TMI Blog2013 (4) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - IT Appeal No. 1336 (Kol.) of 2011 - - - Dated:- 12-4-2013 - Pramod Kumar AND George Mathan, JJ. For the Appellant D.K. Rakshit. For the Respondent Subhash Agarwal. ORDER:- Pramod Kumar, Accountant Member - By way of this appeal, the appellant Assessing Officer has called into question correctness of learned Commissioner (Appeals)'s order dated 15th July 2011, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 2005-06, on the following grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income was taxable in India, the assessee ought to have approached the Assessing Officer under section 195 prior to making the foreign remittance. The assessee's failure to do so, according to the Assessing Officer, was contrary to the law laid down by Hon'ble Supreme Court in the case of Transmission Corporation of India v. CIT (239 ITR 387). With these observations, the Assessing Officer disallowed Rs. 30,44,166 under section 40(a)(i) of the Act. Aggrieved, assessee carried the matter in appeal before the Commissioner (Appeals). Learned CIT (A), after extensively reproducing from the submissions filed by the assessee but in a brief order, deleted the impugned disallowance by observing as follows: After careful consideration, it is noticed that the assessee is engaged in the business of online florist and these advertisement expenses have been paid to M/s Google Limited, which is resident of Ireland, and M/s Overture Services, which is based in USA, and that double taxation avoidance agreements exist between India and USA and India and Ireland. The assessee, being a florist, was making advertisements through these two companies and had made payments to these companies for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the website of the search engine and keys in the search words. The software and database embedded in the search engine than produces a large number of results, such as addresses of the related websites so that internet user can then visit those website for further information on that product or service. This query need not be about a service or product only, it may relate to virtually anything under the sun. These search engine results are sometimes in thousands, are generally presented in a web pages, images, information and other types of files. While producing these results, there are sponsored search results also, which is de facto advertising, and these sponsored search results help those advertisers visibility of their respective websites. Unlike web directories, which are maintained only by human editors, search engines also maintain real time information by running an algorithm on a web crawler, and, therefore, the advertising services offered by these search engines are practically without any human touch and entirely automated. When we use these search engines, the search results are produced which are termed as 'search engine result pages', and, as we have seen a little ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertising, is a computer server, specifically a web server, that stores advertisements used in online marketing and delivers them to website visitors. Whichever be the form of advertising service, whether by sponsored results or by web banner or by any other similar mode, there can hardly be any dispute on the proposition that these search engines or ad servers, which are patented and provide valuable services, which are essentially technical in nature. It is this kind of advertising service for which the payments were made by the assessee. Let us, for example, take the case of a florist in Shillong who intends to use these services. His potential customer is a person looking for a florist in Shillong. When such a person actually uses the search words 'florist' and 'Shillong' in Google, the search engine result page could be like this: 6. The above search engine result page shows several sponsored results, termed and marked as "ads" and it is for these sponsored results being shown on the search engine result page that the Google charges a fees. The mechanism for this online advertising could be further appreciated by the following screenshots: 7. The question t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the A.O., the services rendered by the Ireland company to the assessee company was in the nature of 'technical services' and hence the assessee company was liable to deduct the tax at source form the payment made against the said services. Since no such tax at source was deducted by the assessee, the deduction claimed by the assessee on account of expenditure incurred on payment of 'advertisement charges to M/s. Google Ireland Ltd. was disallowed by the A.O. by invoking the provisions of sec.40(a)(i). 4. The disallowance of advertisement expenses made by the A.O. by invoking the provisions of sec.40(a)(i) was challenged by the assessee in an appeal filed before the Ld. CIT (A) who confirmed the said disallowance made by the A.O. for the following reasons given in paragraph No.9 " .I am unable to accede to the argument of the appellant. It is not in dispute that the payment has been made for the comprehensive services rendered for digital data display in their server and that the same will fall within the meaning of royalty as has been envisaged u/s.9(1)(vi) of the Act. From the facts it is clear that the said Google or for that matter yahoo etc. allot the spa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ldings (Hong Kong) Ltd. for uploading the same on its portal. Assessee thus had no right to access the portal of Yahoo Holdings (Hong Kong) Ltd. and there is nothing to show any positive act of utilization or employment of the portal of Yahoo Holdings (Hong Kong) Ltd. by the assessee company. Having regard to