2025 (5) TMI 1881 - HC - Income Tax

Income deemed to accrue or arise in India - subscription payments received by the Assessee for providing Cloud Services - whether receipt constitute royalty income u/Article 12(3) of the India-Ireland DTAA and Section 9(1)(vi) of the Income Tax Act 1961? - ITAT had allowed the Assessee s appeal - HELD THAT - This Court 2024 (5) TMI 1572 - DELHI HIGH COURT and 2024 (7) TMI 1643 - DELHI HIGH COURT had rejected the Revenue s contention that the decision in Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT would not cover the issues in question. Concededly the issues involved in the appeal is covered by the decision of this Court in Goto Technologies Ireland Unlimited Company (Earlier known As Logmein Ireland Unlimited Company) 2024 (5) TMI 1572 - DELHI HIGH COURT and 2024 (7) TMI 1643 - DELHI HIGH COURT - No substantial question of law arises for consideration of this Court.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal are:

A. Whether the subscription payments received by the Assessee for providing Cloud Services constitute "royalty" income under Article 12(3) of the India-Ireland Double Taxation Avoidance Agreement (DTAA) and Section 9(1)(vi) of the Income Tax Act, 1961, thereby making such income taxable in IndiaRs.

B. Whether the payments received by the Assessee from Indian customers represent royalty income because the Assessee grants access to online services maintained by it, rather than providing a service as an end user, and is engaged in providing information and communication technology solutions, thus falling within the scope of "royalty" as defined under Explanation 2(iv) to Section 9(1)(vi) of the ActRs.

C. Whether the learned ITAT erred in relying on precedents, specifically the Delhi High Court decision in CIT vs. MOL Corporation and the coordinate Bench decision in Amazon Web Services, Inc. vs. ACIT, on the ground that the facts of those cases are distinguishable from the present caseRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue A and B (Taxability of Cloud Service Subscription Payments as Royalty Income)

Relevant legal framework and precedents:

The primary legal provisions under consideration are Article 12(3) of the India-Ireland DTAA and Section 9(1)(vi) of the Income Tax Act, 1961, which define and govern the taxation of royalty income. The interpretation of "royalty" under these provisions is critical.

Key precedents include the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2022) 3 SCC 321, which addressed the nature of payments for software services and their characterization as royalty or business income. Additionally, the Delhi High Court's ruling in CIT vs. MOL Corporation and the ITAT decisions in Amazon Web Services, Inc. vs. ACIT form the immediate precedential backdrop.

Court's interpretation and reasoning:

The Court observed that the issue of whether subscription receipts from Cloud Services constitute royalty income had been thoroughly examined in earlier appeals concerning the same Assessee for AY 2019-20 and AY 2020-21. The ITAT had relied on authoritative precedents, including the Delhi High Court's decision in CIT vs. MOL Corporation, which upheld that subscription receipts from Cloud Services are not taxable as royalty income. The Tribunal also referenced the Amazon Web Services, Inc. decision, which took a similar stance.

The Court noted that the subscription model involved the Assessee allowing customers to access software applications via Cloud Computing Technology, which does not amount to granting a right to use any copyright or information constituting royalty under the treaty or domestic law. The Court emphasized that the Assessee's business model was based on Software as a Service (SaaS), which is fundamentally different from licensing intellectual property rights that would attract royalty tax.

Key evidence and findings:

The factual matrix established that the Assessee, a tax resident of Ireland, provided cloud-based software subscriptions to Indian customers without having a permanent establishment in India. The Assessing Officer had treated these subscription payments as royalty, but the ITAT and earlier courts found no material change in facts or law that would justify deviating from prior rulings that such receipts are business income, not royalty.

Application of law to facts:

Applying the legal definitions and precedents, the Court found that the subscription payments did not fall within the scope of royalty as per Article 12(3) of the DTAA or Section 9(1)(vi) of the Act. The Court underscored that the Assessee's provision of access to software via cloud services did not amount to granting any right or property in the software, but was a business transaction for services rendered.

Treatment of competing arguments:

The Revenue argued that the payments were royalty because the Assessee granted access to online services maintained by it, which constituted intellectual property use. The Revenue also contended that Explanation 2(iv) to Section 9(1)(vi) supported this characterization. However, the Court found these contentions unpersuasive in light of binding precedents and the factual context, which showed the Assessee was providing a service, not licensing intellectual property rights.

Conclusions:

The Court concluded that subscription payments for Cloud Services are not taxable as royalty income under the relevant treaty and domestic law provisions. The payments represent business income from providing SaaS and are not subject to Indian income tax in the absence of a permanent establishment.

Issue C (Reliance on Precedents and Distinguishability)

Relevant legal framework and precedents:

The Court examined whether the ITAT erred in relying on the Delhi High Court decision in CIT vs. MOL Corporation and the coordinate Bench decision in Amazon Web Services, Inc. vs. ACIT, given the Revenue's claim that the facts in those cases differed materially from the present case.

Court's interpretation and reasoning:

The Court observed that the facts and legal propositions in the earlier decisions were substantially similar to those in the present appeal. There were no material differences in the nature of services, the contractual arrangements, or the legal questions involved. The Court also noted that the Revenue had already challenged these precedents in earlier appeals, which were dismissed by the Court.

Key evidence and findings:

The Court referred to the earlier appeals (ITA No. 282/2024 and 315/2024) where the Revenue's challenge to the applicability of the Supreme Court's decision in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT was rejected. The facts in those appeals mirrored the current case, reinforcing the consistency of the legal position.

Application of law to facts:

The Court applied the principle of judicial precedent and consistency, holding that the ITAT was justified in relying on the cited decisions. The absence of any material factual differentiation meant that the precedents were binding and directly applicable.

Treatment of competing arguments:

The Revenue's assertion that the facts were distinguishable was found lacking in merit. The Court emphasized that the Revenue had ample opportunity to demonstrate factual differences but failed to do so convincingly.

Conclusions:

The Court upheld the ITAT's reliance on the earlier decisions and dismissed the Revenue's contention regarding factual distinguishability.

3. SIGNIFICANT HOLDINGS

The Court held that subscription payments received by a non-resident Assessee for providing Cloud Services under a SaaS model do not constitute royalty income under Article 12(3) of the India-Ireland DTAA or Section 9(1)(vi) of the Income Tax Act, 1961.

In the words of the ITAT as quoted by the Court:

"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."

The Court reaffirmed that the provision of access to software via cloud computing technology is a business receipt and not a grant of intellectual property rights or any other right that would attract royalty taxation.

Further, the Court confirmed that no substantial question of law arises for consideration, given the binding precedents and consistent factual matrix, and accordingly dismissed the Revenue's appeal.