Facts The Taxpayer, an Indian company, used search engines of Google/Yahoo for advertising its business. Payments were made to Google Limited (a company resident of Ireland) and Yahoo (a US based company) for displaying the Taxpayer’s advertisement when certain key terms were used on such search engines. No taxes were withheld as the Taxpayer was of the view that the payment was not taxable in India in the hands of the recipient non-residents.
The Tax Authority disallowed the advertisement expenses u/s. 40(a)(i) on the ground that taxes ought to have been withheld by the Taxpayer. CIT(A) ruled in favour of the Taxpayer as the non-resident recipients did not have any permanent establishment (PE) in India, no portion of the payments can be considered as taxable in India.
Held
The Tribunal based on the following ruled that the payment for online advertisement is not taxable in India and hence no withholding on the same was warranted.
Whether income accrues or arises in India:
The Tribunal drew reference to SC decision in the case of Hyundai Heavy Industries (291 ITR 482) wherein SC observed that in order to attract taxability in India u/s. 5(2)(b), income must relate to such portion of income of the non-resident, as is attributable to business carried out in India, and the business so carried out in India could be through its branches or through some other form of presence such as office, project site, factory, sales outlet etc which was collectively referred to as “PE of the foreign enterprise”
Whether Google/ Yahoo have a PE in India
• Traditional commerce required physical presence to carry out business in a country and the concept of PE had developed at a time when e-commerce was non-existent. • The ITAT concluded that a website per se could not constitute a PE in India under the Act for the search engine companies which was also the view taken by the High Powered Committee (HPC) .
• In a tax treaty context, reliance was placed on the OECD MC Commentary to conclude that a search engine, which has a presence through its website, cannot therefore, constitute a PE under the treaty unless its web servers are located in the same jurisdiction which is in line with the physical presence test.
• India’s reservations on the OECD MC Commentary merely state that the website may constitute a PE in certain circumstances, but it does not specify what those “circumstances” are in which, according to tax administration, a website could constitute a PE. Hence, the reservations do not really constitute “actionable statements” and there is difficulty in understanding somewhat vague and ambiguous stand of the tax administration on this issue.
Thus, conditions of income accrual u/s. 5(2)(b) as laid by the SC in Hyundai Heavy Industries are not satisfied to the extent no profits can be said to accrue or arise in India.
Whether income deemed to accrue or arise in India,
• On business connection, the ITAT held that there was nothing on record to demonstrate or suggest that the receipts were on account of business connection in India.
• Payment in connection with online advertising services is not in the nature of royalty – Reliance placed on earlier rulings in Yahoo India Pvt Ltd (140 TTJ 195) and Pinstorm Technologies Pvt Ltd [TS- 536-ITAT-2012(Mum)].
• Based on SC ruling in Bharti Cellular (330 ITR 239), it was concluded that payment is not fees for technical services (FTS) as “human intervention,” is essential for the service being characterised as FTS. As the whole process of online advertising is automated in which there is no human element, the same cannot constitute FTS.
