TMI Blog2021 (8) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... ilchimp. 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. In the two case YAHOO INDIA (P.) LTD.[ 2011 (6) TMI 162 - ITAT, MUMBAI] and PINSTORM TECHNOLOGIES (P.) LTD.[ 2012 (12) TMI 601 - ITAT MUMBAI] 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 India. In the instant case, the recipients, i.e, M/s Facebook an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . - Decided in favour of assessee. - IT(IT)A No.615 to 620/Bang/2020 - - - Dated:- 17-8-2021 - Shri George George K., Judicial Member And Shri B.R. Baskaran, Accountant Member For the Appellant : Shri Padam.C. Kincha, A.R. For the Respondent : Shri Muzaffar Hussain, D.R. ORDER PERB.R. BASKARAN, ACCOUNTANT MEMBER: 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 d cor 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Demand u/s 201(1) 2,65,81,013 2,58,32,586 52,76,689 Interest u/s 20(1A) 93,03,356 59,41,494 5,80,436 6. The nature of payments made to the above cited three companies and the decision taken by the AO are summarized below:- (A) Payments made to Facebook, Ireland:- 6.1 The assessee company uses Facebook platform to display its products on the wall of Facebook users. Hence the assessee makes payments to Facebook for the advertisements hosted on the web for seeking attention of facebook users. 6.2 The case of the AO is described in paragraph 3.2.7 to 3.2.9 of the order passed for AY 2015-16. Identical reasoning is given for other two years also. The discussion made by the AO in AY 2015- 16 are extracted below:- 3.2.7 Facebook provides many options to the businesses/advertisers to reach its database of users. To touch upon a few of the alternatives that Facebook provides the businesses could choose their target market based on the age group, location, gender etc. The advertisement made in the Facebook ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C, USA ( Mail Chimp ):- 6.3 M/s Rocket Science group LLC has got Mail Chimp platform, which allows its users to send bulk email advertisements/marketing content to their customers using its marketing automation tools. 6.4 The case of the AO is stated in paragraphs 3.2.14 to 3.2.15 of the assessment order for AY 2015-16. Identical reasoning has been given for other years also. The relevant portion of AO s order is extracted below:- 3.2.15 For the detailed discussions made from Paragraphs 2.1 to 3.2.14, it is held that the services availed by the Assessee company from the nonresidents is in the nature of usage of technology, model or process and/or equipment and the same is covered by Explanation 2(iii) to Section 9(1)(vi) : the use of any patent, invention, model, design, secret formula or process or trade mark or similar property and also the provisions of Explanation 2(iva) to section 9(1)(vi) : the use or right to use any industrial, commercial or scientific equipment and the payments so made amount to royalty payments. Therefore, the provisions TDS are applicable on royalty payments to non-residents, Rocket Science Group, LLC, US. As the Assessee Company has failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facility is adequately staffed for the provision of all services and that the provider employees, agents and subcontractors have sufficient skill, expertise and ability to perform their duties in a competent and professional manner. This shows that the assessee is in fact not only aware of the technical expertise required in obtaining Data Hosting Services, but also appreciative of the quality of manpower to be employed for such technical services. 4.1.8 The AO extracts Explanation 2 to sec. 9(1)(vi) of Income tax Act 4.1.9 The AO extracts the definition of Royalty as per paragraph 3(a) of Article 12 of India US DTAA. 4.1.10 The AO extracts the definition of fess for included services as per Paragraph 4 of Article 12 of India US DTAA. Then the AO concludes as under:- 4.1.11 In view of the above discussion, even if the cloud computing services are taking the character of Fees for Technical Services (FTS), it is chargeable to tax in India as per the IT Act and also as per the India US DTAA. 5. As elaborated above, the payments of ₹ 18,71,643/- made by the Assessee Company during the FY 2014-15 to ( AWS ) for cloud computing se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under:- 16. Further at the cost of repetition the patent number US20040059708A1 is examined. The system includes an ad campaign entry and management component 210, a tools component 220, a billing component 230, one or more database 240, an ad consumer interface component 250, an ad selection component 260, an ad ordering component 270, an ad serving component 280, and a statistics engine component 290. If the present invention is to be used with such an advertising system, it will primarily concern ad selection component 260. To help understand the invention, other components of the advertising system will be explained below. Furthermore, although FIG 2 shows a particular arrangement of components constituting advertisement system 120, those skilled in the art will recognize that not all components need be arranged as shown, not all components are required, and that other components may be added to, or replace, those shown. 17. The parent document, illustrate an embodiment of the invention and together with the description, explain the invention. In the drawings, in FIG.2 is a diagram functionally illustrating an advertising system consistent with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Facebook Ireland. (C) With regard to the payments made to Amazon Web Services , the Ld CIT(A) has observed as under:- 6. Amazon Web Services (AWS) offers cloud space which is a kind of web hosting services. AWS provides the appellant with certain space of their cloud to store their data/applications and they and their vendors can use it as and when required. AWS has provided the appellant with user it and password for doing the same. In principle what has been offered by Amazon is an infrastructural space with permission to use by the assessee with a login id and password. 