Advertisement charges paid to non-resident company cannot be considered as royalty

The Income Tax Appellate Tribunal (ITAT) in Bangalore has ruled that advertisement charges paid to a non-resident company, such as Facebook Ireland, cannot be classified as royalty payments. Consequently, there is no obligation to deduct tax at source (TDS) on these payments under Indian tax law. The tribunal referenced a Karnataka High Court judgment, emphasizing that Double Taxation Avoidance Agreement (DTAA) provisions are crucial in determining royalty status.

In M/s. Myntra Designs Pvt. Ltd. v. Deputy Commissioner of Income-tax [IT(IT)A Nos.598 to 600/Bang/2020 dated September 3, 2021], M/s. Myntra Designs Pvt. Ltd. ("the Applicant") filed three appeals in Hon'ble ITAT, Bangalore challenging the common order dated March 16, 2020 ("the Order") passed by Ld. CIT(A), Bengaluru w.r.t. assessment years 2012-13 to 2015-16. In all the three years, the Ld. CIT(A) has confirmed the demand raised by the Assessing Officer ("the AO") under Section 201(1) of the Income Tax Act, 1961 ("the IT Act") along with interest under Section 201(1A) of the IT Act by treating the Applicant as an 'assessee in default' for non-deduction of tax at source ("TDS") from the payments made to M/s Facebook Ireland ("Non-resident Company")  towards advertisement fees.

The Hon'ble Income Tax Appellate Tribunal relied upon the judgment passed by the Hon'ble Karnataka High Court in the case of  Urban Ladder Home Décor Solutions Pvt Ltd (supra)v. ACIT [IT(IT)A No.615 to 620/Bang/2020 dated August 17, 2021]to hold that  the payments made by the Applicant to the Non-resident Company cannot be considered as "royalty payments" and hence, it does not give rise any income chargeable in India under the Indian IT Act. Held that there is no requirement to deduct TDS under Section 195 of the IT Act.

Further, noted that as per the definition of royalties contained in Article 12 of the Double Taxation Avoidance Agreement ("DTAA"), it is clear that there is no obligation on the persons mentioned in Section 195 of the IT Act to deduct TDS. Hence, the relevant DTAA provisions should be considered in the cases for determining the question whether the payments made by the Applicant are in the nature of Royalty or not.

Accordingly, set aside the Order passed by Ld. CIT(A) and directed the AO to delete the demand raised under Section 201(1) of the IT Act along with the interest charged under Section 201(1A) of the IT Act for all the three years under consideration.