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Facts
GoTo Technologies Ireland Unlimited Company, a non-resident, received subscription charges for standard software application usage through a SaaS model. The Assessing Officer and DRP treated these receipts as royalty income taxable under the Income Tax Act and India-Ireland DTAA, assessing a higher income than returned. The assessee contested this, arguing the receipts were business income and not taxable in the absence of a Permanent Establishment (PE) in India.
Held
The Tribunal, relying on its own previous orders in the assessee's case and precedents including CIT vs. MOL Corporation (Delhi High Court) and Amazon Web Services, Inc. vs. ACIT, held that subscription receipts from Cloud Services are not taxable as royalty income in India. Consequently, the Tribunal directed the Assessing Officer to delete the additions made and to grant the correct TDS credit after due verification.
Key Issues
Whether subscription receipts from standard software applications (SaaS model) constitute royalty income under the Income Tax Act, 1961, and Article 12 of the India-Ireland DTAA; Whether the Assessing Officer erred in granting short TDS credit; Whether initiation of penalty proceedings under section 270A was justified.
Sections Cited
Income Tax Act, 1961: 143(3), Income Tax Act, 1961: 144C(13), Income Tax Act, 1961: 270A, India-Ireland Double Tax Avoidance Agreement (DTAA): Article 12
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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Dr. B. R. R. Kumar,
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI Before Dr. B. R. R. Kumar, Accountant Member, Ms. Madhumita Roy, Judicial Member Asstt. Year: 2021-22 GoTo Technologies Ireland Unlimited Vs ACIT, Company (formerly known as LogMeln International Taxation, Ireland Unlimited Company), The Circle-1(3)(1), Reflector, 10 Hanover Quay, New Delhi-110002 Dublin 2-D02R573, Ireland (APPELLANT) (RESPONDENT) PAN No. AACCL4273H Assessee by : Sh. Chavli Narayan, CA Revenue by : Sh. Vijay B. Vasanta, CIT-DR Date of Hearing: 09.05.2024 Date of Pronouncement: 05.08.2024 ORDER Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 19.09.2023 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
“1.1 Under the facts and circumstances of the case, the Final Order passed by the Ld. AO pursuant to the directions passed by the Hon'ble DRP is erroneous and contrary to the law. 1.2 Under the facts and circumstances of the case, the Ld. AO and the Hon'ble DRP has erred in law and on facts, by assessing the total income of the Appellant at INR 57,57,83,403/- for AY 2021-22 as against INR 2,00,65,855/- income returned by the Appellant.
Taxability of consideration received from subscription from use of standard software application as royalty under the Income Tax Act, 1961 ('the Act") read with Article 12 of the India - Ireland Double Tax Avoidance Agreement ("DTAA")
GoTo Technologies Ireland Unlimited Company 2.1 That the Ld. AO and the Hon'ble DRP erred on facts and in law in assessing the revenues of the Appellant from subscription charge towards usage of standard software application(s) as income in the nature of royalty and taxing the same at the rate of 10% under the provisions of the Act read with Article 12 of the India-Ireland DTAA. 2.2 That the Ld. AO and the Hon'ble DRP failed to appreciate that the Appellant has granted non-exclusive license to right to use the standard software applications to the buyers for their internal usage and all other rights/ copyrights in the software are retained by the Appellant. 2.3 That the Ld AO and the Hon'ble DRP have erred on facts and in law in failing to appreciate that the Appellant's revenues are derived from the usage of copyrighted article, namely a computer program, and as such there is no transfer of any 'right to use of the copyright in such article, and therefore, the same cannot be constituted as royalty under the provisions of Article 12(3) of the India Ireland DTAA. 2.4 That the Ld. AO and the Hon'ble DRP have failed to appreciate that the ratio upheld by the Hon'ble Supreme Court in the lead case of Engineering Analysis Centre of Excellence Private Limited wherein, it was upheld that payment for grant of license for more usage of software does not amount to royalty, is squarely applicable to the present case of Appellant. 2.5 That the Ld. AO and the Hon'ble DRP have erred in fact and in law in not considering the prevalling precedents of the Hon'ble jurisdictional Delhi High Court and Hon'ble jurisdictional Delhi Income Tax Appellate Tribunal. 2.6 That the Ld. AO erred in facts and in law by placing reliance on case laws which are distinguishable both on facts and merits.
