2022 (7) TMI 276 - AT - Income Tax

Income accrued in India - sale of software product - royalty receipts - India - USA DTAA - HELD THAT - As decided in INFRASOFT LTD. 2013 (11) TMI 1382 - DELHI HIGH COURT and ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED 2021 (3) TMI 138 - SUPREME COURT the sale of software product does not give rise to the royalty income. In the light of aforesaid, since there are no distinguishing facts with regard to present Assessment Year than the Assessment Year 2012-13 2022 (4) TMI 966 - ITAT DELHI , we allow the Ground No. 2 and its Sub Grounds of the assessee. Subscription to cloud base service as royalty - Functional aspect of cloud base service while holding - India - USA DTAA - HELD THAT - The very same issue regarding the cloud service in assessee s own case for the AY 2012- 13 2022 (4) TMI 966 - ITAT DELHI , came up for consideration before the Co-ordinate Bench of the Tribunal wherein by following the ratio laid down in the case of M/s. Salesforce.com Singapore Pte. 2022 (4) TMI 327 - ITAT DELHI and also the decision of Savvis Communication Corporation 2016 (5) TMI 635 - ITAT MUMBAI and the Chennai Tribunal decision in the case of ACIT Vs/. Vishwak Solutions Pvt. Ltd. 2015 (4) TMI 794 - ITAT CHENNAI held that the authorities fallen in error in considering the subscription received towards cloud serviced to be royalty income.

Issues Involved:

1. Taxability of revenue from the sale of software.
2. Taxability of consideration from cloud services.
3. Transfer of TDS credit.
4. Levying surcharge and education cess on interest on income tax refund.
5. Not granting TDS credit.
6. Levying interest under section 234B and 234C of the Act.
7. Initiating penalty proceedings under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Taxability of Revenue from Sale of Software:

The primary contention was whether the revenue earned from the sale of Microsoft Retail Software Products to distributors in India should be classified as "Royalty" under Article 12 of the India-USA DTAA. The appellant argued that such revenue is not in the nature of "Royalty" but rather a sale of 'Copyrighted Article,' which should be considered business income and not taxable in India in the absence of a Permanent Establishment. The authorities had previously held this revenue as taxable royalty, but the appellant cited the Delhi High Court's decision in the case of Infrasoft Limited and the Supreme Court's decision in Engineering Investigation Centre of Excellence Pvt. Ltd., which supported their stance. The tribunal, relying on these precedents and its own earlier decisions in the appellant's cases for AY 2010-11 and 2011-12, concluded that the sale of software products does not give rise to royalty income and allowed the relevant grounds of appeal.

2. Taxability of Consideration from Cloud Services:

The appellant contended that the revenue earned from cloud services should not be classified as "Royalty" under the India-USA DTAA. The authorities had treated this revenue as royalty income. However, the tribunal noted that similar issues had been decided in favor of the appellant in previous cases, including MOL Corporation and M/s. Salesforce.com Singapore Pte., where it was held that subscription to cloud-based services does not constitute royalty income. The tribunal, finding no distinguishing facts or contrary decisions presented by the respondent, allowed the grounds of appeal related to cloud services.

3. Transfer of TDS Credit:

The appellant argued that the authorities erred in not transferring the TDS credit claimed by MRSC to MOL Corporation, citing the mandatory directions of the Hon'ble DRP and the Supreme Court's decision in ITO vs. Bachu Lai Kapoor. However, during the pendency of the appeal, the Revenue provided relief by passing an order under section 154 of the Act, rendering the grounds related to TDS credit transfer in-fructuous.

4. Levying Surcharge and Education Cess on Interest on Income Tax Refund:

The appellant contested the levy of surcharge and education cess on interest on income-tax refund, which they argued should be taxable at a rate of 15% as prescribed under the India-USA DTAA. This ground also became in-fructuous as relief was granted by the authorities through an order dated 29/03/2018.

5. Not Granting TDS Credit:

The appellant claimed that the authorities erred in not granting the TDS credit of INR 13,74,99,642. This issue was addressed by the tribunal, directing the authorities to allow the TDS credit in accordance with the law.

6. Levying Interest under Section 234B and 234C of the Act:

The appellant argued against the levying of interest under sections 234B and 234C of the Act. The tribunal found these grounds to be consequential in nature and dismissed them accordingly.

7. Initiating Penalty Proceedings under Section 271(1)(c) of the Act:

The appellant contested the initiation of penalty proceedings under section 271(1)(c) of the Act. The tribunal did not find it necessary to adjudicate on this issue separately, as it was consequential to the main grounds of appeal.

Conclusion:

The appeals were partly allowed for the assessment years 2013-14, 2014-15, and 2015-16. The tribunal upheld the appellant's contentions regarding the non-taxability of revenue from the sale of software and cloud services as royalty. The issues related to TDS credit transfer, surcharge, and education cess became in-fructuous due to relief granted by the authorities. The grounds related to interest levied under sections 234B and 234C and penalty proceedings were dismissed as they were consequential in nature.

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