7. This access is provided through various software and processes that are patented. The cloud space and web hosting services are practice of using a network of remote servers hosted on the internet to store, manage and process data, rather than a local server or a personal computer. The appellant used this cloud space and web hosting services to store its data and or applications and software. Using this, the appellant can make its software/products available to any of its users anywhere in the world. The mechanism is adopted by the assessee to avoid incurring huge capital expenditure in purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard, the Ld CIT(A) has observed as under:- 8. I find that the decision of Hon'ble Karnataka High Court in the case of Samsung (supra) is applicable in the facts of the case. Accordingly, the claim that use of software is not royalty within the I T Act is rejected. Finally, the Ld CIT(A) concluded as under:- 31. In view of the above, the argument of the appellant that consideration paid for purchase of software, cloud computing, cloud space hiring, (involving transfer of the right to use the software) is not royalty is not acceptable. The grounds in this respect are therefore dismissed. Aggrieved by the order passed by Ld CIT(A) for the three years under consideration, the assessee has filed six appeals, viz., three appeals for the demand raised u/s 201(1) of the Act. and three appeals for the interest charged u/s 201(1A) of the Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CONCLUSION 168 . Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/endusers, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the 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 non-resident 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd use Facebook at Work in accordance with this Agreement; and (b) a non-exclusive, personal, non-transferrable, limited, revocable license to use any tool we may make available to you to create and manage Your Contents. 4.2 This License is not sub-licensable and is subject always to this Agreement. 5. Our Content 5.1 We own or license all Intellectual Property rights in Facebook at Work and Our Content. Facebook at Work and Our Content is protected by copyright laws and other Intellectual Property Laws. All such rights are reserved to us. 5.2 You may, and you must ensure that your Users will; (a) only use Facebook at Work for its intended 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp Campaigns, so you may not host images on our servers for anything else (like a website). We may throttle your sending or connection through our API at our discretion. .. 30. Assignments You may not assign any of your rights under this agreement to anyone else. We may assign our rights to any other individual or entity at our discretion. (C) AMAZON WEB SERVICES:- 1. Use of the Service Offerings 1.1 Generally, you may access and use the Service Offerings in accordance with this Agreement. Service Level Agreements and Service Terms apply to certain Service Offerings. You will comply with the terms of this Agreement and all laws, rules and regulations applicable to your use of the Service Offerings. 1.2 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. 1.3 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 accompanyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of EPRSS Prepaid Recharge Services India P Ltd (ITA No.828/Pun/2016 dated 24.10.2018) (2018) (100 taxmann.com 52) (Pune), which was relied upon by Ld A.R. The relevant discussions made and decision taken by Pune Tribunal are extracted below:- 11. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in respect of charges paid by assessee to AWS. The assessee was engaged in sale of recharge pens and did not have the facility available with it of high technology equipments i.e. servers. So, in order to carry on its activity of distributorship of recharge pens, it used servers of Amazon, for which it paid web hosting charges. Before using the services available of Amazon online, it entered into an agreement, under which fees structure was provided. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include the Services. AWS Marks means any trademarks, service marks, service or trade names, logos, and other designations or AWS and its affiliates that we may make available to you in connection with this Agreement.' 13. The assessee has used services and has made monthly payments to Amazon. The assessee has attached sample invoice of Amazon at pages 23 to 41 of Paper Book and ledger extract of Amazon in its books at pages 1 and 2 of Paper Book. The assessee had filed submissions before the Assessing Officer giving detailed note on web hosting charges, which was as under:- Web Hosting Charges: (a) Primarily EPRSS 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of such payments made to Amazon and for such non-deduction or withholding of tax, the assessee can be held to be at default and the payment made by assessee being not allowed as deduction in its hands, in view of provisions of section 40(a)(i) of the Act. We reverse the orders of authorities below in this regard. We are not going into the issue raised by assessee that Amazon is not having PE in India and hence, no liability to deduct tax in India. 19. Now, another issue which needs to be seen is whether charges paid to Amazon for various services provided by it are in the nature of royalty, if any, or not. The assessee has placed on record the copy of agreement with Amazon, which we have referred in the paras hereinabove. He has also placed on record the copies of bills raised by Amazon online. The perusal of details filed by assessee of monthly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service. 8. When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 20. In the case of Engineering Analysis Centre of Excellence (P) Ltd (supra), the issue related to issuing of license to use software , i.e., the software purchased by a person shall be used by the buyer for his own business purposes. Since the license was granted without parting the copy rights attached to the software, the Hon ble Supreme Court held that the payments received by the non-resident software companies cannot be taxed as royalty under the provisions of DTAA and hence there is no requirement to deduct tax at source from the payment made to them by a resident assessee. 21. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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