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TMI Blog2025 (2) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... Bang/2020, 617/Bang/2020 and 618/Bang/2020. 3. The assessee-respondent claims to be a Company involved in business of dealing in home décor products. It has placed advertisements in several social medias such as Facebook, Amazon Web services and Rocket Science Group, LLC, US. Assessee has made payments to non-residents without deducting tax at source. Hence, Assessing Officer ('AO' in short) treated assessee in default and passed orders under Section 201 (1) and 201 (1A) of the Income Tax Act, 1961 ('the Act' for short) for the assessment years 2015-16, 2016-17 and 2017-18 vide orders dated 21.02.2018. Assessee preferred appeals before Commissioner of Income Tax (Appeals) ['CIT(A)' for short] against the said orders. The said Authority passed order on 17.03.2020 confirming the orders passed by the AO. The assessee preferred appeal before the ITAT. The ITAT, vide order dated 17.08.2021, has allowed the appeals for the aforesaid years. The relevant part of the order of the ITAT is reproduced as under: "24. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analyzing the facts and materials of the present case with provisions of respective DTAA's? 5. The Assessing Officer has, in his order, stated as under: "Conclusion: As the Assessee company, has failed to deduct tax at source as stipulated u/s 195 on the payments made towards: (a) Advertisement charges paid (b) Cloud Computing Services (Web charges) and (c) purchase of Software for the F.Y. 2015-16 relevant to Assessment Year 2016-17, the assessee is held to be an assssee in default as per the provisions of Section 201 (1) of the Income Tax Act, 1961, for non-deduction of tax at source. The Assessee company, should have deducted tax at the rate of 10% on these payments. However, the assesse has failed to 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 as under: Sl.No. Particulars Rs. Total Amount (Rs.) 01 Assess deemed to be in default u/s 201 (1) for non-deduction of tax at source under section 195: (a) Advertisement Charges (i) Facebook (ii) Rocket Science Group (b) Web Charges (c) Software Purchases Tax to be deducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He stated that, the reliance placed by the ITAT to hold that assessee is not liable to deduct TDS by relying on the decision of the Supreme Court in the case of Engineering Analysis (supra) is clearly distinguishable on facts. In support of his submissions, he has heavily relied upon the assessment order and the order in appeal before the CIT(A). 8. On the other hand, Sri. Sandeep Huilgol, learned counsel appearing for the respondent-assessee, at the outset, would submit that, against the same impugned order, two more appeals were filed by the appellants-Revenue which were numbered as ITAs No. 16/2022 and 17/2022 relevant for assessment year 2017-18, which came to be dismissed by this Court vide orders dated 23.09.2024 on the ground that, the tax effect of the issues arising in the said appeals were less than the monetary limits prescribed by the CBDT vide its Circular bearing No. 9/2024 dated 17.09.2024 read with Circular No. 5/2024 dated 15.03.2024. 9. According to him, even otherwise the aforesaid three non-resident entities admittedly do not have a permanent establishment in India. In the subject assessment years, the respondent made the following payments to Facebook, Mailc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng these payments. 12. He also stated, despite the above, vide separate orders, both dated 21.02.2018, the 2nd appellant held that, the respondent erred in not withholding tax under Section 195 while making the aforesaid payments to these payees. According to him, the 2nd appellant had held that these payments tantamount to payments of 'royalty' in terms of Section 9 (1) (vi) of the Act and are thus, taxable in India under the Act, as a result of which, the respondent ought to have withheld tax at the rate of 10% at source while making these payments to them and thus, by doing so, the respondent has erred, thereby necessitating passing of the said orders dated 21.02.2018 deeming the respondent to be an assessee in default. 13. According to Sri. Huilgol, even the CIT(A) placed extensive reliance on the order dated 15.10.2011 passed by this Court in the case of The Commr. of Income Tax -Vs.-M/s Samsung Electronics Co. Ltd. [ITA No.2808/2005 and connected matters, decided on 15.10.2011], which according to him is totally untenable. He by drawing our attention to the impugned order of the ITAT, would submit that, the ITAT, after examining in detail the agreements entered into by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained by this Court would demonstrate the above. According to him, at no point of time until the hearing of these appeals on 30.09.2024 did the Revenue seek to contend that the said order in Engineering Analysis' case (supra) would not apply to the facts of the instant case. Per contra, by seeking repeated adjournments on the ground of pendency of the above review petition, it stands to reason that it accepted the applicability and binding nature of the said decision in Engineering Analysis' case (supra). They had only sought that this Court exercises its discretion in a lenient manner by adjourning the appeals to await the outcome of the said review petition. Hence, on this ground also, the Revenue ought not to have contended the decision in Engineering Analysis' case (supra) does not apply to the instant case. 17. He also contested that, although