Cloud Computing Services- Tax Clarity

1. CONTEXTUAL BACKGROUND

The Delhi High Court ("High Court") in Commissioner of Income-tax, International Taxation-1 v. Amazon Web Services, Inc.¹ has recently upheld the Income Tax Appellate Tribunal's ("ITAT's") ruling to hold that the cloud computing services provided by Amazon Web Services ("AWS") are standardised, do not involve transfer of any intellectual property or technology, and therefore cannot be characterised as royalty or Fees for Technical Services ("FTS") or Fees for Included Services ("FIS") under the Income-tax Act, 1961 ("Act") and the India-USA Double Tax Avoidance Agreement ("India-USA DTAA").

This case is pivotal because it clarifies the taxation framework applicable to non-resident cloud service providers, especially in a rapidly digitising economy like India's, where reliance on Infrastructure-as-a Service ("IaaS"), Platform-as-a-Service ("PaaS"), and Software-as-a-Service ("SaaS") has grown exponentially.

2. UNDERSTANDING CLOUD COMPUTING MODELS

Cloud computing refers to the delivery of computing resources including servers, storage, databases, networking, software, analytics, and intelligence over the internet. It can be defined as "a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction"² Cloud computing has become essential in today's world due to:

• Cost savings (on IT infrastructure)
• Scalability and flexibility in resource usage
• Broad network accessibility and collaboration
• Enhanced data security and automatic updates

The need for digital transformation has pushed enterprises, especially in India, to aggressively adopt cloud technologies, making questions addressing the taxation of such services even more pertinent.

From a technological standpoint, cloud computing services are characterised by:

• Remote Accessibility: Services are provided over the internet using a self-service interface, requiring no physical or personnel interface between the service provider and the user.
• Standardisation: Services like AWS are offered via uniform Service-Level Agreements ("SLAs") and terms of use. Users have limited, often no ability to customise the core platform.
• No Transfer of Rights: Users receive a revocable, non-exclusive license to access the interface [dashboard, Application Programming Interfaces ("APIs"), Software Development Kits ("SDKs")], but not to exploit the underlying software or hardware. They are usually barred from reverse engineering or modifying the tools they use.
• Multi-tenancy and Scalability: This means that the same infrastructure serves multiple users without partitioned allocation, making it unsuitable for being considered as placed at the 'exclusive disposal' of a customer—a general but one of the key tests while analysing the presence of a Permanent Establishment ("PE") and equipment royalty.

The key models of cloud computing are:

• Infrastructure-as-a-Service (IaaS)

In this model, cloud providers deliver and manage fundamental storage, computing, and networking resources.³ Customers can run their own platforms and applications within the provider's infrastructure on a pay-as-you-go basis without managing the physical environment. Amazon EC2 (Elastic Compute Cloud) is a prime example. This model is especially useful for enterprises with complex workloads requiring scalability, flexibility, and cost efficiency.

• Platform-as-a-Service (PaaS)

PaaS offers a platform that allows developers to build, test, and deploy applications without worrying about the underlying infrastructure. It includes operating systems, data management services, AI services, development tools, database management, and more.⁴ Google App Engine, Heroku, and AWS Elastic Beanstalk are commonly used PaaS offerings.

• Software-as-a-Service (SaaS)

This is perhaps the most widely used cloud model, where software applications are accessed via the internet on a subscription basis. Users do not install or maintain the software on their own hardware.⁵ Common SaaS services include Microsoft 365, Salesforce, and Zoom.

