TDS not deductible on Payment for Facebook Ads and Other Digital Advertising Companies as per DTAA: ITAT

The Income Tax Appellate Tribunal (ITAT) Bangalore bench has ruled that payments made for advertising through Facebook and other digital advertising companies are not subject to TDS under section 195 of the Income Tax Act of 1961 because they are not in the nature of “royalty” as defined by the double taxation avoidance agreement (DTAA).

The assessee, Moonfrog Labs Pvt. Ltd, claimed before the Tribunal that the advertisement expenses were paid to Facebook, Ireland, Tapjoy, USA, and Motive Inc, USA, among others. They presented the TRCs, no PE declarations, and explained that the advertisement expenses paid to Facebook Inc. and other businesses are exempt from TDS under Section 195.

The Assessing Officer, on the other hand, determined that the advertisement expenses paid to Facebook, Tapjoy, and Motive Inc were disallowed under section 40(a)(i) for failure to deduct tax at source under section 195.

The Tribunal’s two members determined that the Supreme Court, in the case of Engineering Analysis Centre of Excellence, held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers as consideration for the resale/use of the computer software via EULAs/distribution agreements are not royalty payments for the use of copyright in the computer software, and that the same does not give rise to any incumbency.

The bench, which included Judicial Member Ms. Beena Pillai and Accountant Member Mr. Chandra Pujari, stated that “it is pertinent to emphasise that the Hon’ble Supreme Court has examined the provisions of the Copy Right Act and its relation to payments paid for software use.” We further note that the verdict of the Hon’ble Karnataka High Court in the instance of Samsung Electronics Co Ltd (above) was overturned by the Hon’ble Supreme Court in paragraphs 101-102 of its ruling. Similarly, the Hon’ble Karnataka High Court remanded back to ITAT the decision of the coordination bench of this Tribunal in the case of Google India Pvt. Ltd. vs. JCIT reported in (2018) 93 taxmann.com 183 relied on by Ld.Sr.DR.”

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