ITAT provides relief to Microsoft

ITAT provides relief to Microsoft

While allowing TDS credit in accordance with the law, the bench held the sale of cloud services did not give rise to royalty income

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed an appeal of the Microsoft Regional Sales Pte. Ltd relating to a Tax Deducted at Source (TDS) claim.

The assessee, Microsoft Regional, incorporated in the US, is a wholly-owned subsidiary of Microsoft Corporation, USA. It is engaged in the business of distribution of Microsoft products in the Asia Pacific region, including India.

The assessee filed its Income Tax Return (ITR) claiming a TDS of Rs.381,22,30,714 and a revised return claiming the same income of Rs.204,90,61,907, but claiming the TDS of Rs.392,67,91,700 filed on 31 March 2105.

The case was selected for scrutiny and the notices were issued. A final assessment order was passed in January 2017 under the Income Tax Act against the assessee. As per the Dispute Resolution Panel (DRP), the total income of the assessee was assessed at Rs.4064,82,52,315.

An amount of Rs.3859,91,90,408 was assessed as 'royalty' and Rs.204,90,61,907 as 'interest' in the income tax refund disclosed in the ITR. The royalty income was taxed at a 10 percent rate. While surcharge and education cess were charged as applicable limit under the IT Act after giving credit to pre-paid taxes.

On analysing, the bench of Yogesh Kumar U.S. (Judicial Member) and Dr. B. R. R. Kumar (Accountant Member) directed the assessing officer to allow the TDS credit in accordance with the law.

Since Microsoft also had an issue related to the cloud services, the bench held that the sale of the software product did not give rise to the royalty income.

Regarding the subscription to cloud services, the tribunal cited other similar cases. It held, "The authorities have erred in considering the subscription received towards the cloud serviced to be royalty income."