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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
Per Chandra Poojari, Accountant Member This appeal by the assessee is directed against the order dated 21.3.2019 of the CIT(Appeals)-5, Bengaluru for the assessment year 2016-17 on the following grounds:-
The Appellant submits that the impugned order has been passed by the learned Commissioner of Income Tax (Appeals)-5, Bangalore without appreciating the factual position in full and without proper application of law on certain matters and therefore the order deserves to be set aside, to the extent inconsistent with law and on facts. Disallowance under section 40(a)(i)
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The learned Commissioner of Income Tax (Appeals)-5, Bangalore has erred by upholding the disallowance of online advertisement expenditure amounting to Rs.5,06,48,758/- under section 40(a)(i). On facts and in circumstances of the case and law applicable, disallowance under section 40(a)(i) is not applicable. 3. Without prejudice to the above, learned Commissioner of Income Tax (Appeals)-5, Bangalore has erred in concluding that online advertisement services are in the nature of royalty under section 9(1)(vi) of the Act on which TDS is applicable. 4. The learned Commissioner of Income Tax (Appeals)-5, Bangalore has erred in a. relying on judicial decisions that are not relevant to the issue on hand and without examining the factual details of the services obtained in the present case b. failing to correctly examine the applicability and taxability of the online expenditure under the respective tax treaty not appreciating that an application before the jurisdictional AO is not mandatory to examine the applicability of withholding taxes. 5. On facts and in circumstances of the case and law applicable, the appellant is not under an obligation to deduct tax at source under section 195 of the Income Tax Act, 1961 read with the applicable DTAA. 6. Accepting without admitting, disallowance if any, under section 40(a)(i) should be restricted to 30 percent on the basis of non-discrimination clause of the Treaties. Interest under section 234B and 234C 7. The learned Commissioner of Income Tax (Appeals)-5, Bangalore has erred in levying interest under section 234B and 234D amounting to Rs. 24,76,287/- and Rs. 11,297/- respectively. On facts and circumstances of the case and law applicable, interest under section 234B and 234D is not
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leviable. The appellant denies its liability to pay interest under section 234B and 234D. Prayer 8. In the view of above and other grounds to be adducted, as part of this appeal/ at the time of personal hearing, the appellant prays that the order passed under section 143(3) be quashed or in the alternative, • Online advertisement expenditure disallowed u/s 40(a)(ia) amounting to Rs. 5,06,48,758 be deleted; • Consequential levy of interest under section 234B and section 234D be cancelled or deleted. The appellant prays accordingly.”
The appellant is a domestic private company engaged in the business of development of Gaming Applications (information technology software). It filed its original return of income on 09-Oct-2016 declaring a loss of Rs.2,76,89,682/-. The case was selected for limited scrutiny. Notice u/ s 143(2) of the Income Tax Act, 1961 ('the Act') was issued to the Appellants on 07.7.2017. In this regard, various notices u/ s 142(1) were also issued on various dates, calling for details, which were duly submitted by the Appellant. The AO passed the assessment order under section 143(3), dated 24.12.2018.
During the year, the appellant made certain payments to vendors outside India towards online advertisements amounting to Rs. 5,06,48,758. The AO observed that these payments were in the nature of royalty and were liable for deduction of taxes at source. The Appellant, in their reply dated 22.10.2018 submitted that the impugned payments did not constitute royalty or fees for technical services. It further submitted that these parties
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do not have a permanent establishment in India and hence these payments did not warrant withholding of taxes. The Appellant supported the same with Form 15CA/CB for the payments made outside India.
The AO did not agree to the arguments of the Appellant and issued a show cause notice dated 07.12.2018 as to why the impugned sum should not be disallowed under section 40(a)(ia) / 40(a)(i). In the show cause notice, the AO relied on the case of Consim Info Pvt. Ltd. v. Google India Pvt Ltd and Google Inc v Australian Competition and Consumer Commission [2013] HCA 1 to provide an overview of internet, search engine and online advertising. The AO did not appreciate that the fact that the case laws relied on by appellant were not applicable to the present case, both on facts and under law.
The AO observed that the Appellant has not advanced any argument to negate as to why the same should not be construed as royalty. The appellant had filed its submission vide letter dated 12.12.2018, detailing why the impugned sum is not liable to withholding taxes, both under the Act and under the treaty. It is submitted that the AO has not given his findings on the chargeability under the treaty. The learned AO also observes that the appellant could have filed an application before the AO under section 195 to obtain a certificate for non-deduction or lower deduction.
The AO concluded that the impugned online advertisement expenditure of Rs. 5,06,48,758/- was liable for deducting taxes. Accordingly, the sum is disallowed u/s. 40(a)(ia) and added to income. It is submitted that the total income is assessed at Rs. 2,29,59,080/ - and tax thereon is computed, without setting off the brought forward losses amounting to Rs. 53,35,666/ -. Interest under section 234B and section
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234D is computed at Rs. 24,76,287/- and Rs. 11,297/- respectively. As a consequence, a sum of Rs. 1,00,82,021/- is determined as payable by the appellant.
