TaxTMI 
TaxTMI 
2022 (7) TMI 1333
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 on behalf of the advertiser, provides details of advertisem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rein) 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 between the assessee and Facebook Ireland Limited, the ld. AO has understood the technol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....here 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 itself. 3.6. We find that the ld. CIT(A) concedes to the fact that the assessee had received 15% commission on the aforesaid transac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 the functioning of the interface provided by the Facebook, Ireland. The entire operation and maintenance of the server while providing the advert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee 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 pertinent to note that the assessee has given specific task of advertisement banner to the Facebook Ireland. The element of fees for technical ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 reasoning is given for other two years also. The discussion made by the AO in AY 2015- 16 are extracted below: 3.2.7 Facebook provides many options to the businesses/advertisers to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ayments 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 patent, invention, model, design, secret formula or process 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 scientifi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt 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 included services" as per Paragraph 4 of Article 12 of India - US DTAA. Then the AO concludes as under:- 4.1.11. In view of the above discussion, even if the cloud computing services are taking the character of Fees for Technical Services (FTS), it is chargeable to tax in In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 resident Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or endusers." 12. After analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreemen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se 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 companies mentioned above, in order to understand the nature of services rendered by these companies and also to understand whether the payments made to the three non-residents are royalty or not in terms of the provisions of DTAA. The relevant clauses are extracted below for the sake of convenience:- (A) FACEBOOK 4. License Grant In consideration of your compliance with this Agreement for the duration of your ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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, among other things, create, send, and manage certain marketing campaigns, including, without limitation, emails, advertisements, and mailings (each a "Campaign", and collectively, "Campaigns"). .................... 13. Proprietary Rights Owned by Us You will respect our proprietary rights in the Website and the software used to provide the Service (Proprietary rights include, but aren't limited to, patents, trademarks, service marks, trade secrets, copyrights, and other intellectual property). You may only use our brand assets according to our Brand Guidelines. ................. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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; command line tools; proofs of concept; templates; and other related technology (including any of the foregoing that are provided by our personnel). AWS Content does not include the Services or Third Party content. .................... "AWS Marks" means any trademark, service marks, service or trade names, logos and other designations of AWS and its affiliates that we may make available to you in connection with the Agreement. ....................... "Service Offerings" means the Services (including associated APIs), the AWS Content, the AWS Marks, and any other product or service provided by us under this Agreement. Service Offerings do not include Third-Party Content. 16. A careful perusal of the relevant provisions of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 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 conclusion that Google or Yahoo had a PE in India, which, in turn, could constitute the basis of their taxability in India." 18. The taxability of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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- sublicensable, non-transferrable license is granted to you (assessee) to do the following during the term:- (i) access and use the Service solely in accordance with this agreement; and (ii) copy and use the AWS Content solely in connection with your permitted use of the Services. 12. It is further provided that no rights under this agreement are obtained by you (assessee) from Amazon or its licensor to the Service Offerings, including any related intellectual property rights. The 'terms' between the parties are defined as per clause 14 and the terms which are relatable to the issue raised are as under:- "AWS Content" means Content we or any of its affiliates make available in connection with the Services or on the AWS Site to allow access to and use of the Services, including WSDLs; Documentation; sample c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sions 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 charges paid to Amazon could be described as royalty. There is merit in the plea of assessee. If we construe the meaning of royalty as per DTAA, then we have to consider the possibility of position and control of server/server space, which admittedly, is not possessed by the assessee. Hence, as per Treaty Laws, the assessee cannot be held to have paid royalty to Amazon. Consequently, the payment made by assessee for web hosting services is not taxable in accordance with DTAA and the same cannot be held to be taxable, only because there was retrospective amendment to section 9(1)(vi) of the Act. In any case, the Courts have held that when there is no amendment to the Treaty Laws, then the said Treaty Laws would override the amendment, if any, whether retrospective or otherwise to the Income Tax Act. Such a view has been taken in New Skies Satelite BV (supra). Consequently, there is no merit in hold....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1. 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 was only using services provided by Amazon and was not concerned with the rights in technology. The fees paid by assessee was for use of technology and cannot be said to be for use of royalty, which stands proved by the factum of charges being not fixed but variable i.e. it varies with the use of technology driven services and also use of such services does not give rise to any right in property of Amazon......." 19. (**) The decision in the case of Skycell Communications Ltd (251 ITR 53) has been rendered by Hon'ble Madras High Court in the context of "Fees for Technical Services" on applicability of sec. 194J r.w. Explanation 2 to 9(1)(vii) of the Act. However, following observations made by Hon'ble Madras High Court are relevant in this case also:- "7. In the modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 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 use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to, get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable to fixed telephone service. Neither service can be regarded as ‗technical service' for the purpose of section 194J" The above said decision clarifies the point that mere usage of a facility does not give rise to provision of any technical service. Under same analogy, mere usage of facility provided by the above ....