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Income From Cloud Hosting Services not Taxable under the head ‘Royalty’, rules ITAT [Read Order]

Cloud Hosting Services - Income - Not Taxable - Royalty - Taxscan

The Income Tax Appellate Tribunal (ITAT), Mumbai has ruled that, Income From Cloud Hosting Services not Taxable under the head ‘Royalty’.

Rackspace, US Inc., the assessee, is a company incorporated in and a tax resident of the USA, involved in cloud hosting. It is alleged that they had failed to file the return of income for AY 2010-11 and certain transactions seen in the network management system database led to believe that the income has skipped taxation in accordance with provisions of Section 147 of the Income Tax Act.

The assessee had filed the return of income and the notes stating that the cloud hosting services was not taxable as ‘royalties’ under Article 12 of the India-US tax treaty as the customers do not operate the equipment or have physical access to or control over the equipment used by the assessee to provide cloud support services and do not make available technical knowledge, experience, skill, know-how, etc., to its Indian Customers. And the cloud support services are not in the nature of managerial, technical or consultancy services and consequently same do not constitute fees for included services within the meaning of Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA). The assessee claimed that revenues earned on account of cloud hosting services constitute business profits and 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. There was a mismatch of receipts as per 26AS and as per party-wise receipts furnished by the assessee, therefore, the notice was also issued. After the reply of the assessee and in accordance with the direction of the DRP, the receipt in the sum of Rs.17,12,52,670/- was considered as ‘Royalty’ and held to be taxable @ 10% as per India-USA DTAA prescribed taxation rate. Aggrieved, the assessee filed the present appeal before the ITAT.

The ITAT bench comprising of Judicial member Amarjit Singh and Accountant member M.Balaganesh while allowing the appeal held that, “the assessee and its customer is for providing hosting and other ancillary services to the customer and not for the use of / leasing of any equipment. The Data Centre and the Infrastructure therein is used to provide these services belong to the assessee. The customers do not have physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with the assessee. The agreements entered into the service level agreements. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on higher or lease. The customer is not even aware of the specific location of the server in the Data Centre where the customer application, webmail, websites etc. In view of these facts, we are of the view that income from cloud hosting services has erroneously held as royalty within the meaning of explanation (2) to section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA DTAA by the AO and DRP. Even otherwise, there is no PE of the assessee in India and hence, no income can be taxed in India in terms of Indo-US DTAA.

To Read the full text of the Order CLICK HERE
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