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2022 (5) TMI 246 - AT - Income TaxSale of software products give rise to royalty income - DTAA between India and USA - Assessment on protective business - HELD THAT - As the Bench is of considered opinion that the revenue has been following a persistent approach in regard to assessee and its sister assessee subsidiaries of MS Corp holding sale of MS Retail Software Products to Indian Distributors as royalty under the Act as well as under DTAA between India and US. The assessment in the hands of present assessee was made on protective basis while the substantive assessment was in the hands of MOLC. The assessment in the hands of Gracemac which stands amalgamated with MOLC stands set aside in regard to assessment years 2005-06, 2006-07 and 2007-08 by the Hon'ble Delhi High Court. The same were 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 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 . Functional aspects of Cloud base service while holding the subscription to cloud base service as royalty - HELD THAT - 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 (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 as decided in M/S SALESFORCE. COM SINGAPORE PTE 2022 (4) TMI 327 - ITAT DELHI 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. The Mumbai Tribunal in the case of DDIT v Savvis 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 under section 9(1)(vi), read with Explanation 2 (iva) thereto as also article 12 of Indo-US DTAA. Thus Tax Authorities below had fallen in error in considering the subscription received towards Cloud Services to be royalty income. Assessee appeal allowed.
Issues:
1. Taxability of revenue from the sale of software products. 2. Taxability of revenue from cloud services. 3. Transfer of TDS credit. 4. Penalty proceedings. Taxability of revenue from the sale of software products: The assessee appealed against the tax authorities' decision to treat revenue from the sale of Microsoft Retail Products to Indian distributors as royalty income. The assessee argued that the sale of software products does not give rise to royalty income, citing legal precedents. The Tribunal noted that previous judgments had established that the sale of software products does not constitute royalty income. The Tribunal upheld the assessee's grounds, setting aside the assessment order for the relevant year. Taxability of revenue from cloud services: The assessee contested the tax authorities' classification of revenue from cloud services as royalty income. The Tribunal analyzed the functional aspects of cloud-based services and concluded that the subscription fees for cloud computing services were not royalty but consideration for online access to services. The Tribunal referred to previous cases to support its decision and held that the tax authorities erred in considering the subscription fees for cloud services as royalty income. Consequently, the Tribunal allowed the grounds of appeal related to revenue from cloud services and set aside the impugned orders. Transfer of TDS credit: The assessee raised a ground regarding the transfer of TDS credit claimed by one entity to another. The Tribunal observed that the tax authorities failed to transfer the TDS credit claimed by the assessee to another entity as required. Citing legal principles, the Tribunal held that the TDS credit should have been transferred, and therefore, allowed the ground of appeal related to the transfer of TDS credit. Penalty proceedings: The assessee challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal did not provide detailed analysis of this issue in the summarized judgment. However, it can be inferred that the Tribunal may have addressed this issue separately during the proceedings. In conclusion, the Appellate Tribunal ITAT Delhi, in its judgment, addressed multiple issues related to the taxability of revenue from software products and cloud services, the transfer of TDS credit, and penalty proceedings. The Tribunal ruled in favor of the assessee on the taxability of revenue from software products and cloud services, setting aside the assessment orders. Additionally, the Tribunal directed the transfer of TDS credit as claimed by the assessee. The detailed analysis provided insights into the legal interpretations and precedents considered by the Tribunal in reaching its decisions.
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