DCIT, CHENNAI vs. ZOHO CORPORATION, USA

आदेश / O R D E R

PER PADMAVATHY.S, A.M:

ITA Nos.1841, 1843, 1844, 1845, 1846/Chny/2025 Zoho Corporation :- 2 -:

These appeals by the revenue are against the separate orders of the Commissioner of Income Tax (Appeals) [in short, 'CIT(A)'], Chennai-16, passed under Section 250 of the Income Tax Act (the Act) for the assessment years 2013-14 to 2015-16, 2017-18 and 2018-19. The common issue contended by the revenue across all these appeals pertains to the relief given by the CIT(A) with regard to treatment of receipts towards provision of web hosting services in the hands of the assessee as not taxable in India.

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submissions of the assessee and held that, for providing the services, the assessee is required to maintain huge computers and servers, which would classify as equipment, and ZOHO India, in turn, uses these servers to store its data. Accordingly, the Assessing Officer held that the web hosting charges received by the assessee would qualify as royalty. The Assessing Officer also held that the amount received by the assessee can also be treated as fees for technical services since technical or consultancy services, which are ancillary and subsidiary to the application or enjoyment of the right, are to be treated as FTS and, in the given case, the web hosting involves giving right to use the servers. Accordingly, the Assessing Officer made an addition of Rs.23,27,96,056/- towards royalty/FTS. Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) deleted the addition by holding that:-

“5.5 I have perused the Webhosting Services Agreement dated 8/7/2011 between the appellant and the Indian company (Zoho India). As per this agreement, the appellant will provide webhosting services for the hosted sites of Zoho India including dedicated server space and internet connectivity. The agreement specifically excludes the appellant from providing content management services. Zoho India will be solely responsible for providing the software updates and managing the Zoho India content. The intellectual property rights remain with Zoho India. Further, Zoho India will pay foes for the services equal to the costs incurred by the appellant in connection with the performance of the services with a mark up of 20% on such costs. It is apparent from clause 2.4 of the said agreement that the appellant is responsible for the security of the sites and the data centres. Zoho India representatives would have no right to visit the facilties except for the limited purpose of verifying the security measures in the presence of the appellant's representatives. 5.6 From the above discussion and analysis of the case laws cited by the appellant, the following facts on the nature of services provided to Zoho India emerge: a) The possession and control of the entire equipment in the data centre remained with the Appellant service provider and

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not with the service recipient. Possession and control of the equipment by the user is a prerequisite so as to fall under 'Royalties' under the DTAA and this is absent in case of Webhosting services.

b) Webhosting services provided by the appellant is a standard facility and does not tantamount to use or right to use any equipment and hence not 'Royalty' as per Section 9(1)(vi) of the Act or DTAA.

c) In the absence of 'use or right to use any equipment in a webhosting service, the insertion of Explanation 5 to Section 9(1)(vi) of the Act is of no relevance.

d) Zoho India accesses the server and the data centre for the purpose of storage, data processing etc via the internet.

e) The appellant did not grant Zoho India any rights in the respective software nor was any copyright transferred.

f) Web hosting services do not make available any technical knowledge, skill, know how or process to Zoho India so as to fall within the purview of Article 12 of the India- US Treaty.

5.7 In Akamal Technologles Inc. [2018] 93 taxmann.com 471 (AAR - New Delhi), the AAR, in the context of the India-USA DAA, held that a technology company providing business processes online (Solutions) and catering to customers who had web based applications/websites, etc, on the Internet, to help deliver the web content faster and more reliably does not tantamount to Royalty, since the customers do not have possession or control over the equipment. Even though the solutions may be provided using tangible property such as servers, databases, etc, Akamai India/the Indian customers do not have possession and control over the Akamai EdgePlatform/website/server/any tangible property used in the provision of the solutions.

