DCIT Vs Play Games 24×7 Private Limited (ITAT Mumbai)
Summary: The Mumbai ITAT dismissed the Revenue’s appeal for AY 2016-17 and upheld the CIT(A)’s deletion of disallowances relating to foreign advertisement expenditure and Employee Stock Option Scheme (ESOP) expenses. The assessee, Play Games 24×7 Private Limited, had incurred total advertisement expenditure of Rs.55,68,59,099/-. The Assessing Officer found that tax had not been deducted from payments aggregating to Rs.27,69,15,831/- made to Facebook Ireland Ltd. and other non-resident entities and treated those payments as royalty, resulting in disallowance under section 40(a)(i). The amount comprised Rs.26,09,19,423/- paid to Facebook Ireland and Rs.1,59,96,408/- paid to other non-resident service providers. The AO also disallowed ESOP expenditure of Rs.6,34,559/- as notional expenditure.
On the advertisement expenditure, the CIT(A) followed the Tribunal’s decision in the assessee’s own case for AY 2015-16. That decision recorded that the assessee used Facebook Ireland’s standard advertising platform, had no control over the interface or servers, had no economic or possessory rights over the servers and was not provided any dedicated equipment or installation. The server used for uploading advertisements was not located in India and, on the facts considered in that decision, there was no permanent establishment of Facebook Ireland in India. The earlier Tribunal order consequently held that use of Facebook Ireland’s advertising platform was neither royalty nor fees for technical services.
The CIT(A) applied the same reasoning not only to Facebook Ireland but also to advertisement payments of Rs.1,59,96,408/- made to other non-resident entities and deleted the entire advertisement disallowance of Rs.27,69,15,831/-. Before the Tribunal, the assessee submitted that the matter was squarely covered by the earlier Mumbai ITAT order in its own case. The Departmental Representative did not contest that claim and nothing was brought on record to controvert either its factual or legal basis. The Tribunal therefore found no infirmity in the CIT(A)’s order and dismissed the Revenue’s grounds relating to advertisement expenditure.
On ESOP expenditure of Rs.6,34,559/-, the assessee relied upon the Special Bench ruling in Biocon Ltd. vs. DCIT. The CIT(A) also noted that the Karnataka High Court in Commissioner of Income Tax v. Biocon Ltd., ITA No.653 of 2013, had affirmed the Special Bench ruling that discount on issuance of ESOPs is allowable business expenditure under section 37(1). The CIT(A) accordingly deleted the disallowance. Before the Tribunal, the assessee further relied upon its own case for AY 2013-14 in ITA No.3600/M/2018 dated 31.05.2022. The Revenue did not contest that the matter was covered, and the Tribunal upheld the CIT(A)’s order on this issue as well. The Revenue’s appeal was dismissed in its entirety.
Cases Discussed
- Play Games 24×7 Private Limited – assessee’s own case for AY 2015-16, order dated 23.03.2022 — Followed by the CIT(A) and applied by the Tribunal on payments made to Facebook Ireland and other non-residents for advertisement services; the Revenue did not contest the assessee’s contention that the issue was covered.
- Play Games 24X7 Pvt. Ltd. Vs Principal Commissioner of Income Tax-13, ITA No.3600/M/2018, AY 2013-14, order dated 31.05.2022 (ITAT Mumbai) — Relied upon for the ESOP issue; the Tribunal recorded that the Revenue did not contest the assessee’s claim that the issue was squarely covered by this order.
- Biocon Ltd. vs. DCIT, [2013] 35 taxmann.com 335 (Bangalore-Trib.) (SB) — Special Bench ruling relied upon for the proposition that discount on issue of Employee Stock Options is deductible as employee cost during the vesting period.
- Commissioner of Income Tax v. Biocon Ltd., ITA No.653 of 2013 (Karnataka High Court) — Noted by the CIT(A) as affirming the Special Bench ruling that ESOP discount is allowable business expenditure under section 37(1).
- Yahoo India Pvt. Ltd., 140 TTJ 195, order dated 24.06.2011 (ITAT Mumbai) — Relied upon by the assessee before the AO on advertisement payments; distinguished by the AO.
