Services of web promotion, social media management held not liable to withholding tax

Services of web promotion, social media management held not liable to withholding tax u/s 195 as per the provisions of the DTAA

ABCAUS Case Law Citation:
ABCAUS 3335 (2020) (07) ITAT

Important case law relied upon by the parties:
ITO vs. B. A. Research India Pvt. Ltd.
ITO vs. Cadila Health Care Ltd.
Mckinsey & Co. Inc. vs. ACIT [2006] 99 ITD 549 (Mum)
Pinstorm Technologies (P) Ltd. vs. ITO [2012] 24 345 (Mumbai)
ITO vs. Right Florists (P.) Ltd. [2013] 32 99
Yahoo India (P.) Ltd. vs. Deputy CIT [2011] 11 431 (Mumbai)

In the instant case, the appeal of the assessee was directed against the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) in disallowing expenses on the ground of non-deduction of withholding tax.

The assessee was engaged in the business of web designing SEO services, Social Media Management, Bulk SMS, email management, Website Advertising, Online Video Management, Mobile Application Designing.

During the relevant assessment year, the asssessee had made payments to a foreign entity for obtaining the services of data promotion, social media management and general consulting.

The assessee explained that the said foreign entity was managing and overseeing the various on page and off page activities which drive traffic to a specific website. The services provided were in the nature of site   promotional   activity   i.e.   bandwidth provisions, data storage and web hasting services using the servers located in Foreign Country.

The AO was of the view that the payments made by the assessee were in the nature of payment for technical or management services or execution of contract on which TDS was liable to be made u/s 195 of the Income Tax Act, 1961 (the Act).

Accordingly, the AO disallowed the expenses u/s 40(a)(ia) of the Act.

The CIT(A) dismissed the appeal of the assessee holding that the payment made was a fee for technical services and squarely covered under the Explanation 2 to section 9(1)(vii) of the Act.

The Tribunal observed that the assessee had obtained the services of web promotion, social  media  management  services from a foreign entity located in a foreign country and  they  had used  many  techniques such as web content  development, search engine optimization to increase the  site traffic.   

It was noted that the entire transaction had taken place on internet through virtual server. Servers were located worldwide outside not under the control of payer and it was used for hiring of space for domain hosting and  display of advertisement on the server located worldwide.

The Tribunal stated that the provisions of section 90(2) of the Act provide where the Central Government has entered into an Double Taxation Avoidance Agreement (DTAA) outside India, the provisions of the Act shall apply to the extent they are more beneficial to the assessee.

The Tribunal noted that to cover the services in the  definition of “fee” for included services according to the Article 12 of the DTAA with USA,it is required to satisfy either of the following two conditions, (i)   Services are ancillary and subsidiary to the application of right for which royalty is paid; or( ii) Services make available technical knowledge, experience, skill, know-how, or processes etc. or if it consists of development and transfer of any technical plan or technical design.

The Tribunal observed that observed that the CIT(A) had dismissed the appeal in a general manner holding that  services provided was covered by definition of fee for  technical services as per the provision of explanation 2 to section 9(1)(vii) of the Act and without any reasons stated that he did not agree with the submission of that  assessee for not to deduct tax as per Article 12 of the  DTAA. Even the provisions of the DTAA and judicial pronouncements referred by the assessee had not been controverted.

In view of the above facts and the judicial findings the Tribunal opined that there was no sharing of knowledge or know-how or any technology to the assessee as prescribed in  the  Article  12  of  the DTAA between India and U.SA.

The Tribunal concurred with the assertion of the assessee  that tax was not deductible  u/s  195 of the Act since the  payment made was not taxable in India.   

Accordingly, the appeal was allowed.

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