2022 (12) TMI 864 - AT - Income Tax

Taxability of revenue from sale of software - DRP/AO held that receipt earned by the Appellant outside India from sale of Microsoft Retail Software Products to distributors belonging to India is taxable under the Act/ DTAA - HELD THAT - As in assessee s own case for AY 2012-13 2022 (5) TMI 246 - ITAT DELHI the issue has culminated in favour of assessee conclusion based on the principles of law that sale of software products does not give rise to royalty income as laid down by the Hon ble Delhi High Court in Infrasoft Ltd. case 2013 (11) TMI 1382 - DELHI HIGH COURT which have now further been affirmed in the case of Engineering Analysis Centre of Excellence P. Ltd. 2021 (3) TMI 138 - SUPREME COURT Royalty receipts - subscription to cloud base service - whether income from cloud services cannot be taxed as royalty in the hands of distributor? - HELD THAT - As 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 (para 10.5 of the Ld. AO order). 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. While dealing with similar question in regard to the case of M/s. Salesforce.com Singapore Pte. 2022 (4) TMI 327 - ITAT DELHI where the said assessee was provider of comprehensive customer relationship management servicing to its customer by using Cloud Computing Services / Web Casting Services held that all the equipments and machines relating to the service provided by the assessee are under its control and are outside India and the subscribers do not have any physical access to the equipment providing system service which means that the subscribers are only using the services provided by the assessee. 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. No distinction on facts or law could be pointed by Ld. DR. Therefore, following aforesaid findings in favor of the assessee these grounds are determined in favour of the assessee.

Summary

Issues Involved:
1. Taxability of revenue from the sale of software.
2. Taxability of consideration from cloud services.
3. Granting of TDS credit.
4. Levying of excess interest under section 234B.
5. Initiation of penalty proceedings under section 270A.

Detailed Analysis:

1. Taxability of Revenue from Sale of Software:
The primary issue was whether the revenue earned by the assessee from the sale of Microsoft Retail Software Products to distributors in India is taxable as "royalty" under the Income Tax Act, 1961, and the India-USA Double Taxation Avoidance Agreement (DTAA). The assessee argued that the revenue should be considered business income and not royalty, as there was no transfer of rights in the software, only the sale of a copyrighted article. The Tribunal observed that in the assessee's own case for previous assessment years, similar issues had been decided in favor of the assessee, following the principles laid down by the Delhi High Court in the case of DIT vs. Infrasoft Ltd. and affirmed by the Supreme Court in Engineering Analysis Centre of Excellence P. Ltd. The Tribunal concluded that the revenue from the sale of software products does not give rise to royalty income and should be considered business income, not taxable in the absence of a Permanent Establishment (PE) in India.

2. Taxability of Consideration from Cloud Services:
The second issue was whether the consideration received for cloud services should be taxed as royalty. The assessee contended that the cloud services did not involve any transfer of rights to the customers in any process, and the subscription fees were merely for online access to the cloud computing services. The Tribunal noted that similar issues in the assessee's own case and other cases, such as M/s. Salesforce.com Singapore Pte., had been decided in favor of the assessee, concluding that cloud services do not constitute royalty income. The Tribunal held that the cloud services provided by the assessee did not involve any transfer of rights and were merely for online access, thus not taxable as royalty.

3. Granting of TDS Credit:
The assessee claimed that the Assessing Officer (AO) erred in not granting the TDS credit of INR 49,77,246. The Tribunal, following the decision on the primary issues, directed that the TDS credits should be allowed in accordance with the law.

4. Levying of Excess Interest under Section 234B:
The assessee argued that the AO had levied excess interest under section 234B of the Income Tax Act. The Tribunal, having decided the primary issues in favor of the assessee, implied that any consequential relief, including the correction of interest levied under section 234B, should follow the event of the primary decision.

5. Initiation of Penalty Proceedings under Section 270A:
The assessee contended that the AO erred in initiating penalty proceedings under section 270A. Given the Tribunal's decision in favor of the assessee on the primary issues, it was implied that the grounds for initiating penalty proceedings were not sustainable.

Conclusion:
The Tribunal allowed the appeal, setting aside the impugned final assessment order. The grounds related to the taxability of revenue from the sale of software and cloud services were decided in favor of the assessee, following precedents from previous years and higher judicial authorities. The TDS credits were to be allowed as per the law, and any consequential relief, including corrections in interest levied and penalty proceedings, were to follow the primary decision. The order was pronounced in the open court on 30th August 2022.