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TMI Blog2013 (4) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicate on this appeal, a few material facts, as culled out from orders of the authorities below, are required to be taken note of. The assessee is a florist and he uses advertising on search engines, i.e. by Google and Yahoo, to generate business. The way it works, in broad terms, is like this. Whenever anyone does a web search on the respective search engines, in looking for a particular website, and uses certain keywords, the advertisement of the assessee is shown alongwith the search results. The assessee had made payments aggregating to Rs. 30,44,166 in respect of online advertising to US based entities, namely Google Ireland Limited (Google Ireland, in short) and Overture Services Inc USA (Yahoo USA, in short) . However, no taxes were withheld from these payments. It was in this backdrop that, during the course of scrutiny assessment proceedings of the income tax return filed by the assessee, the Assessing Officer required the assessee to show cause as to why these payments not be disallowed, as a deduction in computation of its income, under section 40(a)(i). Section 40(a)(i) provides that when an assessee fails to discharge his tax withholding obligations, in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,166 is deleted. 3. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 5. To adjudicate on the issue in appeal, we will have to first understand the nature of services rendered by the Google and Yahoo. Both these companies own popular search engine websites, namely Google and Yahoo, and the advertising is done in the results generated by the search results against agreed keywords or by placing the advertising banners on websites. Yahoo and Google, as internet search engines, have brought about an information revolution and the entire conventional business model of businesses reaching out to the potential customers has undergone paradigm shift. Nicholas Negroponte, in his classic book 'Being Digital' published in January 1995, had said that "Information about information is more important than information" and illustrated this with an example, which looks too simplistic today, that "the fact that TV Guide makes more money than all the four major networks combined". It was around th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pear next to the search results. The advertisements are then before an audience which is already interested in the related product or service. People can simply click on these advertisements and they will reach the related website so as to make a purchase or learn more about the product or service. The functioning of this form of online advertising can indeed be explained in such simple terms, but actual rendering of this service is a highly technical process. To search engines, providing this online advertising service, is a complex technical activity and rendering of a highly technical service which works with the use of software code that is designed to search for information on the World Wide Web, and generate, alongwith the search results, sponsored search results - the service which is paid for by the sponsors of those results, like this assessee before us. On one hand, a web search engine like Google, as we have noted earlier also, maintains real-time information by running an algorithm on a web crawler, and, on the other hand, produces, in the search results to the internet users, advertisement sponsored. It is primarily for this service that the Google is paid for. An onli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned counsel to a decision of the coordinate bench in the case of Pinstorm Technologies Pvt Ltd. v. ITO [TS 536 ITAT (2012)Mum] wherein, on materially identical set of facts and dealing with question of correctness of similar disallowance made by the Assessing Officer, a coordinate bench has observed as follows: 3. The assessee in the present case is a company which is engaged in the business digital advertising and internet marketing. It utilises the internet search engine such as Google, Yahoo etc. to buy space in advertising on the internet on behalf of its clients. The search engine carries out its own programme whereby the assessee books certain words called "key words". Whenever any person searches through the net for a specific "key word", the advertisement of the assessee or its client is displayed. For example, if the "key word" "Hotels in Mumbai" is searched for, the advertisement of 'Taj Hotel' may be displayed among sponsor links on the search engine page. The price charged for such booking depends on type of phrase, its popularity, usage etc. The search engine renders this service outside India through internet. Google does such online advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of royalty as defined u/s.9(1)(iv) of the Act. since the payment is termed as royalty in nature the amount paid on such account would be liable to be taxed in India and such the appellant company was liable to deduct the tax on such payment and since no tax was deducted at source the AO was right in invoking the provisions of section 40(a)(i) of the Act." 5. The Ld. CIT (A) thus held that the payment made by the assessee to Google Ireland Ltd. for the services rendered was in the nature of 'royalty' chargeable to tax in India and the assessee therefore was liable to deduct the tax at source from the said payment. Since there was failure on the part of the assessee to deduct such tax, the Ld. CIT (A) confirmed the disallowance made by the A.O. u/s.40(a)(i) although on different ground. Aggrieved by the order of the Ld. CIT (A), the assessee has preferred this appeal before the Tribunal. 6. We have heard arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue had come up for consideration before the Tribunal in the case of Yahoo India Pvt. Ltd. and vide its order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we respectfully follow the decision rendered by the coordinate Bench of this Tribunal in the said case and delete the disallowance made by the A.O. and confirmed by the Ld. CIT (A) by invoking the provisions of sec.40(a)(i) holding that the amount paid by the assessee to M/s. Google Ireland Ltd. for the services rendered for uploading and display of banner advertisement on its portal was in the nature of business profit on which no tax was deductible at source since the same was not chargeable to tax in India in the absence of any PE of Google Ireland Ltd. in India. 