Subscription Fee Towards Cloud Services Not Taxable As Royalty: Delhi ITAT

The Microsoft Corporation, USA is the ultimate parent entity of the Assessee MOL Corporation which is incorporated in the United States of America.

Due to certain License Agreements entered into between the associated enterprises, the Assessee MOL Corporation was considered the ultimate beneficiary of the licensing of Microsoft software products to end users in India.

The Assessee MOL Corporation did not show any income in its income tax return for the relevant assessment year, even though it had received revenue from licensing of Microsoft Software products and from online services termed as "Cloud Services".

The Assessing Officer (AO) held that the income arising to the Assessee on account of licensing of software products as well as the receipts from Cloud Services were in the nature of 'Royalty' under the Income Tax Act, 1961 and the India-US DTAA, and thus were taxable.

The AO accordingly made additions to the Assessee's taxable income. Against the order of the AO, the Assessee filed an appeal before the ITAT.

The Assessee MOL Corporation submitted before the ITAT that as per the law laid down by the Delhi High Court in the case of DIT versus Infrasoft Ltd (2013) the sale of software cannot be qualified as royalty. The Assessee added that the Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd versus Commissioner of Income Tax (2021) has upheld the judgment of the Delhi High Court.

The Assessee placed reliance on the judgment of the co-ordinate bench of ITAT Delhi in M/s. Salesforce.com Singapore Pte. versus Dy. D.I.T. (2022) and contended that subscription to cloud computing services does not give rise to royalty income.

The ITAT ruled that the cloud base services do not involve any transfer of rights to the customers and the grant of the right to install and use the software did not include providing any copy of the said software to the customer. The ITAT added that though the Assessee's cloud base services were based on patents / copyright but the subscriber did not get any right of reproduction.

The ITAT ruled that the Cloud Services were provided online via a data centre located outside India, and the Cloud Services merely facilitated the flow of user data. The ITAT added that the AO had erred in interpreting the subscription to cloud computing services as licensing of the right to use a Software.

The ITAT thus held that the subscription fee received towards Cloud Services was not royalty but merely a consideration for online access of the cloud computing services for processing and storage of data or to run the applications.

The ITAT thus allowed the appeal of the Assessee.

Case Title: M/s MOL Corporation versus DCIT (International Taxation)

Dated: 13.04.2022 (ITAT Delhi)

Representative for the Appellant/Assessee: Nageshwqar Rao, Advocate and Deepika Agarwal, Advocate

Representative for the Respondent/Revenue Department: Anupama Anand, CIT-DR

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