- Uraban Ladder Home Decor Solutions Pvt. Ltd., ITA Nos.615 to 620/Bang/2020, order dated 17.08.2021 — Relied upon in the assessee’s earlier order concerning online advertisement payments.
- Google India Pvt. Ltd., 127 Taxmann.com 36 (Karnataka High Court) — Relied upon in the assessee’s earlier order concerning online advertisement payments.
- M/s. Inception Business Services, ITA No.2674/Chny/2016, order dated 18.02.2019 — Relied upon in the assessee’s earlier order concerning online advertisement payments.
- Carat Lane Trading (P) Ltd., 89 Taxmann.com 434 — Relied upon in the assessee’s earlier order concerning online advertisement payments.
- ITO vs. Right Florist Pvt. Ltd., 25 ITR (T) 639 (Kolkata Tribunal) — Relied upon in the assessee’s earlier order concerning online advertisement payments.
FULL TEXT OF THE ITAT MUMBAI ORDER
The present appeal emanating from the appellate order dated 18.08.2025 is preferred by the Revenue against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 30.12.2018 for the Assessment Year [A.Y.] 2016-17.
2. The grounds of appeal are as under:
1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.26,09,19,423/-made on account of Advertisement Expenses paid to Facebook Ireland without appreciating the fact that the said expenditure was liable to be disallowed u/s.40(a)(i) of the IT Act since the same falls under the definition of Royalty and subject to TDS u/s. 195 and the assessee has not deducted TDS on the same as per Explanation 2 below clause (vi) of sub section (1) of section 9 of Income Tax Act, 1961.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in fact and in law in not appreciating the fact that the point of access of information by the assessee and its customers/ clients is in India and hence rendering of these services by FBIL through Facebook.com amounted to rendering of services within the meaning of the term Royalty as enumerated in section 9(1) of the IT Act, 1961 and therefore these services are taxable in India irrespective of location of the server.
3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in not appreciating the fact that Facebook.com, the parent company, also had a dependent agent FBIOSL in India to canvass support for advertising on Facebook.com and hence even otherwise, these advertising revenues were taxable in India and hence assessee was liable for deduction of tax at source in India u/s. 195 of the IT Act, 1961.
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in overlooking that services by FBIL to its customers were not only rendered but also originated in India accordingly assessee was liable to deduct tax at source at appropriate rate in India as mandated by section 195 of the IT Act, 1961.
5. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) is justified to hold that the Assessee Company has made use of standard facility for displaying advertisement on the website of Facebook, Ireland without involving any customization OR any managerial role OR having any access OR control over the equipment OR part of the equipment either directly OR indirectly.
6. Whether on the facts and circumstances of the case and in law the Ld CIT(A) is justified to hold that the Assessee Company does not have any economic OR possessory right with regard to the server of Facebook.
7. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in fact and in law in deleting the disallowance of Rs. 1,59,96,408/- made on account of payments made to non-resident service provide namely acknowledge Asia Pacific Pvt. Ltd., Appsflyer Ltd., T. J. Support.com, Traffic Factory, Nanigans Inc. towards advertisement expenses aggregating to INR 1,59,96,408/- being similar in nature to payment to made Facebook would be liable for with-holding under section 195 of Act, and thereby, erred in deleting the aforesaid sum in view of the provision of section 40(a)(i) of the Act.
8. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) is justified in deleting the disallowance of Rs.6,34,559/-made on account of Employees Stock Option compensation (ESOP) without appreciating the fact that the said expenditure does not fall under section 37 0r any other provisions of the IT Act.
