M/S. META PLATFORM IRELAND LIMITED(FORMERLY KNOWN AS FACEBOOK IRELAND LIMITED),IRELAND vs. JOINT COMMISSIONER OF INCOME-TAX (OSD), INTERNATIONAL TAXATION, CIRCLE-1(1), BENGALURU

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ITITA 230/BANG/2023Status: DisposedITAT Bangalore03 August 2023AY 2014-159 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the receipts from the sale of online advertisement space by the assessee to Indian customers are not taxable in India. The Tribunal relied on its own previous decisions in the case of Urban Ladder Home Décor Solutions Pvt. Ltd. and Myntra Designs Pvt. Ltd., which dealt with similar issues for the same assessment years and involved the same assessee (under its former name). These decisions held that payments for online advertisement space do not fall within the definition of 'royalty' under the Act or the DTAA, as the non-resident entities only provide enabling facilities for placing advertisements and do not grant any license or right to use underlying intellectual property or equipment. The Tribunal noted that the DRP had acknowledged the Urban Ladder decision but did not follow it due to the Revenue's appeal before the High Court. Since the issue on merits was decided in favour of the assessee, the jurisdictional grounds (grounds 4 to 7) were not adjudicated and were left open. General grounds (1 to 3) and consequential grounds (11 to 13) were dismissed.

What were the facts?

The assessee, Meta Platforms Ireland Ltd. (formerly Facebook Ireland Ltd.), an Irish tax resident, is engaged in selling advertisement spaces to Indian advertisers. For Assessment Years (AY) 2014-15 to 2016-17, the Assessing Officer (AO) initiated reassessment proceedings under Section 147 of the Income Tax Act, 1961, as the assessee had not filed returns. The AO considered the receipts from online advertisement space sales, amounting to INR 4,36,99,933 for AY 2014-15, INR 31,77,82,761 and INR 37,44,73,365 for AY 2015-16 and AY 2016-17 respectively, as royalty taxable in India. The AO suo motu allotted a PAN. The assessee's objections to the reassessment and the characterization of receipts were rejected, leading to draft assessment orders. The Dispute Resolution Panel (DRP) upheld the AO's view. Final Assessment Orders were passed on January 25, 2023, under Section 143(3) r.w.s. 144C(13). The assessee appealed these orders.

What were the issues?

1. Whether the reassessment proceedings and the impugned order are invalid, without jurisdiction, barred by limitation, and illegal, contrary to the provisions of the Act, and therefore liable to be quashed (Section 148 of the Act)? 2. Whether the DRP erred in not quoting computer-generated DIN on its directions, contravening CBDT Circular No. 19 of 2019, rendering the directions and consequently the impugned order invalid? 3. Whether the assessee's receipts from Indian advertisers for the sale of online advertisement space constitute 'Royalty' under Section 9(1)(vi) of the Act and Article 12 of the India-Ireland DTAA? Assessee's Contentions: - The reassessment proceedings and orders are invalid due to jurisdictional defects and procedural violations, including non-compliance with principles of natural justice and binding judicial precedents. - The DRP's directions are invalid due to the absence of a computer-generated DIN. - The receipts from online advertisement space sales are business profits, not royalty, as the assessee does not grant control or possession of equipment or access to underlying algorithms, and the consideration is for standard facilities. Revenue's Contentions: - The learned DR supported the orders of the AO and DRP.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 147,Section 148,Section 9(1)(vi),Section 9(1)(vii),Section 12,Section 195,Section 201(1),Section 234A,Section 234B,Section 234C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “A” BENCH : BANGALORE

Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU

For Appellant: Shri. Percy Pardiwala, Senior Counsel
For Respondent: Shri. D. K. Mishra, CIT(DR), ITAT, Bengaluru
Hearing: 02.08.2023Pronounced: 03.08.2023

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(IT)A Nos.230 to 232/Bang/2023 Assessment Years : 2014-15 to 2016-17 M/s. Meta Platforms Ireland Ltd., The Joint Commissioner of Income Tax (formerly known as Facebook Ireland Ltd.,), (OSD), 4 Grand Canal Square, Vs. International Taxation Circle – 1(1), Grand Canal Harbour, Dublin 2 D02 X25, Bengaluru. Ireland. PAN : AAECF 5080 A APPELLANT RESPONDENT Assessee by : Shri. Percy Pardiwala, Senior Counsel Revenue by : Shri. D. K. Mishra, CIT(DR), ITAT, Bengaluru. Date of hearing : 02.08.2023 Date of Pronouncement : 03.08.2023

O R D E R Per George George K, Vice President :

These appeals at the instance of the assessee are directed against three Final Assessment Orders (all orders dated 25.01.2023), passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Years are 2014-15 to 2016-17.

2.

Common issues are raised in these appeals; hence, they were heard together and are being disposed off by this consolidated order.

3.

