2022 (5) TMI 1143 - AT - Income Tax

Tribunal: ESPN India not liable for tax on payments to ESPN UK

M/s. ESPN Digital Media (India) Pvt. Ltd. Versus International Taxation 1 (1), Chennai.

The Tribunal ruled that payments by ESPN India to ESPN UK for advertisement space did not constitute 'royalty' under Section 9(1)(vi) or the India-UK ... TDS u/s 195 - Consideration paid by ESPN India to ESPN UK - whether payments made by ESPN India constitutes ‘royalty’ falling u/s.9(1)(vi) ? - resale of advertisement space on websites owned - Taxability as per India-UK DTAA - treating the assessee as ‘assessee in default’ for non-deduction of tax at source u/s.201(1) & 201(1A) - whether ESPN India has obtained the right to use/ exploit the websites? - HELD THAT:- Re-seller agreement clearly states that the seller, ESPN UK, directly owns or has the rights to exploit numerous digital media websites and no such right has been transferred to ESPN India. Further Clause 4.2 of the Re-seller agreement, which confirms that ESPN UK controls the amount of advertising space available on the websites and the nature of advertisements permitted to be displayed. Hence, assessee does not in any way control the website / server, nor has been conferred with a right over any part of the website / server. We cannot accept the argument of Learned Department Representative, who at the hearing, pointed out the Assessee’s submissions as encircled by the AO on page 10 of the order, stating that, “ESPN UK or third party service provides do not provide specific access to / control over any particular server / website”, which in fact supports the case of the assessee. Therefore, in our view neither is any equipment given to the Assessee nor is it under the control of the Assessee. This is only a re-seller agreement of advertising space. Objective of the Equalisation Levy provisions was to levy a tax on online advertisements as it was otherwise not chargeable under the Act read with the Tax Treaties - It was a business profit and in the absence of any permanent establishment was not taxable in India as held by Right Florists[2013 (4) TMI 338 - ITAT KOLKATA] - Since the Tax Treaties would override any non-favourable clause under the Act, to overcome this, EL provisions were introduced as a separate stand-alone enactment by the Finance Act 2016 and outside the Act. Consequently, the above object and purpose was achieved by the introduction of section 164 (i) of the Finance Act 2016 that defines a “specified service” to mean “online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf”. We noted that the Finance Act, 2016 recognizes providing advertising space as a ‘specified service’ subject to Equalisation levy. Consequently, to suggest that the sale of advertising space is ‘royalty’ would even be contrary to the legislative intent, the objects and purpose of the EL provisions and result in absurdity and double taxation, as acknowledged by the Memorandum to the Finance Bill, 2016. We noted that the assessee has filed the details and Challans for the EL payment, which are annexed as a summary of the EL amount paid along with the date of payment and challan details Thus we are of the view that the consideration paid by ESPN India for purchase of advertisement space was not taxable during the period under consideration. The consideration paid by ESPN India is not for ‘use’ of equipment (server) or for any process nor imparting of any information concerning technical, industrial, commercial, or scientific knowledge, experience or skill. Further, no right has been conferred on ESPN India over the server or website belonging to ESPN UK and ESPN India is merely a reseller of advertisement space it purchases on ESPN UK’s website. Further, the reliance of the AO and CIT(A) on the unilateral retrospective amendments to section 9(1)(vi) of the Act to the definition of ‘royalty’ cannot override the more beneficial definition under Article 13(3) of the UK-India Tax Treaty. Hence, we allow the issue on merits in these appeals of assessee. Issues Involved:1. Whether the payments made by ESPN India to ESPN UK for advertisement space constitute 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.2. Whether ESPN India is liable for non-deduction of tax at source under Section 201(1) & 201(1A) of the Income Tax Act.3. Applicability of the India-UK Double Taxation Avoidance Agreement (DTAA) to the payments made by ESPN India.4. Impact of the unilateral amendments to Section 9(1)(vi) of the Income Tax Act on the definition of 'royalty'.5. Relevance of the Equalisation Levy provisions introduced by the Finance Act, 2016.Detailed Analysis:1. Payments as 'Royalty':The primary issue is whether the payments made by ESPN India to ESPN UK for purchasing advertisement space on its websites constitute 'royalty' under Section 9(1)(vi) of the Income Tax Act. The assessee argued that the payments were merely for the purchase of advertisement space and did not involve any transfer of rights, property, or information. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the payments were for the use of servers and thus constituted 'royalty'. The Tribunal noted that the reseller agreement did not provide any right to use any industrial, commercial, or scientific equipment, nor was the website or server under the control of ESPN India. The Tribunal relied on the decision in Engineering Analysis Centre for Excellence Pvt. Ltd. v. CIT, which held that mere usage of a facility does not constitute 'royalty'.2. Non-Deduction of Tax at Source:The AO and CIT(A) treated ESPN India as an 'assessee in default' for not deducting tax at source under Section 201(1) & 201(1A) of the Act. The Tribunal, however, held that since the payments did not constitute 'royalty', ESPN India was not liable to deduct tax at source. The Tribunal also noted that the unilateral amendments to Section 9(1)(vi) expanding the definition of 'royalty' could not override the more beneficial provisions of the India-UK DTAA.3. Applicability of India-UK DTAA:The Tribunal examined whether the payments fell under the definition of 'royalty' as per Article 13 of the India-UK DTAA. It concluded that the payments were not for the use of, or the right to use, any industrial, commercial, or scientific equipment, nor for any process. The Tribunal emphasized that the DTAA provisions would prevail over the unilateral amendments to the domestic law.4. Unilateral Amendments to Section 9(1)(vi):The AO and CIT(A) relied on Explanations 5 and 6 to Section 9(1)(vi), introduced retrospectively by the Finance Act, 2012. The Tribunal, citing the Supreme Court's decision in Engineering Analysis Centre for Excellence, held that such unilateral amendments could not apply to the Tax Treaties. The Tribunal also noted that the withholding obligation could not be imposed retrospectively, as it would lead to impossibility of performance.5. Equalisation Levy Provisions:The Tribunal addressed the introduction of the Equalisation Levy (EL) by the Finance Act, 2016, which aimed to tax online advertisements not chargeable under the Act or the Tax Treaties. The Tribunal noted that the consideration for advertisement space was subject to EL and not 'royalty'. It highlighted that treating the payments as 'royalty' would result in double taxation, contrary to legislative intent.Conclusion:The Tribunal concluded that the payments made by ESPN India to ESPN UK for advertisement space did not constitute 'royalty' under Section 9(1)(vi) or the India-UK DTAA. Consequently, ESPN India was not liable for non-deduction of tax at source. The Tribunal allowed the appeals filed by ESPN India and directed the AO to delete the demands raised under Section 201(1) & 201(1A) of the Act. The decision emphasized the precedence of Tax Treaties over unilateral amendments to domestic law and the relevance of the Equalisation Levy provisions.