Indian Tax Tribunal exempts Lenskart from tax witholding on advertisement payments to Facebook Ireland

The Indian Income Tax Appellate Tribunal (ITAT) dismisses the Indian Income Tax Department (ITD) appeal, holds Lenskart’s payment to Facebook Ireland Inc. for advertisement services to be not chargeable to tax under article 7 of the India-Ireland DTAA. 

For assessment year 2012/13 (equivalent to financial year 2011/12), ITD disallowed INR 6.768 million for not withholding tax on marketing expenses paid to Facebook. The Commissioner of Income Tax (Appeal) (CIT(A)) deleted the disallowance, thereby accepting the assessee’s contention that Facebook had no PE in India and payments made to it for advertising services were therefore not chargeable to tax in India as per article 7 of the India-Ireland DTAA. 

The ITAT noted that the CIT(A) had analysed the provisions of the Indian Income Tax and provisions of the India-Ireland DTAA and held that there was no liability of tax on payments made for advertising services to Facebook, since it had certified that it has no PE in India and is a resident of Ireland for tax purposes. The ITAT states that these facts remain uncontroverted and thus no contrary view could be taken against the conclusion drawn by the CIT(A) and accordingly upholds the deletion of disallowance . 

As regards addition made by the ITD, the ITAT observes that out of INR 16.4 million disallowed, INR 9.8 million pertained to trade creditors and the balance amount consisted of a provision for ascertained liabilities, expenses payable and reimbursement to be made to the employees. It observed that the assessee had furnished the purchase registers, ledger accounts, names and addresses of all the creditors, but no efforts were made by Revenue to verify these parties and it notes that the assessee had also filed complete bank statements qua purchases and copy of the DVAT returns of the four quarters of the year in question. Thus, the ITAT opines that “it is clear that payments were made through banking channels only… AO has accepted the trading results and, therefore, no addition is warranted qua disallowance of corresponding purchases.”

Taxsutra Note:
1. Recently, another Indian State (Mumbai) ITAT in Play Games 24X7 [TS-233-ITAT-2022(Mum)] held that payment made to Facebook, Ireland for the “Rummy” banner on Facebook is not taxable as royalty or FTS. 
2. The Indian State (Kolkata) ITAT in Right Florists [TS-137-ITAT-2013(Kol)] held that Yahoo, Google do not constitute PEs by virtue of search engines used for online advertisement unless the web servers are located in India. Due to the absence of human interaction, the payments made were held to be not taxable as FTS in India. 
3. Similarly, the Indian State (Bangalore) ITAT in Myntra Designs [TS-833-ITAT-2021(Bang)] held that advertisement charges paid to Facebook were not in the nature of royalty and thus not liable for withholding tax. The ITAT followed its coordinate bench ruling in Urban Ladder [TS-773-ITAT-2021(Bang)] wherein it was observed that mere usage of the facility provided by Facebook does not render the payments taxable as “royalty” since copyright attached to the facility is not parted with.