2022 (6) TMI 881 - AT - Income Tax

Income accrued in India - Taxability of revenue from sale of software - whether i n come is not chargeable in appellant's hands under Income Tax Act, 1961 India-USA Double Taxation Avoidance Agreement ('DTAA') as the same was earned outside or India ? - HELD THAT - Mumbai Tribunal in the case of DDIT v. Sawis Communication Corporation 2016 (5) TMI 635 - ITAT MUMBAI has held that payment received for providing web hosting services though involving use of certain scientific equipment cannot be treated as 'consideration for use of, or right to use of, scientific equipment' which is a sine qua non for taxability u/s 9(1)(vi) read with Explanation 2(iva) thereto as also article 12 of Indo-US DTAA. Chennai Tribunal in the case of ACIT v. Vishwak Solutions Pvt. Ltd. 2015 (4) TMI 794 - ITAT CHENNAI has upheld the findings of CIT(A) that the amount paid to the non-resident is towards hiring of storage space. The aforesaid squarely covers the controversy in regard to the present assessee also. In the light aforesaid, 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 - Decided in favour of assessee.

Summary

Issues:
Taxability of revenue from sale of software and cloud services, validity of reassessment under section 147 of the Act, applicability of India-USA Double Taxation Avoidance Agreement, TDS credit transfer, excess interest under section 234B, and penalty proceedings under section 271(1)(c) of the Act.

Taxability of Revenue from Sale of Software:
The assessee appealed against the AO's computation of total income, arguing that the revenue from the sale of software by Microsoft Regional Sales Pte. Ltd. was not taxable as royalty under the India-USA DTAA. The ITAT referred to previous decisions favoring the assessee and held that the sale of software is a sale of copyrighted article, not royalty income, and thus not taxable in India under the DTAA.

Taxability of Consideration from Cloud Services:
The assessee contested the taxability of revenue from cloud services, claiming it was not royalty income. The ITAT analyzed the functional aspects of cloud-based services, emphasizing that the subscription fee was for online access and not royalty. Citing precedents, the ITAT ruled in favor of the assessee, stating that the subscription fee for cloud services was not royalty income under the Act or the India-USA DTAA.

Validity of Reassessment and DTAA Applicability:
The assessee challenged the validity of the reassessment under section 147 of the Act and argued that income earned outside India was not chargeable under the DTAA. The ITAT considered the applicability of the DTAA and upheld the assessee's contentions, ruling that income earned outside India was not taxable under the DTAA.

TDS Credit Transfer, Excess Interest, and Penalty Proceedings:
The assessee raised issues regarding the transfer of TDS credit, excess interest levied under section 234B, and penalty proceedings under section 271(1)(c) of the Act. The ITAT found errors in the AO's actions and ruled in favor of the assessee, directing appropriate actions to be taken by the AO.

The ITAT, in line with previous decisions and considering identical facts, set aside the orders of the revenue authorities and decided in favor of the assessee. The appeals were allowed, and the ITAT's order applied to all relevant ITA numbers. The judgment was pronounced on June 7, 2022.