The above judgement has been passed by Hon’ble ITAT, Bangalore in case of M/s. Myntra Designs Pvt. Ltd. Vs. Deputy Commissioner of Income-tax (International Taxation) Circle-1(2) Bangalore.
Date of Pronouncement : 03.09.2021
Facts of the Case:
- The AO noticed that the assessee has made payments to M/s Facebook Ireland Ltd towards advertisement charges as detailed below:-
- Assessment year Amount paid (in Rupees)
2012-13 Rs. 9,72,87,433
2013-14 Rs. 12,47,08,737
2014-15 Rs. 10,90,02,677 - The AO noticed that the assessee had made the above said payments without deducting tax at source u/s 195 of the Act. Hence the AO initiated proceedings u/s 201(1) of the Act treating the assessee as an ‘assessee in default’
Assessee’s contention:
The Consideration for advertisement is paid to the overseas bank account of Non-resident. Therefore, the said payments cannot be construed to be received or deemed to be received in India.
The non resident does not carry out any of the activities in India and they are wholly carried out outside India and accordingly there is no business connection in India. Therefore, the payments to non-resident would not be deemed to accrue or arise in India.
The company submits that the payment made to Non resident payee is towards the services rendered for uploading and display of the banner advertisement of the Company on its portal.
The company submits that the banner advertisement hosting did not involve use or right to use by the Company any Industrial, Commercial or Scientific equipment and no such use was actually granted by non resident payees to the Company.
The Company submits that the service rendered by non-resident payees is a wholly automated process. Further, there is no human touch at all in the services rendered which provide these advertising opportunities.
In light of the above legal position that services are rendered without human touch would not qualify as fees for technical services under section.
AO’s/ Revenue’s contention:
It is evident that the Facebook advertisements are nothing but the usage of Facebook technology and process to advance the business in the e-commerce era.
The technology, design, process and equipment of Facebook are being used, in a complex manner, with very high efficiency levels, to reach out the target audience, within a fraction of the second of the target user logging in his/her account.
The advertiser A1 (in the schematic) communicates its requirements (in terms of its target market, and the profile of the consumer it wants to serve) through its advertiser’s account with Facebook. In turn, using complex algorithms and advanced processors and equipment, the network of servers throughout the world locates the users that are being targeted by the advertiser A1.
After hearing the assessee and after examining the provisions of sec.9(1)(vi) and 9(1)(vii) of the Income tax Act and also the provisions of DTAA entered between India and Ireland, the AO held that the above said payments are taxable in India primarily as ‘royalty’ and alternatively as FTS/FIS. Accordingly, the AO raised demand u/s 201(1) @ 20% of the payments and also charged interest u/s 201(1A) of the Act in all the three years.
The Ld CIT (A) held that the impugned payments are in the nature of royalty and accordingly confirmed the demand raised upon the assessee in all the three years under consideration.
Hon’ble ITAT observation:
The tribunal relied on the judgement of the same tribunal in case of Urban Ladder Home Décor Solutions P Ltd in IT(IT)A No. 615 to 620/Bang/2020 dated 17.08.2021 wherein it was held as under:
“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 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.
Accordingly, we are of the view that the these non-resident 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).
Accordingly, following the ratio laid down by Hon’ble Supreme Court, we hold that the payments made to the above said three non-resident companies do not fall within the meaning of “royalty” as defined in DTAA. The AO has not made out an alternative case that these payments are taxable as business income in India.”
Judgement:
The facts prevailing in the instant cases are identical with the facts of M/s Urban Ladder (supra) with regard to the payments made to M/s Facebook, Ireland towards advertisement charges.
Accordingly, following above said decision, we hold that the payments made by the assessee the non-resident company M/s Facebook, Ireland cannot be considered ad “royalty payments” and hence they do not give rise any income chargeable in India under Indian Income tax Act in all the three years under consideration.
In that view of the matter, there is no requirement to deduct tax at source from those payments u/s 195 of the Act.
Hence the assessee herein cannot be considered as an assessee in default u/s 201(1) of the Act. Accordingly, we set aside the orders passed by Ld CIT(A) for the years under consideration and direct the AO to delete the demand raised u/s 201(1) of the Act and also the consequential interest charged u/s 201(1A) of the Act in all the three years under consideration.
To read full judgement CLICK HERE.
Further, after the introduction of Equalisation law from 2016, such transactions will also get covered under Equalization levy.
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