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TMI Blog2022 (7) TMI 1333X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Urban Ladder Home D cor Solutions Pvt Ltd [ 2021 (8) TMI 927 - ITAT BANGALORE] . This tribunal decision has duly considered other tribunal decisions and also the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited [ 2021 (3) TMI 138 - SUPREME COURT] We hold that the payments made to Facebook Ireland Limited cannot be disallowed u/s 40(a)(i) of the Act in the facts and circumstances of the instant case. Ground raised by the assessee is allowed. - ITA No. 3130/Mum/2019 - - - Dated:- 7-7-2022 - SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For the Assessee : Shri P.J. Pardiwala For the Revenue : Shri Rajneesh Yadav ORDER PER M. BALAGANESH (A.M): This appeal in ITA No.3130/Mum/2019 for A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-22, Mumbai in appeal No.CIT(A)-22/DCIT-14(2)(1)/IT-10397/2017-18 dated 25/02/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/12/2017 by the ld. Dy. Commissioner of Income Tax-14(2)(1), Mumbai (herei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, the assessee had made certain payments to Facebook Ireland Limited towards the cost of advertisements, carried by facebook, for its clients. The ld. AO noticed that the assessee has not deducted tax at source from these payments to Facebook Ireland Limited and accordingly sought to disallow the payments made to Facebook Ireland Limited in the sum of Rs 16,23,82,466/- u/s 40(a)(i) of the Act. This action of the ld. AO was upheld by the ld. CIT(A). 3.2. We find that the assessee, being an advertising agency, had merely helped its clients to place their advertisements on digital media. The assessee utilizes the internet search engine such as Google, Yahoo, Facebook etc to buy space in advertising on the internet on behalf of its client and the search engine renders this service outside India through internet. Once the agreed time frame is over, the actual details of advertisements published are gathered based on which a report is made and the service provider/ publisher/website owners issues the invoices to the assessee for gross media spends and assessee in turn charges the client after adding its commission on the same. Hence it could be safely concluded that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act as well as under Article 12 of the India Ireland DTAA. We find that the ld. AO had placed heavy reliance on the following decisions in support of his contentions:- a) Decision of Bangalore Tribunal in the case of Google India Private Limited vs ADIT reported in 86 taxmann.com 237 b) Decision of Hon ble Karnataka High Court in the case of CIT vs Samsung Electronics Co. Ltd reported in 345 ITR 494 (Kar) c) Decision of Mumbai Tribunal in the case of DDIT vs Reliance Infocom Ltd reported in 64 SOT 137 3.4. We find that the assessee had pleaded that payment made by it to Facebook Ireland Limited was for services rendered for uploading and display of banner advertisement. The banner hosting and uploading advertisement did not involve use by the assessee of any industrial, commercial or scientific equipment, copyright and no such use was granted by Facebook Ireland Limited to the assessee. The uploading and display of advertisement on its portal was entirely responsibility of Facebook Ireland Limited and assessee has no right to access the portal of Facebook Ireland Limited. The assessee was to provide only the advertisement content to Facebook Ireland Limited. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. It is trite law that the entries in the books of accounts are not determinative of taxable income of an assessee. Reliance in this regard is placed on the celebrated decision of the Hon ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd vs CIT reported in 82 ITR 363 (SC) ; Taparia Tools Ltd vs JCIT reported in 372 ITR 605 (SC), among others. 3.7. We find that the ld. CIT(A) says that assessee is a dependent agent of Facebook and hence there is an obligation to deduct tax at source. We find that assessee is an agent of Indian advertisers and assessee is not an agent of Facebook Ireland. We are unable to persuade ourselves to accept to this contention of the ld. CIT(A) because , in our considered opinion, Facebook Ireland Limited cannot be deemed to be having Permanent Establishment in India merely based on existence of assessee in India. We further find that assessee is not concluding any contracts on behalf of Facebook Ireland Limited. If it is so, this fact is to be proved by the revenue, as held by the Hon ble Supreme Court in the case of E-Funds reported in 399 ITR 34 (SC), which has not been admittedly done in the instant case. If assessee is treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... server is not at the disposal of the assessee company. The assessee company does not get any right to modify/deal with the server in any