Charges Received by Amazon Web Services for Cloud Computing not Taxable as ‘Equipment Royalty’ under India-US DTAA: Delhi HC [Read Order]

The Delhi High Court held that payments received by Amazon Web Services Inc. (AWS) from Indian customers for cloud computing services are not taxable as "equipment royalty" under Article 12(3) of the India-US Double Taxation Avoidance Agreement ( DTAA ).

The Revenue had sought to classify the charges received by AWS for providing infrastructure and cloud-based services to Indian clients as royalty income, either under the provisions of the Income Tax Act, 1961 or the DTAA. However, the High Court upheld the decision of the Income Tax Appellate Tribunal (ITAT), ruling in favour of AWS.

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The dispute arose after AWS received payments from Indian companies such as Snapdeal for hosting and bandwidth services. The Assessing Officer (AO) alleged that these charges represented consideration for the use of scientific equipment and software infrastructure, thus falling under the definition of “royalty” under section 9(1)(vi) of the Act and Article 12 of the DTAA. Consequently, reassessment proceedings were initiated for AYs 2014–15 and 2016–17, determining AWS’s income chargeable to tax in India at over ₹12,500 crore.

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AWS contested this assessment, arguing that the payments were for standardized, automated cloud computing services offered globally and did not involve any transfer of rights to use intellectual property, technical know-how, or equipment.

The company maintained that it merely provided remote access to its cloud infrastructure, without placing any servers or equipment at the disposal of its customers. The ITAT accepted this position, holding that such services did not amount to royalty or fees for included services (FIS).

The Delhi High Court concurred with the ITAT’s analysis, observing that the Agreement between AWS and its customers only granted a limited, non-exclusive, non-transferable license to access the services. There was no right given to commercially exploit AWS’s intellectual property or hardware.

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Importantly, the Court observed that the mere use of cloud infrastructure, including servers and storage, did not amount to “use of equipment” in the context of royalty under the DTAA. It also noted that AWS retained full control and ownership of its infrastructure, which was neither transferred nor made available for independent use by customers.

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Rejecting the Revenue’s reliance on the “equipment royalty” clause under Article 12(3)(b), the Court stated that the use of AWS’s computing resources by customers did not constitute a right to use industrial or scientific equipment. The charges paid were solely for the services rendered and not for the underlying assets themselves.

Justices Vibhu Bakhru and Tejas Karia also dismissed the argument that AWS’s support services amounted to FIS, noting that the assistance provided was incidental to the main service and did not involve transfer of technical knowledge or skills to the customer as required under Article 12(4)(b) of the DTAA.

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The court cited previous rulings including Engineering Analysis by the Supreme Court and Salesforce.com Singapore Pte. Ltd. and affirmed that subscription to cloud-based services, even where infrastructure is involved, does not attract taxation as royalty under the Indian domestic law or relevant tax treaties unless there is an express transfer of rights.

Accordingly, observing no substantial question of law, the bench dismissed the appeal filed by the income tax department.

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To Read the full text of the Order CLICK HERE

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