In a landmark ruling, the Kolkata bench of the Income Tax Appellate Tribunal (ITAT) has ruled that no tax is deductible on payments made by Indian companies to Google and Yahoo for online advertisement on their respective search engines.
ITAT has held that search engines such as Google having their presence in India through website cannot create a permanent establishment (PE) in India, unless their web servers are also located in the country and hence, cannot be taxed under the Indian Income-tax Act.
Delving extensively into how Google and Yahoo search engines operate and even reproducing screen shots from the websites, the ITAT judges ruled: "A 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."
ITAT also called upon the government to clarify its stand on taxation of e-commerce activity. ITAT members Pramod Kumar and George Mathan observed: "Clearly, conventional PE tests fail 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 this exercise can only be at the cost of tax certainty."
CA SHIVA SHANKARA R. SHETTY
CHARTERED ACCOUNTANT
Mobile: +91 9035846043 Email: ca.srshetty@icai.org
www.casrshetty228359.in
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