Payments for internet-hosting services are like business profits. Payments do now not represent royalties for the “use of commercial, industrial or clinical gadgets.” 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. Without a permanently established order (“PE”) of the non-resident payee in India, the payments could not be a problem with a withholding tax in India.
Background
The payee, Amazon Web Services LLC (“AWS”), is a USA company and a Seattle subsidiary, situated at Amazon.com Inc. It provides on-call cloud computing offerings to individuals, groups, and governments on a paid subscription foundation. The payer, PRESS Prepaid Recharge Services India Private Limited (“EPL” 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 buying/renovating 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 no longer withheld tax. The association between AWS and ESIPL is clearly shown in the diagram below.
On the idea that the Agreement granted ESIPL a constrained license to use and get the 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 manipulation, possession, or bodily 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 below.
8. 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-transferable license to do the subsequent: (a) get entry to and use the Services solely according to this Agreement; and (b) copy and use the AWS Content exclusively in connection with your accredited use of the Services. Except as provided in Section eight. Third, 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 the right of entry to and use of the Services, along with APIs; WSDLs; Documentation; sample code; software libraries; command line equipment; proofs of concept; templates; and another associated era (including any of the preceding which might be provided with the aid of our employees). AWS Content no longer consists of the Services or Third-Party Content.
“AWS Marks” refers to 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” are the Services (including associated APIs), the AWS Content, the AWS Marks, and some other services or products we provide under this Agreement. Service Offerings do now not encompass Third-Party Content. Y
