PLAY GAMES 24 X 7 PRIVATE LIMITED, MUMBAI V. DY.CIT-13(1)(2), MUMBAI

ITA 1533/MUM/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 6212 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2015-2016
• Appeal Filed On: 13-03-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Residential status; Permanent establishment; Condonation of delay; TDS; Set aside
• Section: 154; 2; 40(a)(ia); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “I” MUMBAI BEFORE SHRI PROMOD KUMAR (VICE PRESIDENT) AND MS. SUCHITRA KAMBLE (JUDICIAL MEMBER) ITA No. 1533/MUM/2019 Assessment Year: 2015-16 Play Games 24X7 Private Limited, 401, B-Wing, 4 th floor, Interface 16, Off Malad Link Road, Malad (West), Mumbai-400067. Vs. DY. CIT-13(1)(2), Aayakar Bhavan, Maharshi Karve Road, Mumbai-400020. PAN No. AADCP 9139 P Appellant Respondent C.O. No. 13/MUM/2021 (In ITA No. 1533/MUM/2019) Assessment Year: 2015-16 DY. CIT-13(1)(2), Aayakar Bhavan, Maharshi Karve Road, Mumbai-400020. Vs. Play Games 24X7 Private Limited, 401, B-Wing, 4 th floor, Interface 16, Off Malad Link Road, Malad (West), Mumbai-400067. PAN No. AADCP 9139 P Appellant Respondent Assessee by : Mr. Percy J. Pardiwala, Sr. Advocate Revenue by : Mr. Chintamani V. Dingankar, Sr. DR Date of Hearing : 19/01/2022 Date of pronouncement : 23/03/2022 Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 2 ORDER PER MS. SUCHITRA KAMBLE, JM The appeal being ITA No. 1553 of 2019 was filed by the assessee against the order dated 26.12.2018 passed by Commissioner of Income Tax (Appeals)-21, Mumbai [in short ‘CIT(A)’] for assessment year 2015-16. The Cross-objection was filed by the Revenue on 19.02.2021 with the approval from the office of Pr. CIT-5, Mumbai thereby stating that cross-objection needs to be raised on the issue and the same was came across during the course of hearing in this case. 2. The grounds of appeal are as follows: ITA No. 1553/Mum/2019 (Assessee’s appeal) 1. Ground 1 – Erred in not adjudicating on following points: 1.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in not adjudicating the reliance placed by the Appellant on the decision of Supreme Court laid down in the case of G.E. India Technology Cen. (P.) Ltd. (193 Taxman 234) which held that the provisions relating to Tax Deducted at Source applies only to those sums which are “chargeable to tax” under the Income-tax Act, 1961. 1.2 On the facts and circumstances of the case and in law, the learned CIT(A) has factually erred in claiming that the Assessing Officer considered the payments to Facebook taxable under Section 9 of the Act without acknowledging the fact that the Assessing Officer did not actually determine the taxability of payments and held that all payments to non-residents are liable to withholding of taxes under Section 195 of the Act. 2. Ground 2- Erred in concluding that the payments made to Facebook, Ireland (‘Facebook’) towards banner advertisement expenses amounting to INR 10,46,35,355 are in the nature of Fees for Technical Services (‘FTS’) which are rendered in India and hence within the meaning of Section 9(1)(vii) of the Act and thereby, erred in disallowing the aforesaid sum in view of the provision of Section 40(a)(ia) of the Act. Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 3 2.1 On the facts and circumstances of the case and in law, the learned CIT(A) has legally erred in stating that the payments made to Facebook towards banner advertisement expenses amounting to INR 10,46,35,355 should be disallowed under Section 40(a)(ia) read with Section 9(1)(vii) and 195 of the Act on account of non-withholding of taxes, without appreciating the fact that the payments were clearly in the nature of business profits and not ‘FTS’, as held by several tribunal decisions. 2.2 On the facts and circumstances of the case, the learned CIT(A) has factually erred in holding that the Appellant has not filed the terms and conditions agreed between the Appellant and Facebook.com, without acknowledging the fact that the Appellant has not entered into any such agreement and moreover, the Appellant has filed the Community Payment Terms, the only agreement and moreover, the Appellant has filed the Community Payment Terms, the only agreement entered into by the Appellant with Facebook in relation to payment made for banner advertisement. 2.3 On the facts and circumstances of the case, the learned CIT(A) has factually erred in alleging that Facebook.Com USA, has provided the services to the Appellant, without conducting appropriate enquiries and verifications and without appreciating the fact that the Community Payment Terms entered into by the Appellant is with Facebook, Ireland. 