TaxTMI 
TaxTMI 
2021 (8) TMI 927
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....mainly through online marketing. Hence, the assessee has placed its advertisement in the platform of Facebook, Ireland. It has also used bulk mail facility offered by M/s Rocket Science group, USA. The assessee has also used Amazon Web Services (AWS) offered by M/s Amazon Inc., USA, which is in the nature of providing information technology infrastructure on rental basis. All the three payees are nonresidents. 3. The A.O. noticed that the assessee has made payments to these non-residents. Hence, he conducted a survey operation u/s 133A of the Act on 27.10.2017 to examine compliance with TDS provisions. During the course of survey operation, the A.O. noticed that the assessee company has made payments to non-residents towards advertisement and marketing expenses without deducting tax at source. The A.O. took the view that the assessee is liable to deduct tax at source from the payments made to non-residents. 4. The AO examined the taxability of above cited payments as per the provisions of sec. 9(1)(vi) of the Act, more particularly under clause (iii) and (iva) of Explanation 2 to Sec. 9(1)(vi) of the Act. The AO has also observed that these payments have been examined as per ....
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.... be myopic to categorise the advertisements made on Facebook as mere dormant, regular ad campaigns or banner services as mentioned in the submission. 3.2.8 It is evident that Facebook advertisements are nothing but the usage of Facebook technology and process to advance the business in the e-commerce era. The technology, design, process and equipment of Facebook are being used, in a complex manner, with very high efficiency levels, to reach out the target audience, within a fraction of the second of the target user logging in his/her account. The advertiser A1 (in the schematic) communicates its requirements (in terms of its target market, and the profile of the consumer it wants to serve) through its advertiser's account with Facebook. In turn, using complex algorithms and advanced processors and equipment, the network of servers that Facebook maintains throughout the world locates the users that are being targeted by the advertiser A1. And as soon as the target user logs in, the ads/banners/web links, as determined by A1 will be displayed to the user near instantaneously. It can be termed as the most evolved form of online, target advertising. 3.2.9 In short, th....
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.... of tax at source. The Assessee company should have deducted tax at the rate of 10% on these payments. However, the Assessee company has failed to deduct tax at source. Hence, the default for non deduction on the payments made and consequential interest leviable u/s 201(1A) for the above said assessment year, are computed at the last page of this order. (C) Payments made to Amazon Web Services Inc., US 6.5 The assessee company has availed cloud computing services from Amazon Web Services Inc (AWS) for its online business needs. Cloud computing is an arrangement in which the cloud provider hosts the shared computing resources such as hardware, software applications etc., and the cloud user accesses them for storage, data processing etc., via internet on a need basis. In view of Cloud computing technology, Enterprises need not make investment in IT infrastructure (hardware, storage space, application softwares, other IT resources etc.) and they can use the required IT resources on payment of charges. 6.6 The case of the AO is stated in paragraphs 4.1.1 to 4.1.11 & 5 of the assessment order for AY 2015-16. Identical reasoning has been given for other years also. For this paym....
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....ovisions of section 201(1) of the Income tax Act, 1961 for non-deduction of tax at source. The Assessee Company should have deducted tax at the rate of 10% on these payments. However the assessee has failed to deduct tax at source. Hence, the default for non deduction of tax on the payments made and consequential interest leviable u/s 201(1A) for the above said assessment year are computed in this last page. Thus, the AO held that the payments made to all the three companies is in the nature of "Royalty" liable for deduction of tax at source u/s 195 of the Act. 7. The Ld CIT(A) has examined the nature of payments made to these three non-residents as under:- (A) In respect of payments made to Facebook, Ireland, the Ld CIT(A) has first analyzed the nature of payments. He has examined the agreement entered between the assessee and Facebook and observed as under:- "13. This involves payments by the appellant for the use of, or the right to use of patented software processes. Under section 195 of the IT Act the income of non-resident which is taxable in India needs to be subjected to tax deduction. Therefore, the liability on the part of the assessee to deduct tax on p....
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....ellant who is handling management component, tools component, billing component and or one or more data bases certainly has more privileges and access to the programs than the ad consumers (130) and the advertisers (110). Then the Ld CIT(A) proceeded to discuss about another patent documents as under:- The Ld CIT(A) has then observed as under:- 20. Thus, from the document of the patent numbers cited supra, it is clear that the appellant's roles are intertwined with that of user and advertisers. 21. These instances are only illustrative and there are a number of such documents which evidence that the technical support cannot be carried out without access to these patented programs. 22. Thus, on examination of patented documents and the ITAT order, the claim that the appellant is not having privileges and access to these patented programs is rejected. Thus, the Ld CIT(A) has taken the view that the assessee was given privilege of accessing/using various components of Advertisement program created by Facebook in its website. (B) With regard to payments made to "MailChimp", the Ld CIT(A) has observed as under:- "28. The appellant's compan....