3. THE DIGITAL BUSINESS MARKET

Cloud services are generally rendered in a cross-border, digital-first market. A cloud computing ecosystem usually functions with the help of the following elements:

• The Cloud Service Provider: Typically based outside India, cloud service providers like AWS, Microsoft Azure, Google Cloud Platform ("GCP"), Alibaba Cloud, and IBM Cloud offer standardised cloud computing services through automated online platforms.
• The Indian Customer: An Indian company that accesses the cloud platform for computing resources and pays subscription or usage-based fees.
• The Service Agreement: Customers accept standard click-wrap agreements with, say, AWS online. These agreements generally grant a limited, revocable, non-exclusive, non-transferable license to use AWS services during the term, without transfer of source code or intellectual property.
• Revenue Flow and Withholding Concerns: Indian customers are required to assess whether or not withholding applies while making payment to the cloud service providers. In cases where payment is made without applying withholding tax, the transaction may invite audit/scrutiny from tax authorities, potentially resulting in litigation before appellate tribunals/courts (as in the present case).

Cloud computing services challenge traditional tax norms, which evolved in the context of physical goods and territorial business presence. They also test the applicability of royalty and FTS/FIS provisions under DTAAs, especially when cloud services are rendered without human intervention or direct sharing of know-how.

4 DELHI HIGH COURT JUDGMENT

4.1 Facts: In the instant case, the taxpayer, AWS, a US-incorporated and resident company provided cloud computing services and received payments from Indian entities/customers. The Assessing Officer ("AO") received information that M/s Snapdeal Private Limited (erstwhile Jasper Infotech Private Limited), who had availed services of AWS and remitted payments to it for "Hosting and Bandwidth Charges" had not applied any withholding tax. Pursuant to this information, the AO initiated reassessment proceedings against AWS and treated the receipts as royalty and FTS under Section 9 of the Act and the India-USA DTAA in the draft assessment order. This was upheld by the Dispute Resolution Panel ("DRP") and a final assessment order was passed by the AO.

4.2 ITAT Ruling: On appeal by the taxpayer, the ITAT held that the impugned receipts for AY 2014-15 and AY 2016-17 did not fall within the purview of royalty since the services extended to customers were automated, standardised, and publicly available online. The customers were only granted a non-exclusive, non-transferable license to access the standard services without getting the right to use or commercially exploit the intellectual property—no source code or any equipment was placed at the disposal of the customers. The support services provided by AWS were ancillary/incidental and included troubleshooting/answering queries of customers to use the platform. Similarly, the ITAT held that the payments did not qualify as FIS under the India-USA DTAA since no technical service has been "made available" to customers while extending architectural guidance so as to equip the customers with the technical knowledge, skills, and process which they can use to provide cloud services for their own benefit without having a recourse to AWS in the future. Thus, the assessment order was set aside by the ITAT. The Department of Revenue ("Revenue") then appealed this decision to the Delhi High Court.

4.3. High Court Ruling: It was not the case of the Revenue that there was any PE of AWS in India. The issue was whether services provided by AWS constituted royalties or FTS/FIS under the Act and the India-USA DTAA. The AO had concluded that AWS provided a host of services/ intellectual property such as Services Offerings and API to its customers to develop further content and use the existing content for its business. Since the AO reasoned that payments were made to AWS for usage of its hardware/infrastructure comprising of servers, software, data storage space, networking equipments, databases, etcetera, he contended for the presence of 'equipment royalty' in the present case.

While analysing the nature of services provided by AWS to its customers under the India-USA DTAA, the High Court perused the standard Customer Agreement provided by AWS to its customers, especially the definition of Service Offerings, its license, and restrictions. Service Offerings here meant "[S]ervices (including associated APIs), the AWS Content, the AWS Marks, the AWS Site, and any other product or service provided" by AWS under the Customer Agreement, except third-party content.⁶ It was noted that AWS had granted a "limited, revocable, non-exclusive, non-sublicensable, non-transferrable license"⁷ to its customers to access and avail AWS's services like documentation, command line tools, sample code, software libraries, and other related technology. AWS did not, however, provide any right to commercially exploit the same, and the customers did not have control over the cloud computing software or hardware. Similarly, the Support Service Guidelines⁸ provided that the technical support for using AWS services did not include debugging, code development, performing administrative tasks, etcetera. It is important to evaluate these facts against the tests for qualifying payments as royalties or FTS/ FIS.

