PLAY GAMES 24 X 7 PRIVATE LIMITED, MUMBAI V. PRINCIPAL COMMISSIONER OF INCOME TAX - 13, MUMBAI

ITA 3600/MUM/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 0521 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 24-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Fair market value; TDS; Set aside
• Section: 37; 263; 2; 143(3); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “I”, MUMBAI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.3600/M/2018 Assessment Year: 2013-14 M/s. Play Games 24X7 Pvt. Ltd., 401, B-Wing, 4th Floor, Interface 16, Off Malad Link Road, Malad (West), Mumbai – 400 067 PAN: AADCP9139P Vs. Principal Commissioner of Income Tax-13, Room No.122, 1st Floor, Aayakar Bhavan, Maharshi Karve Road, Mumbai - 400020 (Appellant) (Respondent) Present for: Assessee by : Shri P. J. Pardiwala, A.R. Shri Jeet Kamdar, A.R. Revenue by : Ms. Surabhi Sharma, D.R. Date of Hearing : 02 . 05 . 2022 Date of Pronouncement : 31 . 05 . 2022 O R D E R Per : Kuldip Singh, Judicial Member: The appellant, M/s. Play Games 24X7 Pvt. Ltd. (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 28.03.2018 passed by Principal Commissioner of Income Tax-13, Mumbai [hereinafter referred to as the PCIT] invoking revisionary jurisdiction contained under section 263 of the Income Tax Act,1961 (hereinafter referred to as the ‘Act’) qua the assessment year 2013-14 on the grounds inter alia that :- ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 2“1. On the facts and circumstances of the case and in law, the learned Pr. CIT has legally erred in stating that the order passed by the AO is erroneous, despite appropriate inquiries and verifications with respect to allowance of employee welfare cost incurred towards ESOP were made by him during the course of assessment proceedings. 2. On the facts and circumstances of the case and in law, the learned Pr. CIT has legally erred in stating that the order passed by the AO with respect to disallowance of employee welfare cost towards ESOP is erroneous and prejudicial to the interest of revenue, when the AO has taken one of the two views permissible in law. 3. On the facts and circumstances of the case and in law, the learned Pr. CIT has erred in failing to appreciate that the method of accounting adopted by the Appellant with respect to amortization of employee welfare cost during the vesting period is in line with the decision of Special bench in the case of M/s Biocon Ltd TTJ 649] 4. On the facts and circumstances of the case and in law, when initiation of revisionary proceedings under Section 263 of the Act is invalid, subsequent inquiries/verifications made during the course of revisionary proceedings should also be invalid. 5. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned Pr. CIT has legally erred in stating that the order passed by the AO is erroneous, despite appropriate inquiries and verifications with respect to payments made to Facebook were made by him during the course of assessment proceedings. 6. On the facts and circumstances of the case and in law, the learned Pr. CIT has legally erred in holding the payments made to Facebook, Ireland are in the nature of royalty and thus, chargeable to tax in India. The Pr.CIT 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 in India. Accordingly the view of Pr. CIT that the payments would amount to royalty is bad in law. The Appellant craves leave to add, to amend, to alter, to withdraw, to modify and/or to substitute any or all the foregoing grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.” 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the assessee filed its return of income ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 3declaring total income of Rs.1,63,72,570/- which was subsequently revised on 25.10.2013 at the total income of Rs.1,63,72,570/-. Assessing Officer (AO) by making disallowance of Rs.10,46,126/-, being the 20% of Rs.52,30,632/- claimed by the assessee as travelling and conveyance expenses and Rs.5,15,532/- being the 20% of Rs.25,77,660/- claimed by the assessee as miscellaneous expenses, framed the assessment at the total income of Rs.1,89,30,410/- under section 143(3) of the Act. However, the Ld. PCIT by invoking the revisionary jurisdiction issued a notice under section 163 of the Act by flagging the issue that “the AO has failed to examine and conduct the enquiries qua the claim of deduction of employees’ welfare cost of Rs.1,53,88,418/- as per vesting period under Employee Stock Option (ESOP) scheme and that the AO has also failed to conduct enquiries qua the payment made to Face Book Ireland Ltd. (for short ‘FB Ireland’) to the tune of Rs.1,76,29,463/- as advertisement expenses by making disallowance under section 40(a)(i) of the Act. 3. Declining the contentions raised by the assessee PCIT proceeded to conclude that assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the revenue on the aforesaid two issues and thereby set aside the assessment order with direction to decide the issue afresh after providing opportunity of being heard in the light of the observations made in the order passed under section 263 of the Act. Feeling aggrieved from the impugned order passed by the Ld. PCIT under section 263 of the Act, the assessee has come up before the Tribunal by way of filing present appeal. ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 44. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. 5. Undisputedly the assessee company has issued shares to its employees under ESOP at a lower price than the fair market value of such shares by treating the difference between fair market value of shares and issue price as Employee Welfare Cost and debited the amount to its profit & loss account. It is also not in dispute that the assessee company has claimed deduction of Rs.1,53,88,418/- (Rs.7,25,18,244 minus Rs.5,71,29,826/-) towards Employee Welfare Cost. It is also not in dispute that during the year under consideration assessee company has made payment to the tune of Rs.1,76,29,464/- to FB Ireland for the purpose of advertisement. 6. In the backdrop of the aforesaid facts and circumstances of the case the Ld. A.R. for the assessee contended inter alia that so far as the question of claiming discount of Rs.1,53,88,418/- being in the nature of Employees’ Welfare Cost, otherwise allowable under section 37 of the Act, is concerned detailed submission dated February 3, 2016 explaining the basis for claim of deduction of Employees’ Welfare Cost was filed before the AO and that this issue has already been decided by the decision of Special Bench, Bangalore ITAT in case of M/s. Biocon Ltd. vs. DCIT (2013) 35 taxmann.com 335/ (2014) 144 ITD 21 (Bangalore – Trib.) (SB)/ (2013) 155 TTJ 649 and as such initiation of proceedings under section 263 of the Act are not sustainable; that so far as second ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 5ground for initiating the proceedings under section 263 of the Act as to withholding tax on payment made to Facebook is concerned, the complete details of the payment made to FB Ireland was submitted to the AO vide submissions dated February 3, 2016, who has decided the issue after verifying the same. This issue is also covered in assessee’s own case for A.Y. 2015-16 order dated 23.03.2022 in ITA No.1533/M/2019 and as such the assessment order is neither erroneous nor it is prejudicial to the interest of the revenue. 7. However, on the other hand, the Ld. D.R. for the Revenue in order to repel the arguments addressed by the Ld. A.R. for the assessee relied upon the order passed by the AO as well as the Ld. CIT(A), also filed written submissions which have been made part of the judicial record. 8. The Ld. D.R. also relied upon the decision rendered by the Hon’ble Guwahati High Court in case of CIT vs. Jawahar Bhattacharjee (341 ITR 434), Hon’ble Rajasthan High Court in case of ITO vs. Emery Stone Manufacturing Company (213 ITR 843), Hon’ble Delhi High Court in cases of Gee Vee Enterprises vs. ADCL (1975) 99 ITR 375 (Delhi), DLF Commercial Developers Ltd., Hon’ble Supreme Court in case of Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC), Hon’ble Calcutta High Court in case of India Finance Ltd. 389 ITR 242 and co-ordinate Bench of the Tribunal in case of Kapil Mehta, Delhi vs. PCIT. 9. So far as first ground for invoking the revisionary jurisdiction by the Ld. CIT(A) under section 263 of the Act that the order passed by the AO by not disallowing Employee Welfare Cost ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 6towards ESOP being erroneous and prejudicial to the interest of Revenue is concerned, first of all the Ld. A.R. for the assessee drew our attention towards annexure-1 annexed with the reply to show cause notice issued under section 263 of the Act. Annexure A is a letter dated February 3, 2016 written by assessee to the AO giving complete detail of ESOP cost recognized claim in income tax. Perusal of the annexure-1 shows that the complete detail as per recognized method of accounting has been given to the AO, who has though not discussed this issue in assessment order, but allowed the same by examining it. The Ld. A.R. for the assessee further contended that assessment order qua ESOP disallowance is neither erroneous nor prejudicial to the interest of the revenue as this issue has already been decided by the Special Bench of Tribunal in case of M/s. Biocon Ltd. 2013 155 TTJ 649 in favour of the assessee. 10. We have perused the order passed by the Special Bench of the Tribunal in case of Biocon Ltd. (supra) which is on identical facts. In the instant case the assessee company has measured the cost of shares based on intrinsic value method as per guidance given by Institute of Chartered Accountants of India. The assessee company got the valuation from a chartered accountant/merchant banker and value of per share based on the report of such valuer is considered as fair market value (FMV) for calculating the discount of the issue on the Employee Stock Option. Thereafter, difference is recognized as “employee staff welfare expenses” over the vested period starting from date of grant. ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 711. Special Bench of the Tribunal discussed this issue in detail and decided in favour of the assessee by returning following findings: “11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head 'Profits and gains of business or profession” 12. So applying the ratio of the order passed by the co-ordinate Bench of the Tribunal that once the discounted shares to the employees are held as consideration for employment the natural collalary to follow is that discount in granting share to the employees is an expenditure; such expenditure is on account of an unascertained liability and as such discount on shares under ESOP is an allowable deduction. 13. So when the complete detail as to the calculation of amount on account of discount on issue of shares under ESOP as claimed in its return of income as per vesting period under the ESOP scheme has been given to the AO during assessment proceedings the same has been rightly allowed by the AO. So on this score the order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue. So when issue has been decided, after discreet ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 8enquiries and verification by the AO initiation of proceedings under section 263 of the Act are not sustainable in the eyes of law. 14. So far as second ground for initiating the proceedings under section 263 of the Act by the Ld. CIT(A) that AO has failed to conduct enquiries “with regard to payments” made to FB Ireland to the tune of Rs.1,76,29,463/- as advertisement expenses without deducting any tax at source and without examining if they were advertisement expenses or use of server of the Facebook which is placed in Ireland and examination of these facts, the issue of deduction at source and consequence disallowance under section 40(a)(i) of the Act has not been examined is concerned, the Ld. A.R. for the assessee contended that this issue has already been decided in assessee’s own case in favour of the assessee in the subsequent years in ITA No.1533/M/2019 & ors. for A.Y. 2015-16. 15. We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2015-16 wherein identical issue was raised by the Revenue by filing cross objection and the same has been decided in favour of the assessee by returning following findings: “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 ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 9of 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 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 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 ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 10made 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 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.” 16. So when we examine the issue at hand in the light of the aforesaid order passed by the co-ordinate Bench of the Tribunal which is on identical facts, again the order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue because while incurring the advertisement cost of Rs.1,76,29,464/- by the assessee company to FB Ireland for banner advertising on Facebook, the assessee company submits the advertisement related ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 11information on the interface provided by Facebook in required format. Thereafter, Facebook after due verification of the advertisement uploads the advertisement on its server. In these circumstances such payment does not fall under the definition of royalty under the Act and the tax treaty between India and Ireland as has been decided by the co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2015-16. So the impugned order passed by the Ld. PCIT on this ground is also not sustainable in the eyes of law. 17. Written submissions filed by the Ld. D.R. and case law relied upon is not applicable to the facts and circumstances of the case. Hence, we are of the considered view that the AO has passed the assessment order after enquiry and due verification on the basis of submissions and details furnished by the assessee and as such order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue. Resultantly, impugned order passed under section 263 of the Act by Ld. PCIT is not sustainable in the eyes of law, hence ordered to be quashed. The appeal filed by the assessee is hereby allowed. Order pronounced in the open court on 31.05.2022. Sd/- Sd/- (M. BALAGANESH) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 31.05.2022. * Kishore, Sr. P.S. ITA No.3600/M/2018 M/s. Play Games 24X7 Pvt. Ltd. 12Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.