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....or, or the right to use of patented software processes. Under section 195 of the IT Act the income of non-resident which is taxable in India needs to be subjected to tax deduction. Therefore, the liability on the part of the assessee to deduct tax on payments made to Amazon Web Hosting Services is clearly defined in the ambit of Income tax law. The nature of payment made is considered in the later part of the order along with other payments for software and data access." 8. Then the Ld CIT(A) has referred to various case laws, but mainly took support of the decision rendered by Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co Ltd (2011)(16 taxmann.com 141)(Kar), wherein it was held that the payment made by Indian residents to the non-resident supplier for software and access to database is "Royalty". Accordingly, the Ld CIT(A) held as under at page 28 of its order:- "4. The decision of the Hon. Karnataka High Court in the case of Samsung Electronics co Ltd (cited supra) clearly holds the payment made by the Indian residents to the non-resident supplier for software and access to database as Royalty. 5. The appellant has argued that....
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....Facebook is located in Ireland and other two are companies located in USA. We notice that India has entered into Double Taxation Avoidance Agreement (DTAA) with Republic of Ireland and also with United States of America. The question whether the provisions of Income tax Act could be referred to ignoring DTAA provisions, has been settled by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs. CIT (Civil Appeal Nos. 8733-8734 of 2018 dated March 02, 2021) (125 taxmann.com 42). The Hon'ble Supreme Court examined the question whether the payments made to non-resident software suppliers is "royalty" and TDS u/s 195 of the Act was required to be deducted on those payments. The Hon'ble Supreme Court examined this question considering four types of situation, which has been narrated as under:- "4. The appeals before us may be grouped into four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, nonresident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that a....
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....he relevant DTAA provisions should be considered in the cases before us also for determining the question whether the payments made by the assessee to the above said three nonresident companies are in the nature of Royalty or not. Hence there is no necessity to refer to the provisions of sec. 9(1)(vi) of the Act for the payments made to the three non-resident persons, referred above. 14. The term "royalties" is defined as under in Article 12(3) of India - USA DTAA:- 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as considerati....
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....igns and trade dress (including but not limited to Facebook, Facebook at Work, or any of the trademarks listed here (currently available at www.facebookbrand.com/trademarks), or any confusingly similar marks, except with our prior written permission. 5.3 You acknowledge and agree that any breach of this Section 5 may cause us irreparable harm for which damages are not an adequate remedy and that we may seek interim, preliminary or protective relief from any competent court to restrain your or your Users anticipated or actual breach of this Section 5. 5.4 Our Content made available on Facebook at Work is provided for information purposes only, is subject to change and will be updated from time to time without notice to you. ....... 17 Definitions. In this Agreement, unless otherwise stated ...... "Facebook at Work" means the features and services we make available, including but not limited to through the Facebook at Works websites, apps, and online services that we operate. ............ "Our Content" means Facebook at Work and its content including without limitation, software, its "look and feel", ima....
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....terms and conditions may include separate fees and charges. ........... 8.3 Service offerings License. We or our licensors own all right, title and interest in and to the Service Offerings, and all related technology and intellectual property rights. Subject to the terms of this Agreement, we grant you a limited, revocable, non-exclusive, non-sublicenseable, non-transferrable license to do the following: (a) access and use the Services solely in accordance with this Agreement; and (b) copy and use the AWS Content solely in connection with your permitted use of the Services. Except as provided in this Section 8.3, you obtain no rights under this Agreement from us, our affiliates or our licensors to the Service Offerings, including any related intellectual property rights. Some AWS Content and Third-Party Content may be provided to you under a separate license, such as Apache License, Version 2.0, or other open source license. In the event of a conflict between this Agreement and any separate license, the separate license will prevail with respect to the AWS content or Third-Party Content that is the subject of such separate license. ................. ....
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....axmann.com 99) (Kol-Trib.), has considered an issue - whether the payments made to foreign search engine portals for online advertising services resulted in accrual of income in India in their hands in terms of sec.9(1) of the Act. The co-ordinate bench referred to the following decisions rendered by other co-ordinate benches:- (a) Pinstorm Technologies (P) Ltd vs. ITO (24 taxmann.com 345)(Mum) (b) Yahoo India (P) Ltd vs. DCIT (2011)(11 taxmann.com 431)(Mum) In the above said two cases, the 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. Finally, the coordinate bench held as under in the case of Right Florists:- "28. In view of the above discussions, we are of the considered view, on the limited facts of the case as produced before us, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of ....
