TaxTMI 
TaxTMI 
2025 (2) TMI 767
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....posing of six appeals. These appeals pertain to the appeals being IT (IT) As No. 615/Bang/2020, 616/Bang/2020, 617/Bang/2020 and 618/Bang/2020. 3. The assessee-respondent claims to be a Company involved in business of dealing in home décor products. It has placed advertisements in several social medias such as Facebook, Amazon Web services and Rocket Science Group, LLC, US. Assessee has made payments to non-residents without deducting tax at source. Hence, Assessing Officer ('AO' in short) treated assessee in default and passed orders under Section 201 (1) and 201 (1A) of the Income Tax Act, 1961 ('the Act' for short) for the assessment years 2015-16, 2016-17 and 2017-18 vide orders dated 21.02.2018. Assessee preferred appeals before Commissioner of Income Tax (Appeals) ['CIT(A)' for short] against the said orders. The said Authority passed order on 17.03.2020 confirming the orders passed by the AO. The assessee preferred appeal before the ITAT. The ITAT, vide order dated 17.08.2021, has allowed the appeals for the aforesaid years. The relevant part of the order of the ITAT is reproduced as under: "24. In view of the foregoing discussions, we are of the view that....
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.... of the assessee by holding that there was no obligation on part of assessee to deduct TDS on payments made to non-resident companies without analyzing the facts and materials of the present case with provisions of respective DTAA's? 5. The Assessing Officer has, in his order, stated as under: "Conclusion: As the Assessee company, has failed to deduct tax at source as stipulated u/s 195 on the payments made towards: (a) Advertisement charges paid (b) Cloud Computing Services (Web charges) and (c) purchase of Software for the F.Y. 2015-16 relevant to Assessment Year 2016-17, the assessee is held to be an assssee in default as per the provisions 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 assesse 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 as under: Sl.No. Particulars Rs. Total Amount (Rs.) 01 Assess deemed to be in default u/s 201 (1) for non-deduc....
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....AT has clearly erred to hold that, the payments cannot be regarded as 'Royalty' ignoring that nature of usage of technology, model or process and equipments are covered by Explanation 2 (iii) to 9 (1) (vi) of the Act and therefore, the assessee ought to have deducted TDS on such payments. He stated that, the reliance placed by the ITAT to hold that assessee is not liable to deduct TDS by relying on the decision of the Supreme Court in the case of Engineering Analysis (supra) is clearly distinguishable on facts. In support of his submissions, he has heavily relied upon the assessment order and the order in appeal before the CIT(A). 8. On the other hand, Sri. Sandeep Huilgol, learned counsel appearing for the respondent-assessee, at the outset, would submit that, against the same impugned order, two more appeals were filed by the appellants-Revenue which were numbered as ITAs No. 16/2022 and 17/2022 relevant for assessment year 2017-18, which came to be dismissed by this Court vide orders dated 23.09.2024 on the ground that, the tax effect of the issues arising in the said appeals were less than the monetary limits prescribed by the CBDT vide its Circular bearing No. 9/2024 dated ....
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....s or, if applicable, under the Act. He stated, since none of the payees has a permanent establishment in India which is undisputed, no income is chargeable to tax under the Act in their hands necessitating the deduction of tax at source by the respondent when making such payments. Thus, it does not withhold tax under Section 195 in making these payments. 12. He also stated, despite the above, vide separate orders, both dated 21.02.2018, the 2nd appellant held that, the respondent erred in not withholding tax under Section 195 while making the aforesaid payments to these payees. According to him, the 2nd appellant had held that these payments tantamount to payments of 'royalty' in terms of Section 9 (1) (vi) of the Act and are thus, taxable in India under the Act, as a result of which, the respondent ought to have withheld tax at the rate of 10% at source while making these payments to them and thus, by doing so, the respondent has erred, thereby necessitating passing of the said orders dated 21.02.2018 deeming the respondent to be an assessee in default. 13. According to Sri. Huilgol, even the CIT(A) placed extensive reliance on the order dated 15.10.2011 passed by this Court....
