Payments to tech giants not "royalty" under DTAA. No tax deduction obligation. CIT(A) decisions overturned.

Urban Ladder Home Décor Solutions Pvt. Ltd. Versus ACIT (International Taxation) Circle-2 (2) Bengaluru

Urban Ladder Home Décor Solutions Pvt. Ltd. Versus ACIT (International Taxation) Circle-2 (2) Bengaluru - TMI Issues Involved:
1. Validity of demand raised under Section 201(1) of the Income-tax Act, 1961.
2. Interest charged under Section 201(1A) of the Income-tax Act, 1961.
3. Nature of payments made to Facebook, Ireland.
4. Nature of payments made to Rocket Science Group, LLC (MailChimp), USA.
5. Nature of payments made to Amazon Web Services (AWS), USA.
6. Applicability of Double Taxation Avoidance Agreement (DTAA) provisions.
7. Definition of "royalty" under the Income-tax Act and DTAA.

Issue-wise Detailed Analysis:

1. Validity of Demand Raised Under Section 201(1) of the Income-tax Act, 1961:
The assessee challenged the validity of the demand raised under Section 201(1) for the financial years 2014-15, 2015-16, and 2016-17. The Assessing Officer (AO) conducted a survey and found that the assessee made payments to non-residents without deducting tax at source. Consequently, the AO treated the assessee as in default and raised a demand under Section 201(1).

2. Interest Charged Under Section 201(1A) of the Income-tax Act, 1961:
Interest was charged under Section 201(1A) due to the failure of the assessee to deduct tax at source from payments made to non-residents. The interest amounts were calculated for each financial year under consideration.

3. Nature of Payments Made to Facebook, Ireland:
The AO classified payments to Facebook for advertisements as "royalty" under Explanation 2(iii) and (iva) to Section 9(1)(vi) of the Act, arguing that the payments involved the use of Facebook's technology, design, process, and equipment. The CIT(A) upheld this view, referencing the Bangalore ITAT decision in the case of Google India (P) Ltd, and concluded that the payments were for the use of patented software processes and thus constituted royalty.

4. Nature of Payments Made to Rocket Science Group, LLC (MailChimp), USA:
Payments to MailChimp for bulk email services were also classified as "royalty" by the AO under Explanation 2(iii) and (iva) to Section 9(1)(vi), asserting that these payments involved the use of technology and equipment. CIT(A) supported this classification, stating that the payments were for the use of patented software processes.

5. Nature of Payments Made to Amazon Web Services (AWS), USA:
The AO examined the payments to AWS for cloud computing services under both the Income-tax Act and the India-US DTAA, concluding that they were taxable as "royalty." The CIT(A) agreed, stating that the payments were for the use of patented software processes and thus constituted royalty under both the Act and the DTAA.

6. Applicability of Double Taxation Avoidance Agreement (DTAA) Provisions:
The tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited vs. CIT, which clarified that DTAA provisions should be considered over the Income-tax Act provisions. The Supreme Court held that payments to non-resident software suppliers do not constitute royalty under DTAA, and thus no TDS is required under Section 195.

7. Definition of "Royalty" Under the Income-tax Act and DTAA:
The tribunal analyzed the agreements with Facebook, MailChimp, and AWS, concluding that the payments were for the use of facilities and did not involve the transfer of any copyright. The payments were not considered royalty under the DTAA definitions. The tribunal also referenced decisions from other ITAT benches and the Supreme Court, which supported the view that such payments do not constitute royalty.

Conclusion:
The tribunal held that the payments made by the assessee to Facebook, MailChimp, and AWS do not fall within the definition of "royalty" under the DTAA. Consequently, there was no requirement to deduct tax at source under Section 195, and the assessee could not be considered in default under Section 201(1). The orders of the CIT(A) were set aside, and the AO was directed to delete the demand and interest charges for all three years under consideration. The appeals of the assessee were allowed.