Case Law Details
CIT (International Tax)-1 Vs Goto Technologies Ireland Unlimited Company (Delhi High Court)
Delhi High Court has dismissed an appeal filed by the Commissioner of Income Tax (CIT), upholding the Income Tax Appellate Tribunal’s (ITAT) decision that subscription payments received by Goto Technologies Ireland Unlimited Company for providing cloud services are not taxable as royalties. This ruling reinforces a consistent judicial stance on the characterization of such digital payments under Indian tax law and Double Taxation Avoidance Agreements (DTAAs).
The appeal by the Revenue challenged an ITAT order dated August 5, 2024, concerning the Assessment Year (AY) 2021-22 for Goto Technologies Ireland Unlimited Company (formerly Logmein Ireland Unlimited Company), a tax resident of the Republic of Ireland. The core controversy revolved around whether the subscription receipts derived by the assessee from its Software as a Service (SaaS) business model, which allows customers to access application software via cloud computing technology, should be treated as taxable royalty income in India.
The Dispute:
The Revenue’s position was that these cloud service payments constituted royalty under both Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12(3) of the India-Ireland DTAA. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) had previously assessed these receipts as royalty income.
Conversely, Goto Technologies contended that these payments were in the nature of business receipts. Since the company did not have a Permanent Establishment (PE) in India, they argued that such income was not taxable in India under the provisions of the India-Ireland DTAA. A central pillar of the assessee’s argument was that the issue was already covered in its favor by the Supreme Court’s landmark decision in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2022) 3 SCC 321.
ITAT’s Consistent Stand:
The ITAT, in its August 2024 order for AY 2021-22, noted that this specific issue had already been decided in the assessee’s favor in earlier assessment years (AY 2019-20 and AY 2020-21) through its own decisions in ITA No. 1514/Del/2022 and ITA No. 793/Del/2023. The Tribunal had previously concluded that there were no material changes in the factual matrix or the legal proposition that would warrant a different outcome.
Furthermore, the ITAT’s reasoning for these earlier decisions, which was reiterated in the current case, relied on significant judicial precedents. The Tribunal cited the Delhi High Court’s ruling in CIT vs. MOL Corporation vs. DCIT (ITA No. 99/2023, dated February 16, 2023), which had upheld the Tribunal’s view that subscription receipts from cloud services are not taxable as royalty, stating that no substantial question of law arose from such a determination. The ITAT also drew support from its own coordinated bench decision in Amazon Web Services, Inc. vs. ACIT (ITA Nos. 522 & 523/Del/2023), which similarly held that cloud service subscription income is not taxable as royalty.
Based on these consistent interpretations, the ITAT directed the Assessing Officer to delete the additions made on account of royalty income for Goto Technologies.
Delhi High Court’s Affirmation and Precedents:
The Revenue’s current appeal before the Delhi High Court for AY 2021-22 raised questions regarding the ITAT’s finding that cloud service payments are not royalties, challenging its reliance on the cited precedents. However, the Delhi High Court quickly disposed of the appeal, declaring that “no substantial question of law arises for consideration.”
This dismissal was grounded in the fact that the very same issues, involving the same assessee (Goto Technologies Ireland Unlimited Company) and the taxability of cloud service payments, had already been brought before the Delhi High Court in appeals pertaining to earlier assessment years (AY 2019-20 and AY 2020-21). Specifically, Revenue’s appeals ITA No. 282/2024 and ITA No. 315/2024 against Goto Technologies had been “examined and disposed of” by the Delhi High Court on May 14, 2024, and July 2, 2024, respectively.
Crucially, in those earlier appeals, the Delhi High Court had explicitly “rejected the Revenue’s contention that the decision of the Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (supra) would not cover the issues in question.” This indicates that the Delhi High Court had already determined that the principles laid down by the Supreme Court were indeed applicable to cloud service payments.
The Guiding Supreme Court Precedent:
The Supreme Court’s decision in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT is a pivotal judgment that clarified the distinction between the transfer of a ‘copyright’ and the mere transfer of a ‘copyrighted article’. The Apex Court ruled that payments made by Indian end-users or distributors for acquiring the right to use computer software, including packaged software, software embedded in hardware, or software purchased from foreign non-resident suppliers, are generally not taxable as ‘royalty’ under DTAAs. This is because such transactions typically involve the transfer of a copyrighted article for end-user consumption, not the transfer of the underlying copyright itself or any rights related to its commercial exploitation (like reproduction, adaptation, or public distribution). The judgment emphasized that if the transaction does not grant the licensee any right to deal with the copyright, it cannot be characterized as royalty.
Extending this principle, the Delhi High Court and ITAT have consistently held that payments for cloud computing services, where users merely access and utilize standardized software or infrastructure without acquiring any proprietary rights over the underlying technology or software, fall outside the definition of royalty under the Income Tax Act and various DTAAs. These services typically involve providing access to a copyrighted article (the software/platform) rather than transferring any rights in the copyright.
Given this consistent judicial interpretation, particularly by the Delhi High Court in its previous rulings concerning the same assessee and the applicability of the Supreme Court’s judgment, the current appeal by the Revenue for AY 2021-22 was deemed without a substantial question of law and was consequently dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. For the reasons stated in the application, the delay in re-filing the present appeal is condoned.
2. The application is disposed of.
ITA 148/2025 and CM APPL. 29106/2025(Exemption)
3. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [the Act] impugning an order dated 05.08.2024 passed by the Income Tax Appellate Tribunal [ITAT] in ITA No. 3250/Del/2023 in respect of Assessment Year [AY] 2021-22.
