India: Ruling on taxability of online advertising revenues

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

India: Ruling on taxability of online advertising revenues

nayak.jpg

jain.jpg

Rajendra Nayak


Aastha Jain

The Kolkata Income Tax Appellate Tribunal recently ruled on taxability of amounts paid by Right Florists Pvt Ltd (taxpayer) [TS-137-ITAT-2013(Kol)] to search engines such as Google Ireland and Yahoo US for online advertising services. The taxpayer, a florist and an Indian company, used the search engines of Google/Yahoo for displaying its advertisement when certain key terms were used on such search engines. The taxpayer was of the view that the payment was not taxable in India in the hands of the search engine companies and hence, no taxes were withheld on such payments. The issue of taxability of the above payments for online advertising came up before the Tribunal for adjudication.

Taxability as business profits

Under the relevant tax treaties, business profits earned by a non-resident (NR) cannot be taxed in India unless the NR carries on its business through a permanent establishment (PE) in India. India, in its role as a non-member observer, had expressed its reservation on the OECD Model Convention (MC) that a website may constitute a PE in "certain circumstances" which was included in the 2008 update to the OECD MC. The Tribunal concluded that a website could not constitute a PE in India since the web servers of the search engines were not located in India. Reliance was placed on the OECD commentary in this regard. It was observed that India's reservations on the OECD MC could be treated as contemporanea expositio in respect of treaties signed by India after 2008. Further, the reservation does not specify the circumstances in which a website could constitute a PE and hence, even on the merits it would have no practical consequence.

Taxability as royalty/ fees for technical services (FTS)

Under the Income Tax Law (ITL), payments for use or right to use industrial, commercial or scientific equipment is considered as royalty when payment is made by a resident in India. Further, payments for technical, managerial or consultancy services are considered as FTS. The relevant India-US tax treaty additionally requires that the service should make available technical knowledge and skills to the payer for it to be taxed as FTS. In the present case, the Tribunal relied on some earlier decisions of Indian courts wherein similar payments were not considered as royalty as there was no "use or right to use" any industrial, commercial or scientific equipment by the user. Further, the payments did not qualify as FTS as the whole process of online advertising was automated and there was no human element involved. The "make available" condition in the India-US treaty was also not satisfied. Hence, the payments did not constitute royalty or FTS under the ITL as well as the tax treaty. In the absence of primary tax liability on the income recipient, it was held that there was no liability under the ITL to withhold taxes on payments made by the taxpayer.

Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)

Ernst & Young

Tel: +91 80 4027 5275

Website: www.ey.com/india

more across site & shared bottom lb ros

More from across our site

Levine, who served under the Joe Biden administration, led the US’s negotiations on the OECD’s two-pillar solution
The deal to acquire ITR's parent company is expected to complete by the end of May 2025
JBS, the biggest meat company in the world, allegedly used Luxembourgian ‘mailbox companies’ to avoid taxes between 2019 and 2022
Despite the conviction of Jessa Dabalos, the Tax Practitioners’ Board’s investigative work continues with five outstanding PwC scandal probes
Heads of tax need to push their teams forward as strategic business advisers to add value across their organisations, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Gift this article