The ITAT’s Delhi Bench, which includes members Anubhav Sharma (Judicial Member) and R.K. Panda (Accountant Member), has ruled that the subscription fee for Cloud Services is not taxable as royalty.
The Assessee MOL Corporation, which is established in the United States of America, is the ultimate subsidiary entity of the Microsoft Corporation, USA.
The Assessee MOL Corporation was regarded as the ultimate beneficiary of the licensing of Microsoft software products to end-users in India due to various License Agreements taken up between the associated enterprises. Despite receiving money from licensing Microsoft Software products and online services referred to as “Cloud Service,” the assessee MOL Corporation did not report any income in its income tax return for the relevant assessment year. The Assessing Officer (AO) determined that the Assessee’s revenue from software licensing as well as receipts from Cloud Services fell into the category of ‘Royalty’ under the Income Tax Act of 1961 and the India-US DTAA, and hence were taxable. The Assessee filed an appeal with the ITAT against the AO’s decision. The ITAT determined that cloud-based services do not constitute any transfer of rights to customers and that the grant of the right to install and use the software did not include supplying the client with a copy of the software. The ITAT went on to say that while the Assessee’s cloud-based services were based on patents and copyright, the subscriber was not given any reproduction rights.
The ITAT held that the Cloud Services were given online through a data center outside of India. The ITAT further stated that the AO was misled in viewing cloud computing subscriptions as licensing of the right to use the software. The ITAT concluded that the subscription fee paid for Cloud Services was not royalty, but consideration for online access to cloud computing services for data processing and storage or application execution.
