Cloud Computing Services and Taxing

Information Technology (IT) services constitute a central division in almost all multinational companies in their objective to do business and generate revenues. Among the most recent tools of IT employed by businesses for their operations is ‘cloud computing’.

Broadly speaking, a cloud computing service provides omnipresent and easy, on-demand network access to a consortium of configurable computing resources including networks, servers, storage, applications and services, which can be provisioned in a short time and released with minimum effort from the management and service provider.

This effectively means that Cloud works on demand, is available anywhere, at any time, provided there is internet connection and is scalable, which means that the user can scale the amount of Cloud Computing services or goods required as and when required or for example when their business grows and requires more resources for more users.

Multinational businesses are switching to the ‘cloud computing’ model as it cuts spending on procurement and development of IT infrastructure plus maintenance and operation of the same by an IT Team. There are three major models of delivering ‘cloud computing’ services to businesses and they are Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS).

In recent years, there have been a spate of judicial rulings regarding e-commerce taxation in India. Cloud computing, on the other hand, being a relatively new phenomenon, has not been taken up in that way yet. Until that happens, there will continue to be a large amount of uncertainty on the question of whether cloud computing services would come under the tax net or not.

It is worth taking note here that under the IncomeTax Act India, 1961, the definition of royalty covers both payments for the right to use certain IP rights (patents, copyrights, secret formulae etc.) and the right to use scientific equipment. A more or less similar definition of this appears in several tax treaties signed by India. Upon this analysis of the definition of ‘royalty’, experts have observed that a majority of the cloud computing models would come under the purview of this definition of 'royalty'. The same conclusion would follow if the cloud service causes transfer of the right to use certain intellectual property in a software stored on the server of the third-party service provider which may be utilised by the client.

Let us look at the three models of cloud computing in detail to figure out how they may or may not become taxable in the future. In the IaaS model of computing, the cloud service provider may make a specific physical portion of the network available to the customer on a dedicated basis. In that case, if the customer avails the computing infrastructure and has control over it, the payment may be characterised as royalty as it is for the use of equipment.

   

If we look at the PaaS model, it can be argued that payment under this arrangement is not royalty. This is because first, the customer does not use any equipment, second, such transactions do not involve the transfer of right in any process, trademark or copyright to the customer, and third, the transactions do not involve the use of any patent, process or copyright by the customer.

To conclude, it is apparent that there is a lot of uncertainty at present in the business environment regarding taxing of cloud computing services. We can only wait to see what treatment is accorded to ‘cloud computing’ by the Indian tax authorities and the Courts and anticipate rule changes at any time through IncomeTax Amendments. Foreign cloud computing service providers as well as service recipient businesses in India will be closely watching the potential tax implications of the business set-ups that they seek entry into and factor the same in their dealings.