Microsoft Regional Sales PTE Ltd, New Delhi V. ACIT Circle-2(2)(1) - International Taxation, New Delhi

ITA 312/DEL/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 1022 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2017-2018
• Appeal Filed On: 25-03-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AKSHAY UPPAL
• Keywords: Double taxation relief; Wholly owned subsidiary; Revised return; TDS; Set aside
• Section: 144; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI (DELHI BENCH ‘D’ : NEW DELHI) BEFORE SH. G.S.PANNU, HON’BLE PRESIDENT AND SH. ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.312/Del/2021 (Assessment Year : 2017-18) Microsoft Regional Sales Pte. Ltd. C/o. Mr. Nirman Malpani Ernst & Young LLP 3 rd & 6 th Floor, Worldmark 1, IGI Airport Hospitality District, Aerocity, New Delhi-110037 PAN : AADCM1638A Vs. Assistant Commissioner of Income- tax, Circle-2(2)(1), Intl. Taxation, Delhi (APPELLANT) (RESPONDENT) Assessee by Sh. Nageshwar Rao, Adv. & Akshay Uppal, Adv. Revenue by Ms. Sapna Bhatia, CIT-DR Date of hearing: 26 .07.2022 Date of Pronouncement: 30 th .08.2022 ORDER PER ANUBHAV SHARMA, JM: The assessee has come in appeal against order dated 19/03/2020 of Dispute Resolution Penal-2, New Delhi in regard to assessment year 2017- ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 2 18 and the assessment order dated 28.01.2021 passed by ACIT, Circle Int. Tax, 2(2)(1), u/s 144 r.w.s. 144(c) (13) of the Income Tax Act, 1961. 2. The facts necessary to understand the controversy are that are present appellant, M/s. Microsoft Regional Sales Pte. Ltd. (‘MRS’) (earlier known as Microsoft Regional Sales Corporation) was registered under the law of United States a wholly owned subsidiary of M/s. Microsoft Corporation, U.S.A. (‘MS Corp.’). The assessee has a branch office in Singapore. The assessee is engaged in the business of distribution of Microsoft retail products in the Asia Pacific region, including India and in licensing of software through independent distributors to the end users under an End User License Agreement (EULA). 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 non-exclusive distribution agreement with the assessee M/s. Microsoft ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 3 Regional Sales Corporation to distribute MS Retail Software Products in a jurisdiction to which MO was allowed. 2.1 Assessee had filed a return of income declaring Nil income on 31.10.2017 claiming TDS of Rs. 9,28,94,483/- and a revised return declaring the same Nil income claiming TDS of Rs. 9,74,72,239/- was filed on 29.03.2019. 2.2 The case was selected for scrutiny. Following previous years assessments, the consideration received by the assessee from the sale of software was held as taxable as royalty in India and the AO assessed the same in the hands of assessee on protective basis and in the hands of MOL Corporation (MOLC) on substantive basis. Further the AO had considered the receipts from Cloud Services. The AO held the payments made by the users as the consideration for the use or the right to use of such patents, Software and Cloud Infrastructure covering them in the definition of royalty both by clause 9 (1)(vi) Explanation 2 sub-clause (iii) and (v) of the Income Tax Act, 1961 and also Article 12 (3) of the India US, DTAA. The addition in hands of assessee was made on protective basis and substantively in the case of MOL Corporation. 3. The assessee has raised following grounds of appeal before this Tribunal :- 1. “That on the facts and in the circumstances of the case and in law, the Assistant Commissioner of Income Tax, Circle - 2(2)(1), International Taxation, Delhi (‘Ld. AO’) has erred in computing the total income of the Appellant at INR 175,50,75,667 as against the returned income of Nil. 2. Taxability of revenue from sale of software ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 4 2.1 That on the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel (‘Ld. DRP’) and the Ld. AO have erred in holding that receipt of INR 44,17,46,478 earned by the Appellant outside India from sale of Microsoft Retail Software Products to distributors belonging to India is taxable under the Act/ DTAA. 2.2 That on the facts and in circumstances of the case and in law, Ld. DRP and Ld. AO erred in disregarding decisions of Hon’ble Courts and concluding that revenue of INR 44,17,46,478 earned by the Appellant from sale of Microsoft Retail Software Products to distributors belonging to India is taxable as “Royalty” (on protective basis). 2.3 That on the facts and in the circumstances of the case and in law, Ld. DRP and Ld. AO have failed to appreciate that sale of software is a sale of ‘Copyrighted Article’ and accordingly, revenue from sale of software being in the nature of business income is not taxable under Article 7 of India - USA Double Taxation Avoidance Agreement (‘DTAA’) in the absence of a Permanent Establishment of the Appellant in India. 2.4 That on the facts and in the circumstances of the case and in law, Ld. DRP and Ld. AO erred in holding that revenue from sale of software is taxable as ‘royalty’ in India, which is contrary to the Supreme Court decision in the case of Engineering Analysis Centre of Excellence Private Limited vs. CIT (Civil Appeal 8733-8734 of 2018). 2.5 That on the facts and in the circumstances of the case and in law, Ld. DRP and Ld. AO erred in failing to appreciate that MRS is merely a distributor of software and income from sale of software cannot be taxed as ‘royalty’ in the hands of distributor. 2.6 Ld. DRP and Ld. AO erred in failing to appreciate that receipt of INR 44,17,46,478 is not taxable as ‘Royalty’ or ‘otherwise’ in the hands of Appellant, under the Income-tax Act, 1961 (‘Act’) or India-USA DTAA. ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 5 3. Taxability of consideration from cloud services 3.1 That in the facts and in circumstances of the case and in law, Ld. DR.P and the Ld. AO have erred in not holding that receipt of INR 131,33,29,189 earned by MRS from cloud services is not taxable as “Royalty” in India both under Act and/ or India - USA DTAA. 3.2 That on the facts and in the circumstances of the case and in law, Ld. DRP and Ld. AO erred in failing to appreciate that MRS is merely a distributor of cloud services and income from cloud services cannot be taxed as ‘royalty’ in the hands of distributor. 3.3 Ld. DRP and Ld. AO erred in failing to appreciate that receipt of INR 131,33,29,189 is not taxable as ‘Royalty’ or ‘otherwise’ in the hands of Appellant, under the Act or India- USA DTAA. Other Grounds 4. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not granting the TDS credit of INR 49,77,246 to the Appellant. 5. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying excess interest under section 234B of the Act. 6. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act against the Appellant. The above grounds of appeal are mutually exclusive and without prejudice to each other. The appellant craves leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal.” 4 Heard and perused the record. Ld. Counsel for the assessee has relied the adjudications of assessee’s own case appeals by coordinate ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 6 bench of Tribunal, to which one of us the Judicial member was on quoram for AY 2010-11, 2011-12, 2012-13, and other benches for AY 2013-14 Vide ITA no 1135/Del/2017, AY 2014-15 vide ITA no 7257/Del/2017 and AY 2015-16 vide ITA no 6832/Del/2018, AY 2016-17 vide ITA no 7857/Del/2019 to contend that both the issues are now decided in favour of the assessee. To which Ld DR submitted that he stands by the orders of Ld. Tax authorities below. 5. Now in regard to Ground no 1 read with Ground no 2 with its sub grounds. It can be observed that in assessee’s own case for AY 2012-13, vide ITA no 1553/Del/2016 the issue has culminated in favour of assessee by following relevant findings; “6. On behalf of the assessee in regard to ground no 1 it was submitted that Ld. Tax Authorities have failed to follow the ratio and principles of law in regard to the sale of software products not giving rise to royalty income as held by Hon’ble Delhi High Court in DIT vs. Infrasoft Ltd. (2014) 220 Taxman. 273. It was submitted that Hon’ble Supreme Court of India in its judgment dated 02.03.2021 in Engineering Analysis Centre of Excellence (P) Ltd. vs. Commissioner of Income Tax (2021) 125 taxmann.com 42 (SC) has upheld the Hon’ble Delhi High Court judgment. It was submitted that in the case of Gracemac Corporation which stands amalgamated with MOL Corporation for the assessment year 2005-06, 2006-07 and 2007-08 the Co-ordinate Bench B at Delhi by order dated 16.12.2020 has allowed the appeals which have been further ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 7 upheld by Hon’ble Delhi High Court by judgment dated 07.03.2022. The Ld DR supported the findings of Tax authorities below. 6.1 Giving thoughtful consideration to the matter on record, the Bench is of considered opinion that the revenue has been following a persistent approach in regard to assessee and its sister assessee subsidiaries of MS Corp holding sale of MS Retail Software Products 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 protective basis while the substantive assessment was in the hands of MOLC. The assessment 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 ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 8 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.” No distinction on facts or law could be pointed by Ld. DR. Therefore, following aforesaid findings in favor of the assessee these grounds are determined in favour of the assessee. 7. Next coming to Ground no 1 read with Ground no 3 with its sub grounds. It can be observed that in assessee’s own case for AY 2012- 13, vide ITA no 1553/Del/2016 the issue has culminated in favour of assessee by following relevant findings; “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 royalty. In this context, the co-ordinate bench judgment in M/s. Salesforce.com Singapore Pte. Vs. Dy. D.I.T. Circle2(2) ITA No. 4915/DEL/2016 [A.Y 2010-11] with six other connected was relied to contend that subscription to the cloud computing services do not give rise royalty income. The Ld DR supported the findings of Tax authorities below. 7.1 Giving thoughtful consideration to the matter on record, the bench is of considered view that the cloud base services do not ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 9 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 storage of data or run the applications. 7.2 While dealing with similar question in regard to the case of M/s. Salesforce.com Singapore Pte. (supra) where the said assessee was provider of comprehensive customer relationship management servicing to its customer by using Cloud Computing Services / Web Casting Services, the Bench in its order dated 25.03.2022 held as under : “28. Considering the facts of the case in totality, in light of 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 ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 10 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.” 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.” No distinction on facts or law could be pointed by Ld. DR. Therefore, ITA No. 312/Del/2021 Microsoft Regional Sales Pte Ltd. New Delhi 11 following aforesaid findings in favor of the assessee these grounds are determined in favour of the assessee. 8. Accordingly the grounds no 1 to 3 in appeal are allowed and the remaining grounds being consequential in nature follow the event. The appeal is allowed and the impugned final assessment order is set aside. The TDS credits shall be allowed in accordance with law. Order pronounced in the open court on 30 th August 2022. Sd/- Sd/- (G.S.PANNU) (ANUBHAV SHARMA) PRESIDENT JUDICIAL MEMBER Date:- 30 th .08.2022 *Binita, SR.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI