Data Centre Servers | APIs | Tax Exemptions
CA. Naveen Wadhwa Vice-President –Taxmann’s Advisory & Research
Data Centre Servers | APIs | Tax Exemptions
CA. Naveen Wadhwa Vice-President –Taxmann’s Advisory & Research
The Finance Bill, 2026, proposed a significant tax incentive for foreign companies until the tax year 2046-47. The exemption under the proposed provision applies to a foreign company from any income accruing or arising in India, or deemed to accrue or arise in India, from procuring data centre services from a data centre owned and operated by an Indian company. The exemption is available on fulfilment of certain important conditions that the Central Government should notify the foreign company, it does not own or operate any of the physical infrastructure or any resources of the data centre, all sales by such foreign co. to users located in India are made through a reseller entity, being an Indian company and the foreign company maintains and furnishes the prescribed information in the prescribed manner.
To understand the exemption, it is imperative to understand how data centres operate, the parties involved in the ecosystem, and the revenue streams.
1. Understanding Data Centres
A data centre is a dedicated, secure facility that houses servers, continuously stores data, and runs applications. These facilities are essential for modern digital infrastructure, providing the backbone for cloud computing, email services, banking applications, and countless other digital services. Data centres offer economies of scale and professional expertise that most organisations cannot replicate cost-effectively. They need a reliable power supply with backup generators, sophisticated cooling systems, physical security, and round-the-clock technical support. For businesses, renting space and services from a professional data centre is far more economical than building and maintaining proprietary infrastructure.
A data centre ecosystem comprises many players: Infrastructure or Colocation Providers, Cloud Service Providers, Managed Service Providers (MSPs), Application Providers, Resellers, Network Service Providers, and Disaster Recovery & Backup Service Providers. However, for the foreign company to claim the new tax exemption, the following key parties must work together:
1.1 Data Centre Providers
They fall into two main categories: Infrastructure and Colocation providers.
Infrastructure providers own and operate complete data centres, including the building, power infrastructure, cooling systems, network connectivity, and servers/hardware. Customers lease computing resources, such as virtual machines, storage, and bandwidth, on a subscription basis, without owning any physical equipment.
Colocation providers, in contrast, own the data centre facility and infrastructure, including the building, power, cooling, physical security, and network connectivity. Still, customers bring and own their own servers and hardware. Customers retain full control over their equipment and are responsible for managing, maintaining, and upgrading their servers.
1.2 Cloud Service Providers
These are the large technology companies that provide computing resources, storage, and services over the internet. Companies like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform fall into this category. They either build their own massive data centres or lease significant space from infrastructure providers, then fill it with their own standardised equipment.
1.3 Resellers
Resellers purchase data centre or cloud services from primary providers and sell them to end customers, often adding additional services, customisation, or industry-specific expertise. They don’t typically own any physical infrastructure themselves but act as intermediaries in the sales and support chain.
The table below gives an overview of the parties involved in a data centre ecosystem and their revenue stream:
Party Type
Infrastructure or Colocation Providers (Data Centre Operators) [i.e., Netmagic (NTT), Adani Data Networks]
Cloud Service Providers [i.e., AWS, Azure, JioCloud, Tata Communications, etc.)
Role in Ecosystem
• Own and operate physical data centre facilities;
• Provide foundational infrastructure for hosting servers and equipment
• Deploy server infrastructure
• Provide scalable computing, storage, and platform services over the internet
• Offer compute, storage, database, AI/ML services
• Provide APIs and developer tools
• Maintain a global network of interconnected regions
Revenue Streams
• Rent per rack or square footage
• Power consumption charges
• Network connectivity fees
• Compute hours (virtual machine usage)
• Storage fees
• Data transfer and bandwidth charges
• Premium services (databases, AI/ML, analytics)
• Marketplace commissions (third-party apps)
Resellers [i.e., Redington India, Ingram Micro India, etc.)
• Purchase cloud and infrastructure services from providers
• Resell with added customisation
2. Conditions for Exemption
• Markup on resold services
• Implementation and setup fees
• Support and maintenance fees
Among other conditions, which are simple to understand, the following are the key aspects:
a) The foreign company procures data centre services from an Indian company,
b) Data centre services are taken from a data centre owned and operated by an Indian company, and
c) It sells those services to Indian users through an Indian reseller.
