Income from cloud hosting and its ancillary services neither royalty nor FTS: ITAT


Income from cloud hosting and its ancillary services neither royalty nor FTS: ITAT

Racksapce US, Inc. v. DCIT – [2021] 124 92 (Mumbai – Trib.)

Short Overview:

Assessee-company was incorporated in the USA. It was a tax resident of the USA. Assessee earned income from cloud services including cloud hosting and other supporting and ancillary services provided to Indian Customers. Assessee filed return of income and the notes stating therein that the cloud hosting services was not taxable as ‘royalties’ under Article 12 of the India-US tax treaty.

Assessee contended that customers do not operate the equipment or have physical access to or control over the equipment used by assessee to provide cloud support services.

Further they do not make available technical knowledge, experience, skill, know-how etc., to its Indian Customers and the cloud support services were not in the nature of managerial, technical or consultancy services.

Thus, same do not constitute fees for included services within the meaning of Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA).

It was further stated that revenues earned on account of cloud hosting services constitute business profits.

Since it did not have Permanent Establishment (PE) in India under Article 5 of the DTAA, the same would not be subject to tax in India under the provisions of Article 7(1) of the DTAA.

However, the Assessing Officer (AO), in accordance in the direction of the Dispute Resolution Penal (DRP), considered said receipt as ‘Royalty’ and held to be taxable @ 10% as per India USA DTAA.

On appeal, Mumbai ITAT held that the agreement between assessee and its customer was for providing hosting and other ancillary services to the customer and not for the use of or leasing of any equipment.

 The Data Centre and the Infrastructure therein was used to provide these services belong to assessee.

 The customers do not have physical control or possession over the servers. Right to operate and manage this infrastructure or servers vested solely with assessee.

The agreement was to provide hosting services simpliciter and was not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in the data centre, webmail, websites etc.

Thus, the income from cloud hosting services had erroneously held as royalty within the meaning of Explanation 2 to section 9(1)(vi) as well as Article 12(3)(b) of the Indo-USA DTAA by AO and DRP.