manner. The server through which the advertisement is uploaded is not at all located in India. Further, there is no role played by the Facebook India Online Pvt. Ltd. in assessee's case and thus there is no element of permanent establishment of Facebook, Ireland in India. The assessee company during the assessment proceedings has provided the tax resident certificate of Facebook, Ireland and as well as copy of remittance of the certificate (form 15CB) to the Assessing Officer. The Assessing Officer has proceeded on the basis that as per the provisions of Section 195 of the Act any amount paid to non-resident will attract this provision and the assessee is liable to make TDS except as provided under Section 195(2) or under Section 197 where such deductee obtain nil deduction certificate from the Assessing Officer and furnish the same to the deductor before receiving the credit of such amount. In the present case, the relevant sub-section 2 to Section 195 has specifically stated that a person responsible for deducting any such sum chargeable und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present case without demonstrating that the services are coming under the purview of FTS or royalty. Therefore, the appeal filed by the assessee is allowed. 3.8. We find that the ld. CIT(A) in page 21 of his order had referred to certain Email IDs and telephone numbers of 3 executives. Those are employees of Facebook and not the assessee herein. The assessee has merely raised an Invoice on Micromax. There is no use of facebook logo by the assessee as argued by the revenue. We hold that the assessee s ultimate income is only the commission component of 15%. If assessee is a dependent agent, then where is the question of claiming any deduction for expenditure incurred on behalf of Principal and in that case, how the provisions of section 40(a)(i) of the Act would even come into operation. Hence the reasoning given by the ld. CIT(A) that assessee is an Agency PE cannot be accepted. 3.9. We find that the entire issue in dispute is no longer res integra in view of the elaborate decision of the Co-ordinate Bench of Bangalore Tribunal in the case of Urban Ladder Home D cor Solutions Pvt Ltd vs ACIT International Taxation in IT(IT)A Nos. 615 to 620/Bang/2020 for Asst Years 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommerce 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 that Facebook maintains throughout the world locates the users that are being targeted by the advertiser A1. And as soon as the target user logs in, the ads/banners/web links, as determined by A1 will be displayed to the user near instantaneously. It can be termed as the most evolved form of online, target advertising. 3.2.9. In short, the technology and/or design and/or process and/or equipment of Facebook that enable the advertisers to reach their target audience in the most efficient way is the crux of the business. The assessee has been using the same to develop its business. Accordingly, the payments made to Facebook get squarely cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are computed at the last page of this order. (C) Payments made to Amazon Web Services Inc., US 6.5. The assessee company has availed cloud computing services from Amazon Web Services Inc (AWS) for its online business needs. Cloud computing is an arrangement in which the cloud provider hosts the shared computing resources such as hardware, software applications etc., and the cloud user accesses them for storage, data processing etc., via internet on a need basis. In view of Cloud computing technology, Enterprises need not make investment in IT infrastructure (hardware, storage space, Application softwares, other IT resources etc.) and they can use the required IT resources on payment of charges. 6.6. The case of the AO is stated in paragraphs 4.1.1 to 4.1.11 5 of the assessment order for AY 2015-16. Identical reasoning has been given for other years also. For this payment, the AO has also referred to the definition given in India US DTAA for Royalty and fees for included services. The relevant portion of AO s order is extracted below:- 4.1.5. There will be sites of the Assessee Company, wherein the data connectivity and networking is provided by the ( AWS ). Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assessment year are computed in this last page. Thus, the AO held that the payments made to all the three companies is in the nature of Royalty liable for deduction of tax at source u/s 195 of the Act. The findings of the Bangalore Tribunal are as under:- 10. We heard the parties and perused the record. We notice that the AO has mainly invoked the provisions of sec. 9(1)(vi) of the Act in respect of payments made to M/s Facebook and M/s Rocket Science Group (MailChimp) to hold that the same is royalty . In respect of payments made for Amazon Web Services, the AO has also referred to the provisions of DTAA entered into India and USA in addition to sec.9(1)(vi) of the Act. However, the AO has held that these payments are royalty mainly considering the provisions of sec.9(1)(vi) of the Act. 11. M/s Facebook is located in Ireland and other two are companies located in USA. We notice that India has entered into Double Taxation Avoidance Agreement (DTAA) with Republic of Ireland and also with United States of America. The question whether the provisions of Income tax Act could be referred to ignoring DTAA provisions, has been settled by Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to nonresident 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 of the Incometax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 13. Hence the relevant DTAA provisions should be considered in the cases before us also for determining the question whether the payments made by the assessee to the above said three non- resident companies are in the nature of Royalty or not. Hence there is no necessity to refer to the provisions of sec. 9(1)(vi) of the Act for the payments made to the three non-resident persons, referred above. 14. The term royalties is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose within the scope of the License. (b) not make alterations, copies, extractions, modifications or additions to Facebook at Work and Our Content or any part of it, or sell, copy, disclose, distribute, disseminate or license it or any part of it or misuse it or any part of it in any way or reverse engineer, decompile, disassemble or decipher it or evade technical limitations on the use of Facebook at Work; (c) not re-publish, sell, extract, reproduce, disseminate or otherwise use Facebook at Work and Our content, except as expressly permitted by this Agreement or with our prior written permission; and (d) not use our copyrights, trademarks, protected designs and trade dress (including but not limited to Facebook, Facebook at Work, or any of the trademarks listed here (currently available at www.facebookbrand.com/trademarks), or any confusingly similar marks, except with our prior written permission. You acknowledge and agree that any breach of this Section 5 may cause us irreparable harm for which damages are not an adequate remedy and that we may seek interim, preliminary or protective relief from any competent court to restrain your or your Users anticipated or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Your account. To access the Services, you must have an AWS account associated with a valid email address and a valid form of payment. Unless explicitly permitted by the Service Terms, you will only create one account per email address. Third-Party content. Third-Party content may be used by you at your election. Third-Party Content is governed by this Agreement and, if applicable, separate terms and conditions accompanying such ThirdParty Content, which terms and conditions may include separate fees and charges. .. 8.3 Service offerings License. We or our licensors own all right, title and interest in and to the Service Offerings, and all related technology and intellectual property rights. Subject to the terms of this Agreement, we grant you a limited, revocable, non-exclusive, non-sublicenseable, nontransferrable license to do the following: (a) access and use the Services solely in accordance with this Agreement; and (b) copy and use the AWS Content solely in connection with your permitted use of the Services. Except as provided in this Section 8.3, you obtain no rights under this Agreement from us, our affiliates or our licensors to the Service Offerings, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isement in web portal of Facebook or sending bulk mails. In case of web hosting charges paid to AWS, the assessee is allowed to use the information technology infrastructure facilities. 17. We shall now refer to some of the decisions relied upon by Ld AR before us. The Kolkata bench of Tribunal, in the case of ITO vs. Right Florists (2013) (32 taxmann.com 99) (Kol-Trib.), has considered an issue whether the payments made to foreign search engine portals for online advertising services resulted in accrual of income in India in their hands in terms of sec.9(1) of the Act. The coordinate bench referred to the following decisions rendered by other co-ordinate benches:- (a) Pinstorm Technologies (P) Ltd vs. ITO (24 taxmann.com 345)(Mum) (b) Yahoo India (P) Ltd vs. DCIT (2011)(11 taxmann.com 431)(Mum) In the above said two cases, the Tribunal held that the amount paid by the assessee to M/s Google Ireland Ltd for the services rendered for uploading and display of banner advertisement on its portal was in the nature of business profit on which no tax is deductible at source, since the same was not chargeable to tax in India in the absence of PE of Google Ireland Ltd in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Copy of agreement is placed at pages 3 to 22 of Paper Book. The agreement is called AWS Customer Agreement, which