Payments to Facebook, AWS for Advertising, Marketing not Taxable as Royalty: ITAT [Read Order]

Payments to Facebook - AWS - advertising - marketing - Royalty - ITAT - Taxscan

In a relief to Urban Ladder Home Décor Solutions, the Bangalore Bench of Income Tax Appellate Tribunal (ITAT) ruled that Payments to Facebook, AWS for advertising, marketing are not taxable as Royalty.

The assessee, Urban Ladder Home Décor Solutions Pvt. Ltd. is engaged in the business of dealing in home décor products. It sells its products mainly through online marketing. Hence, the assessee has placed its advertisement in the platform of Facebook, Ireland. It has also used a bulk mail facility offered by M/s Rocket Science Group, USA. The assessee has also used Amazon Web Services (AWS) offered by M/s Amazon Inc., USA, which is in the nature of providing information technology infrastructure on a rental basis. All three payees are non-residents.

The AO has mainly invoked the provisions of sec. 9(1)(vi) of the Act in respect of payments made to M/s Facebook and M/s Rocket Science Group (MailChimp) to hold that the same is “royalty”. In respect of payments made for Amazon Web Services, the AO has also referred to the provisions of DTAA entered into India and the USA in addition to sec.9(1)(vi) of the Act. However, the AO has held that these payments are “royalty” mainly considering the provisions of section 9(1)(vi) of the Act.

In respect of payments made to Facebook, Ireland, the CIT(A) has first analyzed the nature of payments. He has examined the agreement entered between the assessee and Facebook and observed that this involves payments by the appellant for the use of, or the right to use of patented software processes.

Thus, the CIT(A) has taken the view that the assessee was given the privilege of accessing/using various components of the Advertisement program created by Facebook in its website.

The coram of Judicial Member, George George K. and Accountant Member, B.R. Baskaran observed that 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 information technology infrastructure facilities on a rental basis. Hence the question of transferring the copyright 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 the 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 the MailChimp facility effectively. In the case of AWS, the payment is in the nature of rent payments for use of infrastructure facilities.

“We are of the view 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 Centre of Excellence Private Ltd (supra). Accordingly, following the ratio laid down by Hon’ble Supreme Court, we hold that the 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,” the ITAT ruled.

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