Online advertising on foreign entity not taxable in India – An Analysis


The recent decision of ITO v. Right Florists P. L.   I.T.A. No. : 1336/ Kol. / 2011, deals with India™s right to tax payment made by an Indian entity (˜ICO™) to a foreign entity for online advertising services provided by the latter. Here, ICO made payments to Google Ireland and Yahoo USA (together referred to as ˜FCO™) for displaying its advertisements on their search engines. While it was held that such payment is not taxable in India, we need to appreciate the Tribunal™s order for adopting lucid language and an excellent step-by-step analysis. This article deals with the flow of Tribunal™s analysis to help us adopt a systematic approach while studying a subject or advising clients.


The Tribunal™s analysis is presented by way of a flowchart:

 Florist case - urviasher


  1. Since ˜income accruing or arising in India™ is not defined under the Income Tax Act, 1961ITA™), Tribunal referred to CIT Vs Hyundai Heavy Industries Limited – 291 ITR 482 (SC) wherein only income attributable to FCO™s business carried out in India can be said to accrue or arise in India. Since FCO had no such business in India, no income accrued or arose in India.
  2. Relying on OECD commentary, FCO does not have a Permanent Establishment (˜PE™) in India by virtue of its website alone, unless its web servers are located in India.


While assessing ICO™s income, the Assessing Officer directly jumped to the issue of disallowance of payment made to FCO, without looking into the taxability of payment in the hands of a non-resident. Thus, one needs to get to the root of the issue to decide the matter.

Besides, this case law deals with various other aspects in great detail eg, meaning of e-commerce, impact of India™s reservations on OECD commentary on taxation of e-commerce activities, meaning of PE etc.


By Urvi Kajaria Asher


Tags: FCOForeign and Commonwealth OfficeGovernmentHyundai Heavy IndustriesIncome Tax ActIncome Tax Act 1961IndiaItalyOnline advertisingOrganisation for Economic Co-operation and DevelopmentPermanent establishmentThe Income-tax Act 1961United States

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