Brief facts of the case are as follows:

IT(IT)A Nos.230 to 232/Bang/2023 Page 2 of 9

Assessee is a company incorporated under the laws of Ireland and is a tax resident of Ireland. Assessee was formerly known as Facebook Ireland Limited. For the relevant Assessment Years, assessee was engaged in the business of sale of advertisement spaces to inter alia advertisers in India. The AO noticed that assessee was in receipt of certain amount on account of sale of online advertisement space for the relevant Assessment Years. Since assessee did not file the return of income for the relevant Assessment Years, the AO initiated reassessment proceedings under section 147 of the Act. The AO was of the view that the amounts received by the assessee company are in the nature of royalty and ought to be subjected to tax in India. The details of the aforesaid receipts for the Assessment Years 2014-15 to 2016-17 are detailed below:

Amount AY Name of the Advertisers (in INR)

2014-15 M/s Snapdeal Private Limited 4,36,99,933

M/s Amazon Seller Services 31,77,82,761 2015-16 Private Limited

M/s Amazon. Seller Services 37,44,73,365 Private Limited 2016-17 M/s BrainBees Solutions 96, 976,400 Private Ltd.

4.

The AO suo moto allotted a PAN to the assessee (since assessee was tax resident in Ireland and did not have a PAN) and assumed jurisdiction in the case of the assessee. The assessee company contested the validity of the reassessment proceedings under section 148 of the Act and also disputed the characterization of consideration received by the assessee as ‘royalty’. However, the objections

IT(IT)A Nos.230 to 232/Bang/2023 Page 3 of 9

of the assessee were rejected and draft assessments were completed under section 143(3) r.w.s. 144C of the Act. The AO, in the said draft Assessment Order, held that the receipts by the assessee company partakes the character of ‘royalty’ under clause (iii) and clause (iva) of explanation 2 to section 9(1)(vii) of the Act and the DTAA.

5.

Aggrieved by the Draft Assessment Order, assessee filed objections before the DRP for the Assessment Years 2014-15 to 2016-17. The DRP rejected all the objections of the assessee and upheld the validity of the reassessment as well as the issue on merits that the online advertisement receipts by the assessee company is a royalty taxable under section 9(1)(vii) of the Act. Consequent to the DRP’s directions, the impugned Final Assessment Orders were passed on 25.01.2023.

6.

Aggrieved by the impugned Final Assessment Order, the assessee has filed the present appeals before the Tribunal. Identical grounds are raised for all the Assessment Years concerned except for variation in figures. Therefore, grounds pertaining to Assessment Year 2014-15 is reproduced below:

I. General Grounds 1. The lower authorities erred in finalizing an order of assessment that suffers from legal defects such as, being passed in violation of the principles of natural justice considering the facts and circumstances involved, the provisions of the Act and the applicable DTAA, and consequently, is devoid of merits and as such is liable to be quashed. 2. The lower authorities erred in finalizing the Impugned Order without following the rule of law of binding judicial precedents rendered by the Jurisdictional bench as well as the other benches of the Hon'ble Tribunal.

IT(IT)A Nos.230 to 232/Bang/2023 Page 4 of 9

3.

The Ld. DRP erred in violating the principles of natural justice and equity, by not providing an opportunity of being heard to the Appellant, in connection with the Factual Report dated 07.12.2022 submitted by the Ld. AO. II. Jurisdictional Grounds 4. The reassessment proceedings and the Impugned Order are invalid, without jurisdiction, barred by limitation, illegal, contrary to provisions of the Act, and are therefore liable to be quashed. 5. The Ld. AO has erred in not following the due procedure laid down by Hon'ble Supreme Court in relation to reopening of an assessment under section 148 of the Act. 6. The Impugned Order is invalid and without jurisdiction on account of improper service thereof. 7. The Ld. DRP erred in not quoting computer-generated DIN on the body of DRP directions u/s. 144C(5) of the Act, in contravention to the Circular No. 19 of 2019 by the CBDT, deeming such directions to be invalid and never to have been issued as per para 4 to the said Circular, and consequently the Impugned Order is invalid and is liable to be quashed. III. Taxability of receipts from sale of online advertisement space (INR 43,699,933) 8. The lower authorities erred in holding that the Appellant's receipts from Indian advertisers customers, in connection with the sale of online advertisement space is in the nature of `Royalty' under section 9(1)(vi) of the Act as well as under Article 12 of the India- Ireland DTAA. 9. The lower authorities erred in not appreciating that the Appellant does not grant control or possession of the equipment whatsoever, nor provides the advertiser any access to the underlying algorithms processes. 10. The lower authorities erred in not appreciating that the entire consideration received on account of sale of online advertisement space constitutes business profits in the hands of the Appellant, which are not taxable in India.

IT(IT)A Nos.230 to 232/Bang/2023 Page 5 of 9

IV. Erroneous levy of interest under section 234A, 234B and 234C of the Act 11. The lower authorities erred in levying interest under section 234A of the Act. 12. The lower authorities erred in levying interest under section 234B of the Act. 13. The lower authorities erred in levying interest under section 234C of the Act.

