Section 195 – Purchase of online advertisement space and its sale being independent business transactions, cannot be considered as conducting business on behalf of Seller Company. There is no dependent agent permanent establishment (DAPE) for principal to principal dealings; Payments in the nature of business income not taxable in absence of PE and not liable to withholding tax in India.
Facts:
The Taxpayer, an Indian company (I Co.), and its parent company, a resident of the US (US Co.), are engaged in the business of providing services of internet advertising and marketing services. I Co. caters to Indian clients whereas the US Co. caters solely to clients outside India and generally in the US. In case of advertisements on foreign websites, the US Co. purchases the advertisement space from foreign website owners and sells them to I Co. at cost plus mark-up and I Co. in turn, sells to I Co.’s clients. In India, a similar procedure, in reverse, is followed when foreign clients of the US Co. want to place advertisements on Indian websites.
I Co. made payments to US Co. towards purchase of online advertising space without deducting taxes.
The Tax Authority disallowed the payments made by the I Co. for failure to deduct taxes and contended that the I Co. constituted a DAPE for US Co. as I Co. was habitually conducting business on behalf of the US Co. in India and the activities of the I Co. were devoted wholly or almost wholly on behalf of US Co.
On appeal, the CIT(A) ruled in favour of I Co. by holding that the I Co. and US Co. are independent parties transacting on arm’s length and therefore I Co. did not constitute DAPE.
Held:
On appeal by the tax authority, the Tribunal based on the following reasons held that I Co. was an independent party and did not constitute a DAPE of US Co. Further, purchase of advertisement space on a foreign website by I Co. from US Co. constituted a trading receipt of US Co., not taxable in India in the absence of a PE.
• The advertisement space from US Co. was purchased for I Co.’s customers and was not a transaction which was carried out on behalf of US Co. Further the same was sold at cost plus mark-up being an arm’s length price to I Co on a principal-to-principal basis. All risks and rewards of the business were borne by I Co.
• The advertisement space was in turn ‘sold’ by I Co. to customers at a different price and the same income has been offered as business income of I Co.
• The similarity of business activity does not, by itself, indicate that I Co is acting or doing business on behalf of US Co.
Further, neither I Co. nor US Co. was providing services or goods to the clients of the other party or dealing with the clients of the other party.
• Accordingly, remittance was towards business income which was not taxable in absence of PE.
