Fee For Advertisements Paid To Google And Yahoo Not Taxable In India

Author:Ms Shipra Padhi and Neha Sinha
Profession:Nishith Desai Associates

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 Tribunal (the "Tribunal") in ITO v. Right Florists Limited1 were bound to arise. The Tribunal in this case 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 held such payments were not taxable in India because such payments would not be considered to be fee for technical services ("FTS") in the absence of human intervention in the course of provision of services. BACKGROUND Right Florists Pvt. Ltd. ("Right Florists"), an Indian company providing services in India as a florist, entered into agreements with Google Ireland Limited ("Google Ireland") and Overture Services Inc. USA ("Yahoo USA") for advertisement of its services on their search engines, Google and Yahoo, respectively. Right Florists made payments to Google Ireland and Yahoo USA for advertising services and a claimed deduction for these payments. However, the assessing officer disallowed the deduction for payments 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. The main issue for consideration in this case was whether income tax was required to be withheld in respect of payments made to non-residents for rendering advertising services over the internet. It was the case of Right Florists that such payments were in the nature of business profits, which would not be taxable in India in the absence of a permanent establishment in India of such non-residents. On the other hand, the tax department's contention was that the payments were in the nature of FTS and taxable under Section 9 of ITA. For considering the issue at hand, the Tribunal took into account both the provisions of the tax treaties with Ireland and the USA as well as the provisions of the ITA. THE RULING Before going into the aspects of taxation and the evaluation of the specific facts, the Tribunal analyzed the nature of services actually rendered by Yahoo and Google to Right Florists. The Tribunal appreciated that search engines such as Yahoo and Google provided advertisement services in a purely automated manner using algorithms and codes without any human...

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