2022 (3) TMI 1434 - AT - Income Tax

Facebook, Ireland Payments Not Taxable as Fees for Technical Services - Tribunal Ruling

Play Games 24X7 Private Limited. Versus DY. CIT-13 (1) (2), Mumbai.

The Tribunal allowed the appeal, determining that payments to Facebook, Ireland were not Fees for Technical Services (FTS) and not subject to Tax Deducted ... TDS u/s 195 - payments to non-resident - payment made to Facebook - disallowance u/s 40(a)(ia) - Whether payment made by the assessee to Facebook are in the nature of Royalty and not as fee for technical services (FTS) ? - HELD THAT:- The assessee company is engaged in the business of providing a platform for online gaming, more particularly that of Rummy. The assessee company incurred advertisement expenses for banner advertisement on the website of Facebook. It is pertinent to note that for the purpose of uploading the banner advertisement on Facebook the advertisement related information is put up at the interface provided by the Facebook, Ireland in the required format. Facebook, Ireland, after due verification of the advertisements, upload the advertisement on its server. While uploading the advertisement on Facebook it is an admitted position that the assessee company does not have any control over the functioning of the interface provided by the Facebook, Ireland. The entire operation and maintenance of the server while providing the advertisement platform is under the control of Facebook, Ireland. It is an admitted fact that the assessee company makes use of standard facility which is provided for displaying advertisement on the website of Facebook, Ireland which was also provided to its other global customers in the like manner. In the present case, the assessee was very well aware that Facebook, Ireland is a non-resident and the advertisement payment made to Facebook, Ireland will not come under the purview of TDS and, therefore, has chosen not to deduct tax at source. It is pertinent to note that the assessee has given specific task of advertisement banner to the Facebook Ireland. The element of fees for technical services is determined if there is any technical aspect involved by providing services by the company from whom the services are rendered. As per letter dated 19.01.2015, Facebook Ireland stated that no servers that host the Facebook.com product are located in India. In the present case, the assessee has demonstrated before us that the assessee is taking the privilege of platform of Facebook, Ireland which is not either in the nature of royalty or technical services. The payment terms were specifically defined in the payment agreement with Facebook Ireland which clearly indicates that the Facebook Ireland will provide platform banner for advertisement to the assessee-company. Thus there is no element of fees for technical services or royalty is involved in this case. Thus, the Assessing Officer as well as the CIT(A) has totally ignored the actual fact of the present case without demonstrating that the services are coming under the purview of FTS or royalty. Therefore, the appeal filed by the assessee is allowed. Issues Involved:1. Non-adjudication by CIT(A) on reliance placed on the Supreme Court decision in G.E. India Technology Cen. (P.) Ltd.2. Classification of payments to Facebook, Ireland as Fees for Technical Services (FTS) under Section 9(1)(vii) and disallowance under Section 40(a)(ia).3. Disallowance of Travelling Expenses.4. Disallowance of Miscellaneous Expenses.5. Cross-objection by Revenue on classification of payments as Royalty instead of FTS.Detailed Analysis:1. Non-adjudication by CIT(A) on reliance placed on the Supreme Court decision in G.E. India Technology Cen. (P.) Ltd.:The assessee argued that CIT(A) failed to consider the Supreme Court's decision in G.E. India Technology Cen. (P.) Ltd., which held that Tax Deducted at Source (TDS) provisions apply only to sums chargeable to tax under the Income-tax Act, 1961. The CIT(A) did not address this reliance, leading to an incomplete adjudication on the matter.2. Classification of payments to Facebook, Ireland as Fees for Technical Services (FTS) under Section 9(1)(vii) and disallowance under Section 40(a)(ia):The CIT(A) concluded that payments made to Facebook, Ireland for banner advertisement expenses were FTS rendered in India, thus disallowing the amount under Section 40(a)(ia) due to non-withholding of taxes. The assessee contended that these payments were business profits, not FTS, as there was no human intervention involved, which is a requirement for FTS as per the Supreme Court's decision in Bharti Cellular. The Tribunal found that the services provided by Facebook, Ireland did not involve any technical services or human intervention. The server used for advertisements was not located in India, and there was no Permanent Establishment (PE) of Facebook, Ireland in India. Hence, the payments were not liable to tax in India, and the disallowance under Section 40(a)(ia) was not valid.3. Disallowance of Travelling Expenses:The CIT(A) disallowed travelling expenses amounting to INR 24,20,753 on an ad-hoc basis due to the failure of the assessee to furnish relevant details. The Tribunal did not specifically address this issue in detail, focusing more on the primary contention regarding payments to Facebook.4. Disallowance of Miscellaneous Expenses:Similarly, the CIT(A) disallowed miscellaneous expenses amounting to INR 12,71,459 on an ad-hoc basis without providing explicit reasons. The Tribunal did not delve deeply into this issue, concentrating on the primary issue of payments to Facebook.5. Cross-objection by Revenue on classification of payments as Royalty instead of FTS:The Revenue filed a cross-objection arguing that the payments to Facebook should be classified as Royalty and not FTS, thus liable for TDS under Section 40(a)(i). The Tribunal noted that the cross-objection was filed more than two years after the assessee's appeal, without any application for condonation of delay. Moreover, the Tribunal found no merit in the Revenue's contention, as the payments were not in the nature of Royalty. The Tribunal observed that the advertisement platform provided by Facebook, Ireland did not involve any element of Royalty or FTS, thereby dismissing the Revenue's cross-objection.Conclusion:The Tribunal allowed the appeal filed by the assessee, concluding that the payments made to Facebook, Ireland were not FTS and thus not liable for TDS under Section 40(a)(ia). The cross-objection filed by the Revenue was dismissed due to delay and lack of merit. The Tribunal emphasized that the services provided by Facebook, Ireland did not involve any technical services or human intervention, and there was no PE of Facebook, Ireland in India.