5.8 The Honourable Karnataka High Court in CIT v. Urban Ladder Home Decor Solutions (P.) Ltd. [2025] 171 taxmann.com 549 (Karnataka) dealt with the issue whether payments made by the taxpayer to Amazon Web Services, USA are in the nature of FTS/FIS/ Royalties under the IT Act and the DAA between India and USA. The High Court concurred with the decision of the ITAT and held that webhosting paid to Amazon Web Services, USA are not taxable under the DAA between India and USA. The High Court held as under:

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a) The Court agreed with the ITAT which relied on the decision of the Pune Tribunal in EPRSS Prepaid Recharge Services India P. Ltd. v. ITO (ITA No.828/PUN/2016 & ITA No.1204/PUN/2016). In that case the Tribunal held that the payment made by the assessee, which did not have the facility available with it of high technology equipments i.e.Servers, towards webhosting fees (to Amazon) was for use of technology and cannot be said to be for use of royalty.

b) The Court agreed with the ITAT that the retrospective amendment to Section 9(1)(vi) of the IT Act does not in any way impact the DAA since no such amendment has been made to the Treaty Laws and in DAA, as held in EPRSS (supra).

c) The Court agreed with the ITAT, which relied on EPRSS (supra) wherein it was held that control and possession is essential so as to be termed as Royalties - 'If we construe the meaning of royalty as per DAA, then we have to consider the possibility of possession and control of server/server space, which admittedly, is not possessed by the assessee'.

d) The Court concurred with the ITAT's reliance on the Madras High Court's decision in Skycell Communications Ltd. 251 ITR 53 (Madras), which held that the mere use of a facility does not constitute the provision of a technical service.

e) The payment to Amazon Web Services, USA towards web hosting services is only for using 'information technology facilities' and not Royalties under the India-USA DTAA.

5.9 In Rackspace US Inc vs DCIT in ITA No. 1634/Mum/2016 dated 29/5/2019 ,it was held that income earned by Rackspace, US Inc. (assessee) did not qualify as Royalty or Fee for Technical Services (FTS) but business income, not taxable in India in the absence of Permanent Establishment (PE) of assessee in India, under the provisions of the Income Tax Act, 1961 and India-USA tax treaty (tax treaty) since the payment was for rendition of cloud hosting services being in the nature of standard services, performed in view of the terms of a service agreement. Further, the provisions of tax treaty, being more beneficial to the assessee would prevail, thereby keeping it outside the ambit of taxation in India. The Honourable Tribunal analysed the amended provisions of section 9(1)(vi) of the Act and explanations thereto and held that as per the provisions of Section 90(2) of the Act, the assessee can opt to be governed by the provisions of the tax treaty to the extent they are more beneficial than the provisions of the Act. As per the provisions of

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article 12(3) of the tax treaty, the ITAT observed that definition of 'royalty' is exhaustive and not inclusive and hence and must be given the meaning as contained in the Article itself. Referring to the plain text of the tax treaty provisions, it opined that the definition of 'royalty' did not encompass within its ambit, the payment for the services involved as Rackspace USA is providing hosting services to the Indian customers and does not give any equipment or control over the equipment.It further noted that as per the definition, the term "use" or "right to use" for the purpose of the tax treaty, it entails that the payer has possession/control over the property and/or the said property is at its disposal. Consequently, the income earned by the assessee through rendition of cloud hosting services would not be taxable in India as 'royalty' but as business income and same shall not be taxable in India, in the absence of PE of assessee in India. 5.10 In the present appeal, the Appellant is engaged in the business of providing facilities for storage of data (web hosting services, data centre services, Storage and retrieval services, cloud hosting services, cloud computing services as may be called), to its customers in India. As discussed in the preceding paragraphs, the payments are not in the nature of royalty nor FTS in the absence of make available clause. No material has been brought on record to suggest that the applicant had a PE in India. Hence, the said services are neither Royalties nor FTS/FIS both under the IT Act as well as under the DTAA between India and USA. ******

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9(1)(vi) of the Act and Article 12(3)(b) of the DTAA on the ground that the customers were allegedly using the servers and equipment maintained by the assessee. Alternatively, the receipts were also sought to be assessed as fees for technical services.

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it was held that amendments to domestic law cannot be read into treaty provisions without corresponding amendment to the DTAA. Reliance was also placed on the decision of the Hon’ble Delhi High Court in Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 197 Taxman 263 (Delhi) and the judgment of the Hon’ble Bombay High Court in CIT v. Telstra Singapore Pte. Ltd. [IT Appeal Nos.334 & 335 of 2022 and Others, dt.24-07-2024]. The ld. AR submitted that the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT 125 taxmann.com 42 (SC) affirmed the ratio laid down in New Skies Satellite (supra) and held that unilateral amendments to domestic law could not override the provisions of the DTAA. It was further submitted that the Hon’ble Supreme Court specifically held that Explanations inserted by the Finance Act, 2012 expanded the scope of royalty and could not be imported into treaty provisions where the DTAA definition was narrower and more beneficial to the assessee.

