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TMI Blog2021 (8) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices as mentioned in the submission. 3.2.8 It is evident that Facebook advertisements are nothing but the usage of Facebook technology and process to advance the business in the e-commerce era. 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 A1 (in the schematic) 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 A1. And as soon as the target user logs in, the ads/banners/web links, as determined by A1 will be displayed to the user near instantaneously. It can be termed as the most evolved form of online, target advertising. 3.2.9 In short, the technology and/or design and/or process and/or equipment of Facebook that enable the advertisers to reach their target audien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to deduct tax at source. Hence, the default for non deduction on the payments made and consequential interest leviable u/s 201(1A) for the above said assessment year, are computed at the last page of this order. (C) Payments made to Amazon Web Services Inc., US 6.5 The assessee company has availed cloud computing services from Amazon Web Services Inc (AWS) for its online business needs. 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 softwares, other IT resources etc.) and they can use the required IT resources on payment of charges. 6.6 The case of the AO is stated in paragraphs 4.1.1 to 4.1.11 & 5 of the assessment order for AY 2015-16. Identical reasoning has been given for other years also. For this payment, the AO has also referred to the definition given in India - US DTAA for "Royalty" and "fees for included services". The relevant portion of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct tax at source. Hence, the default for non deduction of tax on the payments made and consequential interest leviable u/s 201(1A) for the above said assessment year are computed in this last page. Thus, the AO held that the payments made to all the three companies is in the nature of "Royalty" liable for deduction of tax at source u/s 195 of the Act. 7. The Ld CIT(A) has examined the nature of payments made to these three non-residents as under:- (A) In respect of payments made to Facebook, Ireland, the Ld CIT(A) has first analyzed the nature of payments. He has examined the agreement entered between the assessee and Facebook and observed as under:- "13. This involves payments by the appellant for the use of, or the right to use of patented software processes. Under section 195 of the IT Act the income of non-resident which is taxable in India needs to be subjected to tax deduction. Therefore, the liability on the part of the assessee to deduct tax on payments made to Facebook Ireland is clearly defined in the ambit of Income tax Law. The nature of payment made is considered in the later part of the order along with other payments for software and data access. 14. Also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut another patent documents as under:- The Ld CIT(A) has then observed as under:- 20. Thus, from the document of the patent numbers cited supra, it is clear that the appellant's roles are intertwined with that of user and advertisers. 21. These instances are only illustrative and there are a number of such documents which evidence that the technical support cannot be carried out without access to these patented programs. 22. Thus, on examination of patented documents and the ITAT order, the claim that the appellant is not having privileges and access to these patented programs is rejected. Thus, the Ld CIT(A) has taken the view that the assessee was given privilege of accessing/using various components of Advertisement program created by Facebook in its website. (B) With regard to payments made to "MailChimp", the Ld CIT(A) has observed as under:- "28. The appellant's company and the MailChimp has entered into an agreement, according to the same it is hereby averred that the MailChimp is providing the space to the appellant's company to create, send and manage certain marketing campaigns, including, without limitation, emails and advertisements and also the MailChimp is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax law. The nature of payment made is considered in the later part of the order along with other payments for software and data access." 8. Then the Ld CIT(A) has referred to various case laws, but mainly took support of the decision rendered by Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co Ltd (2011)(16 taxmann.com 141)(Kar), wherein it was held that the payment made by Indian residents to the non-resident supplier for software and access to database is "Royalty". Accordingly, the Ld CIT(A) held as under at page 28 of its order:- "4. The decision of the Hon. Karnataka High Court in the case of Samsung Electronics co Ltd (cited supra) clearly holds the payment made by the Indian residents to the non-resident supplier for software and access to database as Royalty. 5. The appellant has argued that the transaction of purchase of software and allowing the use of software does not fall within the definition of "Royalty" under respective treaties. I have examined the same. Various treaties are examined alongwith the payments made (supra). I find that the term "royalties" is defined as payments of any kind received as a consideration for the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Engineering Analysis Centre of Excellence Private Limited vs. CIT (Civil Appeal Nos. 8733-8734 of 2018 dated March 02, 2021) (125 taxmann.com 42). The Hon'ble Supreme Court examined the question whether the payments made to non-resident software suppliers is "royalty" and TDS u/s 195 of the Act was required to be deducted on those payments. The Hon'ble Supreme Court examined this question considering four types of situation, which has been narrated as under:- "4. The appeals before us may be grouped into four categories: (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, nonresident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. (iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 12(3) of India - USA DTAA:- 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 15. We shall now advert to the Agreements entered by the assessee with the three non-resident companies mentioned above, in order to understand the nature of services rendered by these companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 5.4 Our Content made available on Facebook at Work is provided for information purposes only, is subject to change and will be updated from time to time without notice to you. ....... 17 Definitions. In this Agreement, unless otherwise stated ...... "Facebook at Work" means the features and services we make available, including but not limited to through the Facebook at Works websites, apps, and online services that we operate. ............ "Our Content" means Facebook at Work and its content including without limitation, software, its "look and feel", images, text, graphics, illustrations, trademarks, photographs, audio, videos and sound but excluding Your content. (B) Rocket Science Group (MailChimp) MailChimp ("MailChimp,""we,"or"us") is an online marketing platform (the "Service") offered through the URL www.mailchimp.com (we'll refer to it as the "Website") that allows you to, among other things, create, send, and manage certain marketing campaigns, including, without limitation, emails, advertisements, and mailings (each a "Campaign", and collectively, "Campaigns"). .................... 