TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 1143
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....he Act and thereby, treating the assessee as 'assessee in default' for non-deduction of tax at source u/s.201(1) & 201(1A) of the Act. For this, assessee has raised exactly identically worded grounds in all the four years. The issue and facts, as conceded by both the sides, are exactly same, except the quantum. As the facts are identical in all the four assessment years and issue is exactly one, we will take the facts from assessment year 2010-11 in ITA No.1070/Chny/2018 and will decide the issue. The relevant grounds Nos.2.1 to 2.14 read as under:- 2. Payment made should not be considered as royalty : 2.1 The order passed by Hon'ble CIT(A) and the learned AO is bad in law and in facts, stating that the payments made by ESPN India constitute as royalty and is subject to withholding tax. 2.2 The Hon'ble CIT(A) and the learned AO has erred in holding that ESPN India has obtained the right to use/ exploit the websites without appreciating that the Appellant, as per the reseller agreement, only purchases advertisement space from ESPN UK and resells the same to third parties/ advertisers in India. 2.3 The Hon'ble CIT(A) and the learned AO has failed to appreciate that the purcha....
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....of the Act. 2.12 The Hon'ble CIT(A) and the learned AO has erred in relying on the decision of Hon'able Madras High court in the case of Verizon Communication Singapore Pte Ltd., without appreciating the fact that the said decision is not applicable to the facts of Appellant's case. 2.13 The Hon'ble CIT(A) and the learned AO has erred in not relying on the judicial precedents quoted by the Appellant. 2.14 The Hon'ble CIT(A) while upholding the order of learned AO fails to give conclusive finding as to how such payments are taxable under the India UK tax treaty. 3. Brief facts relating to the issue are that the assessee ESPN India (erstwhile Cricinfo India Private Limited) is a private limited company incorporated in India entered into an agreement ("Re-seller agreement") dated 01.04.2010 with ESPN Limited, United Kingdom (in short "ESPN UK") for the resale of advertisement space on websites owned by it. The Re-seller agreement is for a term of one-year and was automatically renewed as per Clause 5.1 of the agreement and was valid for all the assessment years in the present appeal. 4. As per the Re-seller Agreement, ESPN India purchased advertising space on websites owned an....
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....(a) payments of any kind received as consideration for the use of , or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films 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; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircrafts in international traffic. 6. Further, AO notes that in the 'modern era', the geographical location is immaterial and therefore where the server lies is not relevant. For this proposition, the AO relied on the decision of Hon'ble Madras High Court in the case of Verizon Communications Singapore v. ITO 361 ITR 575. The AO further holds that the consideration is for the provision of comprehensive services rendered and the payment falls within the definition of "Royalty" as prescribed in Article 13 of....
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....ction 9(1) (vi). Therefore the payment made for these services it will fall within the ambit of "royalty" in clause (via) of Explanation 2 to section 9(1) (vi) of the Act. ESPN India has clarified before the AO that it has no power to upload the advertisements it only collects and forward the material to ESPN UK. The same is factually not found to be correct because ESPN India in its submission has already clarified that(dated 23/01/2014 in para 1.3 and 2.6.6) that ESPN INDIA uploads the advertisements in the server therefore to that extend ESPN India enjoys the right or right to use the server/ equipment to upload the advertisement. The contention of ESPN India that double click a division of google Ireland only upload the advertisement is not acceptable because the ESPN India itself has submitted that the advertisement are uploaded by ESPN India. In the Morden digital era, the geographical location of server does not make any sense because the advertisement were uploaded in ESPN UK and server as well as third parties ad server (in case of video ads and dynamic banner ads) and when an Indian browser surfs the web site he will only view Indian ads because the IP {Internet Protoco....
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....ases where the user of such property gains a right over the same. In ESPN (INDIA) case, such condition relating to transfer of right over website is satisfied as ESPN India is conferred with right on the website to upload the advertisement on the website. The payments made by ESPN India to ESPN UK, is a payment made as a consideration for transfer of all or any rights property or information. Therefore payments made by ESPN INDIA TO ESPN UK clearly amounts to Royalty as per IT Act 1961. Taxability as per India-UK DTAA Payment of any kind received as consideration for the use of or the right to use, any industrial, commercial or scientific equipment and consideration paid for a process is taxable as Royalty as per India UK DTAA. The use of portal/Website(uploading of ads) was not possible without use of server and the server platform being a scientific equipment, the payment made for concurrent access to utilise the sophisticated services offered by the portal of ESPN UK or Third parties is covered by the expression "Royalty" as used in Article 13 of the DTAA. The payment was made for the use of the equipment and the use of the process which was provided by the ESPN UK, whereby ....
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....nformation that is transferred from ESPN UK to ESPN India and the requirements of the definition of royalty under section 9(1)(vi) are as follows: 9.(1) The following incomes shall be deemed to accrue or arise in India:- (vi) Income by way of royalty payable by - ...... Explanation 2 - For the purposes of this clause "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for--- (i) The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) The imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) ....... (iv) The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; 8.1 He argued that the above requirements are totally absent in the case of the Assessee as ESPN UK does not transfer any knowhow to ESPN India and the consideration....
