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Income Tax Appellate Tribunal, DELHI
Before: SH. R.K.PANDA & SH. ANUBHAV SHARMA
1.1 The assessee has come in appeals against the common order dated 23.05.2018 of the DRP-2, New Delhi for assessment year 2010-11 and 2011-12, passed u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and the orders for the respective years, dated 31/7/18 of Ld. Deputy Commissioner of Income Tax Circle 2(2)(1), Internatioinal Taxation, New Delhi.
The facts in brief are assessee is a company incorporated in U.S. and is a wholly owned subsidiary of Microsoft Corporation, USA (‘MS Corp’). Assessee has a branch office in Singapore. Gracemac Corporation, was another wholly owned subsidiary of MS Corp. 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. Then there is MOL Corporation (MOLC), a 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 6193/Del./2018 Microsoft Regional Sales Corporation 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. 2.1 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. 2.2 The assessee submitted objections to the DRP which were rejected and the AO passed final assessment orders on 30.01.2014 for the assessment year 2010-11 and 09.02.2015 for the assessment year 2011-12. 2.3 Earlier in the appeals, the Tribunal vide its order dated 26.09.2016 in ITA No. 6089/Del/2012 and ITA No. 1615/Del/2015 for assessment year 2010-11 and 2011-12 respectively disposed of the appeals of the assessee holding that in the light of Hon’ble Delhi High Court Judgment in DIT vs. Infrasoft Ltd. [2014] [220 Taxman 273] where Hon’ble Delhi High Court had held sale of software cannot be qualified as royalty directed low tax authorities to decide the issue of the assessee and remanded back the matter to the file of AO. The AO again passed draft assessment order proposing to assess the revenue of the assessee from sale of MS Retail Software Products to Indian Distributors as royalty under the Act as well as under DTAA between India and US. 2.4 The assessee filed objections to the said draft assessment orders before DRP however the DRP observed that the grounds have been considered by DRP-1, New Delhi in its order dated 19.09.2017 in the case of assessee for the Assessment year 2014-15 post the orders of Hon’ble Delhi High Court in Infrasoft case and confirmed the action of AO. Based on the same findings the DRP upheld the action of AO substantively assessing the said receipt in the hands of MOLC and protectively assessing the same in the hands of the assessee.
4 6193/Del./2018 Microsoft Regional Sales Corporation 3. Consequent to the order dated 30.05.2018 of the DRP, the Ld. AO had passed the assessment order on 31.07.2018 to which now in appeal the assessee had raised following grounds of appeals :-
“1. That on the facts and in the circumstances of the case and in law, the Deputy Commissioner of Income Tax, Circle - 2(2)(1), International Taxation, Delhi (‘Ld. AO’) has erred in computing total income of the Appellant at INR 23,73,06,53,027 as against returned income at INR 27,84,10,925.
2. Taxability of revenue from sale of software 2.1 Final assessment order dated July 31, 2018 passed by Ld. AO pursuant to directions of Ld. Dispute Resolution Panel (‘Ld. DRP’) completely disregarding specific directions issued by this Hon’ble Tribunal vide its order (ITA No. 1970/Del/2014) dated September 26, 2016 to follow decision of the Hon’ble Delhi High Court in case of Infrasoft Limited (220 Taxman 273) is bad in law, unlawful and invalid. 2.2 Ld. DRP and Ld. AO failed to grant legitimate relief, by wrongly placing reliance on Gracemac vs DIT (42 SOT 550), even while noting that same has been held to be not good law by Hon’ble ITAT vide its order in dated September 26, 2016. 2.3 That on the facts and in circumstances of the case and in law, contumacious reiteration by Ld. DRP and Ld. AO that revenue of INR 23,45,22,42,102 earned by the Appellant from sale of Microsoft Retail Software Products to distributors belonging to India is taxable as “Royalty” (on protective basis) contradicting conclusions reached by this Hon’ble Tribunal, is contrary to settled law. 2.4 In the facts and circumstances of the case and in law, Id. DRP and ld. AO have failed to appreciate that sale of software is a sale of ‘Copyrighted Article’ and not ‘Copyright’ and accordingly, that revenue from sale of software is in the nature of business income not taxable under Article 7 of India - USA DTAA in the absence of a Permanent Establishment of the Appellant in India. 2.5 Routine reiteration by Ld. DRP and Ld. AO that amount paid by Microsoft Operations Pte Ltd to MOL Corporation is not only contrary to directions of this Hon’ble Tribunal but also shows total non- application of mind. Other Grounds 5 6193/Del./2018 Microsoft Regional Sales Corporation 3. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not granting the entire TDS credit to the Appellant.
4. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234B of the Act.
5. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant.”
Heard. On behalf of the assessee it was submitted that the Ld. Tax Authorities below failed to follow the directions of Tribunal to apply the principles of law laid by Hon’ble Delhi High Court in the case of Infrasoft which now stands confirmed by Hon’ble Supreme Court in the judgment dated 02.03.2021 in Engineering Analysis Centre of Excellence (P) Ltd. vs. Commissioner of Income Tax (2021) 125 taxman.com 42 (SC). It was also submitted that in the case of Gracemac Corporation which stands amalgamated with MOL Corporation for the assessment year 2005-06, 2006-07 and 2007-8 the Co-ordinate Bench ‘B’ at Delhi by order dated 16.11.2020 had allowed the appeals which have been further upheld by Hon’ble Delhi High Court by judgment dated 07.03.2022. 4.1. On the other hand Ld. DR defended the orders of Tax Authorities submitting the same have been passed considering due principles of law and the law relied by the counsel for assessee is a subsequent development.
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 was in the hands of MOLC. The assessments in the hands of Gracemac which stands amalgamated with MOLC stands set aside in regard to 6 6193/Del./2018 Microsoft Regional Sales Corporation 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 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). 5.1 In the light of aforesaid as there are no distinguishing facts with regard to present assessment years. The appeals in hand are allowed. The assessment orders for AY for 2010-11 and 2011-12 are set aside.
Order pronounced in open court on this 13th day of April, 2022.