contains the terms and conditions that governs assessee's access to and use of Service Offerings. It was agreement between Amazon Web Services, Inc. and you i.e. assessee. It is provided that agreement takes effect when you click an I Accept button. Clause 1.1 lays down that 'you' (assessee) may access and use the Service Offerings in accordance with agreement. In clause 1.2, it is provided that to access services, 'you' (assessee) must create an AWS account associated with a valid email address. Clause 1.3 provides that if you (assessee) would like support for the services other than the support we generally provide to other users of the services without charge, then you can enroll for customer support in accordance with the terms of AWS Support Guidelines. Clause 2.1 lays down that Amazon could change, discontinue, or deprecate any of the Service Offerings or change or remove features or functionality of the Service Offerings from time to time. As per clause 4.1, you (assessee) are solely responsible for the development, content, operation, maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power, BPRS does not have the same. Hence servers are taken on hire from Amazon, in is cloud units. Ledger copy attached Extract of web agreement also attached. 14. Further, the assessee has also pointed out the nature of its business vide written note before the Assessing Officer and explained as under:- '1. Primarily the a requires servers to run the various online recharges. Due to this there is a very high requirement of servers. Since purchase/maintenance of servers and its upkeep require skilled manpower, the a does not have the same. Hence servers are taken on hire from Amazon, in its cloud units. Information about Amazon Web Services and its benefits as provided on website http://aws.amazon.com/what-is-aws is enclosed for your reference.' . 18. Now, coming to the next aspect raised by assessee which is linked to as to whether retrospective amendment in Income Tax would override the Treaty Laws where no amendment has been made. It is clear that retrospective amendment has changed the definition of 'royalty' from the year 2012 under the Income Tax Act, but the position of DTAA between two countries has not been effected. No such amendment ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y charges paid, it transpires that the same are fluctuating from month to month and there is no regular payment being made to Amazon. In case of provision of royalty to a person, then as seen from the terms and conditions of various agreements, there is fixation of price to be paid and there may be variation on account of use of certain services but first there has to be basic price fixed. However, in the facts of present case, looking at the documentation, the billing is segregated into various services i.e. AWS services, storage services, etc. and the assessee before us has filed a chart of summary of services availed. The first such services are on account of service charges for Elastic Compute Cloud. As per clause 1, it is on account of use of service provider Linux; as per clause 1.2, Windows and as per clause 1.3, Windows SQL Server stanard and clause 1.4 of Bandwidth. The total service charges for Elastic Compute Cloud are USD 40,253.17. The month-wise details of said payments made by assessee from September, 2009 to March, 2010 reflected that in the first month, charges totaled to USD 4269.02, in October at USD 5599.36 and there on. 20. The Hon'ble High Court of Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the revenue. 9. Satellite television has become ubiquitous and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of creating advertisement content. The payment made to Amazon Web Services (AWS) is only for using the information technology facilities provided by it, that too the billing would depend upon the extent of usage of those facilities. In fact, these non-resident companies do not give any specific license for use or right to of any of the facilities (which include software) and those facilities are not going to be used for the use in the business of the assessee. The right to use those facilities, as stated earlier, is intertwined with the main objective of placing advertisements in the case of Facebook and Mailchimp. In the case of AWS, the payment is made only for using of information technology infrastructure facilities on rental basis. Hence the question of transferring the copy right over those facilities does not arise at all. The agreements extracted above also make it clear that the copyright over those facilitating software is not shared with the assessee. In any case, the main purpose of making payment is to place advertisements only and not to use the facilities provided by the non-resident companies. Thus the facilities provided by the non- resident companies are onl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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