ITA Nos.1841, 1843, 1844, 1845, 1846/Chny/2025 Zoho Corporation :- 9 -:

S.N NAME AY O. 1 Verizon Communications Singapore 2002-03, 2003- . PTE Ltd. 04, 2007-08 & 2008-09 2 Cognizant Technology Solutions 2003-04 & . Pvt. Ltd. 2004-05 3 Engineering Analysis Centre of 2001-02 and

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. Excellence Pvt. Ltd. 2002-03

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in page 3 of my written submission. The judgement have to be applied only with reference to the facts of the particular case and in the present case the amendments introduced by the Finance Act, 2012 are within the scope of the Indo US DTAA. 18. In the case of M/s. Verizon Data Services India Pvt Ltd, the customers have no knowledge/control of the equipment or network. This is noted in para 12.5.4 of the judgement relied by the AR. However, in the present case, this is an exclusive service and the customer, as brought out in the agreement, has right of inspection and even the technology is decided in accordance with what is conducive to the needs of the customer, that is the ZOHO INDIA. Thus, the present case stands on a much better footing than Verizon. 19. Thus, it is submitted that the judgment of the Madras High Court in the case of Cognizant Technology Solutions, relied upon by the AR, has no applicability to the present case because it relates to AYs before the introduction of Finance Act 2012, and secondly, it does not relate to the issue of taxability of the receipt in the hands of the recipient. In facts also, the judgement has no application in the present case. Thus, it is prayed that this order of the CIT (A) may kindly be reversed and that of the AO restored.”

ITA Nos.1841, 1843, 1844, 1845, 1846/Chny/2025 Zoho Corporation :- 13 -:

Assessing Officer is that the services provided by the assessee would fall within the purview of section 9(1)(vi) of the Act since the assessee by providing the webhosting services is also providing Zoho India the right to use the industrial and scientific equipments i.e.Servers. We find that the issue is no longer res integra in view of the consistent judicial precedents rendered by various High Courts and the Hon’ble Supreme Court. The Hon’ble Karnataka High Court in CIT v. Urban Ladder Home Décor Solutions (P.) Ltd. (supra) had categorically held that payments made towards web hosting services constitute consideration for availing information technology enabled services and not for use of equipment so as to attract Article 12 relating to royalty. The Hon’ble Court, after considering the scope of section 9(1)(vi) as well as the India-USA DTAA, held that the customer merely avails a facility and does not obtain possession or control over the equipment. Similar principles were earlier laid down by the Hon’ble Madras High Court in Skycell Communications Ltd. v. DCIT wherein it was observed that mere use of a facility provided through technical infrastructure would not amount to receipt of fees for technical services. In this regard it is relevant to consider the following observations of the Bangalore Bench of the Tribunal in the case of Infosys Ltd (IT(IT)A Nos.105 to 115/Bang/2021 dated 25.08.2021) which is relied on by the CIT(A) –

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explained the concept of use of scientific equipment whether would amount to royalty or not by observing as follows:

