2022 (8) TMI 1418 - AT - Income Tax

Taxability of foreign income in India - Taxability of revenue from sale of software Royalty receipts - HELD THAT - As decided by ITAT in assessee s own case for AY 2012-13 2022 (4) TMI 966 - ITAT DELHI sale of software products does not give rise to royalty income as laid down in Infrasoft Ltd. case 2013 (11) TMI 1382 - DELHI HIGH COURT which have now further been affirmed by the Hon ble Supreme Court of India in the case of Engineering Analysis Centre of Excellence P. Ltd. 2021 (3) TMI 138 - SUPREME COURT Taxability of cloud based service receipts - treating subscription to cloud base service as royalty - HELD THAT - As decided in own case 2022 (4) TMI 966 - ITAT DELHI the cloud base services do not involve any transfer of rights to the customers in any process. The grant of right to install and use the software included with the subscription does not include providing any copy of the said software to the customer. The assessee s cloud base services are though based on patents / copyright but the subscriber does not get any right of reproduction. The services are provided online via data centre located outside India. The Cloud services merely facilitate the flow of user data from the front end users through internet to the provider s system and back. The ld. AO has fallen in error in interpreting it as licensing of the right to use the above Cloud Computing Infrastructure and Software - Thus the subscription fee is not royalty but merely a consideration for online access of the cloud computing services for process and storage of data or run the applications.the Bench is of considered view that the ld. Tax Authorities below had fallen in error in considering the subscription received towards Cloud Services to be royalty income. Hence respectfully following the precedent from coordinate Bench, we set aside the order of Revenue authorities and decide the issues in favour of the assessee.

Summary

Issues:
1. Taxability of revenue from sale of software
2. Taxability of consideration from cloud services
3. Transfer of TDS credit to MOLC
4. Levying excess interest under section 234B
5. Initiating penalty proceedings under section 270A

Analysis:

Taxability of revenue from sale of software:
The main issue revolves around whether revenue earned from the sale of software by Microsoft Regional Sales Pte. Ltd. (MRS) is taxable as "Royalty" in India in the hands of the assessee. The assessee argues that the revenue is not in the nature of "Royalty" under the India-USA Double Taxation Avoidance Agreement (DTAA) and should not be taxable in India. They contend that the sale of software constitutes a sale of a "Copyrighted Article" and falls under business income, not taxable under the DTAA. The assessee also cites a Supreme Court decision to support their stance. The ITAT, referring to previous decisions, rules in favor of the assessee, stating that the revenue from the sale of software does not give rise to royalty income.

Taxability of consideration from cloud services:
The issue here is whether the revenue earned from cloud services by MRS is taxable as "Royalty" in India. The assessee argues that the cloud services do not involve a transfer of rights and that the subscription fee is merely a consideration for online access to the services, not royalty. The ITAT, following previous rulings and considering the functional aspects of cloud-based services, agrees with the assessee's argument and holds that the subscription fee is not royalty but payment for access to cloud computing services.

Transfer of TDS credit to MOLC:
The assessee raises the issue that the Assessing Officer (AO) did not transfer the TDS credit claimed by MRS to MOLC as directed by the Dispute Resolution Panel (DRP). This issue pertains to the proper handling of tax deductions at source and the transfer of credits between entities.

Levying excess interest under section 234B:
The assessee challenges the AO's decision to levy excess interest under section 234B of the Income Tax Act. This issue concerns the calculation and imposition of interest on tax liabilities.

Initiating penalty proceedings under section 270A:
The final issue involves the initiation of penalty proceedings under section 270A of the Act against the assessee. This pertains to the penal consequences for misreporting income or other violations of tax laws.

In conclusion, the ITAT, considering previous decisions and the specific circumstances of the case, rules in favor of the assessee on the taxability of revenue from the sale of software and cloud services. The issues related to the transfer of TDS credit, excess interest levied, and penalty proceedings are also addressed, with the ITAT providing a comprehensive analysis and decision on each matter.