TDS on digital payment has always been a contentious issue. Taxpayers and income tax department have been fighting for taxability on digital payments for many years since the digitalization of business has taken place. The income tax department tries to make the digital payments taxable in India as a Fees for Technical Services (FTS), Royalty, or business income. Whereas taxpayer tries to skip the tax liabilities and take benefit of the double taxation avoidance agreement (DTAA). Out of Digital payments, taxability on Web hosting services and promotion services are disputable ones, that have not been settled yet. Though web hosting charges are a common expense for companies operating business through the digital platform.
The question arises that whether Web Hosting services or Promotion/Marketing services are taxable in India and is TDS deductible on web hosting or promotion services?
Let us understand the taxability of transaction through the judgement of the Ahmedabad Tribunal in case of [ESM Sys Pvt. Ltd. Vs ITO ITA No. 350/Ahd/2018]
Facts of the case:
The assessee has made payment to ESM-SYS LLC, USA for obtaining the services of data promotion, social media management and general consulting. On query, the assessee explained that ESM-SYS-LLC was managing and overseeing the various on-page and off-page activities which drive traffic to a specific website. The assessing officer 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 Act. The assessing officer has stated that sub-section 1 to section 195 makes it obligatory for every person in India to deduct tax at source @ specified in the relevant financial act. The Assessing Officer further stated that the assessee had not complied with any of the provisions contained in sub-section (1),(2), (3) of section 195, therefore, it was liable to be held as assessee in default and such expenses incurred without TDS were liable to be disallowed u/s. 40(a)(ia) of the I.T. Act. The assessing officer also stated that the assessee has also not furnished any forms 15CA or 15CB which were mandatory to be filed for making remittances.
The assessee explained that payments made to ESM-SYS-LLC were in the nature of services provided for site promotion activities. The assessee has also submitted copies of article no. 7 of the agreement for avoidance of double taxation of income with USA and article no.12 for ready reference to the assessing officer. The assessee explained that the nature of services availed was not in the nature of technical services or royalty but it was in the nature of business profit and further ESM-SYS-LLC, USA had no permanent establishment in India, therefore, the same was not taxable in India and accordingly, provisions of section 195 of the income tax act did not apply. The assessing officer has not agreed with the submission of the assessee and stated that the hiring of server and providing of web hosting services were in the nature of technical services and the payment made by the assessee was for technical services in terms of section 9 sub-section (1)(vii) of the Act which represented income deemed to accrue or arise income of the recipient. The assessing officer has also stated that the payment made to the nonresident also fall within the ambit of section 9(1)(vi) of the act as these were in the nature of royalty as defined in explanation 2 to section 9(1)(vi) of the Act.
Tribunal decision:
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. The assessee has explained that payer has provided services which were in the nature of site promotional activity i.e. bandwidth provisions, data storage and web hosting services using the servers located in USA.
It is implicit from the Article 12(4) of the DTAA as cited that services which are technical in nature can be said to be “fee for included services” only when it has made available technical knowledge or skill to the recipient of services. Similar rulings and observations were made in the following judicial pronouncements:-
- ITO vs. B.A. Research India Pvt. Ltd. (TS-6184-ITAT-2015(Ahmedabad)-O]
- ITO vs. Cadila Health Care Ltd. [TS-5220-ITAT-2017(Ahmedabad)-O]
- Mckinsey & Co. Inc. (Philippines) vs. ACIT [2006] 99 ITD 549 (MUM.)
- Pinstorm Technologies (P.) Ltd. vs. ITO [2012] 24 taxman.com 345 (Mumbai)
- ITO vs. Right Florists (P.) Ltd. [2013] 32 taxman.com 99 (Kolkata-Trib)
- Yahoo India (P.) Ltd. Vs. Deputy CIT [2011] 11 taxman.com 431 (Mumbai)
Tribunal held that Web Hosting Service and Promotion services have no sharing of knowledge or know-how or any technology to the assessee as proscribed in Article 12 of the DTAA between India and U.SA., therefore, the tax was not deducted u/s. 195 of the Income-tax Act since the payment made was not taxable in India
Our Comments
Taxability of any digital transaction at one sight looks simple and easy, however, it is difficult to determine the nature and implication of that transaction from the point of both countries (parties to DTAA). Generally, taxpayers get confused about FTS, Royalty and Business income and take the advice of an income tax consultant. These all are defined separately in all DTAAs. One needs to carefully look into the definitions, considering all scenarios before taking any decision.
Recently Bangalore ITAT rules on disallowance of web-hosting charges paid by the assessee to non-resident entities, remands the matter back to the Revenue for de novo verification observing that “characterisation of payments for digital goods/services has always been a contentious issue.”; [Lemnisk (P) Ltd v. DCIT – Date of Judgement : 29.04.2022 (ITAT Bangalore)]
It is important to note that India has introduced measures such as Significant Economic Presence, Equalization levy on digital advertisement and E-commerce operators. These all provisions are important for the taxpayer to look into before any transaction takes place.
For any information/query/concerns related to income tax provisions, please feel free to contact us at mail@nbaoffice.com
