No TDS on Payment to Facebook, Amazon Web-Services for Advertisements: Karnataka HC rules in Favour of Urban Ladder Home Décor [Read Order]

In a recent case, the Karnataka High Court has upheld the order of Income tax appellate tribunal (ITAT) which was in favour of asseessee and held that Tax Deduct at source (TDS) is not applicable  on payments made to Facebook, Amazon Web-Services for advertisements.

Urban Ladder Home Décor Solutions Pvt. Ltd, the assessee-respondent claims to be a Company involved in business of dealing in home décor products.  It has placed advertisements in several social medias such as Facebook, Amazon Web services and Rocket Science Group, LLC, US.  Assessee has made payments to  non-residents without deducting tax at source. 

Assessing Officer (‘AO’ )  treated the assessee in default and passed orders under Section 201(1) and 201(1A) of the Income Tax Act, 1961 (‘the Act’) for the assessment years 2015-16, 2016-17 and 2017-18 vide orders dated 21.02.2018.  Assessee preferred appeals before Commissioner of Income Tax (Appeals) [‘CIT(A)’] against the said orders.  The said Authority passed order on 17.03.2020 confirming the orders passed by the AO.  The assessee preferred appeal before the ITAT. The ITAT, vide order dated 17.08.2021, has allowed the appeals for the aforesaid years. 

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Assessee preferred appeals before the Commissioner of Income Tax (Appeals) against the orders. The Authority passed order confirming the orders passed by the AO. The assessee preferred appeal before the ITAT. The ITAT allowed the appeals. The ITAT held that there was no obligation on the part of the assessee to deduct TDS on payments made to non-resident Companies without analyzing the facts and materials of the present case with provisions of respective Double Taxation Avoidance Agreements (DTAA).

Read More: Karnataka HC Quashes Penalty for Non-Deduction of TDS on Professional Advice

The department  representative Sri. Ravi Raj.Y.V, contended that  the ITAT had erred in allowing the appeals of the assessee by holding that there was no obligation on the part of the assessee to deduct TDS on payments made to non-resident Companies without analyzing the facts and materials of the present case with provisions of respective Double Taxation Avoidance Agreements (DTAA). 

According to him, ITAT has clearly erred to hold that, the payments cannot be regarded as ‘Royalty’ ignoring that nature of usage of technology, model or process and equipments are covered by Explanation 2(iii) to 9(1)(vi) of the Act and therefore, the assessee ought to have deducted TDS on such payments.  He stated that, the reliance placed by the ITAT to hold that assessee is not liable to deduct TDS by relying on the decision of the Supreme Court in the case of Engineering Analysis is clearly distinguishable on facts. 

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On the other hand, Sri. Sandeep Huilgol, counsel appearing for the respondent-assessee, at the outset, would submit that, against the same impugned order, two more appeals were filed by the appellants Revenue which were numbered as ITAs No.16/2022 and 17/2022 relevant for assessment year 2017-18, which came to be dismissed by this Court vide orders dated 23.09.2024 on the ground that, the tax effect of the issues arising in the said appeals were less than the monetary limits prescribed by the CBDT vide its Circular bearing No.9/2024 dated 17.09.2024 read with Circular No.5/2024 dated 15.03.2024.

The  division bench of Justices V Kameswar Rao and S Rachaiah has noted that the services offered by non-resident companies are only enabling services that enable an individual to efficiently use the MailChimp facility or post his advertisement content on the Facebook platform. The payment for the usage of infrastructural facilities in the case of Amazon is similar to rent. The payments made to the aforementioned three non-resident companies do not qualify as "royalty" under the DTAA.

The payments made to the three non-resident companies mentioned above do not qualify as "royalty" under the DTAA, the court ruled in rejecting the department's appeal against the ITAT's ruling.

To Read the full text of the Order CLICK HERE

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