2013 (4) TMI 338 - AT - Income Tax

Online advertising to US based entities i.e. Google, Ireland and Yahoo, USA - whether an Obligation to deduct tax at source under section 195 arises? - whether according to the provisions of the DTAA, no portion of payments made to the non resident companies is taxable in India - CIT(A) deleted the addition? - The assessee is a florist using advertising on search engines, i.e. by Google and Yahoo, to generate business - disallowance of advertisement expenses made by the A.O. by invoking the provisions of sec.40(a)(i) - Whether payment to Google and Yahoo could be treated as Royalty or FTS - Held that - The service which is rendered by the Google is generation of certain text on the search engine result page. This is a wholly automated process. There is no dispute that 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 and, as evident from the screenshots reproduced earlier in this order, these results are produced in a fraction of a second- 0.27 seconds in the screenshot reproduced earlier. For the reason that there is no human touch involved in the whole process of actual advertising service provided by Google, in the light of the legal position that any services rendered without human touch, even if it be a technical service, it cannot such a technical service which is covered by the limited scope of Section 9(1)(vii), the receipts for online advertisement by the search engines cannot be treated as fees for technical services taxable as income, under the provisions of the Income Tax Act, in the hands of the Google. The wordings of Explanation 2 to Section 9(1)(vii) as also that of the definition of fees for technical services under Article 12(2)(b) being similar in material respects, the above legal proposition equally applies to the definition under article 12 (2)(b) of India Irish tax treaty. The income earned by Google, in respect of online advertising revenues cannot be brought to tax as income deemed to accrue or arise under section 9(1)(vii), i.e. last limb of Section 9(1), as well. Once come to the conclusion that the online advertising payments made to Google Ltd cannot be brought to tax in India, under section 5(2) r.w.s. section 9 these amounts are not exigible to tax in India at all. The facts relating to Yahoo being admitted similar in material aspects, the same conclusion holds good in respect to Yahoo as well. Since Yahoo is a USA based Delaware company and since Indo USA tax treaty provides for a make available clause which restricts the source taxation of only such technical services, referred to as included services in Indo US tax treaty, as make available the technical knowledge etc. The connotations of expression make available were examined by the Tribunal in the case of Raymond Ltd. v. Dy. CIT (2002 (4) TMI 891 - ITAT MUMBAI). Thus rendering of technical services cannot be equated with making available the technical services. Accordingly unless services rendered by the service provider results in transfer of technology and enable the recipient of service to make use of technical knowledge by himself, and without recourse to the service provider, mere rendition of such services cannot be brought to tax as fees for technical service. Clearly, so far as online advertising is concerned, there no transfer of any technology of any kind, and as such any payment for such service is outside the ambit of source taxation under Article 12. For this reason also, the payments made to Yahoo could not be brought to tax in India. Thus the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Income Tax Act, as also under the provisions of India US and India Ireland tax treaty. Revenue has not brought anything on record, either at assessment stage or even before us, to suggest that Google or Yahoo had a PE in India, and as held by a Special Bench of this Tribunal in the case of Motorola Inc v. DCIT (2005 (6) TMI 226 - ITAT DELHI-A) that the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA . No such burden is discharged by the Revenue. Accordingly, there is no material to come to the conclusion that Google or Yahoo had a PE in India, which, in turn, could constitute the basis of their taxability in India. The law is now very well settled in the case of GE India Technology Centre Pvt Ltd v. CIT (2010 (9) TMI 7 - SUPREME COURT OF INDIA) wherein held that, where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof . Thus there was no failure in deduction of tax at source by the assessee inasmuch as the assessee did not have any obligation to deduct tax at source under section 195 for the simple reason that income embedded in impugned payments was not exigible to tax in India. Accordingly, the disallowance under section 40(a)(i) was uncalled for. Learned CIT(A) rightly deleted the impugned disallowance. In favour of assessee.

