Standard Cloud Computing Services Not Taxable As Royalty or Technical Fees: Delhi High Court Rejects Income Tax Department's Appeal Against Amazon Web Services

“Customer Is Only Granted Non-Exclusive Access—No Right To Use Or Commercially Exploit AWS Infrastructure”: In a significant ruling Delhi High Court in The Commissioner of Income Tax - International Taxation -1 v. Amazon Web Services Inc. dismissed two income tax appeals filed by the Revenue, holding that payments made to Amazon Web Services (AWS) for standardized and automated cloud computing services are neither taxable as 'royalty' nor as 'fees for technical services' (FTS) under the Income Tax Act, 1961 or the India-US Double Taxation Avoidance Agreement (DTAA).

The Division Bench comprising Justice Vibhu Bakhru and Justice Tejas Karia upheld the Income Tax Appellate Tribunal’s decision that there was no transfer of technical know-how, equipment rights, or intellectual property (IPR) to Indian clients, thus rendering the payments outside the tax net under Article 12 of the DTAA.       

Amazon Web Services Inc., a US tax resident, provides cloud computing services globally, including to Indian entities. For the Assessment Years 2014–15 and 2016–17, the company did not file income tax returns in India, asserting that its services did not attract tax liability under Indian law or the DTAA.

The Revenue, however, initiated reassessment proceedings under Section 147 of the Income Tax Act, based on information that Snapdeal Pvt. Ltd. had made payments to AWS without tax deduction at source (TDS). The Assessing Officer (AO) concluded that such receipts constituted royalty and FTS, triggering liability both under the Act and the India-US DTAA.

Consequently, final assessment orders were passed, taxing AWS’s income at ₹2,47,68,23,222 for AY 2014–15 and ₹10,07,81,05,172 for AY 2016–17. These were subsequently overturned by the Income Tax Appellate Tribunal, leading to the current appeals before the High Court.

The core legal question before the Court was: Whether payments received by AWS from Indian clients for cloud computing services constitute ‘royalty’ or ‘fees for included services’ (FIS) under Article 12 of the India-US DTAA and Section 9 of the Income Tax Act, 1961.

The Revenue argued that the payments were in the nature of royalty, citing that customers were using AWS infrastructure, servers, software, and APIs, and therefore had right to use scientific equipment—an essential component of royalty as defined in Explanation 2 to Section 9(1)(vi).

Moreover, it was claimed that since AWS provided technical support, this amounted to “making available” technical knowledge, thus qualifying the consideration as FIS under Article 12(4)(b) of the DTAA.

Rejecting these arguments, the Court emphasized: “The customers do not acquire any right or title or any IPR that would entitle them to exploit or commercially monetize the said assets.”

The Court further clarified that AWS customers received a non-exclusive, non-transferable license merely to access and use services, not any rights to modify, sublicense, reverse-engineer, or exploit AWS content or software.

“The charges paid are for availing services which the Assessee provides by using its proprietary equipment and other assets. No part of its equipment or IPRs are alienated by the Assessee in favour of its customers.”

On Technical Services and 'Make Available' Test

The Court delved into Article 12(4)(b) of the DTAA, which requires that for a service to be taxable as FIS, it must “make available technical knowledge, experience, skill, know-how or processes.”

“The Assessee lends support to customers for using its cloud platform, but does not transfer any technical knowledge or skill. The assistance provided is incidental and only facilitates the customer’s use of AWS services.”

Referring to the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2021) 432 ITR 471, the Bench reiterated that mere access to a cloud platform or provision of support services does not amount to making available technical knowledge.

On Equipment Royalty

The AO’s contention that AWS services amounted to “use of scientific equipment” and hence constituted equipment royalty under Article 12(3)(b) was also dismissed.

The Court observed: “The cloud computing hardware and software are used by the Assessee to render services; customers do not ‘use’ the equipment themselves, nor is any equipment placed at their disposal.”

It clarified that access to infrastructure via the internet does not amount to transfer of possession or use of equipment, and hence cannot be taxed as royalty under either Indian law or the DTAA.

“The Tribunal rightly concluded that the prerequisites for the impugned receipts to be treated as royalty income in terms of Article 12(3) of the India-USA DTAA are not met.”

In dismissing the Revenue’s appeals, the Delhi High Court reaffirmed the settled position that standard cloud computing services—where customers merely access services without obtaining any commercial rights—do not amount to royalty or FTS under Indian law or the India-US DTAA.

“No substantial question of law arises. The appeals are accordingly dismissed.”

This decision is a landmark affirmation for global cloud service providers, reiterating that access-based software and infrastructure models without transfer of rights or knowledge remain outside the Indian tax net in the absence of a Permanent Establishment.

Date of Decision: May 29, 2025