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Mumbai Tribunal rules payment made by ad agency to Facebook for procuring digital ad space is not royalty, rejects first appellate authority’s finding on DAPE
In the case of Interactive Avenues Pvt. Ltd. [1] (Taxpayer), the Taxpayer is an internet advertising agency, which assists its clients (advertisers) to place advertisement on digital media. For this purpose, the Taxpayer approaches website owners to display an advertisement on their website. The website owners issue invoice to the Taxpayer and the Taxpayer, in turn, charges the client after adding its commission (determined based on gross media spends of the advertiser). During the year under consideration, the Taxpayer made certain payments to Facebook Ireland Ltd. (Facebook) without withholding taxes under the Income Tax Laws (ITL), toward the cost of advertisements carried by Facebook on behalf of its client.
In order to determine the taxability of transactions between the Taxpayer and Facebook, the tax authority examined the technology behind the Facebook ad platform from the materials available on the internet. As per the materials, the Facebook ad platform is driven by a complex algorithm that captures data from various users and allows the advertiser to reach its target audience effectively. Basis this, the tax authority concluded that Facebook allows the Taxpayer “the right to use or access the Facebook ad platform” thereby constituting the nature of payment as royalty under section 9(1)(vi) of the ITL as well as under Article 12 of the India-Ireland double taxation avoidance agreement (DTAA). Accordingly, in the absence of tax withholding, the expenses claimed by the Taxpayer were disallowed. The first appellate authority upheld the decision of the tax authority and further held that the Taxpayer is a dependent agent permanent establishment (DAPE) of Facebook in India.
The Mumbai Tribunal held that the payment made to Facebook cannot be disallowed since it does not amount to royalty. It also rejected the first appellate authority’s finding on DAPE. The Tribunal made the following observations while coming to its conclusion:
- The information that the tax authority relied upon are available on internet, which are only the personal views of the authors and, thus, cannot be relied upon to sustain disallowance under the ITL.
- When payment is made to Facebook for purchase of ad-space, the same may not be considered as royalty. Reliance placed on coordinate bench ruling in the case of Play Games 24X7 Pvt. Ltd.[2] , wherein it was held that advertisement expenses for a banner advertisement on the website of Facebook cannot be considered as payment for fees for technical services (FTS) or royalty.
- Further, reliance placed on Bangalore Tribunal ruling in the case of Urban Ladder Home Décor Solutions Pvt. Ltd.[3] , wherein it was held that mere usage of facility provided by Facebook does not render the payments as ‘royalty’, since copyright attached to the facility is not parted with.
- Taxpayer is an agent of its clients (the advertisers) and not that of Facebook. Accordingly, Facebook cannot be deemed to have a PE in India due to Taxpayer's existence in India. Further, the Taxpayer was not concluding any contracts on behalf of Facebook. It further observed that there is no use of the Facebook logo on the invoice raised on the advertiser by Taxpayer.