13. Proprietary Rights Owned by Us You will respect our prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs, including any related intellectual property rights. Some AWS Content and Third-Party Content may be provided to you under a separate license, such as Apache License, Version 2.0, or other open source license. In the event of a conflict between this Agreement and any separate license, the separate license will prevail with respect to the AWS content or Third-Party Content that is the subject of such separate license. ................. 14. Definitions. "API" means an application programme interface. .............. "AWS Content" means Content we or any of our affiliates make available in connection with the Services or on the AWS Site to allow access to and use of the Services, including APIs; WSDLs; Documentation; sample code; software libraries; command line tools; proofs of concept; templates; and other related technology (including any of the foregoing that are provided by our personnel). AWS Content does not include the Services or Third Party content. .................... "AWS Marks" means any trademark, service marks, service or trade names, logos and other designations of AWS and its affiliates that we may make available to you in connection with the Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of PE of Google Ireland Ltd in India. Finally, the coordinate bench held as under in the case of Right Florists:- "28. In view of the above discussions, we are of the considered view, on the limited facts of the case as produced before us, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Income Tax Act, as also under the provisions of India US and India Ireland tax treaty. This observation is subject to the rider that so far as the PE issue is concerned, we have examined the existence of PE only on the basis of website simplicitor, and on no other additional basis, as no case was made out for the same. In any case, revenue has not brought anything on record, either at assessment stage or even before us, to suggest that Google or Yahoo had a PE in India, and as held by a Special Bench of this Tribunal in the case of Motorola Inc v. Dy. CIT[2005] 95 ITD 269/147 Taxman 39 (Mag.) (Delhi) "DTAA is only an alternate tax regime and not an exemption regime" and, therefore, "the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment, content, operation, maintenance and use of Your Content. Now, coming to clause 5.5, which provides the Service Fees to be paid, agreement provided that Amazon would calculate and bill fees and charges monthly. It is further agreed that you (assessee) have to pay applicable fees and charges for use of Service Offerings as described on AWS site using one of the payment modes they support. We may refer to clause 8.4 which lays down the Service Offerings License, under which it is provided that Amazon or its affiliates or licensors own and reserve all right, title and interest in and to the Service Offerings. However, limited, revocable, non-exclusive, non-sublicensable, non-transferrable license is granted to you (assessee) to do the following during the term:- (i) access and use the Service solely in accordance with this agreement; and (ii) copy and use the AWS Content solely in connection with your permitted use of the Services. 12. It is further provided that no rights under this agreement are obtained by you (assessee) from Amazon or its licensor to the Service Offerings, including any related intellectual property rights. The 'terms' between the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effected. No such amendment has been made to the Treaty Laws and in DTAA, position similar to Explanation 5 is not envisaged at all. This is the plea raised by the learned Authorized Representative for the assessee. He further pleaded that in order to construe meaning of royalty as per DTAA, since the provisions of DTAA takes precedent over the provisions of Income Tax Act, where the assessee does not possess and does not have any control over the server or servers space, being deployed by Amazon, while providing e-services as per agreement, then there is no scope to construe that e-service charges paid to Amazon could be described as royalty. There is merit in the plea of assessee. If we construe the meaning of royalty as per DTAA, then we have to consider the possibility of position and control of server/server space, which admittedly, is not possessed by the assessee. Hence, as per Treaty Laws, the assessee cannot be held to have paid royalty to Amazon. Consequently, the payment made by assessee for web hosting services is not taxable in accordance with DTAA and the same cannot be held to be taxable, only because there was retrospective amendment to section 9(1)(vi) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble High Court of Madras in Skycell Communications Ltd. (supra) have held that web hosting charges are not in the nature of royalty. The said principle has further been applied in various decisions of the Tribunal as relied upon by the learned Authorized Representative for the assessee. (sic.)** 21. The aspect which needs to be seen is whether the assessee is paying consideration for getting any right in respect of any property. The assessee claims that it does not pay for such right but it only pays for the services. The claim of assessee before us was that it was only using services provided by Amazon and was not concerned with the rights in technology. The fees paid by assessee was for use of technology and cannot be said to be for use of royalty, which stands proved by the factum of charges being not fixed but variable i.e. it varies with the use of technology driven services and also use of such services does not give rise to any right in property of Amazon......." 19. (**) The decision in the case of Skycell Communications Ltd (251 ITR 53) has been rendered by Hon'ble Madras High Court in the context of "Fees for Technical Services" on applicability of sec. 194J r. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source on the payments made to the cable operator. 10. Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment, does not result in the provision of technical service to the customer for a fee. 11. When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to, get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable to fixed telep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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. 22. 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 thatthe payments made to the above said three non-resident companies do not fall within the meaning of "royalty" as defined in DTAA. The AO has not made out an alternative case that these payments are taxable as business income in India. Hence, there is no necessity for us to deal with that aspect. 23. We have noticed earlier that the Ld CIT(A) has followed the decision rendered by Hon'ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra). In the case of Engineering Analysis Centre of Excellence Private Ltd (supra), the decision rendered by Hon'ble Karnataka High Court in the above sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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