to say that the use of the commercial equipment is made in India and the ‘payments’ also arise in India. The complex portal designed by the applicant is the result of long standing commercial experience and research in the line of cargo booking It offers a sophisticated platform for a complete range of services that enable the clients (forwarders) to manage their time-critical transactions with major carriers. It offers global online-access convenience to a comprehensive range of functions and complete management solution for cargo booking and subsequent multi-carrier track and trace facility. The portal designed by the applicant is hosted on its server in Singapore with Internet accessibility on one side to different airways. The portal which is a complex, commercial, Internet site provides a gateway for processing request for cargo booking to different airlines, and obtaining their acceptance. The use of portal is not possible without the use of server that provides internet access to the cargo agents/subscribers, on the one hand, and to different airlines, on the other hand, for to and fro communication. Therefore, the portal and the server together constitute integrated commercial-cum-scientific equipment and for obtaining Internet access to airlines the use of portal without server is unthinkable. Whereas the portal performs complex functions of providing access to different airlines and translation of messages from English to IMP language, the server provides connectivity and internet access for processing request for booking of cargo and subsequent multicarrier trace and track facility, etc. Therefore, the plea of the applicant that cargo booking agent never uses the server of the applicant for processing or obtaining any data, and that the use of the equipment involves at least some degree of domain or control over the equipment, or suit the business needs of the user, is not tenable. The factual position is that a cargo booking agent/subscriber depending on his business needs, can use the portal at will on the server platform of the applicant, at any time according to his needs for processing his request for booking cargo with various airlines and obtaining benefits of other sophisticated services offered by Ezycargo Para (3) of article 12 defines the term ‘Royalties and fees for technical services. The term ‘Royalties as wed in sub-clause (b) of Para (3) of article 12 means payments of any kind received as consideration for the we for the right to use, any industrial, commercial or scientific equipment. Ezycargo portal on the applicant Server Platform is scientific equipment. authorized to be used for commercial purposes. Therefore, payments made for concurrent access to utilize the sophisticated services offered by the portal, would be covered by the expression royalties’ as used in article 12. Further, the technical and consultancy services being rendered by the employees of the applicant in training the subscribers and providing helpdesk support, in India are covered by the description of ‘Fees for technical services These are ancillary and subsidiary to the application and enjoyment of the use of, or the right to use, the scientific equipment for commercial purposes. What remains to be seen is whether the payments being made to the applicant fall within the meaning of ‘Royalty’ and ‘Fees for technical services’ as defined in section 9(1) After carefully going through the provisions of section 9(1), it is clear that meaning of the term ‘Royalty’ as used in Explanation (2) to clause (v) of sub-section (1) of section 9, is at par with the term ‘Royalties’ as used in article 12(3)(b). The term ‘Fees for technical services’ as used in Explanation (2) of clause (vii) of sub-section (1) of section 9, is analogous to the term ‘Fees for technical services’ as used in article 12(4)(a). In view of this position, the payments being made by the agents/subscribers (residents) to the applicant (a non-resident) are chargeable to tax in India, under article 12 as also under section 9. [Paras 8 and 9] Inasmuch as it is concluded that the payments made by the subscribers to the applicant are in the nature of ‘Royalties and fees for technical services’ and taxable under article 12, the said payments cannot, therefore, be treated as business income. [Para 10] In the light of the foregoing discussion, it is ruled that the payments made by the Indian subscriber to the applicant at Singapore, for providing a password to access and use the portal hosted from Singapore, are taxable in India and subject to deduction of tax at source. [Para 14]”
In the present case the assessee has provided a dedicated facility /space in the servers to the customers in India. Further, there have been various judicial precedents wherein the Courts have held that that ‘right to use’ is the right to access the particular segment of a larger system, to use the capacity of the system powered by the equipments of the whole system. Further, the judgments have provided that the consideration paid for this right to access and the right to use and exploit the system, is royalty. Therefore a right to access and exploit a part of segment of a larger system to use the capacity of the system and the consideration paid therefore clearly falls under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act and hence ‘royalty’. The Courts have upheld that use of dedicated facility would invariably amount to usage of equipment. Hence, the receipts from cloud computing services by the assessee would tantamount for consideration for the use of equipment – being taxable as royalty under the IT Act as well as the Tax Treaty.
13. Without prejudice to the above argument, reliance is also placed on Explanation 5 to section 9(1)(vi) of the IT Act. The Finance Act, 2012, has included Explanation 5 to Section 9(1)(vi) which states that royalty includes and has always included consideration in respect of any right, property or information, whether or not-
a the possession or control of such right, property or information is with the payer.
b. such right, property or information is used directly by the payer;
c. the location of such right, property or information is in India
As seen from the above, the Explanation 5 specifically provides that for determination as to what constitutes Royalty, the possession or control of right / property / information or direct use of such right / property / information by the payer or location of such right/property/information in India are not relevant consideration. Therefore, the Legislature has made its view very clear that even a remote use of right/property/information would also constitute royalty. Hence, the receipts of the assessee would clearly fall under the ambit of royalty.
14. Further, reliance is placed on the Position stated by India on Article 12 of the OECD Model Convention. It is stated in the stated Positions to the Model Convention, that India reserves the right to: tax royalties and fees for technical services at source; define these, particularly by reference to its domestic law; define the source of such payments, which may extend beyond the source defined in paragraph 5 of Article 11, and modify paragraphs 3 and 4 accordingly. In view of the above, India’s position on the OECD Model has always been clear that India does not agree with the definition of royalty as provided in the OECD Model Convention. Therefore, the definition of ‘royalty’ as provided in the Act clearly demonstrates India’s position on royalty and has to be read into the treaty as well.”
9. In rebuttal to the specific contentions raised in the written submissions of the Ld. DR, the Ld. AR submitted a para-wise brief rejoinder which is reproduced below:-
“Para 5 and 6
The appellant has filed detailed submissions/rebuttal on this aspect at pages 05 to 06 of the broad proposition dated 16.05 2023, which is not reiterated here for the sake of brevity. However, the specific conventions of the Ld. DR are rebutted as under:
