Online advertising payments not taxable as royalty where no right to use platform, equipment, or process is acquired.

Payments by an advertising agency to Facebook Ireland Limited for hosting and displaying online advertisements were treated as non-taxable in India because the agency acted only as an intermediary and acquired no right to use equipment, copyright, process, or any portal of the non-resident. Book entries were held not conclusive of the true character of the transaction, and the complexity of the platform did not establish royalty. In the absence of a dependent agent, permanent establishment, or other taxable nexus, withholding was not required and disallowance under section 40(a)(i) was held unsustainable.

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Issues: Whether payments made by an advertising agency to Facebook Ireland Limited for display of online advertisements, without deduction of tax at source, could be disallowed under section 40(a)(i) of the Income-tax Act, 1961 on the footing that such payments constituted royalty or taxable income in India.

Analysis: The assessee acted only as an intermediary for placing advertisements of its clients on digital media. The payment to Facebook Ireland Limited was for hosting and display of advertisements, while the assessee's real income was only the commission component. The entries in the books of account were not conclusive of the true character of the transaction. The reliance placed by the revenue on material describing the Facebook ad platform as technologically complex was held insufficient to establish that the assessee obtained any right to use or access any equipment, copyright, process, or portal of Facebook Ireland Limited. The assessee had no role in concluding contracts on behalf of Facebook Ireland Limited and no basis was shown to treat it as a dependent agent or to infer a permanent establishment in India. Following the principle that mere use of an online facility or platform does not, by itself, amount to royalty, and relying on the applicable treaty and later judicial precedent, the payment was held not to be taxable in India in the absence of any taxable nexus.

Conclusion: The disallowance under section 40(a)(i) was not sustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: Payments for online advertising placement, where the payer merely uses an enabling facility without acquiring any right to use equipment, copyright, or process and the non-resident has no taxable presence in India, do not constitute royalty and do not trigger withholding under section 195.

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