2022 (7) TMI 1054 - AT - Income Tax

TDS u/s 194J or 194C - transactions entered into by the assessee with Social Kinnect by construing it to be in the nature of professional services - HELD THAT - We find that assessee company had entered into an agreement with Social Kinnect (vendor) whereby vendor would act as digital media agency for the assessee company. The said agreement envisaged provision of various services by Social Kinnect to the assessee such as e-mail services, web management, online media buying and management fees. During the year under consideration, the assessee had received single invoice specifying respective services provided by Social Kinnect. The sample invoices copies were duly produced by the assessee before the ld. AO. For web management and management fees, the assessee has deducted tax at source @10% u/s.194J of the Act and for e-mail services and online media buying, influencer charges, the assessee had deducted tax at source @2% u/s.194C of the Act. It is not in dispute that assessee made payment to Ad agency i.e. Social Kinnect. We find from the perusal of the agreement with Social Kinnect and scope of services defined therein, Social Kinnect would engage various professional artists for preparation and execution of the advertisement content and Social Kinnect would provide ultimate advertisement content on behalf of the assessee in digital platform We find that there is no direct connection or direct agreement between assessee company and the professional artists who had assisted in advertisement content. The agreement with professional artists are only with the advertisement agency i.e. Social Kinnect and not the assessee. Hence, Social Kinnect while making payments to those professional artists, would be liable for TDS @10% u/s.194J of the Act as those professional artists are rendering professional services to Social Kinnect. The assessee had merely taken the services only from Social Kinnect. It is not the look out of the assessee to understand the source from where the Social Kinnect obtains its professional services. Once the advertisement content is provided by Social Kinnect in a digital platform, the assessee is bound to make payments to Social Kinnect for that advertisement content. This would constitute the payment made for carrying out any work falling within the ambit of provisions of Section 194C of the Act only. We find from the sample bills issued by Social Kinnect to the assessee, Social Kinnect had raised in its invoice two components of its charges - (i) Seeking reimbursement of professional charges paid by it to various artists with mark up and (ii) its service charges. The assessee had infact deducted tax @10% on the service charges component charged by Social Kinnect. In our considered opinion, even this payment would be liable for tax u/s.194C of the Act as admittedly Social Kinnect is not rendering any professional services to the assessee as detailed supra. The assessee had deducted excess TDS in the instant case in respect of this service charges paid to Social Kinnect. In respect of reimbursement sought by Social Kinnect with mark-up, the same is payable only pursuant to a contract of work entered into by the assessee with Social Kinnect which falls within the ambit of Section 194C of the Act and not u/s.194J Thus we hold that the entire payments made by the assessee to Social Kinnect would fall only within the ambit of provisions of Section 194C of the Act and not u/s.194J of the Act. Accordingly, the ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Whether the payments made by the assessee to Social Kinnect should be classified under section 194C or section 194J of the Income Tax Act, 1961.
2. Whether the assessee was justified in deducting tax at source at varying rates for different services provided by Social Kinnect.

Issue-Wise Detailed Analysis:

1. Classification of Payments under Section 194C or Section 194J:
The primary issue in this appeal was to determine if the payments made by the assessee to Social Kinnect should be considered as professional services under section 194J, which attracts a TDS rate of 10%, or as contractual work under section 194C, which attracts a TDS rate of 2%. The assessee had entered into an agreement with Social Kinnect for various services, including email services, web management, online media buying, and management fees. The Assessing Officer (AO) contended that all payments should be classified under section 194J, leading to a higher TDS rate. However, the Tribunal found that the services provided by Social Kinnect, such as email services and online media buying, were more in the nature of contractual work and thus fell under section 194C. The Tribunal also noted that the assessee had deducted TDS at the appropriate rates for different components of the services provided by Social Kinnect, aligning with the provisions of section 194C and section 194J.

2. Justification for Varying TDS Rates:
The Tribunal examined the nature of services provided by Social Kinnect and the corresponding TDS rates applied by the assessee. It was found that for email services and online media buying, the assessee deducted TDS at 2% under section 194C, while for web management and management fees, TDS was deducted at 10% under section 194J. The Tribunal upheld the assessee's approach, stating that the services provided by Social Kinnect did not constitute professional services directly rendered to the assessee. Instead, Social Kinnect acted as an intermediary, engaging various professional artists and providing a consolidated service to the assessee. Consequently, the Tribunal concluded that the payments made by the assessee to Social Kinnect should be classified under section 194C, and the assessee had correctly applied the TDS rates.

Supporting Circulars and Precedents:
The Tribunal referred to CBDT Circular No. 714 dated 03/08/1995 and Circular No. 715 dated 08/08/1995, which clarified the applicability of sections 194C and 194J in the context of advertising agencies. According to these circulars, payments made by a client to an advertising agency fall under section 194C, while payments made by the advertising agency to professional artists fall under section 194J. The Tribunal also cited the Delhi Tribunal's decision in the case of Perfect Probuild P. Ltd. vs. DCIT, which supported the classification of advertising-related payments under section 194C.

Conclusion:
The Tribunal concluded that the entire payments made by the assessee to Social Kinnect should be classified under section 194C of the Income Tax Act, 1961, and not under section 194J. The appeal of the assessee was allowed, and the Tribunal directed the deletion of the TDS demand and interest levied by the AO. The order was pronounced on 22/07/2022.