3. Facts in brief are that the return of income for was filed declaring total income of Rs.49,48,37,000/-. The case was subsequently selected for complete scrutiny and accordingly notice u/s. 143(2) of the Act was issued. The assessee company is engaged in the business of online games through web and mobile based technologies. During the assessment proceedings, the AO observed that the assessee had claimed expenditure of Rs. 27,69,15,831/-, being Advertisement Expenses paid to certain non-resident entities but did not deduct TDS on the same. The AO treated the said advertisement expenses as Royalty and disallowed the same u/s 40(a)(i) of the Act on account of failure of withholding the taxes. Further, he also noticed the assessee company had claimed ESOP expenses of Rs. 6,34,559/-which was disallowed by holding that these expenses were notional in nature as there was no actual expenditure that the company was incurring.
4. Ground nos.1 to 7 pertain to the disallowance of Rs. 27,69,15,831/-, being Advertisement Expenses. It was noticed by the AO from the details submitted by the assessee that out of the total advertisement expenses of Rs. 55,68,59,099/- during the year, assessee had not deducted taxes (TDS) on payments to certain parties for the reason that they were non-residents and hence,were not liable for TDS.Such parties were Facebook Ireland Ltd. („Facebook‟) [Ireland], Acknowledge Asia Pacific Pvt. Ltd. [Singapore], Appsflyer Ltd. [Israil],T.J. Support.com [Czech Republic], Traffic Factory [Czech Republic] and Nanigans Inc. [USA] , totalling Rs 27,69,15,831/-.
4.1 In so far as the payments made to Facebook Ireland Ltd. of Rs. 26,09,19,423/- towards Advertisement Expenses is concerned,it was stated that as per the provisions of section 195 of the Act, any amount paid to a Non-resident would attract this provision making the assessee liable to make TDS. The only exception provided is u/s 195(2) or u/s 197 was that such deductee should obtain a nil deduction certificate from the AO and furnish the same to the deductor before receiving any credit of such amount. In absence of any such authorization from the Assessing Officer having jurisdiction over the deductees, the assessee was clearly in default.In the instant case, the Facebook Ad Platform was driven by a complex algorithm that captures data from various users and allows the advertiser to effectively reach its target audience. Facebook Ad Platform is an auction- based advertising service that lets advertisers deliver relevant ads targeted to customers using the rich database possessed by Facebook. Signing up on Facebook Ad Platform in effect allows the advertiser to access the auction pricing mechanism of the Platform. He show caused the assessee in this regard in response to which detailed submission was made by the assessee which also relied on a plethora of decisions of various courts of law contesting the observations of the AO. However, the AO went on treat the expenditure in the nature of Royalty in view of the DTAA between India and Ireland. The assessee relied on the Hon‟ble Mumbai Tribunal‟s decision dated 24/6/2011 in the case of Yahoo India Pvt. Ltd. for AY 2004-05 (140 TTJ 195)which was however, distinguished by the AO observing that the payment was covered by clause(iva) of Explanation 2 to Section 9(1)(vi) as it was in the nature of payment made for the use or right to use any industrial, commercial or scientific equipment. Hence, the assessee was required to deduct tax at source before remitting the said amount to YHHL. Since no such tax was deducted by the assessee-company from the payment remitted to YHHL, the deduction claimed by the assessee on account of the said payment was disallowed by the AO by invoking the provisions of section 40(a)(i) of the Act. It was further stated that the Department appeal against order of ITAT in the High Court was dismissed only because of low tax effect and hence no decision has been taken on the substantial question of law raised before the Hon’ble High Court.
4.2 As regard the payments made of Rs. 1,59,96,408/- to other non-residents for Advertisement expenses, the AO observed that the facts and circumstances were same as that of Facebook Ireland Ltd. and the services provided by them were also of similar nature as that of Facebook Ireland Ltd. Hence, the disallowances u/s 40(a)(i) as discussed in the case of Facebook Ireland Ltd. was also applicable to these non-residents entities. Therefore, the total amount of Rs. 27,69,15,831/- (26,09,19,423 + 1,59,96,408), being payments made by the assessee to Non-Residents towards Advertisement Expenses was taxable both under the Act and the DTAA and since tax was not deducted at source the same is liable to be disallowed u/s 40(a)(i) of the Act.
