2022 (1) TMI 1089 - AT - Income Tax

TDS u/s 195 - non-deduction of tax at source as royalty and /or FTS in respect of the payments made to Facebook and other entities - CIT(A) held that the advertisement expenses paid to Facebook and other entities constitutes use of industrial, commercial or scientific equipment under section 9(1)(vi) - HELD THAT - CIT(A) has followed the decision rendered by Hon ble Karnataka High Court in the case of Samsung Electronics Co. Ltd 2011 (10) TMI 195 - KARNATAKA HIGH COURT to decide the issues against the assessee. However the above said decision has since been reversed by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd 2021 (3) TMI 138 - SUPREME COURT - The issue of granting license to use software was examined in the context of its taxability as royalty by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra) as 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 through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195. As rightly pointed out by Ld D.R, we are of the view that the issues contested in all these appeals require fresh examination at the end of Ld CIT(A) applying the ratio of the decision rendered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). Accordingly, we set aside the orders passed by Ld CIT(A) in all these appeals and restore all the issues to his file for examining them afresh - Grounds raised by assessee stands allowed for statistical purposes.

Summary

Issues:
1. Treatment of marketing expenses as royalty under section 9(1)(vi) and disallowance under section 40(a)(i) for non-deduction of tax at source under section 195.

Analysis:
The appeal was filed against the assessment order related to the Assessment Year 2015-16. The primary issue raised by the assessee was the treatment of marketing expenses as royalty under section 9(1)(vi) and the subsequent disallowance under section 40(a)(i) due to non-deduction of tax at source under section 195. The assessee argued that the impugned payments were not liable for TDS under section 195 as the income was not chargeable to tax. The CIT(A) upheld the AO's decision, considering the expenses as royalty. However, the Tribunal noted that the decision of the Karnataka High Court in a similar case had been reversed by the Supreme Court in another case, leading to the need for a fresh examination of the issues.

The assessee, an Indian company in the gaming industry, had filed its return of income for the relevant year, claiming a refund. The AO disallowed a significant amount of marketing expenses as royalty under section 9(1)(vi) for non-deduction of tax at source under section 195. The CIT(A) affirmed this decision, leading to the appeal before the Tribunal. The assessee argued that the payments made for digital advertising did not qualify as royalty, as they did not involve the use or right to use any industrial, commercial, or scientific equipment. The Tribunal, considering the Supreme Court's decision in a similar case, set aside the CIT(A)'s order and directed a fresh examination of the issues.

The Tribunal noted that the Supreme Court's decision clarified that payments made by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers for the resale/use of computer software did not constitute royalty for the use of copyright. The Court emphasized that the provisions of the Income Tax Act relating to royalty were not applicable in such cases. The Tribunal, therefore, decided to set aside the CIT(A)'s orders in all related appeals and instructed a re-examination of the issues in light of the Supreme Court's decision. Consequently, the grounds raised by the assessee were allowed for statistical purposes, and the appeal was allowed accordingly.

In conclusion, the Tribunal's decision highlighted the need for a fresh examination of the treatment of marketing expenses as royalty under section 9(1)(vi) and the disallowance under section 40(a)(i) for non-deduction of tax at source under section 195. The Supreme Court's ruling in a similar case was considered pivotal in this regard, leading to the setting aside of the CIT(A)'s orders for reassessment based on the Supreme Court's decision.