2022 (7) TMI 275 - AT - Income Tax

Appeals partially allowed on taxability of software revenue and cloud services. Dismissed grounds on TDS credit transfer, interest levy, penalty.

MOL Corporation Versus ACIT Circle 2 (2) (1), International Taxation, New Delhi And MOL Corporation Versus DCIT Circle 2 (2) (1), International Taxation, New Delhi

The appeals in ITA No. 1134/Del/2017 and ITA No. 7528/Del/2017 were partly allowed. The grounds related to the taxability of software revenue and cloud ... Income accrued in India - sale of software product - royalty receipts - India - USA DTAA - HELD THAT:- As decided in INFRASOFT LTD. [2013 (11) TMI 1382 - DELHI HIGH COURT] and ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED [2021 (3) TMI 138 - SUPREME COURT] the sale of software product does not give rise to the royalty income. In the light of aforesaid, since there are no distinguishing facts with regard to present Assessment Year than the Assessment Year 2012-13 [2022 (4) TMI 966 - ITAT DELHI], we allow the Ground No. 2 and its Sub Grounds of the assessee. Subscription to cloud base service as royalty - Functional aspect of cloud base service while holding - India - USA DTAA - HELD THAT:- The very same issue regarding the cloud service in assessee’s own case for the AY 2012- 13 [2022 (4) TMI 966 - ITAT DELHI], came up for consideration before the Co-ordinate Bench of the Tribunal wherein by following the ratio laid down in the case of M/s. Salesforce.com Singapore Pte. [2022 (4) TMI 327 - ITAT DELHI] and also the decision of Savvis Communication Corporation [2016 (5) TMI 635 - ITAT MUMBAI] and the Chennai Tribunal decision in the case of ACIT Vs/. Vishwak Solutions Pvt. Ltd. [2015 (4) TMI 794 - ITAT CHENNAI] held that the authorities fallen in error in considering the subscription received towards cloud serviced to be royalty income. Issues Involved:1. Taxability of revenue from the sale of software.2. Taxability of consideration from cloud services.3. Transfer of TDS credit.4. Levy of interest under section 234B of the Act.5. Initiation of penalty proceedings under section 271(1)(c) of the Act.Detailed Analysis:1. Taxability of Revenue from Sale of Software:- The Assistant Commissioner of Income Tax computed the total income of the appellant at INR 3859,91,90,408 for AY 2013-14 and INR 2197,95,13,620 for AY 2014-15, against NIL income reported by the appellant.- The Hon'ble DRP and the Ld. AO held that the revenue from the sale of software by MRSC is taxable in India as 'Royalty' under Article 12 of the India-USA DTAA.- The appellant contended that the revenue from the sale of software should be considered as business income and not royalty, citing the Delhi High Court decision in Infrasoft Limited (220 Taxman 273) and the Supreme Court decision in Engineering Investigation Centre of Excellence Pvt. Ltd. Vs. Commissioner of Income Tax (2021) 125 Taxman.com 42(S.C).- The ITAT applied the ratio laid down by the Hon'ble Supreme Court and the Coordinate Bench in the appellant's own case for AY 2012-13, concluding that the sale of software does not give rise to royalty income. Thus, the grounds related to the taxability of software revenue were allowed in favor of the appellant.2. Taxability of Consideration from Cloud Services:- The authorities below treated the revenue from cloud services as 'Royalty' under the India-USA DTAA.- The appellant argued that the functional aspect of cloud-based services was not appropriately considered and that similar issues had been decided in their favor in previous cases.- The ITAT referred to the decisions in M/s. Salesforce.com Singapore Pte. Vs. Dy. D.I.T. and DDIT Vs. Savvis Communication Corporation, concluding that the subscription received towards cloud services should not be considered royalty income.- The grounds related to the taxability of cloud services were allowed in favor of the appellant.3. Transfer of TDS Credit:- The appellant claimed that the Ld. AO erred in not transferring the TDS credit as mandated by the Hon'ble DRP and the Supreme Court in ITO vs. Bachu Lai Kapoor (60 ITR 74) (1966) (SC).- During the pendency of the appeal, the Revenue provided relief by passing an order u/s 154 of the Act, rendering this ground in-fructuous.- Therefore, the ground related to the transfer of TDS credit was dismissed.4. Levy of Interest under Section 234B of the Act:- The appellant contended that the Ld. AO erred in levying interest amounting to INR 182,88,29,636 under section 234B of the Act.- This ground was deemed consequential and was dismissed accordingly.5. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:- The appellant argued that the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.- This ground was also deemed consequential and was dismissed.Judgment Summary:- The appeals in ITA No. 1134/Del/2017 and ITA No. 7528/Del/2017 were partly allowed.- The grounds related to the taxability of software revenue and cloud services were decided in favor of the appellant.- The grounds related to the transfer of TDS credit, levy of interest under section 234B, and initiation of penalty proceedings under section 271(1)(c) were dismissed as they were either consequential or had become in-fructuous.