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Google, Yahoo ad payments not taxable in India


In a crucial decision that will go a long way in determining the taxability of online advertisements, a Calcutta Income-Tax Appellate Tribunal (ITAT) held that the payment to websites such as Google, Yahoo etc for online advertisement are not liable to tax in India.

The websites' presence in a location cannot be construed as fixed place constituting a Permanent Establishment (PE), the ITAT order held. Under the rules governing cross-border taxation, having the presence of a PE in a location is an ideal condition for any tax regime to claim tax.

The ITAT, in its order on Friday morning, observed that the web server located in the tax jurisdiction can be construed as PE but in this case the servers are outside India and therefore the tax claim based on having a PE in India could not be made.

The ITAT order authored by George Mathan and Pramod Kumar was on an appeal filed by Right Florist who had paid about Rs 35 lakh for its advertisements on Yahoo and Google websites during 2005-06.

The Income-tax department pulled up the company for not deducting Tax Deducted at Source (TDS) as the former claimed that the amount paid to Google and Yahoo were liable to tax in India. The tax officer held that the taxpayer company should have approached him for determining whether tax should have been withheld in India while making payments to Google and Ireland.

However, the first appellate authority, Commissioner, Income-Tax (Appeal) accepted the company's stand that since these websites are not the PE in India, the company was not required to pay tax or withhold tax in India.

The ITAT, the second appellate authority, observed that the PE as defined in the Income-Tax Act is inadequate to cover the variety of issues arising in the contemporary times marked by ever increasing volume of business taking place in the virtual world. ITAT observed that the search engine's presence in a location, other than the location of its effective place of management, is only on the internet or by way of a website, which is not a form of physical presence.

Article referred: http://timesofindia.indiatimes.com/tech/tech-news/internet/Ad-payments-to-Google-Yahoo-not-taxable-in-India-I-T-tribunal/articleshow/19524802.cms

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