TMI Blog2022 (5) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... s submissions as encircled by the AO on page 10 of the order, stating that, ESPN UK or third party service provides do not provide specific access to / control over any particular server / website , which in fact supports the case of the assessee. Therefore, in our view neither is any equipment given to the Assessee nor is it under the control of the Assessee. This is only a re-seller agreement of advertising space. Objective of the Equalisation Levy provisions was to levy a tax on online advertisements as it was otherwise not chargeable under the Act read with the Tax Treaties - It was a business profit and in the absence of any permanent establishment was not taxable in India as held by Right Florists[ 2013 (4) TMI 338 - ITAT KOLKATA] - Since the Tax Treaties would override any non-favourable clause under the Act, to overcome this, EL provisions were introduced as a separate stand-alone enactment by the Finance Act 2016 and outside the Act. Consequently, the above object and purpose was achieved by the introduction of section 164 (i) of the Finance Act 2016 that defines a specified service to mean online advertisement, any provision for digital advertising space or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment years 2010-11, 2011-12, 2012-13 2013-14. 2. The only common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in holding the payments made by ESPN India constitutes royalty falling u/s.9(1)(vi) of the Act and thereby, treating the assessee as assessee in default for non-deduction of tax at source u/s.201(1) 201(1A) of the Act. For this, assessee has raised exactly identically worded grounds in all the four years. The issue and facts, as conceded by both the sides, are exactly same, except the quantum. As the facts are identical in all the four assessment years and issue is exactly one, we will take the facts from assessment year 2010-11 in ITA No.1070/Chny/2018 and will decide the issue. The relevant grounds Nos.2.1 to 2.14 read as under:- 2. Payment made should not be considered as royalty : 2.1 The order passed by Hon ble CIT(A) and the learned AO is bad in law and in facts, stating that the payments made by ESPN India constitute as royalty and is subject to withholding tax. 2.2 The Hon ble CIT(A) and the learned AO has erred in holding that ESPN India has obtained the right to use/ exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing space is not in the nature of royalty specified under Article 13 of India- U K tax treaty. 2.11 The Hon ble CIT(A) and the learned AO has erred in holding Appellant as assessee-in-default for non-deduction of tax at source and initiated recovery proceedings under section 201(1)/(1A) of the Act. 2.12 The Hon ble CIT(A) and the learned AO has erred in relying on the decision of Hon able Madras High court in the case of Verizon Communication Singapore Pte Ltd., without appreciating the fact that the said decision is not applicable to the facts of Appellant s case. 2.13 The Hon ble CIT(A) and the learned AO has erred in not relying on the judicial precedents quoted by the Appellant. 2.14 The Hon ble CIT(A) while upholding the order of learned AO fails to give conclusive finding as to how such payments are taxable under the India UK tax treaty. 3. Brief facts relating to the issue are that the assessee ESPN India (erstwhile Cricinfo India Private Limited) is a private limited company incorporated in India entered into an agreement ( Re-seller agreement ) dated 01.04.2010 with ESPN Limited, United Kingdom (in short ESPN UK ) for the resale of advertisement space o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without appreciating that their retrospective introduction vide Finance Act, 2012 which only came into effect on 28th May, 2012 but with retrospective effect from 1 June 1976. The AO also relies on the UKIndia DTAA, quoting as under: 3. For the purposes of this Article, the term royalties means: (a) payments of any kind received as consideration for the use of , or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films 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; 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 income derived by an enterprise of a Contracting State from the operation of ships or aircrafts in international traffic. 