TMI Blog2022 (5) TMI 246X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] . Functional aspects of Cloud base service while holding the subscription to cloud base service as royalty - 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 storag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany incorporated in U.S.A. and is a wholly owned subsidiary of M/s. Microsoft Corporation, U.S.A. ('MS Corp.'). The assessee has a branch office in Singapore. There was another wholly owned subsidiary of MS Corp. Gracemac Corporation 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. MOL Corporation (MOLC) was also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in law, the Hon'ble DRP and the Learned AO grossly erred in not following the judgment of the Hon'ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd. (STA 1034/2009) which is binding on the lower tax administrative bodies and the other judicial precedents as the same is squarely applicable in the case of Appellant. That on facts and in law, the Hon'ble DRP and the Learned AO failed to appreciate that the sale of software is a sale of 'Copyrighted Article' and not 'Copyright' and accordingly, the revenue from sale of software is in the nature of business income not taxable under Article 7 of India US tax treaty in the absence of the PE of the Appellant in India. Taxability of the revenue from cloud services 3. That on facts and in law, the Hon'ble DRP and the Learned AO has 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 without appreciating that the same is not in the nature of Royalty under the India -USA DTAA and is not taxable in India, Transfer of TPS credit 4. That on facts and in law, the Learned AO gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in the hands of Gracemac which stands amalgamated with MOLC 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). 6.2. 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 and 2011-12, vide separate order of even date the grounds in hand are sustained. The assessment order for AY for 2012-13 are liable to be set aside. Ground no 3 7. It was submitted for the assessee that Ld. Tax Authorities below have failed to appreciate the functional aspects of Cloud base service while holding the subscription to cloud base service as ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services provided by the assessee. 7.3. 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. 1935 1936/MDS/2010 dated 30.01.2015 has upheld the findings of CIT(A) that the amount paid to the non-resident is towards hiring of storage space. The aforesaid squarely covers the controversy in regard to the present assessee also. In the light aforesaid, 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. 8. Accordingly the grounds no 1 to 3 in appeal are allowed and the impugned orders are set aside. Order pronounced in open court on this 13th day of April, 202 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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