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”,
on heas 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 and Pinstorm 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.