Target marketing on overseas social media or automated advertising platforms not taxable as ‘Royalty’
In a major relief to taxpayers availing online marketing services from social media platforms like Facebook, the Bangalore bench of Income Tax Appellate Tribunal (ITAT) recently ruled in the case of Urban Ladder Home Décor Solutions Pvt. Ltd. Vs ACIT that advertisement charges paid to non-resident would not be taxable as Royalty under the Income- tax Act, 1961 (IT Act).
The question in the said ruling revolved around the following payments made by the Appellant:
1. Hosting advertisements on Facebook portal or ‘target advertising’ by Facebook Ireland Limited (‘Facebook’)
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 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. And as soon as the target user logs in, the ads/banners/web links, as determined will be displayed to the user near instantaneously.
2. Bulk mail advertisements facility by Rocket Science Group, LLC, US (‘MailChimp’)
MailChimp is providing a facility to the Appellant’s company to create, send and manage certain marketing campaigns, including, without limitation, emails and advertisements. It also provides access and use of MailChimp domain.
3. Cloud Computing Services by Amazon Web Services Inc., US (‘AWS’)
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 software, other IT resources etc.) and they can use the required IT resources on payment of charges.
As explained above, marketing as well as cloud computing services provided by Facebook, AWS etc., involve usage of highly sophisticated programming technologies and automation tools. Thus, in view of the revenue authorities, services provided by Facebook, AWS & MailChimp were in the nature of usage of patented technology, model or process and/or equipment.
Revenue Authorities claimed that the aforementioned payments made by the appellant were for the use of, or the right to use of patented software processes. Further, in accordance with Explanation 2(iii) & 2(iva) to Section 9(1)(vi) of the IT Act, payments for use of any patent or commercial or scientific equipment amounts to ‘Income from Royalty’ which is taxable in the hands of non-resident recipients. Revenue authorities also evaluated and claimed taxability in the nature of “Royalty” as per Article 12(3) (a) of India – US Double Taxation Avoidance Agreement (DTAA) stating that payments are made by the appellant for the use of, or the right to use of patents embedded in the technologies.
Usage of ‘patent’ is different than usage of ‘patented technologies’ – No parting of rights involved.
On detailed perusal of the agreements entered between the non-resident entities and Appellant, ITAT observed that M/s Facebook and Rocket Science group only allow the assessee to use their facilities for the purpose of creating advertisement content. Further, the payment made to AWS is only for using the information technology facilities provided by it which depends upon the extent of usage of those facilities. In fact, the non-resident companies do not give any specific license for use or right to of any of the facilities (which includes software). The right to use these 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 any copyright or patent over those facilities does not arise at all.
Furthermore, ITAT referred the Apex Court decision which discussed2 the taxability of software license fees, wherein it was held that such payments received by non-residents cannot be taxed as royalty, since software license was granted without parting of copyright.
Key rationale promulgated by the Hon’ble Supreme Court in the case of Engineering Analysis (supra) was that amounts paid by Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software, is not for the use of copyright in the computer software. Instead the consideration is paid for usage of ‘copyrighted software’ itself. Thus, there lies a substantial difference between payments made for the use of ‘copyrighted software’ and use of ‘copyright’ itself.
Drawing analogies from other relevant legal precedents as well, ITAT stated that mere usage/leasing of patented facilities, technologies and automation tools provided by Facebook, AWS etc. does not render the payments as ‘royalty’ since such consideration is not paid for the usage of the actual ‘patent’ imbibed in the technologies. Instead, non-resident companies here only permit usage of ‘patented technologies’. Thus, parting of any rights attached to the facilities or automation tools does not arise at all. Hence, no income from ‘royalty’ arises in the hands of the non-resident companies. Resultantly, no TDS liability under Section 195 arises in the hands of Indian service recipients as well.
In today’s digitized economy, it is imperative for business owners to indulge in technologically advanced and automated marketing technologies. Further, it is a common practice to endorse business using ‘target marketing’ services on platforms such as Facebook, Instagram, Youtube, Google etc.
Thus, this would reduce the tax liability in the hands of multinational corporations providing online marketing services. Consequently, the ruling would also reduce litigation on account of TDS liability for taxpayers availing advertisement services from multinational corporates without any business presence in India.
Since, the marketing and cloud computing services provided by non-resident companies do not amount to ‘royalty’ under the IT Act, it should be noted that such non-resident service providers should evaluate the applicability of ‘Equalisation Levy’ made effective from 1st April 2020. For the same, non-resident service providers should thoroughly appraise whether the facilities rendered in India fall within the scope of ‘e-commerce supply or services’ as defined under the Finance Act, 2016.
Additionally, it also necessary for the concerned Indian service recipients to undertake review of their existing agreements with such non-resident service providers to appropriately understand any possible TDS implications on such transactions.