Summary

Issues Involved:
1. Obligation to deduct tax at source under Section 195 of the Income Tax Act, 1961.
2. Taxability of payments made to non-resident companies under the provisions of the Double Taxation Avoidance Agreement (DTAA).
3. Application of Section 40(a)(i) of the Income Tax Act, 1961.
4. Nature of services rendered by Google and Yahoo and their tax implications.
5. Determination of Permanent Establishment (PE) in India.
6. Interpretation of 'fees for technical services' under Section 9(1)(vii) and related DTAA provisions.
7. Validity of disallowance under Section 40(a)(i) for non-deduction of tax at source.

Analysis:

1. Obligation to Deduct Tax at Source under Section 195:
The appellant Assessing Officer questioned the correctness of the CIT(A)'s order, which deleted the addition of Rs. 30,44,166 on the basis that the assessee was not obligated to deduct tax at source under Section 195. The assessee argued that the payments were made to foreign entities without a permanent establishment in India, thus not taxable in India. The Assessing Officer contended that the assessee should have approached the Assessing Officer under Section 195 before making the remittance, citing the Supreme Court's decision in Transmission Corporation of India v. CIT.

2. Taxability of Payments under DTAA:
The CIT(A) held that due to the overriding provisions of the DTAA between India and the USA/Ireland, no portion of the payments made to the non-resident companies was taxable in India. Consequently, the assessee was not under an obligation to deduct TDS under Section 195. The Tribunal upheld this view, noting that the payments for online advertising to Google Ireland and Yahoo USA were not taxable in India under the DTAA provisions.

3. Application of Section 40(a)(i):
Section 40(a)(i) disallows deductions for payments to non-residents if the payer fails to discharge tax withholding obligations. The Tribunal noted that if the income is not taxable in India, there is no obligation to withhold tax, and hence, Section 40(a)(i) would not apply. The Tribunal upheld the CIT(A)'s deletion of the disallowance under Section 40(a)(i).

4. Nature of Services Rendered by Google and Yahoo:
The Tribunal examined the nature of services rendered by Google and Yahoo, which involved automated processes for displaying advertisements on search engine result pages. These services were highly technical and automated, without human intervention. The Tribunal concluded that these services could not be classified as 'technical services' under Section 9(1)(vii) because they lacked human intervention, as per the principle of noscitur a sociis.

5. Determination of Permanent Establishment (PE):
The Tribunal discussed whether Google and Yahoo had a PE in India. It concluded that a website alone does not constitute a PE unless the servers are located in the same jurisdiction, which was not the case here. The Tribunal noted that the Government of India's reservations on the OECD Commentary did not provide specific circumstances under which a website could be considered a PE. Therefore, Google and Yahoo did not have a PE in India under the basic rule.

6. Interpretation of 'Fees for Technical Services':
The Tribunal analyzed whether the payments for online advertising could be considered 'fees for technical services' under Section 9(1)(vii) and the relevant DTAA provisions. It concluded that the services provided by Google and Yahoo did not involve human intervention and thus could not be classified as 'technical services' under Section 9(1)(vii). The Tribunal also noted that under the India-Ireland and India-US tax treaties, the payments did not qualify as 'fees for technical services' due to the absence of a 'make available' clause.

7. Validity of Disallowance under Section 40(a)(i):
The Tribunal held that since the payments to Google and Yahoo were not taxable in India, the assessee had no obligation to deduct tax at source. Consequently, the disallowance under Section 40(a)(i) was not justified. The Tribunal upheld the CIT(A)'s decision to delete the disallowance.

Conclusion:
The Tribunal dismissed the appeal, concluding that the payments made by the assessee to Google Ireland and Yahoo USA for online advertising were not taxable in India under the Income Tax Act or the relevant DTAA provisions. Therefore, the assessee was not obligated to deduct tax at source under Section 195, and the disallowance under Section 40(a)(i) was rightly deleted by the CIT(A).