2.4 On the facts and circumstances of the case, the learned CIT(A) has factually erred in alleging that payment is to an entity which is acting as a gateway for remitting funds to a US entity viz. Facebook Inc. The above allegation made by learned CIT(A) is without placing reliance on any evidences or conducting any enquiries, investigation or verification, merely on his own conjectures and surmises. Further the learned CIT(A) factually erred in making the above allegation without appreciating the fact that the Community Payment Terms entered into by the Appellant is with Facebook, Ireland. Further, the Appellant is governed by the terms of the agreement entered into with Facebook, Ireland and that, the Appellant is not privy to any terms of the transaction between Facebook, Ireland and Facebook Payments Inc. 2.5 On the facts and circumstances of the case, the learned CIT(A) has factually erred in concluding that Facebook.com provided services of uploading the Appellant’s website and material on its portal, so that any person vising the Appellant’s website and/or looking for website address of the Appellant could visit the Facebook portal and thereby visit Appellant’s website by clicking on Facebook.com. The learned CIT(A) has failed to appreciate that the payments made to Facebook were merely for the purpose of displaying of banner advertisement on Facebook Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 4 web page and Facebook did not act as an intermediary for exiting customers and clients to visit the Appellant’s website. 2.6 On the facts and circumstances of the case, the learned CIT(A) has factually erred in holding that the Appellant has not provided any document / information to prove that Facebook, Ireland has provided the services without acknowledging the fact that the Appellant provided Community Payments Terms to substantiate that the payments for advertisement expenses were to Facebook, Ireland were made under the said agreement. 2.7 On the facts and circumstances of the case, the learned CIT(A) has factually erred in stating that the Appellant has been unable to substantiate that Appellant does not have any contract with Facebook Inc, USA, without verifying the role of Facebook Inc. merely on his own conjectures and surmises. 2.8 On the facts and circumstances of the case, the learned CIT(A) has factually erred in alleging that the advertising services are canvassed through Indian subsidiary of Facebook.com viz. Facebook India Online Services Private Limited, located in Hyderabad, by stating the same as a dependent agent of Facebook.com. Further, the learned CIT(A) alleged that Appellant was liable to withholding of taxes under Section 195 of the Act stating that these advertising revenues of the Indian subsidiary would be taxable in India. The above allegation of learned CIT(A) is without conducting any inquiries and verifications and thereby, passing the order on the basis of mere suspicion and own surmises and conjectures. 2.9 On the facts and circumstances of the case, the learned CIT(A) has factually erred in holding that Facebook.com has rendered services to its clients in India and accordingly, the income on such services is taxable in India as FTS. The learned CIT(A) has taken this position without conducting any inquiries and verifications on the fulfillment of requirements of the definition of FTS under Income-tax Act, 1961 and Double Tax Avoidance Agreement between India and Ireland. 2.10 On the facts and circumstances of the case and in law, the learned CIT(A) has legally erred in concluding that the services provided by Facebook, Ireland are in nature of FTS under Section 9(1)(vii) of the Act. However, in some pages of the order, the learned CIT(A) has stated that the services have been rendered by Facebook.Com USA. Thus, the learned CIT(A) has failed to conclusively determine regarding which entity has provided services. Thus, it appear that the learned CIT(A) has failed to examine the facts of the case before passing the order. 2.11 On the facts and circumstances of the case, the learned CIT(A) has failed to appreciate that the payments were clearly in the nature of business profits as held by several tribunal decisions and admittedly given that Facebook, Ireland does not have a Permanent Establishment in India, such payments would not be liable to tax Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 5 in India. Accordingly, the view of learned CIT(A) that the payments would constitute FTS is bad in law. 2.12 On the facts and circumstances of the case and in law, the learned CIT(A) has legally erred in concluding that payment made to Facebook, Ireland is in nature of FTS under Section 9(1)(vii) of the Act, without appreciating the fact that FTS covers under its ambit rendition of only those managerial, technical or consultancy that requires human element/intervention, as held by Supreme Court in the case of Bharti Cellular and that, the learned CIT(A) has failed to conduct appropriate enquiries and verification to conclude the involvement of human element while displaying and advertising of the Appellant. 