12/3/2020 Nishith Desai Associates: Fee for advertisements paid to Google and Yahoo not taxable in India
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CLIENT ACCESS At a time when the contours of business are undergoing major transformations on account of
technological advancement across the world, issues such as those deliberated by the Kolkata Tax
MEMBER ACCESS
Tribunal (the "Tribunal") in ITO v. Right Florists Limited1 were bound to arise. The Tribunal in this case EVENTS
was presented with the question of taxability of payments made by an Indian resident to Google and
Yahoo for advertisement services rendered through their respective search engines. The Hon'ble Tribunal WEBINARS
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held such payments were not taxable in India because such payments would not be considered to be fee Opportunities in GIFT City – Setting up
for technical services ("FTS") in the absence of human intervention in the course of provision of services. Funds in India’s New Offshore Financial
Center
Events and Calendar December 10, 2020
BACKGROUND
Right Florists Pvt. Ltd. ("Right Florists"), an Indian company providing services in India as a florist, SEMINAR
How we perform entered into agreements with Google Ireland Limited ("Google Ireland") and Overture Services Inc. USA NASSCOM HR Forum: An interactive
workshop on "The Code on Wages 2019"
("Yahoo USA") for advertisement of its services on their search engines, Google and Yahoo, respectively.
February 25, 2020
Right Florists made payments to Google Ireland and Yahoo USA for advertising services and a claimed
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deduction for these payments. However, the assessing officer disallowed the deduction for payments
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made pursuant to Section 40(a)(i)2 of the Income Tax Act, 1961 ("ITA") on the ground that no tax was
withheld by Right Florists on the said payments under Section 1953 of the ITA.
See our recent deals
The main issue for consideration in this case was whether income tax was required to be withheld in NEWS ROUNDUP
respect of payments made to non-residents for rendering advertising services over the internet. It was the
Up to date legal developments case of Right Florists that such payments were in the nature of business profits, which would not be NEWS ARTICLES
taxable in India in the absence of a permanent establishment in India of such non-residents. On the other Nishith Desai Associates announces
hand, the tax department's contention was that the payments were in the nature of FTS and taxable reworked compensation structure; entry-
level lawyers to get Rs 17.4 lakh per annum
Doing business in India under Section 9 of ITA. For considering the issue at hand, the Tribunal took into account both the
November 30, 2020
provisions of the tax treaties with Ireland and the USA as well as the provisions of the ITA.
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THE RULING
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Before going into the aspects of taxation and the evaluation of the specific facts, the Tribunal analyzed
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Case studies in M&A the nature of services actually rendered by Yahoo and Google to Right Florists. The Tribunal appreciated
November 28, 2020
that search engines such as Yahoo and Google provided advertisement services in a purely automated
manner using algorithms and codes without any human intervention. The Tribunal also mentioned that
providing online advertisement services was a complex technical activity, and that these search engines NEWSLETTERS
rendered highly technical service with the use of software codes designed to search for information on
the web, and generated, along with search results - sponsored search results, the service which is paid DEAL CORNER
for by the sponsors of those results, like Right Florists in this case. Mubadala invests over $850 Million in
Reliance Retail
The Tribunal thereafter examined the provisions of Section 5(2)(b) of the ITA which provides for taxation October 07, 2020
of income which accrues or arises in India or is deemed to accrue and arise in India and Section 9 which
January 2011 deems certain kinds of income to have accrued or arisen in India.
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'Business connection' examination - As a first step, the Tribunal examined the taxability of the receipts Don’t Mind: You’ve been Acquired!
of Google Ireland and Yahoo USA in India on account of having a business connection in India4. The April 29, 2020
Tribunal observed that there was no evidence to suggest or demonstrate that the advertising revenues
generated by Google Ireland and Yahoo USA were supported by, serviced by or connected with any TAX HOTLINE
entity based in India. Hence, in the absence of a business connection in India, these receipts of Google Madras High Court holds - Business
Transfer for Non-Monetary Consideration
Ireland and Yahoo USA could be not taxed in India under Section 9(1)(i). does not qualify as Slump Sale
September 18, 2020
'Permanent Establishment' ("PE") examination - While examining the issue of PE under the relevant
tax treaty, the Tribunal relied upon the OECD Commentary and the High Powered Committee report on
taxation of e-commerce to hold that a website would normally not be considered to have a PE because a
website is a made up of intangible material like software and electronic data. However, the Tribunal also
mentioned that, according to the OECD Commentary, while a website by itself could not be considered to
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12/3/2020 Nishith Desai Associates: Fee for advertisements paid to Google and Yahoo not taxable in India
be a PE due to the absence of a fixed place, the server from where the website functions could be a fixed
place of business and could hence be considered to be a PE.
Taking into account these two principles, the Tribunal was of the view that since a search engine does not
carry out its business through its server, a website would not constitute a PE unless its web servers are
located in the same jurisdiction. As Google Ireland and Yahoo USA did have servers in India, the basic
rule of PE was not satisfied. Hence, Google Ireland and Yahoo USA could not be said to have a PE in
India.
