CLR Editorial Note: The assessee, a florist, paid a sum of Rs. 30.44 lakhs to Google Ireland Ltd and Yahoo USA for online advertising. The AO held that the assessee ought to have deducted TDS and that as there was a failure, the expenditure was not allowable u/s 40(a)(i). This was deleted by the CIT(A) on the ground that Google and Yahoo did not have a PE in India. On appeal by the department to the Tribunal, HELD dismissing the appeal:
U/s 5(2)(b) income accruing or arising in India is chargeable to tax in India. A website does not constitute a ˜permanent establishment™ unless the servers on which websites are hosted are also located in the same jurisdiction. As the servers of Google and Yahoo are not located in India, there is no PE in India. As regards the second limb of s. 5(2)(b) of income deemed to accrue or arise in India, one has to consider s. 9. S. 9(1)(i) does not apply as there is no business connection in India nor are the online advertising revenues generated in India serviced by any entity based in India. As regards s. 9(1)(vi), it is held in Yahoo 140 TTJ 195 (Mum) and Pinstorm 54 SOT 78 (Mum) that the advertising revenues are not assessable as royalty. As regards s. 9(1)(vii), the services are not managerial or consultancy in nature as both these words involve a human element. Applying the rule of noscitur a sociis, even the word technical in Explanation 2 to s. 9 (1) (vii) would have to be construed as involving a human element. If there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii). On facts, the service rendered by Google & Yahoo is generation of certain text on the search engine result page. This is a wholly automated process. In the services rendered by the search engines, which provide these advertising opportunities, there is no human touch at all. The results are completely automated. Consequently, the whole process of actual advertising service provided by Google & Yahoo, even if it be a technical service, is not covered by the limited scope of s. 9(1)(vii). Consequently, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Act or the India US and India Ireland tax treaty.
The Full Case Document is available for download
Main Case File :
- Case File – ITO vs. Right Florists Pvt Ltd (ITAT Kolkata)
- Case File – Yahoo India Pvt Ltd vs. DCIT (ITAT Mumbai)