Income Tax Implications on Cloud Computing Services

INTRODUCTION

Cloud computing is the ability to acquire and use computing services- servers, storage, databases, networking, software, analytics, intelligence, and more — over the internet. By providing computing resources on demand, cloud computing lets you avoid the need to install your own physical servers, run your own software, and manage your own databases. You can access data, applications, and computing resources from anywhere in the world, rather than needing to be connected to a computer in an office. As a result, the cloud offers faster innovation, flexible resources, and economies of scale. You typically only pay for the cloud services you use, helping you lower operating costs, run infrastructure more efficiently, and scale as your business needs change.

Cloud computing is the provision of standardised, configurable, on-demand, online computer services, which can include computing, storage, software, and data management, using shared physical and virtual resources (including networks, servers, and applications).  Since the services are provided online using the provider’s hardware, users can typically access the service using various types of devices wherever they are located, provided they have a suitable Internet connection.

There are three major models of delivering ‘clouding computing’ services to businesses and they are as follows:

1. Infrastructure as a Service (IaaS) Model – Under this model, typically utilized by large multinational businesses, IT infrastructure in the form of data centers, virtual servers, network infrastructure, equipment, etc. are sourced as a service from third party service providers.
2. Platform as a Service (PaaS) Model – PaaS is a category of cloud computing services that provides a computing platform and programming tools as a service for customers.
3. Software as a Service (SaaS) Model – Under this model the service provider hosts several software applications for consumers to use as and when required thereby eliminating the need to install and run the software application on the consumer’s own infrastructure. It can be provided either to business customers (B2B) or to individual customers (B2C).

Taxability under the Income Tax Act

Income would be chargeable to tax in India if the same falls within the scope of section 4 read with section 5 of the Income Tax Act. Section 4 is the charging provision under the Act. The charge is in respect of the total income for any year. The scope of total income chargeable to tax in India is outlined by Section 5 of the Income Tax Act. This scope of total income depends upon whether the assessee concerned is a resident or non-resident in India.  Place of accrual assumes importance especially for non-resident taxation, since a non-resident is liable to pay tax only on income, which accrues or arises in India.

Payment for Cloud Services whether Royalty:

Section 9(1)(vi) of the Income Tax Act deals with taxation of Royalty. Section 9(1)(vi)(b) of the Income Tax Act provides that any royalty payable by a person resident in India would deem to accrue or arise in India, except where the royalty is payable in respect of any right, property or information used or utilised for the purpose of business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. If the payment made for Cloud Computing Services is regarded as in the nature of “Royalty” then it would be covered under section 9(1)(vi) of the Income Tax Act and hence would be taxable in India.

Fees for Technical Services

Section 9(1)(vii) of the Income Tax Act deals with taxability of Fee for Technical Services (“FTS” for brevity).  This provision is in line with section 9(1)(vi) dealing with taxation of Royalty and provides that payment made by Indian resident to non-resident would be taxable in India if the services are in nature of technical, managerial or consultancy services and services are utilised for the purpose of business in India.  The definition of FTS in the USA tax treaty is narrower wherein “make available” test is prescribed. 

The question that needs to be answered is whether the Cloud Service Provider are rendering any technical services or making available standard facility to their customers.  If the payment is towards standard facility, then the same would not be classified as FTS under section 9(1)(vii).  The judicial precedents in this context are discussed below.

The Delhi Tribunal in the case of Bharti Airtel Ltd v ITO [2016] 67 taxmann.com 223 (Delhi – Trib.)has held that inter-connect usage charges to foreign telecom operators in connection with its International Long Distance telecom service business, was neither FTS nor royalty as there was no manual or human intervention during the process of transportation of calls between two networks.

Read more: Case Digest: Fee for Technical Service (FTS) and Double Taxation Avoidance Agreement (DTAAs)

CONCLUSION

In today’s technology world, businesses require access to high end technology equipment like servers in order to host various services online. Due to this, requirement for these kinds of servers have increased tremendously, especially for e-commerce businesses. Owning/maintaining such servers and upkeep requires skilled manpower, which is a costly affair. So many e-commerce start-up companies are availing cloud computing services from Amazon, Google, etc.

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