Inception Business Services Vs ITO (ITAT Chennai)
Summary: The Chennai ITAT held that payments proposed to be made by Inception Business Services to Facebook Ireland Ltd. for placing online advertisements on Facebook were not chargeable to tax in India and consequently did not require deduction of tax at source under section 195 of the Income-tax Act, 1961. The assessee, engaged in brand management and posting advertisements on social portals for clients, had applied under section 195(2) for a no-objection/withholding certificate in respect of Facebook advertising services for its client, Cholamandalam General Insurance Company Ltd.
The Assessing Officer considered the services technical in nature and directed deduction of tax at 10% on payments of ₹3,60,813, which was upheld by the CIT(A). Before the Tribunal, the assessee relied upon Google India (P.) Ltd. v. JDIT, ITO v. Right Florist (P.) Ltd., Pinstorm Technologies (P.) Ltd. v. ITO, Yahoo India (P.) Ltd. v. DCIT and ACIT v. Carat Lane Trading (P.) Ltd.. These authorities supported the proposition that payments for online advertising space to a non-resident constitute business receipts/business profits and, where the recipient has no permanent establishment in India, are not chargeable to tax in India.
The Tribunal found merit in the assessee’s submissions and noted that Facebook Ireland was a non-resident without a PE in India. It accordingly held that payments for advertisements on Facebook on behalf of the assessee’s client were not chargeable to tax in India and hence no tax was required to be deducted. The assessee’s appeal was allowed. The issue has subsequently been referred to in later litigation involving Facebook advertisement payments.
Cases Discussed / Relied Upon
- Google India (P.) Ltd. Vs Joint Director of Income-tax (International Taxation), Range-1, Bengaluru, (2018) 93 taxmann.com 193 / (2018) 194 TTJ 385 (ITAT Bangalore), dated 11.05.2018 — Relied upon by the assessee for the proposition, recorded in para 116 thereof, that where an advertiser or its agent purchases online advertising space from a non-resident search-engine owner, the consideration constitutes business receipts/business profits and, in the absence of a PE in India, is not chargeable to tax in India.
- ITO Vs Right Florist (P.) Ltd., (2013) 32 taxmann.com 99 / (2013) 25 ITR(T) 639 / (2013) 143 ITD 445 (ITAT Kolkata), dated 12.04.2013 — Relied upon in support of non-taxability of payments to non-residents for online advertising where the receipts constituted business profits and the recipient had no PE in India.
- Pinstorm Technologies (P.) Ltd. Vs ITO, 54 SOT 78 (ITAT Mumbai) — Referred to in Google India and relied upon for the treatment of payments for online advertising to a non-resident as business receipts rather than income taxable in India in the absence of a PE. :chatgpt-content-reference{index=”2″}
- Yahoo India (P.) Ltd. Vs DCIT, 140 TTJ 195 (ITAT Mumbai) — Referred to for the proposition that payment for uploading/displaying banner advertisements on a non-resident’s portal was business profit and, absent a PE in India, was not chargeable to tax in India.
- ACIT, Corporate Circle-1(2), Chennai Vs Carat Lane Trading (P.) Ltd., (2018) 89 taxmann.com 434 (ITAT Chennai) — Relied upon by the assessee; payments to foreign entities for online advertisements and other services were held not chargeable to tax where the foreign entities had no PE in India and the Revenue failed to establish receipt of technical services within section 9(1)(vi)/(vii). The later TaxGuru decision concerning Facebook advertising also identifies this authority as applicable to such payments.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
The assessee filed this appeal against the order of Commissioner of Income Tax (Appeals)-16, Chennai, in ITA No. 54/CIT(A)-16/2015-16 dated 12.08.2016 for assessment year 2015-16.
