2012 (12) TMI 601 - AT - Income Tax

Disallowance for non-deduction of Tax u/s 40(a)(i) Assessee utilizes the internet search engine to buy space in advertising on the internet on behalf of its clients - The search engine renders this service outside India through internet AO made addition considering the same as technical services - Held that - As the hosting services did not involve use or right to use by the assessee any industrial commercial or scientific equipment and no such use was actually granted to assessee. Uploading and display of banner advertisement on its portal was entirely the responsibility of the service provider. Therefore payment was not in the nature of royalty or technical service but the same was in the nature of business profit and in the absence of any PE in India it was not chargeable to tax in India following the decision in case of Yahoo India (P.) Ltd(2011 (6) TMI 162 - ITAT MUMBAI). Appeal decide in favour of assessee

Summary

Issues:
Disallowance of Advertisement expenditure under sec.40(a)(i) for non-deduction of tax at source.

Analysis:

Issue 1: Disallowance of Advertisement expenditure under sec.40(a)(i) for non-deduction of tax at source

Facts: The appeal involved the disallowance of Rs. 1,09,35,108/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT (A)] on account of Advertisement expenditure by invoking provisions of sec.40(a)(i) for non-deduction of tax at source. The assessee, a digital advertising and internet marketing company, made a payment to Google Ireland Ltd. for advertising services rendered through search engines like Google and Yahoo.

Decision: The CIT (A) upheld the disallowance, considering the payment as falling within the definition of royalty under sec. 9(1)(iv) of the Income Tax Act, 1961. The CIT (A) held that the payment made by the assessee was for advertising services rendered through the search engine, constituting royalty chargeable to tax in India. As tax was not deducted at source, the disallowance under sec.40(a)(i) was confirmed.

Precedent: The Tribunal referred to a similar case involving Yahoo Holdings (Hong Kong) Ltd., where it was held that the payment made for banner advertisement services did not constitute royalty but was considered business profit. As Yahoo did not have a Permanent Establishment (PE) in India, the payment was not chargeable to tax in India, and thus, no tax deduction was required.

Judgment: The Tribunal followed the precedent set in the Yahoo Holdings case and ruled in favor of the assessee. It held that the payment to Google Ireland Ltd. for banner advertisement services was in the nature of business profit, not subject to tax deduction at source due to the absence of a PE in India. Therefore, the disallowance under sec.40(a)(i) was deleted, allowing the appeal of the assessee.

This detailed analysis provides a comprehensive overview of the issues involved in the legal judgment, including the facts, decisions, precedents, and the final judgment rendered by the Tribunal.