4. The respondent [Assessee] – a tax resident of the Republic of Ireland – has preferred the said appeal impugning an order dated 19.09.2023 passed by the Assessing Officer [AO] under Section 143(3) read with Section 144C(13) of the Act.
5. One of the controversies involved in the present appeal is regarding subscription payments received by the Assessee for providing cloud services. Whereas the Revenue claims that the said proceeds are taxable as royalty, the Assessee contests the same. It is the Assessee’s case that such payments could not be considered as royalty under the provisions of Article 12(3) of the India Ireland Double Taxation Avoidance Agreement [DTAA]. It is also contended on behalf of the Assessee that the issue stands covered in its favour by the decision of the Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT: (2021) 3 SCC 321.
6. The learned ITAT had noted that the said issue was covered by the earlier decisions in the Assessee’s case in ITA No. 1514/Del/2022 and ITA No.793/Del/2023 relating to AY 2019-20 and AY 2020-21 respectively. Additionally, the learned ITAT relied upon the order dated 25.09.2023 whereby the aforementioned appeals were disposed of and noted the following extract from the said order:
“3. The assessee hitherto is a non-resident corporate entity incorporated under the laws of Ireland and tax resident of Ireland. The assessee is stated to be engaged in the business of sale of software subscription in various countries including India. The assessee operates software as Service (SaaS) business model, wherein, the customers are allowed to access the application software developed by the assessee from various devices through Cloud Computing Technology. The subscription receipts from Cloud Services permitted to customers was not offered to tax in India, as the assessee was of the view that they are not in the nature of royalty, but business receipts and in the absence of PE in India, they are not taxable under the India-Ireland Double Taxation Avoidance Agreement (DTAA). However, the Assessing Officer was not convinced with the submissions of the assessee and proceeded to assess subscription receipts as royalty income both under the Act as well as under the treaty provisions and accordingly, framed draft assessment orders. Learned DRP also upheld the decision of the Assessing Officer.
4. Learned counsel for the assessee submitted that the issue is squarely covered by the decision of Hon‟ble Delhi High Court in case of CIT vs. MOL Corporation vs. DCIT in ITA No. 99/2023-order dated 16.02.2023. He further relied upon the decision of coordinate Bench in case of Amazon Web Services, Inc. vs. ACIT in ITA Nos. 522 & 523/ Del/ 2023.
5. Learned Departmental Representative fairly submitted that the issue is covered by the decisions cited by learned counsel for the assessee. However, he dutifully relied upon the observations of the Assessing Officer and learned DRP.
6. We have considered rival submissions and perused materials on record. The short issue arising for consideration is whether the subscription received from Cloud Services is taxable as royalty income. As we find, while considering identical issue in case of CIT vs. MOL Corporation (supra), Hon’ble jurisdictional High Court has upheld the decision of the Tribunal holding that no substantial question of law arises out of the order of the Tribunal in accepting that subscription receipts from Cloud Services is not taxable as royalty. In case of Amazon Web Services Inc (supra), the coordinate Bench of the Tribunal has also expressed identical view holding that subscription received from Cloud Services is not taxable as royalty. Thus, in our view, the issue is squarely covered by the aforesaid decisions. Accordingly, we hold that the income received by the assessee from Cloud Services is not taxable in India, as they cannot be treated as royalty income. Accordingly, we direct the Assessing Officer to delete the additions. Grounds are allowed.
7. In the result, appeals are allowed.”
7. The learned ITAT noted that there were no material changes in the factual matrix or the legal proposition. Therefore, following the earlier decisions, the learned ITAT had allowed the Assessee‟s appeal.
8. The Revenue has preferred the present appeal projecting the following questions for consideration of this court:
“A. Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in holding that the subscription payments received towards Cloud Services by the Assessee is not taxable as Royalty income within the meaning of Article 12(3) of the India-Ireland DTAA as well as section 9(l)(vi) of the Income Tax Act,1961?
B. Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in holding that the payments received by the assessee from customers is not royalty without appreciating the fact that the assessee company grants access to the Indian customers to online services maintained by it rather than providing service to them as an end user & is in the business of providing information and communication technology solutions to its customers and hence constitutes „royalty‟ in terms of clause (iv) of Explanation 2 to Section 9(1)(vi) of the Act?
C. Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in relying on the decision of Hon‟ble Delhi High Court in case of CIT vs. MOL Corporation and on the decision of coordinate Bench in case of Amazon Web Services, Inc. vs. ACIT in ITA Nos. 522 & 523/Del/2023 as the facts of these cases are differentiable to the facts of the case of the assessee?”
9. Concededly, the decisions rendered by the learned ITAT in ITA No.1514/Del/2022 and ITA No.793/Del/2023 in respect of AY 2019-20 and AY 2020-21 were subject matter of the appeals filed by the Revenue in this Court being ITA No.282/2024 and 315/2024 respectively. The said appeals were examined and disposed of by this Court in terms of the orders dated 14.05.2024 and 02.07.2024 respectively. This Court had rejected the Revenue‟s contention that the decision of the Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (supra) would not cover the issues in question.
10. Concededly, the issues involved in the appeal is covered by the decision of this Court in ITA No.282/2024 and 315/2024, captioned Commissioner of Income Tax International Taxation-1, New Delhi v. Goto Technologies Ireland Unlimited Company (Earlier known As Logmein Ireland Unlimited Company).
11. In view of the above, no substantial question of law arises for consideration of this Court. The present appeal is, accordingly, dismissed. The pending application is also disposed of.
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