Indian Tax Tribunal holds ESPN India not liable for TDS on payment for ad space

The Indian Income Tax Appellate Tribunal (ITAT) Chennai allowed the assessee’s (ESPN Digital Media (India) Pvt. Ltd) appeal, holding that payment made by ESPN India to its UK counterpart for purchase of advertisement space was not taxable as royalty in India.

It accepted ESPN India’s submission that provision of advertising space is covered under the Equalisation Levy (EL) provisions, since it was not chargeable under the Act read with the DTAAs, opining that “to suggest that the sale of advertising space is ‘royalty’ would even be contrary to the legislative intent, the objects and purpose of the EL provisions and result in absurdity and double taxation, as acknowledged by the Memorandum to the Indian Finance Bill, 2016”. 

For AYs 2010-11 to 2013-14 (equivalent to FYs 2009-10 to 2012-13), Revenue (Indian Income Tax Department) held that payments made by ESPN India to ESPN UK for procuring advertisement space constituted royalty, thus, holding ESPN India to be “assessee in default” for failure to withhold tax on the aforesaid payments. The ITAT notes that ESPN India entered into a reseller agreement with ESPN UK for the resale of advertisement space on websites owned by it in April 2010. It observed that (i) said agreement did not provide any “right to use” of any industrial, commercial or scientific equipment; (ii) neither the website nor the server are placed under the control or domain of ESPN India; and (iii) no right, property, information or scientific experience had been transferred in any manner whatsoever.

It also observed that ESPN UK directly owns or has the rights to exploit numerous digital media websites and that no such right has been transferred to ESPN India, further noting that ESPN UK controls the amount of advertising space available on the websites and the nature of advertisements permitted to be displayed. The ITAT remarked that “[the] assessee does not in any way control the website/server, nor has been conferred with a right over any part of the website/server”.

It opined that ESPN India is merely a reseller of advertisement space it purchases on ESPN UK’s website. It rejected Revenue’s reliance, clarifying that in light of the SC ruling in Engineering Analysis wherein it was held that unilateral amendments expanding the definition of “royalty” under domestic law cannot apply to DTAAs, and further stating that the expanded definition was brought in by the Indian Finance Act, 2012, which did not exist at the time of making payments in AYs 2010-11 to 2012-13 and, thus, that withholding obligation could not be imposed retrospectively. Also, it factually distinguished Revenue’s reliance on the jurisdictional State High Court ruling in Verizon Communications Singapore, which was overruled by the Indian Supreme Court ruling in Engineering Analysis by express approval to Indian State Delhi High Court ruling in New Skies Satellite.

Taxsutra Note:

1. Recently, the ITAT Delhi bench [TS-236-ITAT-2022(DEL)] held that payment to Facebook Ireland Inc. for advertisement services is not chargeable to tax under article 7 of the India-Ireland DTAA, absent PE in India. This was preceded by another ITAT Mumbai bench ruling [TS-233-ITAT-2022(Mum)] where it was held that payment made to Facebook Ireland Inc. for the “Rummy” banner on Facebook is not taxable as royalty/FTS.
2. Another ITAT bench (Kolkata) [TS-137-ITAT-2013(Kol)] held that Yahoo and Google did not constitute PE by virtue of search engines used for online advertisement unless 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 ITAT Bangalore bench [TS-833-ITAT-2021(Bang)] held that advertisement charges paid to Facebook were not in the nature of “royalty” and, thus, not liable for TDS by following coordinate bench ruling [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.
4. In the case of Engineering Analysis, the Indian Supreme Court held that payments made for software are not covered under article 12 of DTAAs and that Indian payers were not liable to withhold tax, as no income chargeable to tax arose in India.