6. Further, AO notes that in the modern era , the geographical location is immaterial and therefore where the server lies is not relevant. For this proposition, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SPN INDIA collects the advertisement material from Indian advertisers and upload the same in the web server thereby positively utilise the web server for the desired purpose. ESPN India directly access and use the server for uploading the contents as contemplated by the word use clause (via) of explanation 2 to section 9(1) (vi). Therefore the payment made for these services it will fall within the ambit of royalty in clause (via) of Explanation 2 to section 9(1) (vi) of the Act. ESPN India has clarified before the AO that it has no power to upload the advertisements it only collects and forward the material to ESPN UK. The same is factually not found to be correct because ESPN India in its submission has already clarified that(dated 23/01/2014 in para 1.3 and 2.6.6) that ESPN INDIA uploads the advertisements in the server therefore to that extend ESPN India enjoys the right or right to use the server/ equipment to upload the advertisement. The contention of ESPN India that double click a division of google Ireland only upload the advertisement is not acceptable because the ESPN India itself has submitted that the advertisement are uploaded by ESPN India. In the Morden digit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m property used in clause (i) of explanation 2 to section 9(1) (vi) includes patent, invention, model, design, secret formula or process and similar property. The clause covers income in the form of any consideration received for transfer of all or any rights or use of such property. The clause typically covers those cases where the user of such property gains a right over the same. In ESPN (INDIA) case, such condition relating to transfer of right over website is satisfied as ESPN India is conferred with right on the website to upload the advertisement on the website. The payments made by ESPN India to ESPN UK, is a payment made as a consideration for transfer of all or any rights property or information. Therefore payments made by ESPN INDIA TO ESPN UK clearly amounts to Royalty as per IT Act 1961. Taxability as per India-UK DTAA Payment of any kind received as consideration for the use of or the right to use, any industrial, commercial or scientific equipment and consideration paid for a process is taxable as Royalty as per India UK DTAA. The use of portal/Website(uploading of ads) was not possible without use of server and the server platform being a scientific equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd appeal before Tribunal. 8. Ld Counsel for the assessee Shri Porus Kaka argued that consideration paid to ESPN UK as per the Re-seller Agreement is not chargeable to tax in India as Royalty as per section 9(1)(vi) of the read with the India-UK DTAA (the India-UK DTAA ). It was contented that there is no right, property or information that is transferred from ESPN UK to ESPN India and the requirements of the definition of royalty under section 9(1)(vi) are as follows: 9.(1) The following incomes shall be deemed to accrue or arise in India:- (vi) Income by way of royalty payable by ...... Explanation 2 For the purposes of this clause royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for--- (i) The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) The imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25. Accordingly, we set aside the orders passed by Ld CIT(A) for the years under consideration and direct the AO to delete the demand raised u/s 201(1) of the Act and also the consequential interest charged u/s 201(1A) of the Act in all the three years under consideration. 8.3 The ITAT in Myntra Designs Private Limited v. DCIT, ITA No.598/Bang/2020, dated 03.09.2021 has taken identical view. Further, Ld Counsel for the assessee relied on the decision of Kolkata Tribunal, wherein it has been held, even before the decision of Engineering Analysis (supra), in the case of ITO v. Right Florists (2013) 32 taxmann.com 99 (Kol. Trib.) relying on the decisions in Pinstorm Technologies (P) Limited vs. ITO (24 taxmann.com 345) (Mum) and Yahoo India (P) Limited vs. DCIT (2011) (11 taxmann.com 431) (Mum.) that the services rendered for uploading and display of banner advertisements on its portal was in the nature of business profit on which no tax is deductible at source. Based on the above, it was argued that Re-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained that in the instant case, a web server was installed and provided by another entity namely ESPN UK and it is used by ESPN, India for a consideration. The ESPN collects the advertisement material from Indian advertisers i.e., third parties and upload the same in the web server thereby positively utilizing the web for the desired purpose. Therefore, the payment made for these services will fall within the ambit of royalty as falling in the provision of the Act i.e., clause (via) of explanation 2 to section 9(1)(vi) of the Act. The ld.CIT-DR referred to the order of CIT(A) page 17 last para and stated that the facts narrated in this para clearly covers those cases where the user of such property gains a right over the same. He explained that in the case of ESPN, India, the assessee, such condition relating to transfer of right over website is satisfied as ESPN, India is conferred with the right on the website to upload advertisements on the website. Hence, according to him, payment made by ESPN, India to ESPN UK clearly amounts to royalty and for this, the assessee should have deducted TDS u/s.195 of the Act. Hence, he supported the order of AO treating the assessee as asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ESPN India. No copy right in the advertisement is ever given to ESPN India or ESPN UK. 5) ESPN India uploads advertisements in the form of Hard Coded Banners on the websites owned by ESPN UK. 6) ESPN India uploads Dynamic and Video advertisements on the Google Ad Manager, owned by Google Ireland. 