2.1 Procuring the Data Centre Services
The exemption applies to a foreign company that procures data centre services from an Indian data centre. As discussed above, data centres can be operated by either Colocation Providers or Infrastructure Providers. It appears that, for the foreign company to claim the exemption, the exemption provision applies only when the infrastructure provider operates the data centres. If the foreign company obtains data centre services in a colocation model, in which it brings its servers, computers, etc., the exemption will be denied.
To support this conclusion, we can take the following arguments:
a) The definition of ‘data centre service’ as provided in Note 3(b) of Table in Schedule IV specifies that a data centre should provide the services through the use of physical infrastructure, including servers, computers, storage systems, operating systems, etc.
b) The definition mentions rendering services “through the use of,” which suggests that the data centre should operate servers and computers.
c) One of the conditions in Column D of the Table states that the foreign company does not own or operate any of the data centre’s resources.
2.2 An Indian Company Owns and Operates the Data Centre
Note 3(c) of Table in Schedule IV specifies the meaning of ‘specified data centre’. It means a data centre set up under an approved scheme and owned and operated by an Indian company. The definition only requires that it should be owned by an Indian company and set up under an approved scheme. When this definition is read in conjunction with the meaning of ‘data centre service’ provided in Note 3(b) of the Table in Schedule IV, it indicates that all resources and infrastructure should be located in India. There is no clarity on whether a data centre set up by an Indian company underwater in international waters1, or in space2, will still be eligible for the exemption for the foreign company.
2.3 Sales to Users Located In India Are Made Through a Reseller Entity
The exemption for the foreign company applies if all sales by the foreign company to users in India are made through an Indian reseller. This condition indicates that the:
a) Sales to users in India should be made through the Indian reseller. Sales to overseas users can be done directly by the foreign company, and the question of exemption from such income does not arise, as this income is not deemed to accrue or arise in India3 .
b) The Indian reseller may be the same as or different from the Indian company operating the data centre.
c) The Indian reseller may also be a subsidiary of a foreign company.
3. Practical Illustration
There are four parties in the transaction relating to the data centre:
1. SCloud Pte Ltd (a Singapore-based cloud management platform)
2. DC Ltd (an Indian data centre), RS India Ltd (an Indian reseller)
3. OTT Pvt Ltd (the Indian end user)
1 https://brightlio.com/underwater-data-centers/
2 https://www.datacenterdynamics.com/en/news/spacex-files-for-million-satellite-orbital-ai-data-center-megaconstellation/
3 A ‘business connection’ may not be exist as the operations are carried out outside India and the transaction is not carried out with any person in India.
4. OS Inc. (the Singapore-based end user).
The details of the transaction between the parties are as follows:
• DC enters into an agreement with SCloud to provide 50 servers, 10 TB of storage, power, cooling, and facility services for Rs. 7,00,000 per month. DC owns and operates all physical equipment, while SCloud has only API access to manage virtual resources and no ownership or physical control.
• SCloud enters into a reseller agreement with RS, offering managed cloud services (including the DC infrastructure, SCloud proprietary management platform, orchestration software, 24/7 monitoring, technical support, and analytics) for Rs. 13,50,000 per month.
• SCloud enters into a cloud service agreement with OS, under which SCloud offers managed cloud services for USD 50,000 per month.
• RS enters into a contract with OTT to provide a complete managed cloud solution for Rs. 18,00,000 per month, adding value through local sales support, Hindilanguage assistance, billing services, and account management.
The taxability of such sum under the DTAA and Income-tax Act shall be as follows:
Particulars Earnings of Service Provider Per Month
Whether Conditions of Entry 13C of Schedule IV Fulfilled? Whether Income is Deemed to Accrue or Arise in India Under Section 9? Whether Taxable in India Under ITA?
DC provides access to the data centre to SCloud Rs. 7 lakhs – –
SCloud enters into a reseller agreement with RS
Rs. 13.50 lakhs Yes
[Section 9(2)]
SCloud enters into a cloud service agreement with OS USD 50,000 No No
RS enters into a contract with OTT
[Section 26]
Whether Taxable in India Under DTAA?
Whether Taxable in India in View of Section 159(4) of ITA?
[Schedule IV: Table, Sl. No. 13C] No
[Article 7 of the Singapore DTAA4] No
[Section 9(9)]5 No No
[Article 7 of the Singapore DTAA] No
Rs. 18 lakhs – –
[Section 26]
The income of SCloud would be exempt from Indian tax, provided SCloud is notified by the Central Government and DC Ltd qualifies as a specified data centre. SCloud’s income from OS Inc. (overseas user) is not deemed to accrue in India and falls outside the scope of the exemption. However, it would generally not be taxable in India unless there is a permanent establishment.
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