the aforesaid review petition is pending consideration, numerous other appeals and SLPs have been disposed of by the Supreme Court by following its earlier order in Engineering Analysis' case (supra). Such orders have been passed despite being specifically informed that the said review petition is pending, thereby demonstrating, the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the three entities. The said agreements, as noted by the ITAT, are the following: "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 companies and also to understand whether the payments made to the three non-residents are royalty or not in terms of the provisions of DTAA. The relevant clauses are extracted below for the sake of convenience:- (A) FACEBOOK 4. License Grant 4.1 In consideration of your compliance with this Agreement for the duration of your subscription to Facebook at Work (unless terminated earlier) we hereby grant you and your Users: (a) A non-exclusive, personal, non-transferrable, limited, revocable license to access and 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rights Owned by Us You will respect our proprietary rights in the Website and the software used to provide the Service (Proprietary rights include, but aren't limited to, patents, trademarks, service marks, trade secrets, copyrights, and other intellectual property). You may only use our brand assets according to our Brand Guidelines. ................. 19. Bandwidth Abuse/Throttling You may only use our bandwidth for your MailChimp Campaigns. We provide image and data hosting only for your MailChimp 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay make available to you in connection with the Agreement. ....................... "Service Offerings" means the Services (including associated APIs), the AWS Content, the AWS Marks, and any other product or service provided by us under this Agreement. Service Offerings do not include Third-Party Content." ITAT has also noted the term 'royalties' as defined under Article 12 (3) of India-USA DTAA in paragraph No.14 of the order, which reads as under: "14. The term "royalties" is defined as under in Article 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 ; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate any of the Service Offerings or change or remove features or functionality of the Service Offerings from time to time. As per clause 4.1, you (assessee) are solely responsible for the development, 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lear that retrospective amendment has changed the definition of 'royalty' from the year 2012 under the Income Tax Act, but the position of DTAA between two countries has not been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils of said payments made by assessee from September, 2009 to March, 2010 reflected that in the first month, charges totaled to USD 4269.02, in October at USD 5599.36 and there on. 20. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at 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 telephon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case has been over-ruled by the Supreme Court in the case of Engineering Analysis (supra). It is on that ground also, the decision rendered by the CIT(A) was set at naught. We agree with the aforesaid conclusion drawn by the ITAT. The terms of the agreement have been specified in the aforesaid paragraphs. A perusal of the agreements with the aforesaid three entities makes it clear that, copyright remained with the aforesaid three entities. The limited grounds on which the appeal has been filed, have been noted above. The conclusion drawn by the CIT(A) in favour of the Revenue was primarily by relying upon the judgment in the case of Samsung Electronics Co. Ltd. (supra) and also by holding that the payments received by assessee from two affiliates by granting user right to software is royalty and has been brought to tax in India. The said judgment has been over-ruled. In this regard, we may also refer to the judgment of the Supreme Court in the case of Engineering Analysis (supra). Paragraphs No. 111 to 119 are very clear in that respect. The Supreme Court has referred to the judgments of the Delhi High Court in the case of Director of Income Tax -Vs.-Ericsson A.B. [(2012) 343 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of The Commissioner of Income Tax-Vs.-GE India Technology Centre Private Limited [Order dated 23.04.2024 in Review Petition (C) at Diary No.35475/2023], wherein the Supreme Court has held as under: "ORDER 1. IA No. 174660/2023 is rejected. 2. There is an inordinate delay of 515 days in filing the present review petitions, which has not been satisfactorily explained. 3. Even otherwise, having gone through the review petitions and the connected papers, we do not find any justifiable reason to entertain the review petitions. 4. The review petitions are, accordingly, dismissed on the ground of delay as well as on merits. 5. Pending application(s), if any, shall stand disposed of." 23. We find that, in the aforesaid review petition, the Supreme Court has dismissed the review petition on merits by stating that, there is no justifiable reason to entertain the same. Having said that, as stated by Sri. Huilgol, the review in the case of Engineering Analysis (supra) being pending before the Supreme Court. Hence, liberty is granted to the appellants-Revenue to seek review/restoration of these appeals if the review petition filed before the Supreme Court in Engineering Analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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