• Royalty- Article 12(3)(a) & (b)
• IPR Use Test: Article 12(3) of the India-USA DTAA deals with royalties. The Delhi High Court held that AWS customers did not acquire any right to commercially exploit copyright, trademark, or scientific equipment. The AWS marks and content (e.g., sample code, documentation) are provided only to facilitate access, not for independent commercial use.
• Equipment Use Test: It was observed by the High Court that the expressions 'use' or 'right to use' under this provision were to be given a narrow interpretation. This meant that payment for services provided by AWS to its customers, which are delivered by use of scientific equipment (a.k.a. the cloud computing platform), are not to be considered as royalties. Under Article 12(3)(b), payment is considered royalty if made for "use of, or the right to use, any industrial, commercial, or scientific equipment." However, AWS retains control of all servers and does not assign them to the customer. Thus, the payment fails to qualify as royalty.
• Further, it was observed that the India-USA DTAA is more beneficial to the taxpayer than the Act and thus royalty provisions under the India-USA DTAA will be applicable.
• Fees for Included Services (FIS)– Article 12(4)(a) & (b)
• Article 12(4)(a) deals with FIS when payments were made for technical or consultancy services which are ancillary or subsidiary to the enjoyment of the right, property, or information referred to under the provision pertaining to royalty. Since the High Court held that these payments did not constitute royalty, the argument for such consideration qualifying as FIS fell through.
• "Make Available" Test: The India-USA DTAA has a 'make available' clause under Article 12(4)(b). For FIS to apply, services must make available technical knowledge, skill, experience, or know-how enabling the recipient to apply them independently in the future. The High Court reaffirmed the ITAT's ruling that although AWS provides certain support and assistance to its customers for availing its services, this does not imply that it has 'made available' or transferred any technology or technical skills, know-how, or other processes to its customers to qualify as FIS. Thus, these services were not pedagogic—AWS does not teach its customers how the services work or transfer know-how. The customers will still require the cloud computing services provided by AWS or other similar platforms for any subsequent use.

The Delhi High Court also relied on the following landmark precedents to reach its decision:

• Engineering Analysis Centre of Excellence (P) Ltd. v. CIT⁹: This Supreme Court judgment held that license fees for off-the-shelf software did not amount to royalty if no copyright was transferred.
• Commissioner of Income-tax (International Taxation) v. Salesforce.com Singapore Pte. Ltd.¹⁰: Subscription fees for Customer Relationship Management ("CRM") cloud platforms was held by the Delhi High Court to be not taxable as royalty, as there was no transfer of copyright and the customers were only provided web access to the data hosted by the assessee on its Singapore-based servers.
• Commissioner of Income-tax, International Taxation v. Urban Ladder Home Decor Solutions (P.) Ltd.¹¹: Payments made, inter-alia, to Amazon for IaaS were akin to rental payments for IT infrastructure, not for copyright or technical services, and hence not royalty.

5. TAKEAWAYS AND BROADER IMPLICATIONS

This decision of the Delhi High Court significantly strengthens the position of global cloud service providers providing services to Indian customers. It confirms that:

• Mere access to standardised online services without customization(s) does not amount to 'use' of equipment or software in the tax sense.
• There must be a transfer of rights or making available (in specific DTAAs) of technology for a payment to qualify as royalty or FTS/FIS.
• Indian customers availing these services are not liable to deduct withholding tax unless those conditions are satisfied.

The ruling aligns with India's obligations under various DTAAs and confirms that automated cloud services without human intervention or transfer of know-how remain outside the scope of royalty or FTS/FIS.

However, this area remains dynamic. India has recently abolished its digital service tax, the Equalisation Levy,¹² to improve trade diplomacy with the USA and align itself with global tax developments, especially the global minimum tax.¹³ The OECD's Pillar One and Pillar Two reforms and various digital service tax initiatives taken across the globe indicate that governments are actively seeking ways to tax digital services fairly. Until those frameworks evolve and treaties are renegotiated, the current interpretation will continue to favour non-resident cloud computing service providers.