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.... of these appeals, the appellants have repeatedly sought adjournments by contending that as against the order of the Supreme Court in Engineering Analysis' case (supra), a review petition bearing RP(C) No.1422-1497/2021 has been filed and vide order dated 27.01.2022, the Supreme Court is seized of the matter. A bare perusal of the order sheet maintained by this Court would demonstrate the above. According to him, at no point of time until the hearing of these appeals on 30.09.2024 did the Revenue seek to contend that the said order in Engineering Analysis' case (supra) would not apply to the facts of the instant case. Per contra, by seeking repeated adjournments on the ground of pendency of the above review petition, it stands to reason that it accepted the applicability and binding nature of the said decision in Engineering Analysis' case (supra). They had only sought that this Court exercises its discretion in a lenient manner by adjourning the appeals to await the outcome of the said review petition. Hence, on this ground also, the Revenue ought not to have contended the decision in Engineering Analysis' case (supra) does not apply to the instant case. 17. He also contested t....
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....Analysis' case (supra). Analysis: 19. Having heard the learned counsel for the parties and perused the record, before we deal with the rival contentions of the counsel for the parties, we at the outset reproduce the conclusion drawn by the ITAT in its order. The ITAT has analyzed the terms of the aforesaid agreements executed by the respondent with the three entities. The said agreements, as noted by the ITAT, are the following: "15. We shall now 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 4.1 In consideration of your compliance with this Agreement for the duration of your subscription to Facebook at Work (unless terminated earlier) we hereby grant you and your Users: (a) A non-exclusive, personal, non-transferrable, limited, revocable license to access and use Facebook at....
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....ine services that we operate. ............ (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. ................. 19. Bandwidth Abuse/Throttling You may only use our bandwidth for your MailChimp Campaigns. We provide image and data hosting only for your MailChimp Campaigns, so you may not host images on our servers for anything else (like a website). We may throttle your sending or....
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...." 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." ITAT has also noted the term 'royalties' as defined under Article 12 (3) of India-USA DTAA in paragraph No.14 of the order, which reads as under: "14. The term....
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....er to some of the decisions relied upon by Ld AR before us. The Kolkata bench of Tribunal, in the case of ITO vs. Right Florists (2013) (32 taxmann.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 ca....
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....'s access to and use of Service Offerings. It was agreement between Amazon Web Services, Inc. and you i.e. assessee. It is provided that 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 ....
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....xtract of web agreement also attached." 14. Further, the assessee has also pointed out the nature of its business vide written note 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....
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....there is no regular payment being made to Amazon. In case of provision of royalty to a person, then as seen from the terms and conditions 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....
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....g from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering 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. Ins....
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.... 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 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 faciliti....
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....cilities for the purpose to use their advertisement contents. The payment to Amazon Web Services is only for using information technology facilities provided by it, that too the billing would depend upon the extent of usage of those facilities. The ITAT has come to a conclusion that 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 Amazon, the payment is in the nature of rent payments for use of infrastructure facilities. The ITAT has, in paragraph No. 22, has come to conclusion that the payments made to above three non-resident Companies do not fall within the meaning of 'royalty' as defined in DTAA. It may also be stated here that, in paragraph No.23, the ITAT has also referred to the judgment relied upon by the CIT(A) in the case of Samsung Electronics Co. Ltd. (supra) to hold that the decision as rendered by this Court in the above case has been over-ruled by the Supreme Court in the case of Engineering Analysis (supra). It is on that ground also, the decision rendered by the CIT(A) was set at naught. We agree ....
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....died in the copyright which would therefore amount to transfer of an exclusive right of the copyright owner in the work, is also wholly incorrect. For all these reasons, therefore, the judgment of the High Court of Karnataka in Synopsis Intl. [CIT v. Synopsis International Old Ltd., 2010 SCC OnLine Kar 5512] also does not state the law correctly." 22. So, in view of the aforesaid conclusion, Sri. Huilgol is justified to state that the issue in hand is covered by the judgment of the Supreme Court in the case of Engineering Analysis (supra). This is primarily because, the CIT(A) holds in its order that the arguments of the appellants i.e., respondent herein that consideration paid for purchase of software, cloud computing, cloud space hiring involving transfer of the right to use software is not royalty, is not acceptable, which has been negated by the ITAT, which order we have already reproduced above. Having said that, we also note that Sri. Huilgol has placed before us an order passed by the Supreme Court in the case of The Commissioner of Income Tax-Vs.-GE India Technology Centre Private Limited [Order dated 23.04.2024 in Review Petition (C) at Diary No.35475/2023], wherein th....