The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the payments made for advertising through Facebook and other digital advertising companies shall not be subject to TDS under section 195 of the Income Tax Act, 1961 since the same is not in the nature of “royalty” as per the double taxation avoidance agreement (DTAA).

Before the Tribunal, the assessee, Moonfrog Labs Pvt. Ltd contended that the advertisement expenses were paid among others to Facebook, Ireland, Tapjoy, USA and Motive Inc, USA. They submitted the TRCs, no PE declarations and explained that the advertisement expenses paid to Facebook Inc, and other entities are not liable for TDS under section 195.

However, the Assessing Officer held that the advertisement expenses paid to Facebook, Tapjoy and Motive Inc shall be disallowed under section 40(a)(i) for non deduction of tax at source under section 195.

The Two-Member of the Tribunal found that the Supreme Court, in the case of Engineering Analysis Centre of Excellence, held that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act.

The bench comprising Judicial Member Ms. Beena Pillai and Accountant Member Mr. Chandra Pujari held that “it is pertinent to mention that the Hon’ble Supreme Court has analysed the provisions of Copy right Act and their applicability to the payments made for use of software. We also notice that the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd (supra) has been reversed by Hon’ble Supreme Court in paragraph 101-102 of its order. Similarly decision of coordinate bench of this Tribunal in case of Google India Pvt. Ltd. vs. JCIT reported in (2018) 93 taxmann.com 183 relied by Ld.Sr.DR has been remanded back to ITAT by Hon’ble Karnataka High Court.”