2.13 On the facts and circumstances of the case and in law, the learned CIT(A) has legally erred in not considering submission of the Appellant, regarding absence of human intervention on part of Facebook, Ireland in order to display / provide banner advertisement on its webpage. 2.14 On the facts and circumstances of the case, the learned CIT(A)has legally erred in stating that all the cases cited by the Appellant discussed whether advertisement charges constituted Royalty or not and not whether these payments constitute FTS without appreciating the fact that such judicial precedents have also discussed the taxability under Section 9(1)(vii) of the Act for payments toward advertisements expenses. The learned CIT(A) has further failed to distinguish judicial precedents relied upon the Appellant. 2.15 On the facts and circumstances of the case and in law, the learned CIT(A) legally erred in holding that payment to Facebook, Ireland was in nature of FTS and hence liable for withholding of taxes without considering the recommendation of the High-Powered Committee constituted by the Central Board of Direct Taxes vide Notification No. F No 500/ 122/99 dated December 16, 1999, which suggests that payment for banner advertisement is not in the nature of FTS. 3. Ground 3 – Erred in disallowing Travelling Expenses 3.1 On the facts and circumstances of the case and in law, the learned CIT(A) has legally erred in disallowing the Travelling Expenses amounting to INR 24,20,753 on an adhoc basis on account of failure of furnishing relevant details without appreciating the fact that the Appellant had from time to time submitted for details called for by the learned AO. 4. Ground 4 – Erred in disallowing Miscellaneous Expenses 4.1 On the facts and circumstances of the case, the learned CIT(A) has legally erred in disallowing Miscellaneous expenses amounting to INR 12,71,459 on ad-hoc basis, without providing an explicit reason for such disallowance, whilst appropriate and detailed submission was made by the Appellant during the course of assessment proceedings.” Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 6 C.O. No. 13/Mum/2021 filed by the Revenue: “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) in his decision erred in not holding the payment made by the assesse to Facebook as Royalty and instead held it as fee for technical services (FTS) and liable for TDS deduction u/s 40(a)(i) of the Act. 2. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) on this issue may be set aside and that of the AO be restored.” 3. The assessee-company is engaged in the business of Online Games Services Sector and is a resident of India. The return of income was e-filed by the assessee on 29.09.2015 declaring total income of ₹22,19,08,470/-. During the course of assessment proceedings, the assessee was asked to explain as to why withholding tax on payment made to Facebook to the tune of ₹10,46,35,355/- has not been deducted and why it should not be disallowed as per disallowance u/s 40(a)(ia) of the Act. After taking cognizance of the reply of the assessee as well as details given by the assessee during the assessment proceedings, the Assessing Officer made disallowance of ₹10,46,35,355/- on account of non-deduction of TDS u/s 40(a)(ia) of the Act. The Assessing Officer further made disallowance of expenses related to travelling and conveyance as well as miscellaneous expenses towards ₹24,20,753/- and ₹18,24,506/-. The assessment was completed on 29.12.2017. The Assessing Officer vide order under Section 154 dated 29.03.2019 passed rectification thereby holding that the Section quoted by the Assessing Officer as 40(a)(ia) of the I.T. Act in the assessment order dated 29.12.2017 for the said disallowance be read as Section 40(A)(i) of the I. T. Act, 1961. Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 7 4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee thereby sustaining the addition related to disallowance u/s 40(a)(ia). 5. The Ld. AR submitted that the assessee has not rendered any technical services from the company Facebook. In fact, the payments made to the Facebook cannot come under the purview of Section 9 of the Act as all the payments to non-resident are not liable to withhold taxes u/s 195 of the Act. The payments made to Facebook, Ireland towards banner advertisement expenses are not in the nature of fees for technical services which was rendered in India and therefore could not come within the meaning of section 9(1) of the Act and therefore disallowance u/s 40(a)(ia) is not valid disallowance. The Ld. AR submitted that the payments were clearly in the nature of business profits and not that of fees for technical services as held by several Tribunal decisions. The Ld. AR further relied upon the decision of Hon’ble Supreme Court in the case of G.E. India Technology Centre Pvt. Ltd. 193 Taxman 234 wherein it is held that the provisions relating to tax deducted at source applies only to those sums which are chargeable to tax under the Income Tax Act, 1961. The assessee did not enter