3. Short grant of Tax Deducted at Source ("TDS") credit by INR 1,749/- 3.1 That on the facts and in the circumstances of the case, the Ld. AO erred in granting TDS credit of INR 3,19,48,723 as per Final Assessment Order issued under section 143(3) read with section 144C for the subject year, as against INR 3,19,50,472 as per the latest Form 26AS available on the income tax e- filing/TRACES portal.
4. Initiation of penalty proceedings under section 270A of the Act GoTo Technologies Ireland Unlimited Company 4.1 That on the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act for under-reporting/misreporting of income.”
At the outset, both the parties fairly submitted that the issues involved in the present appeal stands covered by the order of the Tribunal in assessee’s own case in and ITA No. 793/Del/2023 for A.Y. 2019-20 and A.Y. 2020-21 vide order dated 25.09.2023. For the sake of ready reference, the said order is hereby reproduced in toto:
“3. The assessee hitherto is a non-resident corporate entity incorporated under the laws of Ireland and a tax resident of Ireland. The assessee is stated to be engaged in the business of sale of software subscription in various countries including India. The assessee operates software as a Service (SaaS) business model, wherein, the customers are allowed to access the application software developed by the assessee from various devices through Cloud Computing Technology. The subscription receipts from Cloud Services permitted to customers was not offered to tax in India, as the assessee was of the view that they are not in the nature of royalty, but business receipts and in absence of PE in India, they are not taxable under India-Ireland Double Taxation Avoidance Agreement (DTAA). However, the Assessing Officer was not convinced with the submissions of the assessee and proceeded to assess subscription receipts as royalty income both under the Act as well as under the treaty provisions and accordingly, framed draft assessment orders. Learned DRP also upheld the decision of the Assessing Officer.
Learned counsel for the assessee submitted that the issue is squarely covered by the decision of Hon’ble Delhi High Court in case of CIT vs. MOL Corporation vs. DCIT in order dated 16.02.2023. He further relied upon the decision of GoTo Technologies Ireland Unlimited Company coordinate Bench in case of Amazon Web Services, Inc. vs. ACIT in ITA Nos. 522 & 523/Del/2023.
5. Learned Departmental Representative fairly submitted that the issue is covered by the decisions cited by learned counsel for the assessee. However, he dutifully relied upon the observations of the Assessing Officer and learned DRP.
We have considered rival submissions and perused materials on record. The short issue arising for consideration is whether the subscription received from Cloud Services is taxable as royalty income. As we find, while considering identical issue in case of CIT vs. MOL Corporation (supra), Hon’ble jurisdictional High Court has upheld the decision of the Tribunal holding that no substantial question of law arises out of the order of the Tribunal in accepting that subscription receipts from Cloud Services is not taxable as royalty. In case of Amazon Web Services Inc (supra), the coordinate Bench of the Tribunal has also expressed identical view holding that subscription received from Cloud Services is not taxable as royalty. Thus, in our view, the issue is squarely covered by the aforesaid decisions. Accordingly, we hold that the income received by the assessee from Cloud Services is not taxable in India, as they cannot be treated as royalty income. Accordingly, we direct the Assessing Officer to delete the additions. Grounds are allowed.
In the result, appeals are allowed.”
4. In the absence of any change in the factual matrix and the legal proposition, we hold that the appeal of the assessee is hereby allowed.
With regard to the issue of short grant of TDS, the AO is directed to grant the credit for taxes paid after due verification.
GoTo Technologies Ireland Unlimited Company 6. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 05/08/2024.