Urban Ladder Home Décor Solutions Pvt. Ltd. Vs ACIT (ITAT Bangalore)
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 saving to both the advertiser and the advertising platform. Thus the facilities have been created by the non-resident companies for mutual benefit. However, a person shall get the right to use those facilities only when he enters into an agreement with them for hosting his advertisement or for sending bulk mails, meaning thereby, the use of facilities is intertwined with the activity of placing advertisement 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.
Mere usage of a facility does not give rise to provision of any technical service. Under same analogy, mere usage of facility provided by the above said non-residents does not render the payments as “royalty payments”, since the core point of parting of any “copy right” attached to the said facilities does not arise at all.
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 India.
In the instant case, the recipients, i.e, M/s Facebook and Rocket Science group only allow the assessee to use their facilities for the purpose 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 nonresident companies are only enabling facilities, which help a person to place his advertisement contents on the platform of Facebook or to use MailChimp facility effectively. In case of AWS, the payment is in the nature of rent payments for use of infrastructure facilities.
Accordingly, we are of the view that the these non-resident recipients stand on a better footing than those assessees before the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd (supra). Accordingly, following the ratio laid down by Hon’ble Supreme Court, we hold that the payments made to the above said three non-resident companies do not fall within the meaning of “royalty” as defined in DTAA.
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.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed these appeals challenging the common order dated 17.3.2020 passed by Ld. CIT(A)-12, Bengaluru confirming the demand raised u/s 201(1) of the Income-tax Act,1961 [‘the Act’ for short] and interest charged u/s 201(1A) of the Act5 for financial years 2014-15, 2015-16 & 2016-17 relevant for assessment years 2015-16, 2016-17 & 2017-18. In all these appeals, the assessee is challenging the validity of demand raised u/s 201(1) and interest charged u/s 201(1A) of the Act.
2. The facts relating to the issue are stated in brief. The assessee company is engaged in the business of dealing in home décor products. It sells its products mainly through online marketing. Hence, the assessee has placed its advertisement in the platform of Facebook, Ireland. It has also used bulk mail facility offered by M/s Rocket Science group, USA. The assessee has also used Amazon Web Services (AWS) offered by M/s Amazon Inc., USA, which is in the nature of providing information technology infrastructure on rental basis. All the three payees are nonresidents.
3. The A.O. noticed that the assessee has made payments to these non-residents. Hence, he conducted a survey operation u/s 133A of the Act on 27.10.2017 to examine compliance with TDS provisions. During the course of survey operation, the A.O. noticed that the assessee company has made payments to non-residents towards advertisement and marketing expenses without deducting tax at source. The A.O. took the view that the assessee is liable to deduct tax at source from the payments made to non-residents.
4. The AO examined the taxability of above cited payments as per the provisions of sec. 9(1)(vi) of the Act, more particularly under clause (iii) and (iva) of Explanation 2 to Sec. 9(1)(vi) of the Act. The AO has also observed that these payments have been examined as per DTAA provisions. However, the AO has made reference to DTAA provisions while examining the payments made to AWS. Since there was failure to deduct tax at source by the assessee, the AO treated the assessee as assessee in default in all the three years under consideration and raised demand u/s 201(1) of the Act and also charged interest u/s 201(1A) of the Act.
5. The details of payments made by the assessee to three different non-residents and the demand raised by the A.O. during the years under consideration are tabulated below:-