2. M/s. Inception Business Services, the assessee, is in the business of brand management, engaged in posting advertisements in the social portal on behalf of their clients. It applied for a NOC for withholding certificate u/s.195(2) in respect of the services to be availed from M/s. Face Book Ireland Ltd., a non-resident, for making advertisement in their social portal for the assessee’s client M/s.Cholamandalam General Insurance Company Ltd. The 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 ofsection 195 and hence tax is deductible @ 10% on the payments to be made at ₹3,60,813/-. Aggrieved, the assessee filed appeal before the CIT(A). The Ld. CIT(A) dismissed the appeal. Aggrieved against that order, the assessee filed this appeal with the following grounds:-
“1. The Order of Commissioner of Income Tax(Appeals) is contrary to law and facts of the case.
2. The Commissioner of Income Tax(Appeals) erred in holding that the payment made for posting advertisement in Face Book requires technical expertise and amounts to rendering technical service u/s. 195 r.w.s. 9(i)(vii) of the Act.
2.1. The Commissioner of Income Tax(Appeals) ought to have appreciated that there is no human intervention in advertisement and therefore, is a non-technical fees a per Sec.9(i)(vii) based on the settled principle of law [ITO Vs. Right Florist -ITAT Kolkatta]
2.2 The Commissioner of Income Tax(Appeals) ought to have appreciated the payment is for hosting in the Web Site which is kept outside India ie., Ireland and the Non Resident having no P.E., such payments are assessable as Business income only at Ireland as per Article 7 of DTAA between India and Ireland.
3. After Introduction of “Equalization Levy” by the Finance Act 2016which makes it clear that there is no taxability of this payment under the then existing law, prior to 2016. For the above grounds and for such other grounds that may be adduced at the time of hearing, the order of the Commissioner of Income Tax (Appeals) may be set aside and the appeal be allowed.”
3. The Ld.AR presented the case on the above lines. She invited our attention to the decision of Google India (P)Ltd. Vs. Joint Director of Income-tax (International Taxation) Range-1,Bengaluru, reported in (2018) 93 taxmann.com 193 (Bangalore– Trib.) / (2018) 194 TTJ 385 (Bangalore–Trib) dated 11.05.2018, wherein after referring the Tribunal decisions in the cases of Right Florist P.Ltd., dated 12.04.2013 (2013) 32 taxmann.com 99(kolatta-Trib) (2013) 25 ITR(T) 639 (Kollatta-Trib) (2013) 143 ITD 445(Kolkatta-Trib) and Pinstorm Technologies P.Ltd, Yahoo India (P) Ltd., etc, 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”. The Ld.AR submitted that this ratio applies to the assessee’s case, as it acted on behalf of its client, has purchased space from the owner of search engine, who is a non-resident and it is not having a permanent establishment in India also. Therefore, the business profits/receipts, received by them were not chargeable to tax in India and hence there is no case for the deduction of TDS. Further, she relied on the decision of ITAT., Chennai in the case of ACIT, Corporate Circle-1(2), Chennai Vs.Carat LaneTrading P.Ltd., reported in (2018) 89 taxmann.com 434(Chennai Trib), the head note of which is extracted as under:-
“Section 9, read with sections 40(a)(i) and 195 of the Income tax Act, 1961 and article 12 of the OCED Model Convention – Deeded to accrue or arise in (India) (Royalties and fee for technical services) Assessment Year 2012-13 – Assessee was engaged in trading of jewellery, precious and semi-precious stones and other ornamental items made of precious metals During the relevant year, assessee made payments to various foreign parties for rendering services such as online advertisement, web page security certifications, maintenance of database of customers etc. assessee did not deduct tax at source while making payments to foreign parties – AO thus disallowed said payments. It was noted that foreign entities did not have PE in India. Further revenue failed to prove that assessee had received any ‘technical services’ within the meaning of section 9(1)(vi) or section 9(1)(vii). whether on facts, payments were not chargeable to tax in India u/s.9(1)(vii) r.w.s. 195 and thus impugned disallowance was to be deleted. Held, Yes (para 5) (in favour of the assessee).
Per contra, the Ld. DR relied on the decisions of the lower authorities.
4. We heard the rival submissions, gone through the relevant material and find merit in the submissions made by the Ld.AR., supra. 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.
5. In the result, the assessee’s appeal is allowed.
Order pronounced in the open court on 18th February, 2019
