During the year, an assessee paid Rs. 67,68,768/- to an Irish company for advertisement services without deducting tax at source. The Assessing Officer disallowed the payment under section 40(a)(i) for non-deduction of tax at source. However, the Commissioner (Appeals) observed that the Irish company had certified that it did not have a Permanent Establishment (PE) in India and was a resident of Ireland for taxation purposes. Therefore, there was no liability for the assessee to deduct TDS under section 195 on the payment made for advertisement services.
The assessee argued that the payment was made to Facebook Ireland Inc. (FII), which did not have a PE in India. Therefore, the payment for advertisement services was not chargeable to tax in India under the India-Ireland Double Taxation Avoidance Agreement (DTAA). The assessee also relied on various judgments, including the Yahoo India case, which held that in the absence of a PE of the deductor, the deductee is not liable to deduct tax at source from payments made for online advertisement services. The assessee further claimed that the equalization levy, which requires a person making payment exceeding Rs. 1,00,000/- in a year to a non-resident, having no PE in India to withhold tax at 6% of the gross amount, came into effect from 01.06.2016 only and prior to that online advertisement was not subjected to deduction of tax at source.
The Commissioner (Appeals) analyzed the provisions of sections 9 and 195 of the Income Tax Act and held that the India-Ireland DTAA provides that the profits of the foreign enterprise shall be taxable only if it had carried on business in India through a PE situated therein. The Commissioner further observed that FII had certified that it had no PE in India and was a resident of Ireland for taxation purposes. Consequently, the Commissioner concluded that there was no liability of tax on payments made for advertising services to FII. The Tribunal upheld the Commissioner’s view, and the disallowance under section 40(a)(i) was set aside in favor of the assessee.
In conclusion, the Tribunal held that since the Irish company did not have a PE in India and was a resident of Ireland for taxation purposes, there was no liability for the assessee to deduct TDS under section 195 on the payment made for advertisement services. The Tribunal further held that the India-Ireland DTAA provides that the profits of the foreign enterprise shall be taxable only if it had carried on business in India through a PE situated therein. The Tribunal also noted that the equalization levy, which requires a person making payment exceeding Rs. 1,00,000/- in a year to a non-resident, having no PE in India to withhold tax at 6% of the gross amount, came into effect from 01.06.2016 only and prior to that online advertisement was not subjected to deduction of tax at source. Therefore, the disallowance under section 40(a)(i) was set aside in favor of the assessee.
[In favour of assessee] (Related Assessment year 2012-13) – [Addl. CIT v. Lenskart Solution (P) Ltd. (2022) 140 taxmann.com 242 (ITAT Delhi)]
