TaxTMI 
TaxTMI 
2021 (9) TMI 852
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....2012-13 9,72,87,433 2013-14 12,47,08,737 2014-15 10,90,02,677 The AO noticed that the assessee had made the above said payments without deducting tax at source u/s. 195 of the Act. Hence the AO initiated proceedings u/s. 201(1) of the Act treating the assessee as an 'assessee in default'. 3. The assessee company furnished following objections to the AO:- * The Consideration for advertisement is paid to the overseas bank account of Non-resident. Therefore, the said payments cannot be construed to be received or deemed to be received in India. * The non resident does not carry out any of the activities in India and they are wholly carried out outside India and accordingly there is no business connection in India. Therefore, the payments to non-resident would not be deemed to accrue or arise in India. * The company submits that the payment made to Non resident payee is towards the services rendered for uploading and display of the banner advertisement of the Company on its portal. The company submits that the banner advertisement hosting did not involve use or right to use by the Company any Industrial, Commercial or Scientific e....
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.... (v) It is evident that the 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 throughout the world locates the users that are being targeted by the advertiser A1. And as soon as the target users log in, the ads/banners/web links, as determined by A1 will be displayed to the user near instantaneously. It an be termed as the most evolved form of online target advertising". 5. After hearing the assessee and after examining the provisions of sec. 9(1)(vi) and 9(1)(vii) of the Income tax Act and also the provisions of DTAA entered between India and Ireland, the AO hel....
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....ions relating to M/s. Facebook alone are extracted below: "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 payments made to Facebook Ireland 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. 14. Also as per the extract of the agreement it is inferred that the proper space will be given by the Facebook to the appellant's company in which they can create their own company's domain and use the same. I find this issue of 'Royalty' under the IT Act as w....
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....trates an exemplary ad system 120', consistent with the present invention. The exemplary ad system 120' may include an inventory system 210 and may store ad information 205 and usage or historical (e.g., statistical) information 245. The exemplary system 120' may support ad information entry and management operation(s) 21a. campaign (e.g., targeting) assistance operation(s) 220, accounting and billing operation(s) 225, ad serving operation(s) 230, relevancy determination operation(s) 235, optimization operations 240, presentation ordering operations 250, and fraud detection operation(s) 255. Advertisers no may interface with the system 120' via the ad information entry and management operations) 215 as indicated by interface 216. Ad consumers 130 may interface with the system 120' via the ad serving operations) 230 as indicated by interface 231. The present invention primarily concerns the presentation ordering operation(s) 250, and is described more fully in section 4.2. For contextual purposes, however, a brief description of the other parts of ad system 120' appears below. An advertising program includes information concerning accounts, ....
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....T AT 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. 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 the transaction of purchase of software and allowing the use of software does not fall within the definition of "Royalty" under respective treaties. I have exami....
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....le 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 act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacture....
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....on whether the payments made by the assessee to the above said three non-resident 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 consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, othe....
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....he 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", images, text, graphics, illustrations, trademarks, photographs, audio, videos and sound but e....
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....e 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 the Income Tax Act, as also under the provisions of India US and India Ireland tax treaty. This observation is subject to the rider that so far as the PE issue is concerned, we have examined the existence of PE only on the basis of website simplicitor, and on no other additional basis, as no case was made out for the same. In any case, revenue has not brought anything on record, either at assessment stage or even before us, to suggest that Google or Yahoo had a PE in India, and as held by a Special Bench of this Tribunal in the case of Motorola Inc v. Dy. CIT [2005] 95 ITD 269/147 Taxman 39 (Mag.) (Delhi) "DTAA is only an alternate tax regime and not an exemption regime" and, therefore, "the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA". No such burden is discharged by the Revenue. Accordingly, there is no material before us to come to the conc....
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....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 that the payments made to the above said three non-resident companies do not fall within the meaning of "royalty" as defined in DTAA. The 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. 23. We have noticed earlier that the Ld. CIT(A) has followed the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (supra). In the case of Engineering Analysis Centre of Excellence Private Ltd. (supra), the decision rendered by Hon'ble Karnataka High Court in the above said case has been overruled by Hon'ble Supreme Court. Hence on this reasoning also, the decision rendered by Ld. CIT(A) would fail. 24. In view of the foregoing discussions, we are of the view that the payments made by the assessee to the three non-resident companie....