6. CONCLUSION

The Indian public cloud services market (including IaaS, PaaS, and SaaS) had generated a revenue of USD 5.2 billion in the first half of 2024. It is expected to reach USD 25.5 billion by 2028 (CAGR 24.3% from 2023 28).¹⁴ With this staggering growth in the public cloud services market, coupled with the rapid deployment of generative AI and globally distributed cloud infrastructure, the complexity in taxing the digital economy increases. Traditional international taxation rules and architecture anchored in nexus (often physical presence) and the arm's length principle struggle to accommodate new realities where value creation transcends borders, servers, local offices, or personnel. This inadequacy has led to stop-gap measures like domestic digital service taxes (e.g., the Equalisation Levy which is now abolished in India) and developments of multilateral frameworks under the OECD BEPS Pillar One and Two. As India aligns with these global reforms, it faces the dual challenge of preserving its tax base while ensuring neutrality, certainty, and fairness in taxing cross-border digital services.

Until then, specifically with reference to royalty and FTS/FIS, the AWS HC Judgment is a definitive guidepost in India's tax treatment of digital services. It balances domestic legislative ambitions with international treaty commitments. More importantly, it showcases the Indian judiciary's appreciation of technical and functional nuances of cloud computing models- a necessity in the evolving global digital economy.

Footnotes

1 Commissioner of Income-tax, International Taxation-1 v. Amazon Web Services, Inc, 2025 SCC OnLine Del 3870 ("AWS HC Judgment")

2 Peter Mell & Timothy Grance, 'The NIST Definition of Cloud Computing' (2011) National Institute of Standards and Technology, U.S. Department of Commerce, Special Publication 800-145, 2 https://nvlpubs.nist.gov/nistpubs/legacy/sp/nistspecialpublication800-145.pdf accessed 16 June 2025

3 Chnar Mustafa Mohammed & Subhi R. M. Zeebaree, 'Sufficient Comparison Among Cloud Computing Services: IaaS, PaaS, and SaaS: A Review' (2021) 5(2) IJSAB 17, 20

4 Payal Malik et al, 'A Competition Analysis of the Indian Cloud Computing Market' (2024) ICRIER Prosus Centre for Internet and Digital Economy (IPCIDE), 2

5 S.K. Sowmya et al, 'Layers of Cloud – IaaS, PaaS and SaaS: A Survey' (2014) 5(3) IJCSIT 4477, 4479

6 AWS HC Judgment, ¶ 18

7 AWS HC Judgment, ¶ 20

8 AWS Support Guidelines as available at http:co\ s. amazon.com/premiumsupport/guidelines, Amazon Web Services Inc. v. Assistant Commissioner of Income Tax, Circle-1(1)(1), 2023 SCC OnLine ITAT 584, ¶ 23

9 (2021) 432 ITR 471 (SC)

10 (2024) 465 ITR 257 (Delhi)

11 (2025) 475 ITR 518: [2025] 171 taxmann.com 549 (Karnataka)

12 Abolition of 2% levy on services provided by non-resident e-commerce platforms from 1 August 2024 and the Google Tax (6% levy on advertisement services provided by non-resident e-commerce operators) from 1 April 2025

13 Shouvik Das, "Google Tax' Abolition: No Major Revenue Gains for Big Tech, but a Moral Victory' (Mint, 28 March 2025)https://www.livemint.com/industry/google-tax-abolition-big-tech-meta-google-donald-trump-us-reciprocal-tariffs-india-us-trade relations-11743062738569.html accessed 17 June 2025

14 'IDC: Indian Public Cloud Services Market to Reach $25.5 Billion by 2028, Growing at a CAGR of 24.3%' (IDC, 19 December 2024) https://my.idc.com/getdoc.jsp?containerId=prAP52965924 accessed 15 June 2025

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