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July 25, 2022

Addition towards cloud based services not royalty nor sustainable

by CA Shivam Jaiswal in Income Tax

Addition towards cloud based services not royalty nor sustainable

Facts and Issues of the case

MOL Corporation (‘MOLC’) is a company incorporated in the United States of America, is the ultimate parent entity of MOLC. Gracemac Corporation (‘Gracemac’), a corporation incorporated in the USA and a Wholly Owned Subsidiary of MS Corp got merged with MOLC with effect from 2ndOctober 2006. All the rights and obligations of Gracemac got merged into the affairs of MOLC. ‘MS Corp’ is the sole owner of intellectual property rights vested in Microsoft Software. It has granted exclusive license to manufacture and distribute Microsoft products to one of its wholly owned subsidiary, M/s Gracemac.  

The assessment order came to be passed on 31/01/2017 against the assesse u/s 143(3) read with Section 144C (13) of the Income Tax Act by the Assistant Commissioner of Income Tax, wherein the Ld. A.O has computed the total income of the assessed at Rs.. 3859, 91, 90,408/- as against NIL income reported in the return of the assesse. The Ld. A.O has held that the Revenue earned and received from sale of software by MRSC amounting to Rs. 38,32,90,74,884/- is taxable in India as royalty in the hands of the assesse. Further, held that the Revenue earned by MRSC from Cloud Services amounting to INR 27,01,15,524/- is also taxable as royalty in India  in  the hands of the assessee.

Observations by the court

We are  of the opinion that 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.

We have heard the parties and verified the material on record. The very same issue regarding the cloud service in assessee’s own case for the AY 2012-

13 came up for consideration before the Co-ordinate Bench of the Tribunal. The Co-ordinate Bench, held that the authorities fallen in error in considering the subscription received towards cloud serviced to be royalty income.


Addition towards cloud based services not considered as royalty.


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