Withholding Tax on Cloud Infrastructure Payments : Characterisation, Treaty Relief and a Documentation Roadmap for Cross - Border Vendors

Introduction : Cloud computing has fundamentally transformed the manner in which businesses procure computing resources. Instead of purchasing and maintaining physical servers, enterprises increasingly subscribe to Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), managed hosting, colocation facilities, and other cloud-based solutions offered by multinational service providers. While these arrangements improve operational efficiency and scalability, they simultaneously create complex tax questions where payments are made to non-resident cloud vendors. Every rupee an Indian company remits to a foreign cloud vendor for servers, storage or managed hosting carries a threshold question that decides whether tax must be withheld at all, and at what rate: what is the payment actually for? 

This blog examines the withholding tax implications of payments for cloud infrastructure services under Indian law, analyses the characterisation challenges arising from different cloud business models, discusses treaty considerations affecting cross-border payments, and provides practical guidance for structuring cloud transactions from a withholding tax perspective.

Legal Provisions

A. The Characterisation Trigger: Section 9 and the Definition of Royalty

Section 9 of the Income-tax Act, 1961 deems certain categories of income, such as royalties and fees for technical services, to accrue or arise in India even if the non-resident payee has no other connection with the country. Section 9(1)(vi) of the Income-tax Act, 1961, carried forward under Section 9 of the recodified Income-tax Act, 2025, deems royalty income to accrue in India where paid for, among other things, the use of any patent, process, or industrial, commercial or scientific equipment. Explanation 2, clause (iva) to Section 9(1)(vi) specifically extends this definition to the use of equipment and Explanations 4, 5 and 6 which are inserted with retrospective effect by the Finance Act, 2012 clarify that this includes computer software and that royalty arises regardless of whether the payer possesses or controls the equipment, or where the equipment is located.

Section 9(1)(vii) of the Income-tax Act, 1961 separately deems fees for technical services (hereinafter referred to as “FTS”) to accrue in India. It deems FTS to accrue in India where the payment is consideration for managerial, technical or consultancy services, excluding construction, mining and similar project services and salary income. Where a cloud contract bundles standardised infrastructure with dedicated engineers or configuration assistance, the Revenue has sometimes argued the support component, or the entire arrangement, falls within this definition.

B. The Withholding Mechanism and Applicable Rates

The obligation to withhold tax on payments to non-residents, earlier under Section 195 of the 1961 Act, now sits at Section 393(2), Serial No. 17 of the Income-tax Act, 2025, effective 1 April 2026, and applies to any sum chargeable to tax, other than salary, paid to a non-resident. The obligation arises only where the sum is chargeable to tax in India; pure business income without a permanent establishment (hereinafter referred to as “PE”) falls outside Section 393(2) entirely, which is why correct characterisation drives the whole exercise.

Where a payment is royalty or FTS and the payee has no PE in India, Section 115A prescribes the domestic rate, doubled by the Finance Act, 2023, from ten to twenty per cent (plus surcharge and cess) from 1 April 2023. This increase has made the treaty rate, typically between ten and fifteen per cent under most DTAAs that India has entered into, considerably more attractive than the domestic default rate, which raises the stakes for correctly claiming treaty benefit under Section 90(2) of the Income-tax Act, 1961.

C. Treaty Relief and the “Make Available” Standard

Section 90 of the Income-tax Act, 1961 permits a non-resident taxpayer, or an Indian payer withholding tax on the non-resident's behalf, to apply the provisions of an applicable DTAA instead of domestic law, wherever the treaty provisions are more beneficial to the taxpayer. Most Double Taxation Avoidance Agreements or DTAAs, including Article 12(4)(b) of the India-USA DTAA, define fees for included services more narrowly, requiring that the service “make available” technical knowledge, skill or know-how such that the recipient can thereafter apply it independently, without continued recourse to the provider.