into any agreements and only filed the community payment terms in relation to payment made to the Facebook, Ireland for banner advertisement. The Ld. CIT(A) as well as Assessing Officer has made categorically incorrect finding without relying upon any evidences and also did not conduct any inquiries, investigation or verifications towards the actual transactions. The Assessing Officer merely on his own conjunctures and surmises made the addition. The assessee is governed by the terms of the agreement entered into Facebook Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 8 Ireland and assessee is not the signatory to the terms / agreement between Facebook Ireland and Facebook Payment Inc. The Ld. AR further submitted that Facebook did not act as an agent for existing customers and clients could visit the website. It is only for a banner advertisement for which the click to the banner is sufficient and no technical services required from Facebook Ireland. The Ld. AR submitted that the assessee provided community payments terms to substantiate that payments for advertisement expenses where the Facebook Ireland as per the said agreement before the Assessing Officer. The Revenue Authorities never disputed the said terms of Facebook Inc. at any stage between the assessee and Facebook Ireland. The Ld. CIT(A) has not verified the fulfilment /requirement of the definition of fees for technical services under the Income Tax Act, 1961 and Double Taxation Avoidance Agreement between India and Ireland. It is admitted fact that Facebook Ireland does not have any permanent establishment in India. Therefore, such payment would not be liable to tax in India and there is no element of technical services involved in the present assessee’s case. The Fees for Technical Services covers under its ambit only those managerial, technical or consultancy that requires human intervention as held by the Hon’ble Supreme Court in the case of Bharati Cellular. There is no human intervention on the part of Facebook, Ireland regarding the banner advertisement on its web page. As per rectification order under Section 154 dated 29.03.2019 passed by Assistant Commissioner of Income Tax-13(1)(2), the Department/Revenue has rectified the original order dated 29.12.2017. The Assessing Officer rectified Section quoted at Sr. No. (iii) of para 4.3 made the Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 9 disallowance of ₹10,46,35,355/- on account of non-deduction of TDS u/s 40(a)(i) of the Act. 6. The Ld. DR submitted that the cross-objection should be allowed and the delay should be condoned as during the proceedings, the Revenue has rectified its original order and corrected the mistake of giving proper section i.e. 40(a)(i) of the Act which deals with royalty and deduction to that extent. The Ld. DR relied upon the assessment order and the order of the Ld. CIT(A) as well. 7. We have heard both the parties and perused all the relevant material available on record. The assessee company is engaged in the business of providing a platform for online gaming, more particularly that of Rummy. The assessee company incurred advertisement expenses amounting to Rs.10,46,35,355/- for banner advertisement on the website of Facebook. It is pertinent to note that for the purpose of uploading the banner advertisement on Facebook the advertisement related information is put up at the interface provided by the Facebook, Ireland in the required format. Facebook, Ireland, after due verification of the advertisements, upload the advertisement on its server. While uploading the advertisement on Facebook it is an admitted position that the assessee company does not have any control over the functioning of the interface provided by the Facebook, Ireland. The entire operation and maintenance of the server while providing the advertisement platform is under the control of Facebook, Ireland. It is an admitted fact that the assessee company makes use of standard facility which is provided for displaying advertisement on the website of Facebook, Ireland which was also Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 10 provided to its other global customers in the like manner. Equipment/installations are all owned by Facebook, Ireland and the assessee company does not have any role to play in either maintaining or involving into any managerial activities with the Facebook, Ireland. There is no dedicated equipment/installation/any portion of equipment/installation is earmarked/provided by the Facebook, Ireland by the assessee company. As per the payment agreement between the Assessee company and Facebook, Ireland, the assessee company does not have any economic or possessory right with regard to the server of the Facebook and the server is not at the disposal of the assessee company. The assessee company does not get any right to modify/deal with the server in any manner. The server through which the advertisement is uploaded is