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2022 (7) TMI 1333
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....ction of tax at source. 3. We have heard the rival submissions and perused the materials available on record. The assessee is an internet advertising agency and as such advertisements are placed by the assessee on behalf of its clients. The clients (advertisers) in order to place their advertisements on digital media, avail the services of the assessee to approach various website owners and to display advertisement on their websites. We find that the assessee during the course of hearing placed on record the following flow of transactions , which remain uncontroverted by the revenue before us :- a) The advertiser approaches the assessee to place its advertisements on the digital medium, say Facebook. The assessee prepares advertising media plan based on the advertiser's requirements, after which, an advertising services work order is issued, and a period of campaign is determined. The advertiser approves the work order stating that the advertisement will be published or displayed on particular website for a particular time period or for a particular occasion. The advertiser signs the work order with the assessee. b) Post approval of the work order, the assessee....
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....f its business income, as the revenue of an advertisement agency (i.e the assessee herein) would only be the commission received in respect of advertisements so placed. Infact the commission income is determined as a percentage of the gross media spends of the advertiser. Hence the payments made to the media company would be on behalf of the advertisers. Accordingly, neither the amount received from the advertiser towards payment to the media company is income of the advertising agency, nor the payment made to the media company on behalf of the advertiser is its expense. However, for the year under consideration, the assessee had reflected in its profit and loss account, the amount received from the advertiser as its income and claimed deduction towards payment made to media company on behalf of its advertiser, as an expenditure. The net result of this accounting treatment would only be the commission income of the assessee subjected to tax. 3.3. We find that in response to the details called for by the ld. AO in the assessment proceedings, the assessee submitted the details of transactions with Facebook Ireland Limited. In order to determine the taxability of the transactions b....
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....blishment of Facebook Ireland Limited in India, the said payments are not taxable in India. In view thereof, there cannot be any obligation that could be cast on the assessee to deduct tax at source in terms of section 195(1) of the Act. Hence disallowance u/s 40(a)(i) of the Act could not be invoked. 3.5. We find that the reliance placed on the various decisions by the ld. AO would not advance the case of the revenue due to the following facts :- a) Bangalore Tribunal decision in the case of Google India reported in 86 taxmann.com 237 , has been remanded back by the Hon'ble Karnataka High Court to the Tribunal for fresh consideration in accordance with law vide ITA Nos. 502 to 505 and 507/2018 , 549-550/2018, 560 -564/2018, 879/2017, 882-883/2017, 897-899/2017 dated 17.4.2021. b) Hon'ble Karnataka High Court decision in Samsung Electronics Co. Ltd (345 ITR 494) has been set aside by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd vs CIT reported in 125 taxmann.com 42 (SC) c) Mumbai Tribunal decision in the case of DDIT vs Reliance Infocom Ltd (64 SOT 137) has been subsequently recalled by the Mumbai Tribunal ....
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.... In our considered opinion, the same could not be considered as Royalty. Hence the decision relied upon by the ld. AR on Mumbai Tribunal in the case of Play Games 24X7 Private Limited vs DCIT in ITA No. 1533/Mum/2019 for Asst Year 2015-16 dated 23.3.2022, would apply to the instant case. For the sake of convenience, the operative portion of the said decision is reproduced below:- 7. We have heard both the parties and perused all the relevant material available on record. The assessee company is engaged in the business of providing a platform for online gaming, more particularly that of Rummy. The assessee company incurred advertisement expenses amounting to Rs.10,46,35,355/- for banner advertisement on the website of Facebook. It is pertinent to note that for the purpose of uploading the banner advertisement on Facebook the advertisement related information is put up at the interface provided by the Facebook, Ireland in the required format. Facebook, Ireland, after due verification of the advertisements, upload the advertisement on its server. While uploading the advertisement on Facebook it is an admitted position that the assessee company does not have any control over t....
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....sing Officer to determine in such a manner as may be a prescribed. The said application though in the present case has not been made by the assessee cannot be treated as a mandate because the Section clearly states that such person "may make an application" as may be prescribed. In the present case, the assessee was very well aware that Facebook, Ireland is a non-resident and the advertisement payment made to Facebook, Ireland will not come under the purview of TDS and, therefore, has chosen not to deduct tax at source. The assessee has relied upon the decision of Urban Ladder Home Decor Solutions Pvt. Ltd. - ITA No.615 to 620/Bang/2020 - order dated 17.08.2021, Google India Pvt. Ltd. - 127 Taxmann.com 36 - Karnataka High Court, M/s. Inception Business Services - ITA No.2674/Chny/2016 - order dated 18.02.2019, Carat Lane Trading (P) Ltd., 89 Taxmann.com 434 as well as decision in the case of ITO vs. Right Florist Pvt. Ltd., 25 ITR (T) 639 (Kolkata Tribunal). All these decisions are though factually identical yet the observations made in these decisions are applicable in the present case. These decisions also highlight that advertisement expenses in respect of non-resident. It is pe....