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....ments received by the non-resident software companies cannot be taxed as "royalty" under the provisions of DTAA and hence there is no requirement to deduct tax at source from the payment made to them by a resident assessee. 21. 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. 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 no....
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....and also the consequential interest charged u/s 201(1A) of the Act in all the three years under consideration. 8.3 The ITAT in Myntra Designs Private Limited v. DCIT, ITA No.598/Bang/2020, dated 03.09.2021 has taken identical view. Further, Ld Counsel for the assessee relied on the decision of Kolkata Tribunal, wherein it has been held, even before the decision of Engineering Analysis (supra), in the case of ITO v. Right Florists (2013) 32 taxmann.com 99 (Kol. Trib.) relying on the decisions in Pinstorm Technologies (P) Limited vs. ITO (24 taxmann.com 345) (Mum) and Yahoo India (P) Limited vs. DCIT (2011) (11 taxmann.com 431) (Mum.) that the services rendered for uploading and display of banner advertisements on its portal was in the nature of business profit on which no tax is deductible at source. Based on the above, it was argued that Re-seller agreement with ESPN UK is merely for the sale of advertisement space. There is no right, property, information or scientific experience transferred in any manner. There is no copyright or right to reproduce either software or any other property granted and the assessee is a mere reseller and neither the website nor the server is placed u....
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..... Therefore, the payment made for these services will fall within the ambit of royalty as falling in the provision of the Act i.e., clause (via) of explanation 2 to section 9(1)(vi) of the Act. The ld.CIT-DR referred to the order of CIT(A) page 17 last para and stated that the facts narrated in this para clearly covers those cases where the user of such property gains a right over the same. He explained that in the case of ESPN, India, the assessee, such condition relating to transfer of right over website is satisfied as ESPN, India is conferred with the right on the website to upload advertisements on the website. Hence, according to him, payment made by ESPN, India to ESPN UK clearly amounts to royalty and for this, the assessee should have deducted TDS u/s.195 of the Act. Hence, he supported the order of AO treating the assessee as assessee in default u/s.201(1) & 201(1A) of the Act for non-deduction of TDS. He also supported the order of CIT(A) and asked the Bench to confirm the orders of lower authorities. 10. We have heard rival contentions and gone through the facts and circumstances of the case. First of all, we try to understand the process of uploading of advertisements....
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....nager is placed on the website owned by ESPN UK by Google Ad Manager. 10.1 We noted the facts that the assessee ESPN India is a private limited company incorporated in India entered into an agreement ("Re-seller agreement") dated 01.04.2010 with ESPN Limited, United Kingdom (in short "ESPN UK") for the resale of advertisement space on websites owned by it. The Re-seller agreement is for a term of one-year and was automatically renewed as per Clause 5.1 of the agreement and was valid for all the assessment years in the present appeals. We have gone through the reseller agreement and noted that the Re-seller agreement does not provide any "right to use" of any industrial, commercial, or scientific equipment nor is the website not the server that is placed under the control or domain of the Assessee, nor has a right, property, information or scientific experience been transferred in any manner whatsoever. The reliance placed on the decision of Right Florists (supra), which in paragraphs 15 holds that, "The underlying principle is this. While website per se which is a combination of software and electronic data, does not constitute a tangible property as it cannot have a location whic....
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....xcellence, which has held that unilateral amendments expanding the definition of royalty under domestic law cannot apply to the Tax Treaties. The Tax Treaty containing the more favourable provision would be applicable. We also noted that the AO and the CIT(A) placed heavy reliance on the decision of the Madras High Court in Verizon Communications Singapore (supra). The relevant portions of the Verizon decision are reproduced as under: 100. The definition of "royalty" under DTAA and the Indian Income Tax Act are in parimateria. As rightly pointed out by the Revenue, Explanation 6 defines 'process' to mean and include transmission by satellite (including, up-linking, amplification, conversation for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. Thus, apart from the reliance and applicability of Clause (iva) that the payment is for the use or right to use of the equipment, the Tribunal held that payment for the bandwidth amounts to royalty for the use of the process. The Tribunal also pointed out that out by reason of the long distance, to maintain the required speed, boosters are kept at periodical intervals....
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.... on business. Hence, we do not think that we need to go in depth in this regard for the reason that we have already given herein before. 10.5 We are of the view that the facts of Verizon are completely different to that of the assessee's case. In Verizon, the Assessee was engaged in providing international connectivity services i.e. bandwidth services and telecom services for transmission of data and voice by way of International Private Leased Circuit ('IPLC'). IPLC is an end-to-end managed dedicated bandwidth service that provides internet service to customers for various applications and consisted of high-tech equipment. The assessee in Verizon had installed customized sophisticated equipment terminals at client locations to enable transmission of signals. Hence Hon'ble High Court held the payment for use of the equipment was to be categorized as royalty. However, that is not so in the present case. In the case of ESPN, no such equipment has been installed by ESPN UK in the premises of ESPN India or any customer of ESPN India to enable the display of ads on the website. ESPN India is merely making a payment under a reseller agreement towards purchase of ad spaces on websites be....
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....de 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: Date Amount Challan No. 16.09.2016 34,77,200 53571 07.10.2016 12,52,400 74227 06.04.2017 32,62,958 59,759 18.11.2017 18,29,823 50,684 Total 98,22,381 10.9 In view of the above ....