7.

The assessee has filed an application to amend / substitute ground No.7 whereby it is challenging that the order passed by the DRP as well as the Final Assessment Order are without DIN. Hence, it contended that the same are invalid and needs to be quashed. The learned AR submitted that the issue on merits is covered by the various orders of the Tribunal and especially the order of the Bangalore Bench of the Tribunal in the case of Urban Ladder Home Décor Solutions Pvt. Ltd., Vs. ACIT, in IT(IT)A Nos.615 to 620/Bang/2020 (order dated 17.08.2021) which has been referred to by the DRP. It was stated that, however, the same has not been followed since Revenue has filed appeal before the Hon’ble High Court of Karnataka. As regards the jurisdictional issues raised in ground Nos.4 to 7 (substitute ground No.7), the learned AR submitted that the issues raised in the above grounds may be left open and not adjudicated if the decision is taken on merits viz., ground Nos.8, 9 and 10.

8.

The learned DR supported the orders of the AO/DRP.

9.

We have heard the rival submissions and perused the material on record. The receipts on account of sale of online advertisement space to Indian customers, whether it would be liable to tax in India has been considered by the Bangalore Bench of the Tribunal in the case of Urban Ladder Home Décor

IT(IT)A Nos.230 to 232/Bang/2023 Page 6 of 9

Solutions Pvt. Ltd., (supra). The Tribunal, after considering the judicial precedents on the subject, held that deductors / payers are not liable to deduct tax at source under section 195 of the Act, since payments to foreign entities for online advertisement space is not liable to tax in India. The relevant finding of the Tribunal reads as follows:

“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 facilities, as stated earlier, 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. Hence the question of transferring the copy right over those facilities does not arise at all. The agreements extracted above also make it clear that the copyright over those facilitating software is not shared with the assessee. In any 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 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. 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

IT(IT)A Nos.230 to 232/Bang/2023 Page 7 of 9

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 said case has been overruled by Hon'ble Supreme Court. Hence on this reasoning also, the decision rendered by Ld CIT(A) would fail. 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 "royalty payments" and hence they do not give rise any income chargeable in India under Indian Income tax Act in all the three years under consideration. In that view of the matter, there is 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.” 9. Similar view has been taken by the Bangalore Bench of the Tribunal in the case of Myntra Designs Pvt. Ltd., in IT(IT)A Nos.598 to 600/Bang/2020, order dated 03.09.2021. Perusal of the above orders of the Bangalore Bench of the Tribunal would clearly show that for the very same Assessment Year in respect of which the impugned orders were passed, the Tribunal, after thoroughly evaluating the underlined arrangement that the Facebook Ireland Ltd., (now known as Meta Platforms Ireland Ltd.,) (i.e., the assessee in these cases) had with its customers, categorically held that the receipts in question cannot be characterized as royalty as these are standard facilities that are provided to advertisers. The assessee has the same business model with all its customers and there is no instance where the fundamental factual aspects, as observed by the Tribunal in the above mentioned case, would be in any way different. All the end customers would only be able to access the platform for the limited purpose of merely displaying their advertisements. In other words, it was held by the Tribunal that the mere hosting of online advertisement does not grant the advertiser right to use the underlying platform or equipment of the platform owner. The advertisers have no access or right to access any process or equipment or technology, or any other intellectual property rights or assets of the company. Therefore, it was concluded by the Tribunal that the receipts from

IT(IT)A Nos.230 to 232/Bang/2023 Page 8 of 9

such services cannot be chargeable to tax in India. The Tribunal in the case cited supra has categorically held that ‘deductors are not the assessees in default’ as there is no income liable to be taxed in India which is a prerequisite for withholding tax under section 195 of the Act. Therefore, the issue raised in these appeals are squarely covered in favour of assesssee by orders of the Tribunal cited supra. The DRP has also mentioned about the Tribunal’s order in the case of Urban Ladder Home Décor Solution Ltd., but however has not followed the same, since Revenue has filed an appeal before the Hon’ble High Court. In view of the aforesaid reasoning and the judicial pronouncements cited supra, we hold that the receipts by the assessee company on account of sale of online advertisement space is not taxable under the Act and DTAA. Since the issue on merits has been decided, the jurisdictional grounds viz., ground Nos. 4 to 7 are not adjudicated and are left open. Ground Nos.1 to 3 are general in nature and no specific adjudication is called for, hence the same are dismissed. Ground Nos. 11 to 13 are consequential and hence the same are dismissed. It is ordered accordingly.

10.

In the result, appeals filed by the assessee for Assessment Years 2014-15 to 2016-17 are partly allowed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President

Bangalore. Dated: 03.08.2023. /NS/*

IT(IT)A Nos.230 to 232/Bang/2023 Page 9 of 9

Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order

Assistant Registrar, ITAT, Bangalore.

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