Before the CIT(Appeals), the Appellant also submitted that the impugned payments do not constitute royalty or fees for technical services and supported the arguments on the basis of various judicial precedents in favour of the Appellant. It is submitted that the CIT(A) did not consider the submissions of the appellant and upheld the disallowance made by the AO that the impugned payments be construed as royalty without discussing/ appreciating/ considering the various arguments, explanation and judicial precedents submitted by the appellant. The CIT(A) was of the view that whether it is business profit or royalty, in both the circumstances, so far as the assessee is concerned, the assessee is duty-bound to deduct the TDS unless there is an adjudication by the AO to the contrary u/s. 195(2), placing reliance on the judgement of Hon’ble High Court of Karnataka in the case of CIT Vs Samsung- Electronics, 320 ITR 209 (Kar) and Hon’ble Supreme Court in the case of Transmission Corporation of A.P. Ltd Vs Anr., 239 ITR 537(SC). Against this, the assessee is in appeal before the Tribunal.
The ld. AR submitted that the Hon’ble Supreme Court in the GE India Technology Cen (P) Ltd Vs CIT [20101 193 Taxman 234 (SC) had set aside/reversed the order of Hon'ble Karnataka High court in the case of CIT v. I Samsung Electronics (supra). Thus the appellant's contention that the impugned payments did not constitute Royalty/FTS and supported by various arguments and judicial precedents has been ignored and the CIT(A) placed reliance on the judgments in the case of CIT Vs Samsung Electronics(Supra) and Transmission corporation of A.P. Ltd Vs Anr
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(Supra) to hold that the appellant was duty bound to apply for adjudication U/s 195(2).
The ld. AR further submitted that the CIT(Appeals) has not provided any findings in relation to ground no. 6 raised before him regarding disallowance to be restricted to 30% of expenses, not subject to deduction of tax at source u/s. 40(a)(i). It is submitted that the appellant has filed an application for rectification of the same on 05.04.2019 and the rectified order in this regard U/s 250 is still awaited as on the date of filing this appeal. The CIT(Appeals), however, allowed the ground no 7 raised before him pertaining to setting off the brought forward losses while computing the total income under consideration and has directed the learned AO to rectify the order U/s 143(3). Further, it was submitted that the CIT(Appeals) has dismissed all other grounds raised by the appellant.
The ld. DR relied on the orders of lower authorities.
We have heard both the parties and perused the material on record. We are of the opinion that the similar issue came up for consideration before the Tribunal in the case of Moonfrog Labs Pvt. Ltd. v. ACIT in ITA No.3066/Bang/2018, order dated 14.12.2021, wherein it was held as follows:-
“5. We heard both sides in light of records placed before us. 5.1 We notice 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) to decide the issues against the assessee. However the above said decision has since been reversed by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). The issue of granting license to use software was examined in the context of its taxability as royalty by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra). The Hon'ble
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Supreme Court examined this question considering four types of situations, 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, non-resident supplier or manufacturer.3 (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.4 (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 distributors or end-users.5 (iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users. 5.2 After analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with non-resident software suppliers, provisions of Copy right Acts, the circulars issued by CBDT, various case laws relied upon by the parties, the Hon'ble Supreme Court concluded as under:- “CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act
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(section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end- users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.” 5.3 It is pertinent to mention that the Hon’ble Supreme Court has analysed the provisions of Copy right Act and their applicability to the payments made for use of software. We also notice that the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) has been reversed by Hon’ble Supreme Court in paragraph 101-102 of its order. Similarly decision of coordinate bench of this Tribunal in case of Google India Pvt. Ltd. vs. JCIT reported in (2018) 93 taxmann.com 183 relied by Ld.Sr.DR has been remanded back to ITAT by Hon’ble Karnataka High Court. This decision of Hon’ble Karnataka High Court is reported in (2021) 127 taxmann.com 36. 5.4 However, as rightly pointed out by Ld D.R, we are of the view that the issues contested in all these appeals require fresh examination at the end of Ld CIT(A) applying the ratio of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra). Accordingly, we set aside the orders passed by Ld CIT(A) in all these appeals and restore all the issues to his file for examining them afresh applying the ratio of the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd (supra).
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Accordingly, grounds raised by assessee stands allowed for statistical purposes.” 12. Following the above order of the Tribunal, we remit the issue to the file of AO with similar directions. The AO shall call for the Master Services Agreement which reveals the type of services rendered by the service provider. The assessee is directed to cooperate in the proceedings before the AO by providing all relevant information.
As we have placed reliance on the Supreme Court judgment in the case of Engineering Analysis Centre of Excellence P Ltd (432 ITR 471) (SC), we have not considered the order of the coordinate Bench of the Tribunal in the case of Urban Ladder Home Décor Solutions Pvt. Ltd. v. ACIT in IT(IT)A No.615 to 620/Bang/2019 dated 17.8.2021.
In the result, the appeal is allowed for statistical purposes.
Pronounced in the open court on this 9th day of March, 2022.
Sd/- Sd/- ( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore, Dated, the 9th March, 2022. /Desai S Murthy /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.