9. The above decision, as also another coordinate bench's decision in the case of Yahoo India Pvt Ltd. v. DCIT (140 TTJ 195) which has been relied upon, is certainly an authority in support of the proposition that the payment by Indian arm of foreign owner of search engine portal, in connection with online advertising services, is not in the nature of royalty under Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961. However, taxability of the payments made for online advertising to Google, or, for that purpose, to Yahoo or any such similar payment, does not hinge on applicability of Section 9(1)(vi) alone. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court has explained that, in order to attract taxability in India under Section 5(2)(b), the income must relate to such portion of income of the non-resident, as is attributable to business carried out in India, and the business so carried out in India could be "through its branches or through some other form of presence such as office, project site, factory, sales outlet etc" as "branch or through some other form of its presence in India such as office, project site, factory, sales outlet etc". The term permanent establishment, has its origin in the tax treaties but, by the virtue of judge made law - which is as binding on us as law enacted by the parliament, it is used in the context of domestic law where it is not defined or even elaborated upon. As to how we should construe such an expression, we find guidance from Australian New South Wales Supreme Court's decision in the case of Unisys Corporation v. Federal Commissioner of Taxation (5 ITLR 658) in which Justice Ian Gzell interpretated domestic law provisions of the Australian Income Tax Assessment Act with reference to treaty laws. In doing so, Hon'ble Supreme Court also took note of the Australian Tax Office Ruling No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its effective place of management, is only on the internet or by way of a website, which is not a form of physical presence. As to whether an website can be PE or not, we find guidance from High Powered Committee Report which, while recognizing the need to make form of presence tax neutral but realizing the limitations of the scope of existing principles and rules, has also observed that, "The Committee, therefore, supports the view that the concept of PE should be abandoned and a serious attempt should be made within OECD or the UN to find an alternative to the concept of PE". Clearly, conventional PE tests fails in this virtual world even when a reasonable level of commercial activity is crossed by foreign enterprise. It is a policy decision that Government has to take as to whether it wants to reconcile to the fact that conventional PE model has outlived its utility as an instrument of invoking taxing rights upon reaching a reasonable level of commercial activity and that it does fringe neutrality as to the form of commercial presence i.e. physical presence or virtual presence, or whether it wants to take suitable remedial measures to protect its revenue base. Any inertia in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise (see paragraph 4 above), even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met. 42.4 Computer equipment at a given location may only constitute a permanent establishment if it meets the requirement of being fixed. In the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - advertising of goods or services; - relaying information through a mirror server for security and efficiency purposes; - gathering market data for the enterprise; - supplying information. 42.8 Where, however, such functions form in themselves an essential and significant part of the business activity of the enterprise as a whole, or where other core functions of the enterprise are carried on through the computer equipment, these would go beyond the activities covered by paragraph 4 and if the equipment constituted a fixed place of business of the enterprise (as discussed in paragraphs 42.2 to 42.6 above), there would be a permanent establishment. 42.9 What constitutes core functions for a particular enterprise clearly depends on the nature of the business carried on by that enterprise. For instance, some ISPs are in the business of operating their own servers for the purpose of hosting web sites or other applications for other enterprises. For these ISPs, the operation of their servers in order to provide services to customers is an essential pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they host the web sites of many different enterprises. It is also clear that since the web site through which an enterprise carries on its business is not itself a "person" as defined in Article 3, paragraph 5 cannot apply to deem a permanent establishment to exist by virtue of the web site being an agent of the enterprise for purposes of that paragraph." 15. The interpretation of the expression 'permanent establishment', even in the context of tax treaties, does not, therefore, normally extend to websites unless the servers on which websites are hosted are also located in the same jurisdiction. The underlying principle is this. While website per se, which is a combination of software and electronic data, does not constitute a tangible property as it cannot have a location which constitutes place of business, a web server, on which the web site is stored and through which it is accessible, is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server. A search engine, which has only its presence through its website, cannot therefore be a permanent establishment unless its web s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax language' developed by the organizations like OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non OECD country, one may generally proceed on the basis that it is used in the same meaning and with the same connotations as assigned to it by the OECD Model Convention Commentary. Of course, even contemporanea expositio is not a binding interpretation of statutory provisions and there are serious limitation in its legal application, but when it comes to interpreting a tax treaty, the position is entirely different and this principle has much bigger role to play because interpreting a tax treaty is a case in which emphasis has to be on true intentions rather than on literal meaning. As observed by Federal Court of Canada, in Gladden v. Her Majesty the Queen 85 DTC 5188, at p. 5190, "Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties". True intentions of the parties to an agreement, which a tax treaty inherently is [See observations of Harman, J. in Union Texas Petroleum Corporation v. Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make it clear that our observations are confined to the basic rule PE and these will have no application on extended PE provisions, such as dependent agent permanent establishment i.e. DAPE, which are relevant only in the context of tax treaties - something with which we are not really concerned at this stage. 