India: Are Payments For Web Hosting Services Royalties Or Business Income?

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Payments for internet-hosting services are like business profits.
Payments do now not represent royalties for “use of commercial, industrial or clinical gadget.”
No withholding tax relevant.
Recently, the Pune Bench of the Income Appellate Tax Tribunal (“Tribunal”) ruled that bills (“Payments”) for web hosting services (“Services”) aren’t like royalties. The Tribunal held that the Payments are within the nature of commercial enterprise earnings and inside the absence of a permanently established order (“PE”) of the non-resident payee in India, the Payments could not be a problem to a withholding tax in India.

Background
The payee, Amazon Web Services LLC (“AWS”) is a company included in the USA and is a subsidiary of Seattle situated Amazon.Com Inc. It provides on-call for cloud computing offerings to individuals, groups, and governments, on a paid subscription foundation. The payer, PRESS Prepaid Recharge Services India Private Limited (“ESIPL” or the “Taxpayer”) is a business enterprise incorporated in India and is a distributor of online recharge answers for cell telephones, dish-to-home connections, etc.

ESIPL uses servers to provide its online recharge solutions. Due to the prohibitive prices of buy/renovation of servers on its account, ESIPL entered into a settlement (the “Agreement”) with AWS for the provision of the Services (regarding the use of AWS’ servers). Believing that the Payments for the Services constituted neither royalties nor costs for technical services (“FTS”), ESIPL did no longer withhold tax. The association between AWS and ESIPL is ready out in the diagram underneath.

On the idea that the Agreement granted ESIPL a constrained license to use and get right of entry to the Services, the AO concluded that the Payments had been for the “use or proper to apply any business, commercial or clinical gadget (“ICS Equipment”) i.E., AWS’ servers, constituted royalties beneath Explanation 2 (“Explanation 2”) to section 9(1)(vi) of the Income Tax Act, 1961 (“ITA”)1, had been taxable in India, and ESIPL should consequently have withheld at the Payments. The AO relied on Explanation 5 (“Explanation five”) to section 9(1)(vi) of the ITA2 to leave from setting up precedents requiring the use of ICS Equipment to involve manipulate, possession or bodily get entry to the ICS Equipment.

Due to ESIPL’s failure to withhold tax, the Payments have been disallowed (below phase 40(a)(i)three of the ITA) as deductions from the Taxpayer’s taxable income. On attraction by the Taxpayer, the Commissioner of Income Tax (Appeals) upheld the order of AO. Aggrieved, the Taxpayer appealed to the Tribunal.

The Agreement
Essential extracts are set out beneath.

Eight. Proprietary Rights

8.3. Service Offerings. We or our licensors own all proper, identify, and hobby in and to the Service Offerings, and all related era and highbrow assets rights. Subject to the terms of this Agreement, we supply you a limited, revocable, non-distinct, non-sublicensable, non-transferrable license to do the subsequent: (a) get entry to and use the Services solely according with this Agreement; and (b) copy and use the AWS Content exclusively in connection with your accredited use of the Services. Except as provided on this Section eight. Three, to procure no rights beneath this Agreement from us, our affiliates or our licensors to the Service Offerings, together with any related highbrow belongings rights. (Emphasis provided)

14. Definitions.

“AWS Content” manner Content we or any of our affiliates make to be had in connection with the Services or on the AWS Site to permit get right of entry to to and use of the Services, along with APIs; WSDLs; Documentation; sample code; software libraries; command line equipment; proofs of concept; templates; and other associated era (including any of the foregoing which might be provided with the aid of our employees). AWS Content does no longer consist of the Services or Third-Party Content.

“AWS Marks” manner any trademarks, service marks, provider or change names, emblems, and different designations of AWS and its affiliates that we may additionally make to be had to you about this Agreement.

“Service Offerings” manner the Services (including associated APIs), the AWS Content, the AWS Marks, and some other services or products provided using us under this Agreement. Service Offerings do now not encompass Third-Party Content.Y

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