all these facts of the case and keeping in view the decision of the Authority of Advance Rulings in the case of Isro Satellite Centre 307 ITR 59 and Dell International Services (India) P. Ltd. 305 ITR 37we are of the view that the payment made by assessee to Yahoo Holdings (Hong Kong) Ltd. for the services rendered for uploading and display of the banner advertisement of the Department of Tourism of India on its portal was not in the nature of royalty but the same was in the nature of business profit and in the absence of any PE of Yahoo Holdings (Hong Kong) Ltd. in India, it was not chargeable to tax in India. Assessee thus was not liable to deduct tax at source from the payment made to Yahoo Holdings (Hong Kong) Ltd. for such services and in our opinion, the payment so made cannot be disallowed by invoking the provisions of section 40(a) for non-deduction of tax. In that vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deeming fiction embedded in Section 5(2)(b). In the present case, it is an admitted position that the payment was not received or deemed to have been received in India. Section 5(2)(a), therefore, has no application in the matter. As regards Section 5(2)(b), i.e. 'income accruing or arising in India' and 'income deemed to accrue or arise in India', let us pick up the scope of 'income accruing or arising in India' first. 11. The expression 'income accruing or arising in India' has not been statutorily defined under the provisions of the Income Tax Act, 1961. However, while dealing with the connotations of this expression under Section 5(2), Hon'ble Supreme Court, in the case of CIT v. Hyundai Heavy Industries Limited (291 ITR 482), has inter alia observed that, " as far as the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly defined even by judge made law, it will be appropriate to look at primary meaning of permanent establishment in the context of the tax treaties, and construe the scope of the expression 'permanent establishment' under the domestic tax law, and in the context of issue before us, accordingly. 12. Let us first examine as to what is primary meaning of a PE and whether a search engine like Google or Yahoo can be said to have a PE, within its primary meaning, in India. It is important to bear in mind the fact that the concept of PE evolved because in traditional commerce, physical presence was required in the source country if any significant level of business was to be carried on, but, with the development of internet, correlation between the size of business and extent of physical presence in the source country has virtually vanished. In that sense, the traditional concept of PE, which was conceived at a point of time when internet and e commerce was not even on the radar, does not really fit into the modern day world in which virtual presence through internet, in certain respects, is as effective as physical presence for carrying on businesses. At a policy level, taxation may inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 2 above) as far as the software and data constituting that web site is concerned. On the other hand, the 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. 42.3 The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at that location for the operation of the equipment. The presence of personnel is not necessary to consider that an enterprise wholly or partly carries on its business at a location when no personnel are in fact required to carry on business activities at that location. This conclusion applies to electronic commerce to the same extent that it applies with respect to other activities in which equipment operates automatically, e.g. automatic pumping equipment used in the exploitation of natural resources. 42.7 Another issue relates to the fact that no permanent establishment may be considered to exist where the electronic commerce operations carried on through computer equipment at a given location in a country are restricted to the preparatory or auxiliary activities covered by paragraph 4. The question of whether particular activities performed at such a location fall within paragraph 4 needs to be examined on a case-by-case basis having regard to the various functions performed by the enterprise through that equipment. Examples of activities which would generally be regarded as preparatory or auxiliary include: - providing a communications link - much like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment and the delivery of the products are performed automatically through the equipment located there), these activities cannot be considered to be merely preparatory or auxiliary. 42.10 A last issue is whether paragraph 5 may apply to deem an ISP to constitute a permanent establishment. As already noted, it is common for ISPs to provide the service of hosting the web sites of other enterprises on their own servers. The issue may then arise as to whether paragraph 5 may apply to deem such ISPs to constitute permanent establishments of the enterprises that carry on electronic commerce through web sites operated through the servers owned and operated by these ISPs. Whilst this could be the case in very unusual circumstances, paragraph 5 will generally not be applicable because the ISPs will not constitute an agent of the enterprises to which the web sites belong, because they will not have authority to conclude contracts in the name of these enterprises and will not regularly conclude such contracts or because they will constitute independent agents acting in the ordinary course of their business, as evidenced by the fact that they host the web sites of many different enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry cannot be taken as contemporanea exopsitio. It is so for the following reasons. When an expression or a clause is