Advertisement charges paid to Google & Yahoo is not chargeable to tax in India
Query: The assessee, a florist, paid a sum of Rs. 30.44 lakhs to Google Ireland Ltd and Yahoo USA for online advertisement charges. The AO held that the assessee ought to have deducted TDS and that as there was a failure, the expenditure was not allowable under section 40(a)(i).
Decision: Under Section 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 section 5(2)(b) of “income deemed to accrue or arise in India”, one has to consider section 9. Section 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 section 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 section 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 section 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 under section 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 section 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.
Full Order is below