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Home > Cloud Computing > ITAT rules out tax for cloud hosting

ITAT rules out tax for cloud hosting

Seda Nur Cinar by Seda Nur Cinar
March 3, 2020
in Cloud Computing
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ITAT rules out tax for cloud hosting
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Income from cloud hosting services not taxable under the head Royalty, in Mumbai, according to The Income Tax Appellate Tribunal (ITAT).

Rackspace, the assessee, is a company incorporated in and a tax resident of the USA. The company offers managed dedicated and cloud computing services. For their cloud hosting services, they are accused of failing 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.

Rackspace doesn’t have physical access to servers

To counter this claim, Rackspace said 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.

In addition to this defense, the cloud support services are not in the nature of managerial, technical or consultancy services and consequently do not constitute fees for included services within the meaning of Article 12 of the India-USA Double Tax Avoidance Agreement (DTAA). The assessee also added 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.

In accordance with the decision of the DRP, the bench comprising of Judicial member Amarjit Singh and Accountant member M.Balaganesh said that Rackspace’s income from cloud hosting services is not taxable under ‘Royalty’ because of not having any physical control over the servers:

“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.”

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Seda Nur Cinar

Seda Nur Cinar

Seda Nur Cinar is the news editor of the Cloud7 News. With more than 8 years of Linux and cloud experience, Seda is a Linux and opensource enthusiast, security researcher and a web application developer.

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