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Income Tax Appellate Tribunal, DELHI
Before: SH. R.K.PANDA & SH. ANUBHAV SHARMA
The assessee has come in appeal against order dated 23.12.2015 of Dispute Resolution Penal-1, New Delhi in regard to assessment year 2012-13 ./2016 Microsoft Regional Sales Corporation, USA and the assessment order dated 19.02.2016 passed by Dy. Commissioner of Income Tax, International Taxation, Gurgaon u/s 144(c) (13) read with section 143(3) of the Income Tax Act, 1961.
At the outset it is pertinent to observe that the appeal was filed by the assessee under the name Microsoft Regional Sales Corporation, USA and the intimation has been submitted that the appellant assessee has changed name from Microsoft Regional Sales Corporation to Microsoft Regional Sales Pte. Ltd. and revised Memorandum of Appeal along with grounds of appeal have been filed.
The facts in brief are assessee is a company incorporated in U.S.A. and is a wholly owned subsidiary of M/s. Microsoft Corporation, U.S.A. (‘MS Corp.’). The assessee has a branch office in Singapore. There was another wholly owned subsidiary of MS Corp. Gracemac Corporation which was also incorporated in the US. This subsidiary Gracemac was granted exclusive license to manufacture Microsoft Retail Software Products and exclusive license to distribute the products retailers or to MS Corp. or other subsidiaries of MS Corp. MOL Corporation (MOLC) was also wholly owned subsidiary of MS Corp. in which Gracemac Corporation was merged on 02.10.2006 in pursuance of which rights which earlier belonged to Gracemac were assigned in favour of MOLC. Microsoft operations Pte. Ltd. (‘MO’) was a company incorporated under the laws of Singapore and was a wholly owned subsidiary of MS Corp. MOLC has granted Microsoft Operations Ltd. Singapore the non exclusive right to manufacture MS Retail Software Products in Singapore and distribute such products in Asia (with restrictions in China, Korea and Taiwan), Japan, South East Asia and South Pacific as per the distribution agreement. This corporation MO further entered into a non-exclusive distribution agreement with the assessee M/s. Microsoft Regional Sales Corporation to distribute MS Retail Software Products in a jurisdiction to which MO was allowed. The assessee 3 ITA No. 1553/Del./2016 Microsoft Regional Sales Corporation, USA entered into agreements with various distributors for sale of MS Retail Products. The products are delivered by the assessee to the distributors “ex warehouse” from the warehousing facility and the distributor sales it to consumers directly or through sales. The consideration received by the assessee from the sale of software was held as taxable as royalty in India and the AO assessed the same in the hands of assessee on protective basis and in the hands of MOL Corporation (MOLC) on substantive basis.
3.2 Further the AO had considered the receipts from Cloud Services as user based on royalty observing that the Microsoft online subscription agreement mentions that the software underlying the service in each kind of model i.e. PAAS / SAAS / IAAS is license to the customer and not sold. The software is protected by patent, copyright and trade mark protections, therefore the AO held the payments made by the users as the consideration for the use or the right to use of such patents, Software and Cloud Infrastructure covering them in the definition of royalty both by clause 9 (1)(vi) Explanation 2 sub-clause (iii) and (v) of the Income Tax Act, 1961 and also Article 12 (3) of the India US, DTAA. The addition in hands of assessee was made on protective basis and substantively in the case of MOL Corporation.
The assessee has raised following grounds of appeal before this Tribunal :-
“Grounds of appeal
1.
1. That on facts and in law, the Dy. Commissioner of Income Tax, Circle - ‘Gurgaon’, International Taxation, Gurgaon (‘Learned AO’) has erred in computing the total income of the Appellant at INR 3385,09,98,960 as against the returned income at Nil.
