This article provides a comprehensive analysis of the case between Mol Corporation and the Assistant Commissioner of Income Tax, Circle-2(2)(1), International Taxation, Delhi. The dispute revolves around the classification of cloud services revenue as ‘Royalty’ under the IT Act, 1961, and the India-USA Double Taxation Avoidance Agreement (DTAA).
Mol Corporation, a subsidiary of Microsoft Corporation, USA, contested the Indian Income Tax Department’s decision where revenues from cloud services amounting to INR 171,36,01,900 were deemed as ‘Royalty’. This designation significantly impacts the tax liabilities under both the Indian IT Act and the applicable DTAA.
The main legal contention revolves around whether the payments received for cloud services can be considered as royalties, which would be taxable in India. The appellant argues that these payments, facilitated through cloud platforms, do not transfer any rights akin to usage or licensing of software but merely provide a service, which should not be classified as ‘Royalty’.
The Income Tax Appellate Tribunal (ITAT), New Delhi, heard the case. During the proceedings, precedents were discussed, including similar rulings from previous years which supported the appellant’s position. On December 28, 2022, the tribunal ruled in favor of the appellant, Mol Corporation, thereby overturning the initial assessment made by the Income Tax Department.
The judgment holds significant implications for taxation of cloud services in India, particularly concerning international transactions and DTAA applications. This case sets a precedent, indicating that cloud-based service payments may not necessarily constitute ‘Royalty’ and thus may not attract the associated tax implications under the IT Act and DTAA.
The ITAT’s decision in ITA No. 1914/Del/2022 is a landmark in the realm of international taxation, particularly for IT and cloud services. This ruling provides clarity on the tax treatment of revenues from such services and aligns with global tax practices concerning digital and cloud-based transactions.
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