not at all located in India. Further, there is no role played by the Facebook India Online Pvt. Ltd. in assessee’s case and thus there is no element of permanent establishment of Facebook, Ireland in India. The assessee company during the assessment proceedings has provided the tax resident certificate of Facebook, Ireland and as well as copy of remittance of the certificate (form 15CB) to the Assessing Officer. The Assessing Officer has proceeded on the basis that as per the provisions of Section 195 of the Act any amount paid to non-resident will attract this provision and the assessee is liable to make TDS except as provided under Section 195(2) or under Section 197 where such deductee obtain nil deduction certificate from the Assessing Officer and furnish the same to the deductor before receiving the credit of such amount. In the present case, the relevant sub-section 2 to Section 195 has specifically stated that a person responsible for deducting any such sum chargeable under this Act who is a Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 11 non-resident considers that the whole sum would not be income chargeable in the case of recipient the said person “may make an application” in such form and manner to the Assessing Officer to determine in such a manner as may be a prescribed. The said application though in the present case has not been made by the assessee cannot be treated as a mandate because the Section clearly states that such person “may make an application” as may be prescribed. In the present case, the assessee was very well aware that Facebook, Ireland is a non-resident and the advertisement payment made to Facebook, Ireland will not come under the purview of TDS and, therefore, has chosen not to deduct tax at source. The assessee has relied upon the decision of Uraban Ladder Home Decor Solutions Pvt. Ltd. - ITA No.615 to 620/Bang/2020 - order dated 17.08.2021, Google India Pvt. Ltd. - 127 Taxmann.com 36 - Karnataka High Court, M/s. Inception Business Services - ITA No.2674/Chny/2016 - order dated 18.02.2019, Carat Lane Trading (P) Ltd., 89 Taxmann.com 434 as well as decision in the case of ITO vs. Right Florist Pvt. Ltd., 25 ITR (T) 639 (Kolkata Tribunal). All these decisions are though factually identical yet the observations made in these decisions are applicable in the present case. These decisions also highlight that advertisement expenses in respect of non-resident. It is pertinent to note that the assessee has given specific task of advertisement banner to the Facebook Ireland. The element of fees for technical services is determined if there is any technical aspect involved by providing services by the company from whom the services are rendered. As per letter dated 19.01.2015, Facebook Ireland stated that no servers that host the Facebook.com product are located in India. In the present case, the assessee has demonstrated before us that the assessee Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 12 is taking the privilege of platform of Facebook, Ireland which is not either in the nature of royalty or technical services. The payment terms were specifically defined in the payment agreement with Facebook Ireland which clearly indicates that the Facebook Ireland will provide platform banner for advertisement to the assessee-company. Thus there is no element of fees for technical services or royalty is involved in this case. Thus, the Assessing Officer as well as the CIT(A) has totally ignored the actual fact of the present case without demonstrating that the services are coming under the purview of FTS or royalty. Therefore, the appeal filed by the assessee is allowed. 8. As regards, the cross-objection of the Revenue, the same is filed in 2021 whereas the appeal was filed by the assessee in 14.03.2019 which is more than two years for which no condonation of delay application or any reason was explained by the Revenue. Merely stating that at the time of hearing, the Department find it suitable to file cross-objection thereby contesting that the payment made by the assesse to Facebook are in the nature of Royalty and not as fee for technical services (FTS) and hence the same is liable for TDS deduction u/s 40(a)(i) of the Act. But this contention of the revenue does not sustain on merit as we have observed that the element of royalty was not at all involved in the advertisement platform provided by Facebook, Ireland to the assessee company. Hence, the Cross Objection filed by the Revenue is dismissed. Play Game 24X7 Pvt. Ltd. ITA No. 1533/M/2019 & CO. No. 13/M/2021 13 9. In the result, the appeal filed by the assessee is allowed whereas the Cross-objection filed by the Revenue is dismissed. Order pronounced in the open Court on 23/03/2022. Sd/- Sd/- (PRAMOD KUMAR) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICIAL MEMBER Mumbai; Dated: 23/03/2022 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Sr. Private Secretary) ITAT, Mumbai