'Royalty' examination - In this regard, the Tribunal relied upon the judgments delivered by co-ordinate
benches in the cases of Pinstorm5 and Yahoo6 which dealt with materially similar facts and issues. The
Tribunals in these cases had held that services of banner hosting did not involve the use or the right to
use any industrial, commercial or scientific equipment by the Indian entity and that there was no positive
act of utilization of these portals by the Indian entity; hence, such fee was in the nature of business profits
and not royalty.
'FTS' examination -In its examination of the definition of FTS, the Tribunal held that the lowest common
factor in the scope of 'managerial, technical or consultancy services' as used in Section 9 of the ITA was
human intervention. In this regard, the Tribunal relied upon the Delhi High Court ruling in Bharti Cellular
Limited7 where it was held "it is apparent that both the words managerial and consultancy involve a
human element. And, both, managerial service and consultancy service, are provided by humans.
Consequently, applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to
Section 9 (1) (vii)8 would also have to be construed as involving a human element." The Tribunal
observed that although technical services could be rendered without human interface, a restricted
approach must be taken for the purpose of FTS as defined under the ITA. As the services were rendered
by Google Ireland and Yahoo USA without any human intervention payment for such services would be
excluded from the purview of FTS under the ITA.
Thereafter, the Tribunal examined the relevant provision for taxation of FTS under the India-Ireland
Treaty, which has materially the same definition with respect to FTS as under the ITA, and ruled out
taxability using the same interpretation as under the ITA. The Tribunal then examined the provisions
under the India-USA Treaty and held that the same interpretation should also not apply in the instant
case as the 'make available provision' contained in the FTS article of the said treaty was not satisfied.
This was because Yahoo USA was merely rendering services, and there was no transfer of technology to
Right Florists to enable it to make use of such technical knowledge by itself.
Requirement for withholding under section 195 - The Tribunal took into account the well settled law
laid down in the case of GE India Technology Centre Pvt Ltd v CIT9 where the Supreme Court has held
that where the person responsible for deduction can make his own determination with regard to the
requirement of deducting tax, where he is fairly certain about the same. This is independent of the
requirement to seek a no-withholding certificate. It was the opinion of the Tribunal that the obligation to
withhold taxes under section 195 was not a blanket requirement and that the payer had the right to
determine tax liability on its own, and where no tax liability was determined, there was no need to
withhold tax.
ANALYSIS
The Tribunal has rightly held that the underlying factor in case of a technical service, in the context of the
ITA involves some element of human intervention and that in the absence of the same, any fee paid for
use of such services should not fall within the purview of 'fee for technical services' and taxed in India.
This is a significant departure from a number of rulings10 in the past where courts have held that payment
made for services using automated systems could be treated as taxable in India. The clarity in position
would be welcomed by the growing e-business community in India.
The Tribunal also made observations on the Indian Government's reservation to the OECD's views on
websites being considered a PE. The Tribunal mentioned that there was only a limited observation made
by the Indian Government in the OECD Commentary with respect to a website constituting a PE in
certain specific circumstances, but did not specify those circumstances. Terming the reservations by the
Government "vague and ambiguous stand of the tax administration on this issue", the Tribunal concluded
that the reservations as expressed currently could not play in any role in the judicial analysis of the issue.
It is interesting to note that while the Tribunal in this case rightly relied upon the rulings in Pinstorm and
Yahoo to hold that the fee paid should not be characterized as royalty, in the absence of a positive act of
utilization of the portals in questions, the tax authorities have appealed against these rulings before the
Bombay High Court. It is important for the Supreme Court to settle the position of law with respect to this
issue because of the differing interpretations of the provisions which has resulted in lot confusion
amongst the taxpayers.
- Shipra Padhi and Neha Sinha
You can direct your queries or comments to the authors
1 I.T.A. No.: 1336/ Kol. / 2011
2 Section 40(a)(i) provides that any payments on which tax is deductible as per the ITA, but the payor has failed to deduct tax
thereon, will not allowed as a deduction.
3 Section 195 requires that any person paying a non-resident any amount which is chargeable to tax in India shall withhold
taxes on such amount before making such payment.
4 Section 9(1)(i) of the ITA provides that income arising to a non-resident through a business connection in India is deemed to
accrue or arise in India
5 Pinstorm Technologies Pvt Ltd Vs ITO [TS 536 ITAT (2012)Mum]
6 Yahoo India Pvt. Ltd. , ITA No.506/Mum/2008
DI SCL A I M ER CON TEN T F E E D BA CK WAL K T H R O U G H S UB S CR I BE Nishith Desai Associates 2013. All rights
7 CIT v. Bharti Cellular Limited 319 ITR 139
8 reserved
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12/3/2020 Nishith Desai Associates: Fee for advertisements paid to Google and Yahoo not taxable in India
8 Section 9(1)(vii) of the ITA provides that income of a non-resident by way of 'fees for technical services' as defined shall be
subject to tax in India.
9 (327 ITR 456) (SC)
10 Re: Cargo Community Network Pte. (2007), Re: IMT Labs (India) (P) Ltd. (2005), ONGC Videsh Limited v. ITO (2013)
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