picked up from the OECD Model Convention, the normal presumption is that the persons using the said clause or expression are also aware about the meanings assigned to the said clause or expression by the OECD and have used it in the same sense and for the same purpose. Hon'ble Andhra Pradesh High Court in the case of CIT v. Vishakhapatnam Port Trust [1983] 144 ITR 146 (AP), referred to the OECD Commentary on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Redcliffe's observation in Ostime v. Australian Mutual Provident Society [1960] 39 ITR 210, 219 (HL) which have described the language employed in those documents as the 'international tax language'. These documents are thus in the nature of contemporanea expositio inasmuch as the meaning indicated in these documents to the clauses and expressions in the tax treaties can be inferred as the meaning normally understood in, to use the words of Lord Redcliffe, 'international tax language' developed by the organizations like OECD. Therefore, when an expression or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebsite could constitute the permanent establishment. In effect, these reservations only reserve a right to set out the circumstances in which a website per se can be treated as permanent establishment, even though these reservations do not really constitute actionable statements. We find it difficult to fathom the underlying principle embedded in this reservation, and to understand somewhat vague and ambiguous stand of the tax administration on this issue. In our considered view, therefore, even on merits, the reservations so expressed by India, as on now and without anything more, cannot have any practical impact on a website being treated as a permanent establishment. 20. In the light of the above discussions, in our considered opinion Google's presence in India through its website cannot be said to constitute permanent establishment in India under the basic rule and thus conditions of Section 5(2)(b), read with Hon'ble Supreme Court's judgment in the case of Hyundai Heavy Industries (supra), are not satisfied to the extent that no profits can be said to accrue or arise in India. We, however, make it clear that our observations are confined to the basic rule PE and these will h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following income shall be deemed to accrue or arise in India (vii) income by way of fees for technical services payable by - (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:] Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [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 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x, technology driven process, protected by patents and sharpened by ongoing research and development work. A web search engine like Google, as we have noted earlier as well, maintains real-time and constantly updated information on all sources of information on the internet, and, at the same time it produces, on SERPs (search engine result pages) generated, the advertisements and sponsored results. Of course, online advertising could also be by way of banners and with the help of an adserver. There is no dispute, however, that whatever be the form of advertising service, whether by sponsored results or by web banner or by any other similar mode, these search engines or ad servers, which are patented and provide valuable services, which are essentially technical in nature. It is this kind of advertising service for which the payments were made by the assessee. Providing a sponsored 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 adserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... human interface, while a technical service can be rendered with human interface as also without human interface. A technical service, for example, could be automated analysis of a chemical compound without any scope of any human contribution at any stage, and a technical service could also be physical examination by an expert chemical analyst, with or without the help of machines, of the same chemical compound. However, when we try to restrict the meaning of technical services to the services which are covered by managerial and technical services as well, services without human interface will have to be taken out of its ambit. It is, therefore, clear on principle that as long as words are used together in a statutory provision, they take colour from each other and restrict its meaning to the genus of these words which is evident by the lowest common factor in those words. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field. It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position 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 discussed above and based on the facts on record, 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. 27. Once we 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 of the Income Tax Act, we can conclude that 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. We 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SB), "DTAA is only an alternate tax regime and not an exemption regime" and, therefore, "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 before us 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. 29. Now that we have come to the conclusion that Google and Yahoo did not have any tax liability in India, in respect of the advertising revenues in question, the next question that we need to deal is whether or not assessee still had 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 inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to be deducted at source. In our view, Section 195(2) is based on the "principle of proportionality". The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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