The Income Tax Appellate Tribunal (ITAT), Chennai bench has held that the payment made for advertisement space on website does not amount to “royalty” to attract TDS under section 195 of the Income Tax Act, 1961.
As per the Re-seller Agreement, ESPN India purchased advertising space on websites owned and hosted by ESPN UK on servers outside India, which was to be sold to advertisers who wished to advertise their product/services. For purchase of advertising space on the websites owned by ESPN UK which were then resold to advertisers, ESPN India was required to make payments to ESPN UK as per Clause 2 of the Re-seller Agreement.
The AO during the course of assessment of TDS returns noted that the payment made by ESPN India should be considered as “Royalty” and hence liable for withholding tax.
Shri Mahavir Singh, Vice President and Dr. M.L. Meena, Accountant Member observed that the Re-seller agreement clearly states that the seller, ESPN UK, directly owns or has the rights to exploit numerous digital media websites and no such right has been transferred to ESPN India. Further Clause 4.2 of the Re-seller agreement, which confirms that ESPN UK controls the amount of advertising space available on the websites and the nature of advertisements permitted to be displayed. Hence, assessee does not in any way control the website / server, nor has been conferred with a right over any part of the website / server.
Diving deeply into the facts, the Tribunal observed that 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.
Quashing the impugned order, the Tribunal held that “The consideration paid by ESPN India is not for ‘use’ of equipment (server) or for any process nor imparting of any information concerning technical, industrial, commercial, or scientific knowledge, experience or skill. Further, no right has been conferred on ESPN India over the server or website belonging to ESPN UK and ESPN India is merely a reseller of advertisement space it purchases on ESPN UK’s website. Further, the reliance of the AO and CIT(A) on the unilateral retrospective amendments to section 9(1)(vi) of the Act to the definition of ‘royalty’ cannot override the more beneficial definition under Article 13(3) of the UK-India Tax Treaty.”
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