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2022 (4) TMI 966 - AT - Income TaxIncome accrued in India - Taxability of revenue from sale of software - Royalty receipt - 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 - HELD THAT:- 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 substantive basis while the protective assessment was in the hands of M/s Microsoft Regional Sales Corporation(MRSC). The assessments in the hands of Gracemac which stands amalgamated with the assessee stands set aside in regard to assessment years 2005-06, 2006-07 and 2007-08 by the co-ordinate Bench’s judgment [2020 (11) TMI 1049 - ITAT DELHI] which have been further upheld by Hon’ble Delhi High Court by judgment [2022 (3) TMI 482 - 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] 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, 2011-12 and 2012-13 the grounds in hand are sustained. The assessment order for AY for 2012-13 is liable to be set aside. Income from cloud hosting services - Subscription received towards Cloud Services to be royalty income - 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. Thus 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.
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