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....at agreement takes effect when you click an "I Accept" button. Clause 1.1 lays down that 'you' (assessee) may access and use the Service Offerings in accordance with agreement. In clause 1.2, it is provided that to access services, 'you' (assessee) must create an AWS account associated with a valid e-mail address. Clause 1.3 provides that if you (assessee) would like support for the services other than the support we generally provide to other users of the services without charge, then you can enroll for customer support in accordance with the terms of AWS Support Guidelines. Clause 2.1 lays down that Amazon could change, discontinue, or deprecate any of the Service Offerings or change or remove features or functionality of the Service Offerings from time to time. As per clause 4.1, you (assessee) are solely responsible for the development, content, operation, maintenance and use of Your Content. Now, coming to clause 5.5, which provides the Service Fees to be paid, agreement provided that Amazon would calculate and bill fees and charges monthly. It is further agreed that you (assessee) have to pay applicable fees and charges for use of Service Offerings as describe....
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....ote before the Assessing Officer and explained as under:- '1. Primarily the "a" requires servers to run the various online recharges. Due to this there is a very high requirement of servers. Since purchase/maintenance of servers and its upkeep require skilled manpower, the "a" does not have the same. Hence servers are taken on hire from Amazon, in its cloud units. Information about Amazon Web Services and its benefits as provided on website http://aws.amazon.com/what-is-aws is enclosed for your reference.' ....... 18. Now, coming to the next aspect raised by assessee which is linked to as to whether retrospective amendment in Income Tax would override the Treaty Laws where no amendment has been made. It is clear that retrospective amendment has changed the definition of 'royalty' from the year 2012 under the Income Tax Act, but the position of DTAA between two countries has not been effected. No such amendment has been made to the Treaty Laws and in DTAA, position similar to Explanation 5 is not envisaged at all. This is the plea raised by the learned Authorized Representative for the assessee. He further pleaded that in order to ....
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....tions of various agreements, there is fixation of price to be paid and there may be variation on account of use of certain services but first there has to be basic price fixed. However, in the facts of present case, looking at the documentation, the billing is segregated into various services i.e. AWS services, storage services, etc. and the assessee before us has filed a chart of summary of services availed. The first such services are on account of service charges for Elastic Compute Cloud. As per clause 1, it is on account of use of service provider Linux; as per clause 1.2, Windows and as per clause 1.3, Windows & SQL Server stanard and clause 1.4 of Bandwidth. The total service charges for Elastic Compute Cloud are USD 40,253.17. The month-wise details of said payments made by assessee from September, 2009 to March, 2010 reflected that in the first month, charges totaled to USD 4269.02, in October at USD 5599.36 and there on. 20. The Hon'ble High Court of Madras in Skycell Communications Ltd. (supra) have held that web hosting charges are not in the nature of royalty. The said principle has further been applied in various decisions of the Tribunal as relied upon b....
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....ing technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the revenue. 9. Satellite television has become ubiquitous and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments made to the cable operator. 10. Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of ....
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....ling would depend upon the extent of usage of those facilities. In fact, these non-resident companies do not give any specific license for use or right to of any of the facilities (which include software) and those facilities are not going to be used for the use in the business of the assessee. 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 ....
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.... 210 Tools 220 Bling 230 Database(s 240 Ad Ordering 270 Ad Serving 200 Steristics Engine 290 Ad Selection 260 Ac Consumer Interface Ad Consumer 130 250 120 FIG. 2 FIG. 2 is a diagram functionally illustrating an advertising system consistent with the invention. Document 2 18. Further, the patent number US7778872B2 is examined. (12) United States Patent Kamangar et al. (10) Patent No.: US 7,778,872 B2 (45) Date of Patent: *Aug. 17, 2010 (54) METHODS AND APPARATUS FOR 6,026,368 A 22000 Brown et al. ORDERING ADVERTISEMENTS BASED ON PERFORMANCE INFORMATION AND PRICE INFORMATION 6,098,065 A 82000 Skillen et al. 70713 6,269.361 B1 7/2001 Davis et al. 707/3 6,401,075 BI 6/2002 Mason et al. 705/14 6,907,566 B1 6/2005 McElfresh et al. 715-517 (75) Inventors: Salar Arta Kamangar, Mountain View, 7,076,443 B1 7/2006 Emens et al. 705/14 CA (US); Eric Veach, Redwood City, 7,130,808 B1 10/2006 Ranka et al. CA (US); Ross Konings tein, Menlo 7,406,434 B1 7/2008 Chang et al. Park, CA (US) 7415.423 B2 &2008 Ranka et....