Several other treaties, including the DTAA between India and Belgium, go further and exclude payments for the use of industrial, commercial, or scientific equipment from the definition of royalty altogether, following a protocol amendment made in 2001. Because Section 90(2) entitles the non-resident to whichever of the Act or the applicable treaty is more beneficial, a payment may lawfully escape Indian withholding tax under a narrower treaty definition even though it would otherwise be caught under the wider domestic definition.

D. Documentation Gateway for Treaty Benefit

Sections 90(4) & (5) of the 1961 Act, recodified at Section 159 of the 2025 Act, make a Tax Residency Certificate (hereinafter referred to as “TRC”) mandatory for DTAA benefit; where the TRC lacks particulars prescribed under Rule 21AB, the payee must also file a self-declaration under Form 41. Rule 37BB requires the Indian remitter to obtain a chartered accountant's certificate under Form 146, wherever a taxable remittance exceeds five lakh rupees, along with the remitter's own declaration under Form 145.

E. The Data Centre Tax Holiday

Budget 2026-27 introduced a significant, separate incentive for foreign cloud providers. Entry 13C of Schedule IV to the Income-tax Act, 2025, read with Section 11 of that Act, grants a tax holiday running from tax year 2026-27 to 2046-47 for a period of twenty-one years on the global income of a foreign cloud service provider, provided that income is routed through a data centre located in India and notified by Ministry of Electronics and Information Technology (MeitY). The exemption is subject to two important conditions, i.e., the foreign company must not itself own or operate the Indian data centre and it must serve its Indian customers only through an Indian reseller. Related-party, cost-plus arrangements involving such data centres are separately granted a fifteen per cent safe harbour margin and the pre-existing safe harbour threshold applicable to information-technology-enabled services has been raised to two thousand crore rupees at a 15.5 per cent margin. 

Legal Analysis

A. Tax Treatment of Payments for Servers, Hosting, and Managed Cloud Services

A single cloud arrangement can include access to servers, software, storage, networking, cybersecurity monitoring, automated maintenance and customer support, all billed under a single invoice. Because a single payment can enlist several of these components at once, the correct approach is to examine each recognised category of cloud arrangement separately. Dedicated server arrangements give a customer exclusive access to specified computing resources without transferring ownership or physical possession of the underlying hardware. Tax authorities have historically tried to characterise such payments as consideration for the “use” or “right to use” industrial, commercial or scientific equipment, thereby attracting royalty taxation under Section 9(1)(vi). However, where the customer receives only computing capacity while the provider retains complete possession and operational control of the hardware, the arrangement is increasingly treated as a service contract rather than an equipment lease. 

Managed cloud services go beyond mere infrastructure provisioning to include system monitoring, automated patch management, backup services, security monitoring, migration assistance, and performance optimization. Indian tax jurisprudence has consistently held that the mere deployment of sophisticated technology, or the involvement of technical personnel in a standardised support function, does not automatically convert a commercial service into a technical service for the purposes of Section 9(1)(vii). The critical inquiry is instead whether the customer merely receives the benefit of the provider's technical expertise, or whether technical knowledge, experience, skill, know-how or processes are actually made available to the customer so that it can perform those functions independently in future. 

B. Characterisation Issues and Treaty Concerns

The central characterisation issue in cloud taxation is whether a payment for standardised cloud infrastructure amounts to “equipment royalty” merely because sophisticated servers and software are used to deliver the service. Indian jurisprudence has progressively moved away from treating every technology-enabled payment as royalty. The mere rendering of a technical service is not enough to attract FTS; the recipient must be left able to replicate the service independently, without further recourse to the provider, once the engagement ends. Automated, self-service cloud infrastructure, where the provider's know-how never leaves its own systems, fails this test. The position changes, however, wherever a contract is unbundled into a bespoke engagement, with named engineers configuring or migrating a customer's environment such that the customer's own staff can maintain it independently afterwards; such an engagement risks satisfying the make-available test on its facts, irrespective of how the invoice is worded.

