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2025 Supreme(Online)(Del) 5008
IN THE HIGH COURT OF DELHI AT NEW DELHI
MR VIBHU BAKHRU, MR TEJAS KARIA, JJ
THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -1 – Appellant
Versus
AMAZON WEB SERVICES, INC – Respondent
ITA 150/2025 & CM APPL. 29405/2025 | ITA 154/2025 & CM APPL. 29646/2025
For the Appellants/Petitioners: Mr. Ruchir Bhatia, SSC, Mr. Anant Mann, JSC, Ms. Aditi Sabharwal, Mr. Abhishek Anand
For the Respondents:Mr. Porus Kaka, Sr. Advocate, Mr. Rohit Jain, Mr. Aniket D. Agrawal, Mr. Manish Kanth, Ms. Manisha Sharma
The court affirmed that payments for cloud computing services are not taxable as royalties under the Income Tax Act or the India-US DTAA, as they do not entail the transfer of intellectual property rights.
Headnote:(A) Income Tax Act, 1961 - Section 260A - Double Taxation Avoidance Agreement (DTAA) - Taxability of cloud computing services - The Income Tax Appellate Tribunal concluded that payments received by the Assessee were not taxable as 'royalty income' under the Act or the DTAA as the services rendered did not involve a transfer of any rights, technology, or intellectual property that could be classified as royalties. The Court upheld the Tribunal's findings that cloud computing services provided did not meet the definitions under both the Act and the DTAA. (Paras 6, 44, 47)
(B) Taxation Principles - Payments for cloud computing services cannot be classified as royalties or fees for included services because the provider does not transfer technology or IP rights, and merely grants access to standardized services. (Paras 11, 12, 39)
(C) Appeal - No substantial question of law arose from the findings of the Tribunal as they adhered to precedents established in relevant cases. (Para 48)
Facts of the case:
The Assessee, a foreign incorporated company providing cloud computing services, received payments from Indian businesses that were subject to re-assessment for tax purposes under claims of royalties. The Tribunal ruled in favor of the Assessee, stating that the nature of the contract did not warrant taxation of those payments as royalties.
Findings of Court:
The payments were determined to not constitute taxable income under the definitions of royalties or fees for technical services as defined in applicable legislation.
Issues: The Court addressed whether the revenue's position that payments received constituted taxable income as royalties or fees for included services was sustainable under the law.
Ratio Decidendi: The tribunal found that the nature of cloud computing services does not entail the transfer of rights in technology or intellectual property, and thus payments were not taxable as royalties.
Result: Appeals dismissed.
| Table of Content |
|---|
| 1. nature of income as taxable. (Para 1 , 2) |
| 2. revenue's arguments on taxability. (Para 3 , 6 , 7) |
| 3. assessment procedure overview. (Para 8 , 9 , 10) |
| 4. legal definitions of royalties. (Para 11 , 12 , 13) |
| 5. standardized services and tax implications. (Para 14 , 15 , 39) |
| 6. judicial precedent and principles applied. (Para 42 , 43 , 46) |
| 7. final ruling. (Para 48) |
JUDGMENT
VIBHU BAKHRU, J.
1. The Revenuehas filed the present appeals under Section260A of the Income Tax Act, 1961 [the Act] impugning a common order dated 01.08.2023 passed by the learned Income Tax Appellate Tribunal [the Tribunal] allowing the appeals, being ITA No.522/Del/2023 and ITA No.523/Del/2023, in respect of assessment years [AYs] 2014-15 and 2016-17,respectively.Therespondent[Assessee]hadpreferredthesaid appeals against orders dated 27.01.2023 and 24.01.2023 passed by the Assessing Officer [AO] under Section 147 read with Section 144C (13) of the Act in respect of AYs 2014-15 and 2016-17.
2. The Assessee is a company incorporated in the United States of Americaandisataxresidentofthatcountry.TheAssesseehadreceived certain sums of money from Indian entities for rendering cloud computing services, which, according to the AO are chargeable to tax as royalty and fees for technical service [FTS] under the Act as well as “the Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation and Prevention of Fiscal evasion with respect to taxes on income”[India-US DTAA].
3. The Assessee contends to the contrary and claimsthat its receipts are for providing standard cloud computing services, which are not chargeable to tax either as royalties or as FTS. Therefore, the Assessee had not filed its return of income. The Assessee’s customers that had remitted the charges to the Assessee for services had not withheld any tax under Section 195 of the Act for the same reason.
4. The Revenue had initiated proceedings under Section 201 /201(1A) of the Act in case of one M/s Snapdeal Private Limited (erstwhile Jasper Infotech Private Limited), which had availed of the services of the Assessee. The information that the said company had remitted funds overseas as charges for the services rendered by the Assessee was furnished to the AO. The AO was of the view that the amountsreceivedbytheAssesseewerechargeabletotaxundertheAct. Accordingly, the AO issued notices under Section 148 of the Act and commenced proceedings for re-assessment for AYs 2014-15 and 2016-17.
5. The draft assessment order was passed by the AO, assessing the total income of the Assessee. The Assessee had filed its objections before the Dispute Resolution Panel [DRP], which were rejected by separate orders dated 06.12.2022. Pursuant to the said directions, the AOissuedthefinalassessmentordersdated27.01.2023and24.01.2023 for AY 2014-15 and AY 2016-17, respectively, whereby the AO determined the Assessee’s income chargeable to tax at ₹2,47,68,23,222/- in respect of AY 2014-15 and ₹10,07,81,05,172/- in respect of AY 2016-17.
6. The Assessee appealed the aforementioned final assessment orders before the Tribunal. The learned Tribunal allowed the said appeals and set aside the assessment orders in view of its finding that the amounts received by the Assessee were neither in the nature of royalties nor fees for included services [FIS], which were chargeable to tax under the Act read with the India-US DTAA.
7. In the aforesaid context, the Revenue has projected the following common questions of law in the present appeals:
“2.1 Whether on the facts and in the circumstances of the case,Ld.ITAT has erredinholdingthatthepayments received by the Assessee accruing/arising from India from its customers are not royalty income within the meaning of Article 12(3) of the India-USA DTAA as well as section 9(l)(vi) of the Income Tax Act, 1961 ?
2.2 Whether on the facts and in the circumstances of the case, the Ld. ITAT has erred in holding that
