TMI Blog2022 (4) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and distribute Microsoft products to one of its wholly owned subsidiary M/s Gracemac (now merged with MOL Corporation, the assessee in this case), which, in turn granted non-exclusive rights to its wholly owned, subsidiary, Microsoft Operations Pte.Ltd., Singapore, ( MO Singapore ), to manufacture Microsoft Products in Singapore and distribute such products in Asia (excluding non-English-Ianguage products in China and Taiwan). M/s Microsoft Regional Sales Corporation(MRSC) has been appointed as a distributor of Microsoft products in Asia by MO, Singapore. 2.3 MS Corp entered into an agreement with Gracemac on lsl January 1999 and granted the following rights to Gracemac (Now MOL, the assessee): exclusive license to manufacture and distribute Microsoft retail software products directly to retailers or to MS Corp or to subsidiaries of MS Corp; and exclusive right to license any third party, to directly grant customers the right to use for internal use. Following the merger of Gracemac with MOLC, by operation of law, the exclusive license belonging to Gracemac was assigned in favour of MOLC. 2.4 In pursuance of the above rights, MOLC has entered into a License Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the applicability of the amended provisions of section 9(1 )(vi). The Court has broadly relied upon the Article 3(2) of the India-USA Treaty in deciding the issue in favour of the assessee. From the bare reading of the above Article it is evident that since the language of the definition under the Income Tax Act and DTAA are same, for the purpose of interpreting article 1 2(3) of the India USA treaty, Explanation 4 to the section 9(1}(vi) of the income Tax Act ought to be necessarily read by invoking article 3(2). Since the meaning of use of copyright right in the context of software taxation has been clarified bv Finance Act,2012 (which is not an extension of the scope of Royalty Provisions under the IT Act), both the contracting states to the DTAA convention have agreed that reference to the domestic laws can be made where the treaty requires to do so. This aspect has been omitted to be looked into by the Hon ble Court and is a subject matter of further appeal by the Revenue. 4. 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. 2.5 Without prejudice to the below mentioned grounds of appeal, the Hon ble DRP and Learned AO erred on the facts of the case and in law, in determining the income of the Appellant for the subject Assessment Year at INR 33,73,74,00,209 thereby completely ignoring the fact that the payments received by the Appellant from licensing of manufacturing and distribution rights to MO pertaining to India was INR 20,24,24,40,125 only. 3. Taxability of the revenue from cloud services 3.1 That on facts and in law, the Hon ble DRP and the Learned AO erred in observing that amount paid by MO to Appellant was for earning income from a source in India. 3.2 That on facts and in law, the Hon ble DRP and the Learned AO 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 in the hands of the Appellant without appreciating that the same is not in the nature of Royalty under the India - USA DTAA and is not taxable in India. 3.3 Without prejudice to the above, the Hon ble DRP and the Learned AO erred on facts and in law in determining income of the appellant from cloud services as INR 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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). 7.2 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, 2011-12 and 2012-13, vide order of even date in regard to M/s Microsoft Regional Sales Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 29. 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. 8.3 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-US DTAA. The Chennai Tribunal in the case of ACIT v Vishwak Solutions Pvt. Ltd ITA No. 193 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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