Fee for Cloud Services not ‘Royalty’: ITAT grants Relief to Microsoft Subsidiary [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT), while granting relief to a subsidiary company of IT giant Microsoft Corporation, MOL Corporation (MOLC/the assessee), held that the subscription fee is not royalty but merely a consideration for online access of the cloud computing services.

The assessee is a company incorporated in the United States of America, having its registered office in USA. The department found that the assessee had received a total consideration of INR 3,373,74,00,209/- as revenue from licensing of MS Software products. Apart from this a revenue of Rs. 11,35,98,751/- was also been received from online services termed as “Cloud Services”. According to the department, the amount received for cloud services would amount to royalty within the meaning of the Income Tax Act, 1961.

A division bench of the Tribunal comprising Sh. R.K.Panda, Accountant Member and Sh. Anubhav Sharma, Judicial Member has observed that the cloud base services do not 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. Theservices 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,” the Tribunal said.

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