2019 (2) TMI 2055 - AT - Income Tax

TDS u/s 195 - assessee is in the business of brand management, engaged in posting advertisements in the social portal on behalf of their clients - payment made by the assessee to the owner of the search engine - AO held that face book is social networking site, placing advertisements in the social networking sites are patented and provide valuable services, which are essentially technical in nature, receiving such kind of expertise and knowledge from Face Book, Ireland is nothing but technical services rendered by Face Book which clearly attracts the provisions of section 195 and hence tax is deductible @ 10% on the payments to be made - HELD THAT - As per decision of Google India (P)Ltd. 2018 (5) TMI 896 - ITAT BANGALORE wherein after referring the Tribunal decisions in the cases of Right Florist P.Ltd., 2013 (4) TMI 338 - ITAT KOLKATA and Pinstorm Technologies P.Ltd. 2012 (12) TMI 601 - ITAT MUMBAI Yahoo India (P) Ltd., etc. 2011 (6) TMI 162 - ITAT, MUMBAI it is held in para 116 that In all these cases, the assessee was either an advertiser or act on behalf of some other advertiser and has purchased space from the owner of search engine to display its advertisements online. Therefore, the payment made by the assessee to the owner of the search engine was considered to be business receipt/business profit in the hands of the owner of search engine, who is non-resident and in the absence of permanent establishment (PE) in India, the business profits/business receipts received by them were not chargeable to tax in India . As the assessee is engaged in the business of posting advertisement in the social portal on behalf of their clients. The payments (to be) made for making advertisement in the social portal of M/s. Face Book Ireland Ltd., a non-resident, who is not having a PE in India, on behalf of the assessee s client M/s. Cholamandalam General Insurance Company Ltd. was not chargeable to tax in India, as held by the Tribunal decisions, supra, and hence, there is no need to deduct tax on such payments. The assessee s appeal is allowed.

Summary

Issues:
1. Taxability of payments made for posting advertisements on social portals to a non-resident entity.
2. Interpretation of Section 195 and Section 9(1)(vii) of the Income Tax Act.
3. Application of Double Taxation Avoidance Agreement (DTAA) between India and Ireland.
4. Impact of Equalization Levy introduced by the Finance Act 2016.

Analysis:
1. The appeal addressed the taxability of payments made by M/s. Inception Business Services for posting advertisements on social portals to a non-resident entity, Face Book Ireland Ltd. The Assessing Officer (AO) held that such services are technical in nature, attracting Section 195 of the Income Tax Act, requiring a tax deduction at source. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the current appeal.

2. The appellant contended that posting advertisements on social portals does not involve technical expertise as per Section 9(1)(vii) of the Act. Additionally, it was argued that since Face Book Ireland Ltd. does not have a Permanent Establishment (PE) in India, the payments should be assessed as business income in Ireland under the DTAA between India and Ireland. The appellant also highlighted the impact of the Equalization Levy introduced by the Finance Act 2016, emphasizing non-taxability under the pre-existing law.

3. The appellant relied on the decision in Google India (P) Ltd. vs. Joint Director of Income-tax (International Taxation), Bengaluru, which established that payments for online advertisements to non-resident entities without a PE in India are not chargeable to tax in India. Reference was made to the ITAT Chennai decision in ACIT vs. Carat Lane Trading P. Ltd., supporting the non-deduction of tax at source for similar services.

4. After considering the arguments presented, the ITAT Chennai found merit in the submissions made by the appellant. It concluded that the payments made for posting advertisements on social portals to Face Book Ireland Ltd., a non-resident without a PE in India, were not chargeable to tax in India. Therefore, the appeal was allowed, and the tax deduction requirement on such payments was deemed unnecessary.

This judgment clarifies the tax treatment of payments for online advertising services provided by non-resident entities, emphasizing the importance of PE and the applicability of relevant provisions of the Income Tax Act and DTAA.