Delhi High Court Directs AWS India To Withhold 8% Payment Of The AWS USA And Deposit It With The Dept.

The Delhi High Court has directed that AWS India withhold 8% of payments payable or paid to AWS USA and deposit the same with the income tax department.

The division bench of Justice Vibhu Bakhru and Justice Amit Mahajan has observed that the nature of the proceedings is confined to the withholding of tax and that the financial year 2022–23 is already over.

The Court suggested to the parties that, without prejudice to their rights and contentions regarding the chargeability of AWS USA’s income under the Act, a total of 10% be withheld (less the 2% Equalisation Levy that has already been paid) as withholding tax.

The petitioner/assessee, AWS India, is in the business of reselling web services to third-party customers in India. AWS USA is a company that has its principal place of business in the United States of America and is engaged in the business of providing web services to its customers and resellers worldwide, including AWS India. AWS USA is a tax resident of the United States of America and holds a tax residency certificate (TRC).

AWS India claims that, in terms of the Reseller Agreement between AWS India and AWS USA, it was appointed as a non-exclusive reseller of web services on a principal-to-principal basis.

In terms of the Reseller Agreement, AWS India claims that it is authorised to resell web services to its customers in India. It claims that it independently enters into contracts in its own name with Indian customers and raises invoices directly from such customers. It also receives funds directly from its customers.

AWS India makes payments to AWS USA for the purchase of web services for the purpose of reselling the same to its customers.

According to AWS India, the payments are not subject to tax in the hands of AWS USA. In its application, AWS India claimed that AWS USA’s receipts are chargeable to the Equalisation Levy under Section 165A of the Finance Act, 2016, which was paid.

AWS India claimed that the payments made by it are not chargeable to income tax under the Act either as fees for technical services (FTS) or royalty under Section 9 or under the Indo-US DTAA.

The AO held that AWS USA had a large global infrastructure footprint built around 30 regions and 96 availability zones, with each availability zone consisting of one or more data centres. The AO also concluded that AWS USA had offices in several cities in India. He did not accept AWS India’s claim that data centres in India were owned and operated by separate entities and had no connection with the customers availing of the services in India.

The AO concluded that the data centres and availability zones constituted ASW USA’s fixed place of business through which its core business is carried out.

AWS India challenged the order passed by the Assessing Officer disposing of the application filed by AWS India under Section 195(2) of the Income Tax Act, 1961. AWS India also sought the determination of the appropriate proportion of the sum payable to AWS USA chargeable to tax for the purposes of withholding tax deducted at source (TDS).

The department contended that it has stoutly contested the contentions advanced on behalf of the petitioners (AWS India and AWS USA). He submitted that AWS India had withheld vital information from the Department, including the financial statement of AWS USA for the previous financial years, which would be essential for determining the proportion of income chargeable to tax. He contended that AWS USA was not only servicing clients in India through its PE but also servicing clients overseas from its PE in India. The department now had sufficient material to confirm that AWS USA had PE in India.

The court modified the order to be applicable only for the limited period from 01.11.2022 to 31.03.2023. However, it was clarified that the department is not precluded from taking any measures for the period prior to 01.11.2022 on the basis that neither any application under Section 195(2) was filed for the period nor was it considered by the AO.

The court directed that the withheld tax in terms of the order, as modified in the terms, be deposited with the concerned tax authorities within a period of one week from today. In the event that the amount is deposited, it would constitute a full discharge of AWS India’s obligation to withhold and deposit the tax in respect of payments to AWS USA without any recourse by the department.

Case Title: Amazon Web Services India Pvt Ltd & Anr. Versus ITO

Citation: 2023 LiveLaw (Del) 819

Date: 31.08.2023

Counsel For Petitioner: Porus Kaka

Counsel For Respondent: N Venkataraman

Click Here To Read The Order