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....re of Excellence Private Limited vs CIT reported in 125 taxmann.com 42 (SC). The primary facts of the case before the Bangalore Tribunal and view of the AO there are reproduced as under:- 2. The facts relating to the issue are stated in brief. The assessee company is engaged in the business of dealing in home décor products. It sells its products 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 non- residents. (A) Payments made to Facebook, Ireland:- 6.1. The assessee company uses Facebook platform to display its products on the wall of Facebook users. Hence the assessee makes payments to Facebook for the advertisements hosted on the web for seeking attention of facebook users. 6.2. The case of the AO is described in paragraph 3.2.7 to 3.2.9 of the order passed for AY 2015-16. Identical reasonin....
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....s or trade mark or similar property and also the provisions of Explanation 2(iva) to section 9(1)(vi) : the use or right to use any industrial, commercial or scientific equipment. Therefore, the payments made to Facebook amounting to Rs.26,29,79,222/- is treated as Royalty and hence tax should have been deducted u/s 195 at the time of payment/credit of Royalty. (B) Payments made to Rocket Science Group, LLC, USA ("Mail Chimp"):- 6.3. M/s Rocket Science group LLC has got "Mail Chimp" platform, which allows its users to send bulk email advertisements/marketing content to their customers using its marketing automation tools. 6.4. The case of the AO is stated in paragraphs 3.2.14 to 3.2.15 of the assessment order for AY 2015-16. Identical reasoning has been given for other years also. The relevant portion of AO's order is extracted below:- 3.2.15 For the detailed discussions made from Paragraphs 2.1 to 3.2.14, it is held that the services availed by the Assessee company from the non- residents is in the nature of usage of technology, model or process and/or equipment and the same is covered by Explanation 2(iii) to Section 9(1)(vi): the use of any pa....
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..... It is clear that the services provided by ("AWS") also includes providing the routers and the data connectivity and networking. 4.1.6. The Assessee Company, by relying on the decisions of the ITATs, is wrong in claiming that there is no involvement of any human intervention at any stage and that the entire process is fully automated technique. Had such been the case, there would not have been any separate mention for the Provider to ensure that the facility is adequately staffed for the provision of all services and that the provider employees, agents and subcontractors have sufficient skill, expertise and ability to perform their duties in a competent and professional manner. This shows that the assessee is in fact not only aware of the technical expertise required in obtaining Data Hosting Services, but also appreciative of the quality of manpower to be employed for such technical services. ...... 4.1.8. The AO extracts Explanation 2 to sec. 9(1)(vi) of Income tax Act 4.1.9. The AO extracts the definition of "Royalty" as per paragraph 3(a) Of Article 12 of India -US DTAA. 4.1.10. The AO extracts the definition of "fess for i....
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....ing 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, non- resident 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 manufacturers and then reselling the same to resident Indian end-users. iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to residen....
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....ed 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, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 15. We shall not advert to the Agreements entered by the assessee with the three non-resident ....
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....or 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. 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 excluding Your content. (B) Rocket Science Group (MailChimp) MailChimp ("MailChimp,""we,"or"us") is an online marketing platform (the "Service") offered through the URL www.mailchimp.com (we'll refer to it as the "Website") that allows you to, am....
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....exclusive, non-sublicenseable, nontransferrable 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. ................. 14. Definitions. "API" means an application programme interface. .............. "AWS Content" means Content we or any of our affiliates make available in connection with the Services or on the AWS Site to allow access to and use of the Services, including APIs; WSDLs; Documentation; sample code; software libraries; c....
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.... (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 co- ordinate 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 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 no other additional basis, as no case was made out for the same. In ....
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....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 described on AWS site using one of the payment modes they support. We may refer to clause 8.4 which lays down the Service Offerings License, under which it is provided that Amazon or its affiliates or licensors own and reserve all right, title and interest in and to the Service Offerings. However, limited, revocable, non-exclusive, non- sublicensa....
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....n 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 construe meaning of royalty as per DTAA, since the provisions of DTAA takes precedent over the provisions of Income Tax Act, where the assessee does not possess and does not have any control over the server or servers space, being deployed by Amazon, while providing e-services as per agreement, then there is no scope to construe that e-service cha....
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....see 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 by the learned Authorized Representative for the assessee. (sic.)** 21. The aspect which needs to be seen is whether the assessee is paying consideration for getting any right in respect of any property. The assessee claims that it does not pay for such right but it only pays for the services. The claim of assessee before us was that it wa....
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....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 such equipment, does not result in the provision of technical service to the customer for a fee. 11. When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the u....
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....acilities, 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 non- resident 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. 22. Accordingly, we are of the view that the these nonresident 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). A....