5. In the subsequent appeal before the appellate authority by the assessee, the ld.CIT(A) after taking into account all the above facts and detailed submissions of the assessee concluded that the action of the AO was not in consonance to the decisions of court/ITAT which were rendered in favour of the assessee. He observed that with regard to the payment made to M/s Facebook Ireland Limited, the Hon’ble ITAT in appellant’s own case for AY 2015-16 vide order dated 23.03.2022 had held that as under:
“7. We have heard both the parties and perused all the relevant material available on record. The assessee company is engaged in the business of providing a platform for online gaming, more particularly that of Rummy. The assessee company incurred advertisement expenses amounting to Rs.10,46,35,355/- for banner advertisement on the website of Facebook. It is pertinent to note that for the purpose of uploading the banner advertisement on Facebook the advertisement related information is put up at the interface provided by the Facebook, Ireland in the required format. Facebook, Ireland, after due verification of the advertisements, upload the advertisement on its server. While uploading the advertisement on Facebook it is an admitted position that the assessee company does not have any control over the functioning of the interface provided by the Facebook, Ireland. The entire operation and maintenance of the server while providing the advertisement platform is under the control of Facebook, Ireland. It is an admitted fact that the assessee company makes use of standard facility which is provided for displaying advertisement on the website of Facebook, Ireland which was also provided to its other global customers in the like manner.
Equipment/installations are all owned by Facebook, Ireland and the assessee company does not have any role to play in either maintaining or involving into any managerial activities with the Facebook, Ireland. There is no dedicated equipment/installation/any portion of equipment/installation is earmarked/provided by the Facebook, Ireland by the assessee company. As per the payment agreement between the Assessee company and Facebook, Ireland, the assessee company does not have any economic or possessory right with regard to the server of the Facebook and the 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 under this Act who is a non-resident considers that the whole sum would not be income chargeable in the case of recipient the said person “may make an application” in such form and manner to the Assessing Officer to determine in such a manner as may be a prescribed. The said application though in the present case hasnot been made by the assessee cannot be treated as a mandate because the Section clearly states that such person “may make an application” as may be prescribed. In the present case, the assessee was very well aware that Facebook, Ireland is a non-resident and the advertisement payment made to Facebook, Ireland will not come under the purview of TDS and, therefore, has chosen not to deduct tax at source. The assessee has relied upon the decision of Uraban Ladder Home Decor Solutions Pvt. Ltd. – ITA No.615 to 620/Bang/2020 – order dated 17.08.2021, Google India Pvt. Ltd. – 127 Taxmann.com 36 – Karnataka High Court, M/s. Inception Business Services – ITA No.2674/Chny/2016 – order dated 18.02.2019, Carat LaneTrading (P) Ltd., 89 Taxmann.com 434 as well as decision in the case of ITO vs. Right Florist Pvt. Ltd., 25 ITR (T) 639 (Kolkata Tribunal). All these decisions are though factually identical yet the observations made in these decisions are applicable in the present case. These decisions also highlight that advertisement expenses in respect of non-resident. It is pertinent to note that the assessee has given specific task of advertisement banner to the Facebook Ireland. The element of fees for technical services is determined if there is any technical aspect involved by providing services by the company from whom the services are rendered. As per letter dated 19.01.2015, Facebook Ireland stated that no servers that host the Facebook.com product are located in India. In the present case, the assessee has demonstrated before us that the assessee is taking the privilege of platform of Facebook, Ireland which is not either in the nature of royalty or technical services. The payment terms were specifically defined in the payment agreement with Facebook Ireland which clearly indicates that the Facebook Ireland will provide platform banner for advertisement to the assessee-company. Thus there is no element of fees for technical services or royalty is involved in this case. Thus, the Assessing Officer aswell as the CIT(A) has totally ignored the actual fact 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.”
5.1 In view of the above order, the ld.CIT(A) noted that , the assessee company made payment to FB Ireland for banner advertising on Facebook. Thereafter, Facebook after due verification of the advertisement uploads the advertisement on its server. In these circumstances, such payment did not fall under the definition of Royalty under the Act. Similarly, the assessee had also made payment of Rs. 1,59,96,408/- to other non-resident entities on account of advertisement expenses. As discussed above, such advertisement expenditure was also not covered by the definition of Royalty under the Act. Hence, respectfully following the decision of Hon‟ble ITAT-Mumbai, it was held by the ld.CIT(A) that the AO had wrongly disallowed the said advertisement expenditure by treating the same as royalty and the same is liable to be allowed.
6. Before us, the ld.AR has reiterated the claim of the assessee and vehemently argued that the mater in hand was squarely covered by the above order of ITAT,Mumbai in its own case. The ld.DR did not contest this claim of the ld.AR. Nothing was brought on record to controvert the claim on factual aspects and the legality of the claim of the assessee. Accordingly, we do not find any infirmity in the appellate order which is therefore, confirmed and the grounds of appeal in this regard raised by the Revenue are dismissed.
7. Ground no.8 pertains to the claim of deduction of ESOP expenses. The AO observed that the company has issued shares to its employees under Employee Stock Option Scheme (ESOP) and the company had treated the difference between fair market value of shares and issue price amounting to Rs. 6,34,559/- as Employee Welfare Cost and debited to P & L account. Before him, in its reply the assessee relied upon the decision of the Hon‟ble Special Bench constituted by Bangalore (ITAT) in the case of M/s Biocon Ltd vs DCIT ITA [2013] 35 taxmann.com 335 (Bangalore-Trib.) (SB). However, the AO did not accept the contentions on the ground that the department had not accepted the above decision of the ITAT and has filed the appeal before the Hon‟ble High Court. Accordingly, the claim of expenses of Rs 6,34,559/- under ESOP was disallowed.
8. In this regard, the ld.CIT(A) observed that the said issue had been decided by the Hon‟ble ITAT, Mumbai in favour of assessee in its own case wherein it was held that,
“10. We have perused the order passed by the Special Bench of the Tribunal in case of Biocon Ltd. (supra) which is on identical facts. In the instant case the assessee company has measured the cost of shares based on intrinsic value method as per guidance given by Institute of Chartered Accountants of India. The assessee company got the valuation from a chartered accountant/merchant banker and value of per share based on the report of such valuer is considered as fair market value (FMV) for calculating the discount of the issue on the Employee Stock Option. Thereafter, difference is recognized as “employee staff welfare expenses” over the vested period starting from date of grant.
11. Special Bench of the Tribunal discussed this issue in detail and decided in favour of the assessee by returning following findings:
“11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the investing/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head ‘Profits and gains of business or profession”
8.1 Based on the above order, the ld.CIT(A) observed that applying the ratio of the order passed by the co-ordinate Bench of the Tribunal that once the discounted shares to the employees are held as consideration for employment the natural corollary to follow is that discount in granting share to the employees is an expenditure; such expenditure is on account of an unascertained liability and as such discount on shares under ESOP is an allowable deduction. He further stated that Honb‟le High Court of Karnatka in the case of Commissioner of Income Tax v. Biocon Ltd., ITA No. 653 of 2013 had affirmed the ruling of the Special Bench of the Bangalore Income Tax Appellate Tribunal(“ITAT SB”) in the case of Biocon Ltd. as relied by the ITAT in the appellant‟s own case), wherein it was held that discount on issuance of ESOPs is an allowable business expenditure under Section 37(1) of the Act for the employer. In view of the above discussion, the disallowance of Rs. 6,34,559/- was deleted. By the ld.CIT(A).
9. Before us, the ld.AR has reiterated the claim of the assessee and submitted that the matter in hand was squarely covered by the above order of ITAT, Mumbai in its own case for AY 2013-14 in ITA No 3600/M/2018 dated 31-05-2022.The ld.DR did not contest this claim of the ld.AR. Nothing was brought on record to controvert the claim on factual aspects and the legality of the claim of the assessee. Accordingly,we do not find any infirmity in the appellate order which is therefore, confirmed and the grounds of appeal in this regard raised by the Revenue are dismissed.
10. In the result, appeal of the Revenue stands dismissed.
Order pronounced in the open court on 10/04/2026.
