Introduction
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.
Analysis
The Tribunal™s analysis is presented by way of a flowchart:
Notes:
- Since ˜income accruing or arising in India™ is not defined under the Income Tax Act, 1961 (˜ITA™), 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.
- 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.
Conclusion
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.
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By Urvi Kajaria Asher
