2023 (8) TMI 331 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of cloud service fee received by the assessee from customers in India - payments received by the appellant from Indian customers for standard and automated services - royalty and fee for technical/included services ( FTS/FIS ) - India-USA DTAA - assessee argued that 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 - HELD THAT - It is seen that the issue of taxability of receipts from cloud services is covered by the order of the Delhi Tribunal in the case of Microsoft Regional Sales Pte. Ltd. 2022 (12) TMI 864 - ITAT DELHI , Urban Ladder Home Decor Solutions Pvt. Ltd., 2021 (8) TMI 927 - ITAT BANGALORE MOL Corporation 2023 (2) TMI 1177 - DELHI HIGH COURT and Microsoft Regional Sales Pte. Ltd. 2022 (5) TMI 246 - ITAT DELHI wherein held that consideration for cloud computing services is not chargeable to tax in India. We have also considered various decisions relied upon by the Ld. DR and in our considered view these decisions do not support the Revenue s contentions being distinguishable on facts than that of the assessee. Thus we hold that the payments received by the assessee from Indian Customer(s) from rendering AWS Services do not qualify as royalty under Article 12(3) of the India-USA DTAA and hence are not taxable in India. Decided in favour of assessee. Taxability of AWS Services provided by the assessee - AR submitted that in terms of Article 12(4)(b) of the India-USA DTAA, payment made towards technical or consultancy services constitutes fees for technical services only if such services make available technical knowledge, experience, skill, know-how or processes, etc. - HELD THAT - 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. We are in agreement with the submission of the Ld. AR that the impugned issue also stands covered by the decision of the Pune Tribunal which was rendered in the context of similar cloud services in the case of M/s Sunguard Availability Services LLP 2022 (11) TMI 1313 - ITAT PUNE and Rackspace, US Inc. 2020 (2) TMI 63 - ITAT MUMBA wherein it has been held that rendering cloud computing service cannot be held to be liable to tax in India as FTS/FIS. We are of the view that the impugned receipts of the assessee for AWS services/cloud computing services rendered to the customers in India do not fall within the purview of FIS under Article 12(4)(b) of the India-USA DTAA as the same do not satisfy the make available clause envisaged therein. Accordingly, we allow ground raised by the assessee in both the AYs.

Summary

Issues Involved:
1. Jurisdiction and validity of the reassessment proceedings.
2. Taxability of payments received by the assessee from Indian customers as royalty or fee for technical/included services (FTS/FIS) under the Act and the India-USA Double Tax Avoidance Agreement (DTAA).

Summary of Judgment:
Issue 1: Jurisdiction and Validity of Reassessment Proceedings
- The assessee challenged the reassessment proceedings on grounds of incorrect facts, lack of independent application of mind by the AO, and procedural lapses such as absence of Document Identification Number (DIN) and proper sanction under section 151 of the Act.
- The Tribunal noted that the grounds challenging the initiation of reassessment proceedings were not pressed by the assessee.

Issue 2: Taxability of Payments as Royalty or FTS/FIS
- Nature of Services: The assessee, a tax resident of the USA, provided standard and automated cloud computing services globally, including to Indian customers, without any customization or transfer of technical knowledge.
- AO's Allegations: The AO contended that the payments received were in the nature of royalty and FTS/FIS, alleging that the services involved the use of hardware/infrastructure and provided technical support, thus making available technology to customers.
- Assessee's Defense: The assessee argued that the services were standard and automated, without any transfer of intellectual property or control over equipment to the customers. The services did not make available any technical knowledge or skills enabling the customers to utilize the technology independently in the future.
- Tribunal's Findings:
- Royalty: The Tribunal held that the payments did not qualify as royalty under Article 12(3) of the India-USA DTAA. The customers did not receive any right to use the copyright or other intellectual property, nor was any equipment placed at their disposal.
- FTS/FIS: The Tribunal concluded that the services did not meet the "make available" criterion under Article 12(4)(b) of the India-USA DTAA. The support services provided were incidental and did not transfer any technical knowledge or skills to the customers.
- Judicial Precedents: The Tribunal relied on various judicial precedents, including decisions in the cases of EPRSS Prepaid Recharge Services India P. Ltd., Urban Ladder Home Decor Solutions Pvt. Ltd., and Reasoning Global E-Application Ltd., which held that similar cloud computing services were not taxable as royalty or FTS/FIS.

Conclusion:
- The Tribunal allowed the appeals for both AY 2014-15 and AY 2016-17, holding that the payments received by the assessee for AWS services/cloud computing services were not taxable in India as royalty or FTS/FIS under the provisions of the Act and the India-USA DTAA.
- Other grounds related to the applicable tax rate, levy of interest under sections 234A and 234B, and initiation of penalty proceedings under section 271(1)(c) were either not adjudicated or deemed consequential/premature.