Indian Kanoon - Search engine for Indian Law

16. It is necessary to understand the nature of services being offered by the Assessee. There is no cavil that the services offered by the Assessee are standardised services that can be availed by any of its customers. The Assessee operate a cloud computing platform, which essentially comprises of hardware as well as software. The Assessee provides cloud services for its customers to build and develop their own content. Admittedly, the Agreement does not entail transferring of any skill, knowledge or know-how by the Assessee to its customers, but lends support to its customers for the purposes of enabling the customers to use its cloud computing platform.

"The Company provides standard and automated cloud computing services to its customers. In this regard, we have provided below a general understanding of cloud computing services:

- Historically, various organizations which needed to store and process large amounts of data, invested in computing resources i.e., hardware (servers) and software (operating systems). However, such hardware and software resources were costly, capital intensive, required large amount of space and were used in limited capacity by such companies. For e.g., a company may have a complex Enterprise Resource Planning (ERP) system, which would need large storage and processing capability to run, for which it may need to buy large and expensive servers to host the ERP only.

36. There is no cavil that the customers do not control the cloud computing hardware or software. They also have no right to commercially exploit the same.

37. The expression "use" or "right to use" as mentioned in Article 12(3) of the India-US DTAA is to be used in a narrow manner. The scope of royalties under Article 12(3) of the India-US DTAA does not extend to cover charges for services, which are delivered by an assessee by use of scientific equipment. In the present case, it is clear that the cloud computing hardware and software are used by the Assessee to render its services which are availed by its customers.

38. The AO's conclusion that the provision of such service would amount to grant of the 'right to use' scientific equipment and therefore, the payments made were covered under the definition of 'royalty' under the Act as well as under Article 12(4)(a) of the India-US DTAA is erroneous.

39. There is no doubt that the Assessee grants access to standard and automated facilities, which provides computer power, storage, data and other services which may be required by customer for their computing needs. However, there is no material to establish that grant of such service entails transfer of any technical know-how, skill, knowledge or process. The customers of the Assessee do not acquire any right to commercially exploit any of the Assessee's IPRs. The provision of cloud computing services does not entail placing any hardware at the exclusive disposal of the customer. The Assessee grants access to standard and automated services, which are available online. Customers can select from the services offered according to their needs. As explained by the Assessee, cloud computing provides an effective alternative for customers to use cloud computing services instead of buying, owning and maintaining their own data centres and servers.