2021 (8) TMI 927 - AT - Income Tax

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

The tribunal held that payments made to Facebook, MailChimp, and AWS by the assessee did not qualify as 'royalty' under the Double Taxation Avoidance ... Royalty u/s 9(1)(vi) - TDS u/s 195 - Validity of demand raised u/s 201(1) and interest charged u/s 201(1A) - Assessee sells its products mainly through online marketing. - AO has mainly invoked the provisions of sec. 9(1)(vi) of the Act in respect of payments made to M/s Facebook and M/s Rocket Science Group (MailChimp) to hold that the same is “royalty” - for payments made for Amazon Web Services, the AO has also referred to the provisions of DTAA entered into India and USA in addition to sec.9(1)(vi) - HELD THAT:- On careful perusal of the relevant provisions of the agreement entered by the assessee with Facebook and Rocket Science Group (Mailchimp) would show that both these non-resident companies are allowing the assessee to use the facilities provided in their sites, which includes, inter alia, software facilities also. The purpose of compelling the assessee to use those facilities, as could be inferred by us, is to create an environment of ease in creating the “advertisement content” to suit the platforms of Facebook or Mailchimp. The environment of ease is beneficial and time saving to both the advertiser and the advertising platform. Thus the facilities have been created by the non-resident companies for mutual benefit. However, a person shall get the right to use those facilities only when he enters into an agreement with them for hosting his advertisement or for sending bulk mails, meaning thereby, the use of facilities is intertwined with the activity of placing advertisement in web portal of Facebook or sending bulk mails. In case of web hosting charges paid to AWS, the assessee is allowed to use the information technology infrastructure facilities. In the two case YAHOO INDIA (P.) LTD.[2011 (6) TMI 162 - ITAT, MUMBAI] and PINSTORM TECHNOLOGIES (P.) LTD.[2012 (12) TMI 601 - ITAT MUMBAI]Tribunal held that the amount paid by the assessee to M/s Google Ireland Ltd for the services rendered for uploading and display of banner advertisement on its portal was in the nature of business profit on which no tax is deductible at source, since the same was not chargeable to tax in India in the absence of PE of Google Ireland Ltd in India. In the instant case, the recipients, i.e, M/s Facebook and Rocket Science group only allow the assessee to use their facilities for the purpose of creating advertisement content. The payment made to Amazon Web Services (AWS) is only for using the information technology facilities provided by it, that too the billing would depend upon the extent of usage of those facilities The right to use those facilities, as stated earlier, is intertwined with the main objective of placing advertisements in the case of Facebook and Mailchimp. In the case of AWS, the payment is made only for using of information technology infrastructure facilities on rental basis. Hence the question of transferring the copy right over those facilities does not arise at all. The agreements extracted above also make it clear that the copyright over those facilitating software is not shared with the assessee. In any case, the main purpose of making payment is to place advertisements only and not to use the facilities provided by the non-resident companies. Thus the facilities provided by the nonresident companies are only enabling facilities, which help a person to place his advertisement contents on the platform of Facebook or to use MailChimp facility effectively. In case of AWS, the payment is in the nature of rent payments for use of infrastructure facilities. We are of the view that the these non-resident recipients stand on a better footing than those assessees before the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd (supra). Accordingly, following the ratio laid down by Hon'ble Supreme Court, we hold thatthe payments made to the above said three non-resident companies do not fall within the meaning of “royalty” as defined in DTAA. AO has not made out an alternative case that these payments are taxable as business income in India. Hence, there is no necessity for us to deal with that aspect We are of the view that the payments made by the assessee to the three non-resident companies referred above cannot be considered ad “royalty payments” and hence they do not give rise any income chargeable in India under Indian Income tax Act in all the three years under consideration. In that view of the matter, there is no requirement to deduct tax at source from those payments u/s 195 of the Act. Hence the assessee herein cannot be considered as an assessee in default u/s 201(1) of the Act. - Decided in favour of assessee. 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.