7) The Advertisement uploaded on the Google Ad Manager is placed on the website owned by ESPN UK by Google Ad Manager. 10.1 We noted the facts that the assessee ESPN India is a private limited company incorporated in India entered into an agreement ( Re-seller agreement ) dated 01.04.2010 with ESPN Limited, United Kingdom (in short ESPN UK ) for the resale of advertisement space on websites owned by it. The Re-seller agreement is for a term of one-year and was automatically renewed as per Clause 5.1 of the agreement and was valid for all the assessment years in the present appeals. We have gone through the reseller agreement and noted that the Re-seller agreement does not provide any right to use of any industrial, commercial, or scientific equipment nor is the website not the server that is placed under the control or domain of the Assessee, nor has a right, proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any equipment given to the Assessee nor is it under the control of the Assessee. This is only a re-seller agreement of advertising space. 10.4 We noted that the AO and the CIT(A) placed reliance on Explanations 5 and 6 to section 9(1)(vi) of the Act, which are misplaced in light of the decision of the Hon ble Supreme Court of India in Engineering Analysis Centre for Excellence, which has held that unilateral amendments expanding the definition of royalty under domestic law cannot apply to the Tax Treaties. The Tax Treaty containing the more favourable provision would be applicable. We also noted that the AO and the CIT(A) placed heavy reliance on the decision of the Madras High Court in Verizon Communications Singapore (supra). The relevant portions of the Verizon decision are reproduced as under: 100. The definition of royalty under DTAA and the Indian Income Tax Act are in parimateria. As rightly pointed out by the Revenue, Explanation 6 defines process to mean and include transmission by satellite (including, up-linking, amplification, conversation for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in considering the question under Section 9(i)(vi) read with Explanation 2. Thus, more so when it comes to the question of dealing with issues arising on account of more complex situations brought in by technological development by the use of and role of digital information, goods etc., the foreign enterprise does not need physical presence at all in a country for carrying on business. Hence, we do not think that we need to go in depth in this regard for the reason that we have already given herein before. 10.5 We are of the view that the facts of Verizon are completely different to that of the assessee s case. In Verizon, the Assessee was engaged in providing international connectivity services i.e. bandwidth services and telecom services for transmission of data and voice by way of International Private Leased Circuit ( IPLC ). IPLC is an end-to-end managed dedicated bandwidth service that provides internet service to customers for various applications and consisted of high-tech equipment. The assessee in Verizon had installed customized sophisticated equipment terminals at client locations to enable transmission of signals. Hence Hon ble High Court held the payment for use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable under the Act read with the Tax Treaties. It was a business profit and in the absence of any permanent establishment was not taxable in India as held by Right Florists (supra). Since the Tax Treaties would override any non-favourable clause under the Act, to overcome this, EL provisions were introduced as a separate stand-alone enactment by the Finance Act 2016 and outside the Act. Consequently, the above object and purpose was achieved by the introduction of section 164 (i) of the Finance Act 2016 that defines a specified service to mean online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf . We noted that the Finance Act, 2016 recognizes providing advertising space as a specified service subject to Equalisation levy. Consequently, to suggest that the sale of advertising space is royalty would even be contrary to the legislative intent, the objects and purpose of the EL provisions and result in absurdity and double taxation, as acknowledged by the Memorandum to the Finance Bill, 2016. We note ..... X X X X Extracts X X X X X X X X Extracts X X X X
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