Facts of the Case

The petitioner, Amazon Web Services India Pvt. Ltd. (AWS India), is engaged in reselling cloud/web services to customers in India. It purchases such services from Amazon Web Services, USA (AWS USA), a tax resident of the United States.

AWS India filed an application under Section 195(2) of the Income Tax Act seeking determination for nil withholding tax (TDS) on payments made to AWS USA, contending that:

  • Payments were not taxable in India
  • AWS USA had no Permanent Establishment (PE) in India
  • Income was subject to Equalisation Levy (already paid)
  • Payments did not qualify as royalty or fees for technical services

However, the Assessing Officer (AO) rejected the application and held that:

  • AWS USA had a PE in India through data centres
  • Payments were taxable as business income
  • Directed withholding tax @16%

This order was challenged before the High Court.

Issues Involved

  1. Whether AWS USA has a Permanent Establishment (PE) in India
  2. Whether payments made by AWS India are taxable as royalty/FTS or business income
  3. Applicability of Equalisation Levy vis-à-vis Income Tax
  4. Scope and determination under Section 195(2) for TDS
  5. Validity of AO’s assumptions based on public domain data

Petitioner’s Arguments

  • AWS USA is a tax resident of the USA and eligible for DTAA benefits
  • Payments are not royalty or FTS under Section 9 or DTAA
  • AWS USA has no PE in India, as data centres are owned/operated by independent entities
  • Equalisation Levy @2% has already been paid, making income non-taxable under Income Tax
  • AO relied on incorrect assumptions and public data without proper verification
  • ITAT had already ruled in favour of AWS USA in earlier assessment years

Respondent’s Arguments

  • AWS India failed to provide complete financial and operational details
  • AWS USA has significant infrastructure presence in India, constituting PE
  • AWS India is effectively an extension of AWS USA
  • Payments should be taxed as business income attributable to Indian PE
  • Previous ITAT rulings are under challenge and not final
  • Nil TDS certificate cannot be granted due to lack of full disclosure

Court Findings / Order

  • AO’s conclusions were based on erroneous assumptions and incomplete understanding
  • Financial data of AWS was incorrectly interpreted from consolidated accounts
  • AO wrongly questioned applicability of DTAA without evidence
  • Determination of income attributable to PE was flawed and arbitrary
  • Section 195(2) proceedings are limited to TDS determination, not full assessment

Final Order

  • Impugned order modified
  • TDS reduced from 16% to 8% (after considering Equalisation Levy of 2%)
  • Applicable only for period 01.11.2022 to 31.03.2023
  • Payment of withheld tax within one week directed

Important Clarification

  • Section 195(2) proceedings do not determine final tax liability
  • Revenue is free to reassess income independently
  • Issue of PE and taxability remains open and contentious
  • Applicant must provide complete financial disclosures in such proceedings

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/VIB31082023CW23352023_124550.pdf

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