The characterisation of cloud infrastructure payments assumes even greater significance where the recipient is resident in a country with which India has a tax treaty. Under most of India's tax treaties, payments for cloud infrastructure may fall within one of three categories, namely royalty, fees for technical services (or fees for included services), or business profits and each classification carries different tax consequences and different procedural requirements. Accordingly, businesses must undertake a treaty-specific analysis before deducting tax.

C. Documentation for Cross-Border Vendors

Because the legal characterisation of a cloud payment depends heavily on the contractual documentation governing the transaction, Indian businesses engaging foreign cloud vendors and the vendors themselves should maintain contractual documentation, invoices and statements of work, treaty-benefit documentation, remittance compliance records, transfer pricing documentation and internal withholding-position records to support the position adopted. 

Businesses should preserve detailed invoices that accurately describe the nature of the services rendered. Invoice descriptions referring to “cloud hosting,” “compute instances,” “virtual storage,” “managed infrastructure,” or “subscription services” are generally more consistent with a service characterisation. Wherever treaty benefit is claimed, documentation under Sections 90(4) and 90(5) of the Income-tax Act, 1961 becomes indispensable. Businesses should also retain the compliance documentation required under Rule 37BB of the Income-tax Rules, 1962 for every remittance as well as transfer pricing documentation wherever the transaction occurs between associated enterprises. Finally, the Indian payer should maintain internal documentation supporting its own conclusion on the withholding position adopted under Section 195 (or Section 393(2)).

Relevant Case Laws

Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax, (2021) 432 ITR 471 (SC): The Court held that payments cannot be characterised as royalty unless they involve the transfer of rights contemplated under the Copyright Act or the applicable DTAA. Mere access to technology or use of a copyrighted product, without conferring proprietary rights or control over the underlying intellectual property, does not amount to royalty. This principle has subsequently guided courts in cloud computing disputes, reinforcing the distinction between granting customers access to a standardised technology platform and transferring rights in the underlying software or infrastructure. Accordingly, the decision supports the view that payments for standard cloud infrastructure and hosting services, which do not confer possession, control, or exploitation rights over servers or software, are generally not taxable as royalty.

Commissioner of Income Tax v. Amazon Web Services, Inc., 2025:DHC:4180-DB: The Delhi High Court reaffirmed that consideration received for standardised cloud computing services is neither royalty nor fees for technical services under the Income-tax Act or the India-US DTAA. The Court observed that AWS merely provides customers with automated access to a cloud platform without transferring any proprietary interest in its hardware, software, or intellectual property. Customers neither possess nor control the servers, nor are they granted any right to commercially exploit the underlying technology. The Court also rejected the Revenue's contention that technical support and application programming interfaces amounted to "making available" technical knowledge, holding that such features merely facilitate the use of the platform. The judgment therefore provides strong judicial authority for treating payments for cloud hosting, storage, and infrastructure services as consideration for standard services rather than royalty or fees for technical services.

Rackspace US Inc. v. DCIT, [2019] 180 ITD 1 (Mum. Trib.): The Mumbai Bench of the Income Tax Appellate Tribunal held that payments received for cloud hosting services were not royalty under either the Income-tax Act or the India–US DTAA. The Tribunal emphasised that customers merely received hosting services and never obtained possession, physical access, or operational control over the servers or networking equipment used by the service provider. The infrastructure remained exclusively owned and managed by Rackspace, and the customer only benefited from the output of the service. Since the arrangement did not grant any right to use industrial, commercial, or scientific equipment, nor make available any technical knowledge or know-how, the consideration could not be characterised as royalty or fees for included services.

Practical Implications

The tax treatment continues to depend upon the precise contractual rights transferred, the applicable treaty provisions, and the factual matrix of each transaction. Businesses should therefore avoid adopting a uniform withholding approach for all technology payments. Standard cloud subscriptions, dedicated hosting arrangements, managed infrastructure services, software licensing, cloud migration projects, cybersecurity consulting, and customised technical support frequently involve materially different legal rights and may consequently receive different tax treatment.

