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India: Ruling on taxability of online advertising revenues



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 ( and Aastha Jain (

Ernst & Young

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