“9. We have noted that the very basis of the impugned addition is Assessing Officer's finding that the receipts in question were on account of use of scientific equipment, and, for that reason, giving rise to an income taxable under section 9(l)(vi] of the Act as also article 13[1)(» of the Indo US tax treaty. This finding, however, proceeds on the fallacy that when a scientific equipment is used by the assessee for rendering a service, the receipt will be construed as a receipt for use of scientific equipment. Undoubtedly, when the assessee receives an income on account of allowing a customer to use a scientific equipment, it does become taxable for the reason of its being characterized as such, but the use of a scientific equipment by the assessee, in the course of giving a service to the customer, is something very distinct from allowing the customer to use a scientific equipment. The true test is in finding out the answer to the fundamental question- is it the consideration for rendition of services, even though involving the use of scientific equipment, or is it the consideration for use of equipment simplicetor by the assessee? In the case of former, the consideration is not taxable, in the case of the latter, the consideration is taxable. In the case of Kotak Mahindra Primus Ltd Vs DDIT [(2007) 11 SOT 578 (Bom)], a coordinate bench, dealing with a situation in which the mainframe computer and the specialized software was used for rendering data processing services to an Indian entity, held so and observed that, "No part of this payment can be said to be for the use of specialized software on which data is processed or for the use of mainframe computer because the Indian company does not have any independent right to use the computer or even physical access to the mainframe computer, so as to use the mainframe computer or the specialized software." A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it. In the present case also, what the assessee is providing is essentially web hosting service, though with the help of sophisticated scientific equipment, in the virtual world. The scientific equipment used by the assessee enable rendition of such a service, and such a use, which is not even by the Indian entity, is not an end in itself. In this view of the matter, even though the services rendered by the assessee to the Indian entities may involve use of certain scientific equipment, the receipts by the assessee cannot be treated as "consideration for the use of, or right to use of, scientific equipment" which is a sine qua non for taxability under section 9(l)(vi) read with Explanation 2 (iva) thereto.”

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them on demand. Traditionally we store our data in our computer and can access the data only if the computer is available. In cloud computing the data is store in a server and can be accessed through any system. The Mumbai Tribunal in the case of Rackspace, US Inc. ITA No.1634/Mum/2016 and ITA Nos. 3507 & 1075/Mum/2017 order dated 29.5.2019 followed the earlier decision rendered in the case of American Chemical Society vs. DCIT in ITA No. 6811/Mum/2017 for the AY 2014-15 vide order dated 30.04.2019, wherein identical issue was decided in the context of right to use material in the form of journal,. The Tribunal held that the cloud hosting company creates / maintains information online and grants access to the journals, the assessee neither shares its experiences, techniques or methodology employed in evolving databases with the users, nor imparts any information relating to them. The terms of the agreement between the cloud host and the customer proider that the customer gets right to search, view and display the articles (whether online or by taking a print) and reproducing or exploiting the same in any manner for personal use. The customers do not get any rights to the journal or articles therein. It was held that there was No 'use or right to use' in any copyright or any other intellectual property of any kind is provided by the assessee to its customers. Furthermore, the information resides on servers outside India, to which the customers have no right or access, nor do they possess control or dominion over the servers in any way.Therefore, the question of such payments qualifying as consideration for use or right to use any equipment, whether industrial, commercial or scientific, does not arise. The tribunal thereafter applied the ratio to the case of the Assessee Rackspace, US Inc. and held that the agreement between 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, web mail, websites etc. The tribunal therefore held that income from cloud hosting services was not 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.

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of the subsequent pronouncements rendered by the Hon’ble Delhi High Court in New Skies Satellite BV (supra) and affirmed by the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd (supra). The Hon’ble Supreme Court has categorically held that unilateral amendments to the domestic law cannot automatically alter the scope of treaty provisions unless the DTAA itself is amended through bilateral negotiation. It is a settled position that where the definition contained in the DTAA is narrower and more beneficial to the assessee, the same would prevail by virtue of section 90(2) of the Act. This position is further reiterated by the Hon’ble Jurisdictional High Court in Cognizant Technology Solutions India Pvt. Ltd.(supra), where it is held that amendments introduced by the Finance Act, 2012 cannot be imported into Article 12 of the DTAA in the absence of corresponding treaty amendment. It is relevant to note that the Hon'ble High Court has considered the subsequent law declared by the Hon’ble Supreme Court and has also distinguished the decision relied on by the revenue in the case of Verizon Communications Singapore Pte Ltd(supra). The definition of Royalty as per Article 12(3) of India USA DTAA is –

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Order pronounced on 01st day of June, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY T. Varkey) (Padmavathy.S) �ाियक सद�/Judicial Member लेखा सद�य लेखा सद�य /Accountant Member लेखा लेखा सद�य सद�य चे�नई/Chennai, �दनांक/Dated: 01st June, 2026. M.M, P.S आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF EJTADA Digitally signed by EJTADA DURGA DURGA NARESH Date: 2026.06.04 NARESH 16:57:32 +05'30'