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Issues: (i) Whether receipts from sale of software were taxable as royalty under Article 12 of the India-USA DTAA and the Income-tax Act, 1961. (ii) Whether receipts from cloud services were taxable as royalty under the same tax framework.
Issue (i): Whether receipts from sale of software were taxable as royalty under Article 12 of the India-USA DTAA and the Income-tax Act, 1961.
Analysis: The issue was held to be covered by the earlier coordinate bench decision in the assessee's own case for a prior year, which had followed the principle that sale of software products does not amount to transfer of copyright and therefore does not generate royalty income. The same view was reinforced by the later higher court jurisprudence relied upon in that decision. As the facts were identical and no distinguishing feature was shown, the earlier conclusion was followed.
Conclusion: The receipt from sale of software was not taxable as royalty and the issue was decided in favour of the assessee.
Issue (ii): Whether receipts from cloud services were taxable as royalty under the same tax framework.
Analysis: The cloud services receipts were also treated as covered by the assessee's earlier year decision. The reasoning applied was that customers obtained only online access to services, without any transfer of rights in the underlying software or infrastructure and without any right of reproduction. On that basis, the subscription fee was characterised as consideration for online access to services and not as payment for use of, or right to use, any copyright or equipment.
Conclusion: The receipt from cloud services was not taxable as royalty and the issue was decided in favour of the assessee.
Final Conclusion: The assessments were set aside to the extent they treated the software-sale and cloud-service receipts as royalty, and the connected grounds were allowed following the binding coordinate bench precedent.
Ratio Decidendi: Consideration received for sale of software products or for cloud-based online access services is not royalty where no copyright or other relevant rights are transferred to the customer; such receipts are not taxable as royalty in the absence of a legally cognisable transfer of rights.
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