No TDS required to be deducted for Online Advertisement services availed from Facebook Ireland Ltd: ITAT

Briefly stated facts are that the assessee company is engaged in the business of providing services in connection with marriage alliance and related services. The company markets its product both through online and offline advertisements. During the year, the company has availed the services of Facebook, Ireland Ltd., for advertisement in order to promote the business of matrimony incurred advertisement cost of Rs. 2,45,32,108/-. The AO during the course of assessment proceedings, on examination of financials noted that the assessee has not deducted TDS towards advertisement charges paid to Facebook, Ireland Ltd., and according to the provisions of Section 195I of the Act and hence, applying the provisions of section 40(a)(i) of the Act, disallowed the advertisement charges paid to Facebook. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) relying on the case law of Google India Pvt. Ltd., of ITAT, Bangalore confirmed the disallowance by observing in para 23 as under:-

“23. The facts of the case of the assessee are similar to the facts of M/s. Google India Ltd. and the connected case of M/s. Google Ireland Limited. The taxability of advertising revenue in the source country has been upheld in this set of cases. In view of the same, it is held that the Assessing Officer has correctly disallowed the advertisement expenditure made without TDS by the assessee. The disallowance u/s.40(a)(i) to the extent of Rs.2,45,32,108/- for Assessment year 2014-15 and Rs.2,74,74,487/- for Assessment year 2015-16. The grounds of appeal on this issue are rejected. The Assessing Officer is also directed to make suitable reference to CIT (International Taxation) for passing suitable orders u/s 201(1) in this case.

Aggrieved, now assessee is in second appeal before the Tribunal.

ITAT Order

We have heard rival contentions and gone through facts and circumstances of the case. We noted that the ITAT, Bangalore in the case of Urban Ladder Home Décor Solutions Pvt. Ltd., in IT(TP)A Nos.615 to 620/Bang/2020 considered the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., vs. CIT, Civil Appeal Nos.8733-8734 of 2018, dated March 02, 2021 (125 taxmann.com 42) wherein the Hon’ble Supreme Court exactly on same facts held that there is no requirement to deduct tax at source from the advertisement payments made for using the information technology facility u/s.195 of the Act. The ITAT, Bangalore in the case of Urban Ladder Home Décor Solutions Pvt. Ltd supra has considered this issue vide para 20 to 25 as under:-

20. In the case of Engineering Analysis Centre of Excellence (P) Ltd (supra), the issue related to “issuing of license to use software”, i.e., the software purchased by a person shall be used by the buyer for his own business purposes. Since the license was granted without parting the copy rights attached to the software, the Hon’ble Supreme Court held that the payments received by the non-resident software companies cannot be taxed as “royalty” under the provisions of DTAA and hence there is no requirement to deduct tax at source from the payment made to them by a resident assessee.

21. 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 nonresident 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 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. Hence, there is no necessity for us to deal with that aspect.

23. We have noticed earlier that the Ld CIT(A) has followed the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra). In the case of Engineering Analysis Centre of Excellence Private Ltd (supra), the decision rendered by Hon’ble Karnataka High Court in the above said case has been overruled by Hon’ble Supreme Court. Hence on this reasoning also, the decision rendered by Ld CIT(A) would fail.

24. In view of the foregoing discussions, we are of the view that the payments made by the assessee to the three non-resident companies referred above 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.

25. 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.

From the above, it is seen that the facts are exactly identical and hence, respectfully following, we delete the disallowance and allow this issue of assessee’s appeals.