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TMI Blog2021 (9) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... 14-15 10,90,02,677 The AO noticed that the assessee had made the above said payments without deducting tax at source u/s. 195 of the Act. Hence the AO initiated proceedings u/s. 201(1) of the Act treating the assessee as an 'assessee in default'. 3. The assessee company furnished following objections to the AO:- * The Consideration for advertisement is paid to the overseas bank account of Non-resident. Therefore, the said payments cannot be construed to be received or deemed to be received in India. * The non resident does not carry out any of the activities in India and they are wholly carried out outside India and accordingly there is no business connection in India. Therefore, the payments to non-resident would not be deemed to accrue or arise in India. * The company submits that the payment made to Non resident payee is towards the services rendered for uploading and display of the banner advertisement of the Company on its portal. The company submits that the banner advertisement hosting did not involve use or right to use by the Company any Industrial, Commercial or Scientific equipment and no such use was actually granted by non resident payees to the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business in the e-commerce era. The technology, design, process and equipment of Facebook are being used, in a complex manner, with very high efficiency levels, to reach out the target audience, within a fraction of the second of the target user logging in his/her account. The advertiser A1 (in the schematic) communicates its requirements (in terms of its target market, and the profile of the consumer it wants to serve) through its advertiser's account with Facebook. In turn, using complex algorithms and advanced processors and equipment, the network of servers throughout the world locates the users that are being targeted by the advertiser A1. And as soon as the target users log in, the ads/banners/web links, as determined by A1 will be displayed to the user near instantaneously. It an be termed as the most evolved form of online target advertising". 5. After hearing the assessee and after examining the provisions of sec. 9(1)(vi) and 9(1)(vii) of the Income tax Act and also the provisions of DTAA entered between India and Ireland, the AO held that the above said payments are taxable in India primarily as 'royalty' and alternatively as FTS/FIS. Accordingly, the AO r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idents as under:- (A) In respect of payments made to Facebook, Ireland, the Ld. CIT(A) has first analyzed the nature of payments. He has examined the agreement entered between the assessee and Facebook and observed as under:- "13. This involves payments by the appellant for the use of, or the right to use of patented software processes. Under section 195 of the IT Act the income of non-resident which is taxable in India needs to be subjected to tax deduction. Therefore, the liability on the part of the assessee to deduct tax on payments made to Facebook Ireland is clearly defined in the ambit of Income tax Law. The nature of payment made is considered in the later part of the order along with other payments for software and data access. 14. Also as per the extract of the agreement it is inferred that the proper space will be given by the Facebook to the appellant's company in which they can create their own company's domain and use the same. I find this issue of 'Royalty' under the IT Act as well as under the India-Ireland DTAA has been discussed in the case of Google India (P) Ltd. by the Hon'ble. ITAT Bangalore. ......... Then the Ld. CIT(A) has discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 245. The exemplary system 120' may support ad information entry and management operation(s) 21a. campaign (e.g., targeting) assistance operation(s) 220, accounting and billing operation(s) 225, ad serving operation(s) 230, relevancy determination operation(s) 235, optimization operations 240, presentation ordering operations 250, and fraud detection operation(s) 255. Advertisers no may interface with the system 120' via the ad information entry and management operations) 215 as indicated by interface 216. Ad consumers 130 may interface with the system 120' via the ad serving operations) 230 as indicated by interface 231. The present invention primarily concerns the presentation ordering operation(s) 250, and is described more fully in section 4.2. For contextual purposes, however, a brief description of the other parts of ad system 120' appears below. An advertising program includes information concerning accounts, campaigns, creatives, targeting, etc. The term "account" relates to information for a given advertiser. A "campaign" or "ad campaign" refers to a series of advertisements designed to achieve a larger objective, and may include a start date, an end d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts website. 8. Then the Ld. CIT(A) has referred to various case laws, but mainly took support of the decision rendered by Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd. (2011)(16 taxmann.com 141)(Kar), wherein it was held that the payment made by Indian residents to the non-resident supplier for software and access to database is "Royalty". Accordingly, the Ld. CIT(A) held as under at page 28 of its order:- "4. The decision of the Hon. Karnataka High Court in the case of Samsung Electronics co Ltd. (cited supra) clearly holds the payment made by the Indian residents to the non-resident supplier for software and access to database as Royalty. 5. The appellant has argued that the transaction of purchase of software and allowing the use of software does not fall within the definition of "Royalty" under respective treaties. I have examined the same. Various treaties are examined alongwith the payments made (supra). I find that the term "royalties" is defined as payments of any kind received as a consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work any patent, trade mark, design or model, pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated March 02, 2021)( 125 taxmann.com 42). The Hon'ble Supreme Court examined the question whether the payments made to non-resident software suppliers is "royalty" and TDS u/s. 195 of the Act was required to be deducted on those payments. The Hon'ble Supreme Court examined this question considering four types of situation, which has been narrated as under:- "4. The appeals before us may be grouped into four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, nonresident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. (iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. (iv) The fourth category includes cases wherein computer software is affixed onto h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8." 15. We shall now advert to the Agreements entered by the assessee with the three non-resident companies mentioned above, in order to understand the nature of services rendered by these companies and also to understand whether the payments made to the three non-residents are royalty or not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is subject to change and will be updated from time to time without notice to you. ....... 17 Definitions. In this Agreement, unless otherwise stated ...... "Facebook at Work" means the features and services we make available, including but not limited to through the Facebook at Works websites, apps, and online services that we operate. ............ "Our Content" means Facebook at Work and its content including without limitation, software, its "look and feel", images, text, graphics, illustrations, trademarks, photographs, audio, videos and sound but excluding Your content. .................." 16. A careful perusal of the relevant provisions of the agreement entered by the assessee with Facebook and Rocket Science Group (Mailchimp) would show that both these non-resident companies are allowing the assessee to use the facilities provided in their sites, which includes, inter alia, software facilities also. The purpose of compelling the assessee to use those facilities, as could be inferred by us, is to create an environment of ease in creating the "advertisement content" to suit the platforms of Facebook or Mailchimp. The environment of ease is beneficial and time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a PE in India, and as held by a Special Bench of this Tribunal in the case of Motorola Inc v. Dy. CIT [2005] 95 ITD 269/147 Taxman 39 (Mag.) (Delhi) "DTAA is only an alternate tax regime and not an exemption regime" and, therefore, "the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA". No such burden is discharged by the Revenue. Accordingly, there is no material before us to come to the conclusion that Google or Yahoo had a PE in India, which, in turn, could constitute the basis of their taxability in India." ....................... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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." 10. The facts prevail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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