21. That takes us to the question whether second limb of Section 5(2)(b), i.e. income 'deemed to accrue or arise in India', can be invoked in this case. So far as this deeming fiction is concerned, it is set out, as a complete code of this deeming fiction, in Section 9 of the Income Tax Act, 1961, and Section 9(1) specifies the incomes which shall be deemed to accrue or arise in India. In the Pinstorm's case (supra) and in Yahoo's case (supra), the coordinate benches have dealt with only one segment of this provision i.e. Section 9(1)(vi), but there is certainly much more to this deeming fiction. Clause (i) of section 9(1) of the Act provides that all income accruing or arising whether directly or indirectly through or from any 'business connection' in India, or through or from any property in India or through or from any asset or source of income in India, etc shall be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2] : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". Explanation to Section 9(1) For the removal of doubts, it is hereby declared that for the purposes of this section, income of a nonresident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsored search result, as also placing a banner advertisement on another person's website, is clearly a service rendered to the advertiser. Therefore, the crucial question really is whether these online advertising services, by producing the sponsored results in the search results or by web banners through adservers, could be covered by the connotation of 'technical services' as set out in Explanation 2 to Section 9(1)(vii). 24. While there is no specific definition assigned to the technical services, and Explanation 2 to Section 9(1)(vii), as also Article 12 (2)(b) merely states that 'fees for technical services' will include considering of "rendering of any managerial, technical or consultancy services". It is significant that the expression 'technical' appears alongwith expression 'managerial' and 'consultancy' and all the three words refer to various types of services, consideration for which is included in the scope of 'fees for technical services'. The significance of this company of words lies in the fact that, as observed by a coordinate bench of this Tribunal in the case of Kotal Securities Ltd v. DCIT (50 SOT 158), "when two or more words which are susceptible to analogo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lowest common factor in 'managerial, technical and consultancy services' being the human intervention, as long as there is no human intervention in a technical service, it cannot be treated as a technical service under Section 9(1)(vii). There is one more approach to this issue, even though the results will be the same. The other way of looking at these three words on the basis of the principle of noscitur a sociis is, as was done by Hon'ble Delhi High Court in the case of CIT v Bharti Cellular Limited (319 ITR 139), is that the common characteristic of the majority of the words be read as limitation on the scope of the other words. While doing so, Their Lordships had observed as follows: 13.......... In the said Explanation [i.e. Explanation 2 to Section 9(1)(vii)] the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services. The word technical is preceded by the word managerial and succeeded by the word consultancy. Since the expression technical services is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded as a consultant. 15. From the above discussion, it is apparent that both the words managerial and consultancy involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element. 25. We may also point out that while this judgment did not meet approval of Hon'ble Supreme Court, in the judgment reported as CIT v. Bharti Cellular Limited (330 ITR 239), on the short factual aspect regarding fact of human intervention. It was for recording the factual findings on this aspect that the matter was remitted to the file of the Assessing Officer. However, so far as the principle laid down by Hon'ble Delhi High Court on the application of principle of noscitur a sociis in restricting the scope of 'technical services' to 'technical services with a human interface' was concerned, Their Lordships of Hon'ble Supreme Court took note of the said principle and left it intact. The stand taken by Hon'ble Delhi Court, in our humble understanding, st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may, however, point out that 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 (86 ITD 793). The Tribunal, after elaborate analysis of all the related aspects, observed that "Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services not roped in unless the person utilising the services is able to make use of technical knowledge, etc. by himself in his business and or for his own benefit and without recourse to the performer of services, in nature". The Tribunal also held that rendering of technical services cannot be equated with making available the technical services. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT v. Guy Carpenter & Co Ltd (2012 TII 14 HC DEL INTL) and Hon'ble Karnataka High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a tax withholding obligation in respect remittances for these online advertising payments, and whether assesse's failure to withhold taxes even when the recipient did not have tax liability could be visited with disallowance under section 40 (a)(i). It is only elementary that when recipient of an income does not have the primary tax liability in respect of an income, the payer cannot have vicarious tax withholding liability either. This position is independent of the payer having moved an application under section 195 or not, or on the payer or the payee having obtained an advance ruling in their favour or not. The law is now very well settled in this regard by Hon'ble Supreme Court's judgment in the case of GE India Technology Centre Pvt Ltd v. CIT (327 ITR 456) wherein Their Lordships have categorically 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". In the said case, Their Lordships have, rejecting revenue's reliance on Hon'ble Supreme Court's judgment in Transmission's case (supra) - which has also been referred to by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no TDS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the I.T. Act. 30. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that there was no failure in deduction of tax at source by the assessee before us 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 exig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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