The Assessment years involved are AY 2015-16, 2016-17 and 2017-18. The Assessee-Company is engaged in the business of dealing in home décor products and sells its products mainly through online marketing. The Assessee placed advertisements on the platform of Facebook, Ireland. The Assessee also used the bulk mail facility offered by M/s Rocket Science Group, USA and Amazon’s Web Services offered by Amazon Inc., USA. Facebook is located in Ireland and other two companies are located in USA. All the three entities are non-residents.
The AO examined the taxability of these payments under section 9. For AWS, the AO examined the taxability under DTAA provisions as well. The AO concluded that the payments are in the nature of Royalty and liable for tax deduction at source u/s 195. The AO treated Assessee as ‘assessee in default’. The CIT(A) confirmed the view of the AO. The findings on AO and CIT(A) on above payments is as below:
(A) Payments made to Facebook, Ireland: The AO held that the assessee company uses Facebook platform to display its products on the wall of Facebook users. The AO concluded that Facebook advertisements are nothing but the usage of Facebook technology and process to advance the business in the e-commerce era. The CIT(A) concluded that the payment is for the use of, or the right to use of patented software processes.
(B) Payments made to Rocket Science Group, LLC, USA (“Mail Chimp”): 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. The AO held that the payment is towards usage of technology, model or process and/or equipment and towards use or right to use any industrial, commercial or scientific equipment and therefore constitutes royalty u/s 9(1)(vi). The CIT(A) concluded that the payment is for the use of, or the right to use of patented software processes.
(C) Payments made to Amazon Web Services Inc., US: The payment to AWS was towards cloud computing services, which 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. The AO concluded that payment is royalty. The CIT(A) concluded that the payment is for the use of, or the right to use of patented software processes.
Decisions of ITAT
Referring to SC ruling in Engineering Analysis [2021] 125 taxmann.com 42 (SC), the ITAT held that the relevant DTAA provisions should be considered for determining whether the nature of payments is royalty or not, and thus there was no requirement to consider provisions of section 9(1).
The ITAT perused the relevant provisions of the Agreement entered by the Assessee with Facebook and Rocket Science Group (Mailchimp) and observed that both non-resident companies are allowing the assessee to use the facilities provided on their sites, which includes, inter alia, software facilities also. The ITAT observed that the purpose of compelling the assessee to use those facilities, 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. The ITAT further observed that 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 emails. The ITAT observed that in case of web hosting charges paid to AWS, the assessee is allowed to use the information technology infrastructure facilities.
Referring to the decisions in the case of Right Florists [TS-137-ITAT-2013(Kol)], EPRSS Prepaid Recharge Services, [TS-623-ITAT-2018(PUN)] and Skycell Communications Ltd (251 ITR 53), the ITAT observed that these decisions clarified the point that mere usage of a facility does not give rise to provision of any technical service. The ITAT held that 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.
The ITAT concluded that 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 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. The ITAT observed that 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 in the business of the assessee. The ITAT observed that the right to use those facilities, 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. The ITAT concluded that the question of transferring the copy right over those facilities does not arise at all.
The ITAT further held that 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 non-resident 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.
The ITAT further held that these non-resident recipients stand on a better footing than those assessees before the Hon’ble Supreme Court in the case of Engineering Analysis (supra) and payments made to them are not within the meaning of ‘Royalty’ as defined in the DTAA.
The ITAT held that payments made to non-residents do not give rise to any income chargeable in India, and thus there was no requirement to deduct tax at source u/s 195. Therefore, holds the Assessee cannot be considered as assessee in default u/s 201.