TaxTMI 
TaxTMI 
2026 (4) TMI 1892
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....hout appreciating the fact that the said expenditure was liable to be disallowed u/s. 40(a)(i) of the IT Act since the same falls under the definition of Royalty and subject to TDS u/s. 195 and the assessee has not deducted TDS on the same as per Explanation 2 below clause (vi) of sub section (1) of section 9 of Income Tax Act, 1961. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in fact and in law in not appreciating the fact that the point of access of information by the assessee and its customers/ clients is in India and hence rendering of these services by FBIL through Facebook.com amounted to rendering of services within the meaning of the term Royalty as enumerated in section 9(1) of the IT Act, 1961 and therefore these services are taxable in India irrespective of location of the server. 3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in not appreciating the fact that Facebook.com, the parent company, also had a dependent agent FBIOSL in India to canvass support for advertising on Facebook.com and hence even otherwise, these advertising revenues were taxable in India and he....
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.... the assessee had claimed expenditure of Rs. 27,69,15,831/-, being Advertisement Expenses paid to certain non-resident entities but did not deduct TDS on the same. The AO treated the said advertisement expenses as Royalty and disallowed the same u/s 40(a)(i) of the Act on account of failure of withholding the taxes. Further, he also noticed the assessee company had claimed ESOP expenses of Rs. 6,34,559/-which was disallowed by holding that these expenses were notional in nature as there was no actual expenditure that the company was incurring. 4. Ground nos.1 to 7 pertain to the disallowance of Rs. 27,69,15,831/-, being Advertisement Expenses. It was noticed by the AO from the details submitted by the assessee that out of the total advertisement expenses of Rs. 55,68,59,099/- during the year, assessee had not deducted taxes (TDS) on payments to certain parties for the reason that they were non-residents and hence, were not liable for TDS. Such parties were Facebook Ireland Ltd. ("Facebook") [Ireland], Acknowledge Asia Pacific Pvt. Ltd. [Singapore], Appsflyer Ltd. [Israil], T.J. Support.com [Czech Republic], Traffic Factory [Czech Republic] and Nanigans Inc. [USA], totalling Rs 2....
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....n the substantial question of law raised before the Hon'ble High Court. 4.2 As regard the payments made of Rs. 1,59,96,408/- to other non-residents for Advertisement expenses, the AO observed that the facts and circumstances were same as that of Facebook Ireland Ltd. and the services provided by them were also of similar nature as that of Facebook Ireland Ltd. Hence, the disallowances u/s 40(a)(i) as discussed in the case of Facebook Ireland Ltd. was also applicable to these non-residents entities. Therefore, the total amount of Rs. 27,69,15,831/- (26,09,19,423 + 1,59,96,408), being payments made by the assessee to Non-Residents towards Advertisement Expenses was taxable both under the Act and the DTAA and since tax was not deducted at source the same is liable to be disallowed u/s 40(a)(i) of the Act. 5. In the subsequent appeal before the appellate authority by the assessee, the ld. CIT(A) after taking into account all the above facts and detailed submissions of the assessee concluded that the action of the AO was not in consonance to the decisions of court/ITAT which were rendered in favour of the assessee. He observed that with regard to the payment made to M/s Facebo....
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....ent proceedings has provided the tax resident certificate of Facebook, Ireland and as well as copy of remittance of the certificate (form 15CB) to the Assessing Officer. The Assessing Officer has proceeded on the basis that as per the provisions of Section 195 of the Act any amount paid to non-resident will attract this provision and the assessee is liable to make TDS except as provided under Section 195(2) or under Section 197 where such deductee obtain nil deduction certificate from the Assessing Officer and furnish the same to the deductor before receiving the credit of such amount. In the present case, the relevant sub-section 2 to Section 195 has specifically stated that a person responsible for deducting any such sum chargeable under this Act who is a non-resident considers that the whole sum would not be income chargeable in the case of recipient the said person "may make an application" in such form and manner to the Assessing 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....
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....ment did not fall under the definition of Royalty under the Act. Similarly, the assessee had also made payment of Rs. 1,59,96,408/- to other non-resident entities on account of advertisement expenses. As discussed above, such advertisement expenditure was also not covered by the definition of Royalty under the Act. Hence, respectfully following the decision of Hon'ble ITAT-Mumbai, it was held by the ld. CIT(A) that the AO had wrongly disallowed the said advertisement expenditure by treating the same as royalty and the same is liable to be allowed. 6. Before us, the ld.AR has reiterated the claim of the assessee and vehemently argued that the mater in hand was squarely covered by the above order of ITAT, Mumbai in its own case. The ld. DR did not contest this claim of the ld.AR. Nothing was brought on record to controvert the claim on factual aspects and the legality of the claim of the assessee. Accordingly, we do not find any infirmity in the appellate order which is therefore, confirmed and the grounds of appeal in this regard raised by the Revenue are dismissed. 7. Ground no.8 pertains to the claim of deduction of ESOP expenses. The AO observed that the company has issued ....