Payment-Structuring Guide

Nature of Payment	Likely Characterisation	Principal Withholding Consideration
Shared cloud hosting	Business profits	Taxable only if a PE exists under the applicable DTAA.
Infrastructure-as-a-Service (IaaS)	Generally business profits	Examine whether any equipment possession or IP rights are transferred to the customer.
Platform-as-a-Service (PaaS)	Business profits/service income	Assess whether proprietary platform software rights are licensed, rather than merely accessed.
Managed cloud services	Service income or FTS, depending on facts	Consider whether technical knowledge is “made available” under the relevant DTAA.
Dedicated server arrangements	Fact-dependent	Determine whether exclusive possession amounts to equipment royalty or merely infrastructure services.
Software licence bundled with cloud services	Mixed transaction	Separate software licensing consideration from infrastructure charges wherever commercially possible.
Cloud migration and implementation consultancy	Potential FTS	Analyse the degree of human intervention, the consultancy element, and the applicable treaty's make-available requirement.

Conclusion

The taxation of cloud infrastructure payments represents one of the most significant challenges in contemporary international taxation. Traditional concepts of royalty and technical services were developed in an era dominated by tangible assets and conventional licensing arrangements, whereas cloud computing functions through integrated digital infrastructure in which customers receive scalable computing capability without acquiring proprietary rights over the underlying hardware or software. Indian jurisprudence has moved decisively away from the expansive equipment-royalty reasoning. For businesses operating across jurisdictions, withholding tax compliance therefore requires considerably more than identifying the service being purchased. It demands careful examination of contractual rights, domestic tax provisions, treaty definitions, judicial precedents, and documentary evidence supporting the adopted tax position. 

Author: Damita in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes

1. Income-tax Act, No. 43 of 1961 (India); Income-tax Act, 2025 (India).

2. Income-tax Act, No. 43 of 1961 (India); Income-tax Act, 2025 (India); Income-tax Rules, 1962 (India).

3. Finance Act, 2025 (India); Finance (No. 2) Act, 2024 (India); Income-tax Act, No. 43 of 1961 (India).

4. Convention Between the Government of the Republic of India and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, India–U.S., art. 12(4)(b), Sept. 12, 1989; Memorandum of Understanding Concerning Fees for Included Services, India–U.S.

5. Convention Between the Republic of India and the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, India–Belg., art. 12(3)(a), as amended by Protocol (2001); Income-tax Act, No. 43 of 1961, § 90(2) (India).

6. Convention Between the Government of the Republic of India and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, India–U.S., art. 7; OECD Comm. on Fiscal Affairs, Commentary on Articles 7 and 12 of the OECD Model Tax Convention (latest ed.).

7. Income-tax Rules, 1962 (India); Notification No. 93/2015, Central Board of Direct Taxes (Dec. 16, 2015) (India).

8. Ministry of Finance, Press Release, Exemption from Minimum Alternate Tax (MAT) to All Non-Residents Who Pay Tax on Presumptive Basis; Tax Holiday Till 2047 to Any Foreign Company That Provides Cloud Services to Customers Globally by Using Data Centre Services from India (Feb. 1, 2026).

9. Press Information Bureau, Budget 2026–27 Sets the Stage for India as a Global Hub for Cloud and AI Infrastructure (Feb. 14, 2026).

10. Organisation for Economic Co-operation and Development (OECD), Addressing the Tax Challenges of the Digital Economy, Action 1—2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project (2015); OECD, Addressing the Tax Challenges of the Digital Economy (2014).

11. Circular No. 789, Central Board of Direct Taxes (Apr. 13, 2000) (India).

12. Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax, (2022) 3 SCC 321.

13. Commissioner of Income Tax v. Amazon Web Services, Inc., 2025:DHC:4622-DB.

14. Rackspace US Inc. v. Deputy Commissioner of Income Tax, [2019] 180 ITD 1 (Mum. Trib.).