INCOME TAX ACT, 1961

Section 9(1)(vi)

Income deemed to accrue or arise in India - Under section 9(1)(vi) - Royalty - Payment made to non-resident for using information technology facilities treated as royalty

Assessee company was engaged in dealing in home Decor products. It sold its products mainly through online marketing. Hence, assessee has placed its advertisement in the platform of Facebook, Ireland. It also used 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 as in the nature of providing information technology infrastructure on rental basis. All the three payees were non-residents. During the course of survey operation, the AO noticed that the assessee company has made payments to non-residents towards advertisement and marketing expenses without deducting tax at source. The AO took the view that the assessee was liable to deduct tax at source from the payments made to non-residents. The AO examined the taxability of above cited payments as per the provisions of section 9(1)(vi) of the Act, more particularly under clause (iii) and (iva) of Explanation 2 to section 9(1)(vi) of the Act. The AO has also observed that these payments have been examined as per DTAA provisions. However, the AO has made reference to DTAA provisions while examining the payments made to AWS. Since there was failure to deduct tax at source by the assessee, the AO treated the assessee as assessee in default in all the three years under consideration and raised demand under section 201(1) of the Act and also charged interest under section 201(1A) of the Act. AO treated payment made by assessee as royalty and, therefore, treated assessee as assessee-in-default under section 201(1)/(1A) for non-deduction of tax from said payment.Held: Recipients, i.e., M/s. Facebook and Rocket Science group only allowed assessee to use their facilities for the purpose of creating advertisement content. The payment made to Amazon Web Services (AWS) was 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 did not give any specific license for use or right to of any of the facilities (which include software) and those facilities were not going to be used for the use in the business of the assessee. The right to use those facilities, was inter-twined with the main objective of placing advertisements in the case of Facebook and Mailchimp. In the case of AWS, payment was made only for using of information technology infrastructure facilities on rental basis. Hence, question of transferring copyright over those facilities does not arise at all. The agreements extracted above also make it clear that copyright over those facilitating software was not shared with the assessee. In any case, the main purpose of making payment was to place advertisements only and not to use facilities provided by non-resident companies. Thus, facilities provided by non-resident companies were only enabling facilities, which helped a person to place his advertisement contents on the platform of Facebook or to use Mail Chimp facility effectively. In case of AWS, the payment was in the nature of rent payments for use of infrastructure facilities. Accordingly, payments made to the above said three non-resident companies did not fall within the meaning of 'royalty' and did not give rise to any income chargeable in India and there was no requirement to deduct tax from those payments under section 195. Hence, assessee could not be considered as an assessee-in-default under section 201(1).

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