It is not the fact that the other person takes no damage, its just that your moves are arriving late/later on his end (ie: if you punch, but he gets punched 2 seconds later because of the lag).
On your end however, it seems like you are beating the crap out of this guy, and nothing is happening. If it makes you feel better, the guy on the other end is experiencing the exact same thing (gotta love lag).
There are a number of plans in progress to help the lag issue, but, as always, you will have to wait until they get implemented