2. Taxability of revenue from sale of software 2.1 That on facts and in law, the Hon’ble Dispute Resolution Panel 4 ITA No. 1553/Del./2016 Microsoft Regional Sales Corporation, USA (‘Hon’ble DRP’) and the Learned AO erred in holding that the revenue amounting to INR 3373,74,00,209 earned by the Appellant from sale of Microsoft Retail Products to distributors in India is taxable as Royalty ignoring the fact that the same is not in nature of Royalty under Article 12 of the India - USA DTAA and is not taxable in India. 2.2 That on facts and in law, the Hon’ble DRP and the Learned AO grossly erred in not following the judgment of the Hon’ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd (STA 1034/2009) which is binding on the lower tax administrative bodies and the other judicial precedents as the same is squarely applicable in the case of Appellant. That on facts and in law, the Hon’ble DRP and the Learned AO failed to appreciate that the sale of software is a sale of ‘Copyrighted Article’ and not ‘Copyright’ and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. Taxability of the revenue from cloud services 3 That on facts and in law, the Hon’ble DRP and the Learned AO has erred in not holding that the revenue earned by MRSC from cloud services amounting to INR 11,35,98,751 is taxable as Royalty in India without appreciating that the same is not in the nature of Royalty under the India - USA DTAA and is not taxable in India, Transfer of TPS credit 4 That on facts and in law, the Learned AO grossly erred in not transferring the TDS credit claimed by MRSG to MOL Corporation in view of the mandatory directions of Hon’ble DRP and the law laid down by the Supreme Court in the case of ITO vs. Bachu Lai Kapoor (60 ITR 74) (1966) (SC). Penalty Proceedings 5 That on facts and in law, the Learned AO erred in initiating penalty 5 ITA No. 1553/Del./2016 Microsoft Regional Sales Corporation, USA proceedings under section 271(1)(c) of the Act against the Appellant. The above grounds of appeal are mutually exclusive and without prejudice to each other. The appellant craves leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal.”
5. Heard and perused the record. The Ld. AR restricted his arguments to ground no 1 to 3 only and same are taken up below for determination.
Ground no 1 and 2 with their sub grounds.
On behalf of the assessee in regard to ground no 1 it was submitted that Ld. Tax Authorities have failed to follow the ratio and principles of law in regard to the sale of software products not giving rise to royalty income as held by Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. (2014) 220 Taxman.
It was submitted that Hon’ble Supreme Court of India in its judgment dated 02.03.2021 in Engineering Analysis Centre of Excellence (P) Ltd. vs. Commissioner of Income Tax (2021) 125 taxmann.com 42 (SC) has upheld the Hon’ble Delhi High Court judgment. It was submitted that in the case of Gracemac Corporation which stands amalgamated with MOL Corporation for the assessment year 2005-06, 2006-07 and 2007-08 the Co-ordinate Bench B at Delhi by order dated 16.12.2020 has allowed the appeals which have been further upheld by Hon’ble Delhi High Court by judgment dated 07.03.2022. The Ld DR supported the findings of Tax authorities below. 6.1 Giving thoughtful consideration to the matter on record, 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 6 ITA No. 1553/Del./2016 Microsoft Regional Sales Corporation, USA 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 co-ordinate Bench’s judgment dated 16.11.2020 which have been further upheld by Hon’ble Delhi High Court by judgment dated 07.03.2022. 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 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. (supra). 6.2 In the light of aforesaid as there are no distinguishing facts with regard to present assessment years and as this Bench has also allowed the similar grounds for the assessment year AY for 2010-11 and 2011-12, vide separate order of even date the grounds in hand are sustained. The assessment order for AY for 2012-13 are liable to be set aside. Ground no 3 7 It was submitted for the assessee that Ld. Tax Authorities below have failed to appreciate the functional aspects of Cloud base service while holding the subscription to cloud base service as royalty. In this context, the co-ordinate bench judgment in M/s. Salesforce.com Singapore Pte. Vs. Dy. D.I.T. Circle- 2(2) [A.Y 2010-11] with six other connected was relied to contend that subscription to the cloud computing services do not give rise royalty income. The Ld DR supported the findings of Tax authorities below. 7.1 Giving thoughtful consideration to the matter on record, the bench is of considered view 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 7 ITA No. 1553/Del./2016 Microsoft Regional Sales Corporation, USA 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. 7.2 While dealing with similar question in regard to the case of M/s. Salesforce.com Singapore Pte. (supra) where the said assessee was provider of comprehensive customer relationship management servicing to its customer by using Cloud Computing Services / Web Casting Services, the Bench in its order dated 25.03.2022 held as under : “28. Considering the facts of the case in totality, in light of the Master Subscription Agreement, we are of the considered view that the customers do not have any access to the process of the service provider i.e. the assessee, and the assessee does not have any access except otherwise provided in the master subscription agreement to the data of the subscriber.
In our considered opinion, 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.” 7.3 The Mumbai Tribunal in the case of DDIT v Savvis Communication Corporation [2016] 69 taxmann.com 106 (Mumbai – Trib.) 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- 8 ITA No. 1553/Del./2016 Microsoft Regional Sales Corporation, USA US DTAA. The Chennai Tribunal in the case of ACIT v Vishwak Solutions Pvt. Ltd & 1936/MDS/2010 dated 30.01.2015 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.
Accordingly the grounds no 1 to 3 in appeal are allowed and the impugned orders are set aside.