The Delhi High Court has dismissed a criminal case against Microsoft India, accused of hosting "objectionable" content on its web pages.
Microsoft was among 21 web firms, including Facebook and Yahoo, accused of hosting material that could cause communal unrest.
In its defence the company said it dealt only with computer software.
The judge said journalist Vinay Rai, who filed the case, can refile if he finds any credible evidence later.
Microsoft's counsel told the court that no defamatory material was posted on its web sites as it was not a platform for people to interact with each other, reported the Press Trust of India news agency.
The company is involved in the development and sale of software and computing solutions, the counsel said.
Judges in India had threatened to block sites that fail to crack down on offensive content.
Last month, Facebook and Google said they had complied with a court directive and removed "objectionable" material.
Late last year, Communications Minister Kapil Sibal met officials from Google, Facebook and other web sites and said the government would introduce guidelines to ensure "blasphemous material" did not appear on the internet.
The Delhi High Court in January asked Facebook and Google India to "develop a mechanism to keep a check and remove offensive and objectionable material from their web pages" or "like China, we will block all such web sites".
The criminal case was brought by the journalist Vinay Rai.
A separate civil lawsuit, which makes similar accusations against a number of the same internet companies is proceeding, but Microsoft had already successfully appealed to be dropped from it.
Many firms say it is impossible to pre-filter material.
In December, Communications Minister Sibal said: "My aim is that insulting material never gets uploaded. We will evolve guidelines and mechanisms to deal with the issue. [The companies] will have to give us the data, where these images are being uploaded and who is doing it."
Mr Sibal was angered by morphed photos of Prime Minister Manmohan Singh and Congress party president Sonia Gandhi, as well as doctored images of pigs running through Islam's holy city of Mecca.