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The imposition of tax in India is based on the principles of ‘jurisdictional nexus’ and the source of ‘income and status’ principles. Jurisdictional nexus indicates whether a tax is attracted or imposable whereas the source of tax means grouping of income in different classes and imposing appropriate taxes on them. A tax is attracted based on a person’s nationality, domicile and residence. Section 5 of the Income Tax Act, 1961 states that the total income of a person in any year who resides in India shall include all the income received or deemed to be received in India in the relevant year by the person or which accrues or arise or deemed to accrue or arise to him during the year in India or outside India and such amount shall be taxable.

The Central Board of Direct taxation (CBDT) set up a high-powered committee of E-commerce and taxation on 16th December, 1999 to analyse the potential of E-commerce and to discuss feasibility of taxing the E-commerce activities. The Committee assessed the technology transfer contracts where technology is transferred into India or outside India and whether tax should be imposed on such contracts and the necessary changes required to tax E-commerce transactions and its implementation in light of the practice followed by developing and developed nations. The committee recognized that E-commerce should be subjected to tax. It also recognized that a continuous monitoring of business models and changes in technology need to be maintained and reaching an international acceptance of the tax principles is as important as the need to protect national interest.

According to the OECD Model Tax Convention, Article 5 mandates that a server which is within the control of a business entity through which it also hosts its website could be construed as a permanent establishment in case it is located at a fixed place for a sufficient period of time and carries out the main business functions of an entity. The OECD’s approach complies with the provisions of Article 5 and UN Model Tax Conventions. In OECD, certain countries differ in this approach realizing that taxing E-commerce activity is full of challenges including that of anonymity in cyberspace, anonymity of transaction, transfer pricing issues, e-payment issues and availability of tax havens, determining the jurisdiction that is entitled to levy tax and recovery of tax.

The committee however rejected the concept of permanent establishment explained by Article 5 of OECD Model Tax Convention. It suggested that the ‘base erosion approach’ should be upheld which imposes a low withholding tax on payment remitted to a foreign entity with a set-off option when taxed by the receiving entity in its country on its net income. The committee further recommended that no changes should be introduced in the income tax or the Double Tax Avoidance Agreement till the time the concept of PE is discarded.


There was an agreement between Right Florists Pvt. Ltd. ("Right Florists") and Google Ireland Limited ("Google Ireland") and Overture Services Inc. USA ("Yahoo USA"). Right Florists was an Indian company who was providing services to florists. The said Agreement concerned about the advertisement of services provided by Right Florist on the search engines of Google and Yahoo. Whenever someone conducts a web search online, search engines use those criteria when searching for a specific website. Along with the search results, the assessee advertising is being shown. The assessee had made payments totalling Rs. 30,44,166. These fees, however, were not subject to taxation.

During the scrutiny assessment proceedings of the assessee's income tax return, the Assessing Officer required the assessee to show cause why these payments should not be disallowed as a deduction in calculating its income under Section 40(a)(i) of the Income Tax Act, 1961. On the basis of assessee’s failure with regard to the same, since Right Florists did not defer any tax on the payments under Section 195 of the ITA, the assessing officer precluded the deduction for payments made under Section 40(a)(i) of the Income Tax Act of 1961. Aggrieved by this, the Assessee filed an appeal before the Commissioner (Appeals). The CIT found in favor of the assessee, ordering the A.O. to make the addition of Rs. 30,44,166 to be removed on the grounds that no subset of payments made to these non-resident entities was assessable income due to an underlying clause of the Double Tax Avoidance Agreement (DTAA), thus the taxpayer was not expected to deduct TDS u/s 195 of the ITA. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before the ITAT, Kolkata bench. The said appeal is the present case.

The main issue in this case was whether or not income tax had to be deducted from payments paid to non-residents for providing internet advertisement services?

The laws involved are mainly Section 40(a)(i) of Indian Income Tax Act, 1961 which provides that an assessee is not permitted a deduction for amounts charged to non-residents if he fails to satisfy his tax return criteria. Section 195 of Indian Income Tax Act, 1961 provides for deduction of income tax from the payments made to non-residents. Section 9(1)(i) of Indian Income Tax Act, 1961 provides for income earned by a non-resident through a business relation in India is considered to accrue or occur in India, according to the law. Section 9(1)(vii) of Indian Income Tax Act, 1961 provides for non-resident income derived from 'fees for technical services,' as described, is taxed in India. Section 5(2)(b) of Indian Income Tax Act, 1961 provides for taxation of income which accrues or arises in India or is deemed to accrue and arise in India and Section 9 which deems certain kinds of income to have accrued or arisen in India. In addition to these, references have been made to Indian US Double Taxation Avoidance Treaty and Double Taxation Agreement between India and Ireland.

It has been contended by Assessee that the payments made in the nature of fee to advertisements are those which are paid to foreign entities. The argument that these foreign companies had no fixed place of business in India was discredited because there was no proof that they were from collaboration of partner countries. As regards, even under section 9(1) of the Indian Income Tax Act, 1961, only so much of the income of the non-resident can be brought to tax as is reasonable attributable to the operations carried out in India.

The assessing officer argued that regardless of whether the income was taxable in India in the assessee's view, the assessee should have contacted the Assessing Officer under Section 195 of the ITA before making the international money transfer. 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]. The Assessing Officer precluded Rs. 30,44,166 based on these findings under section 40(a)(i) of the Act.

The tribunal before delving into the complex nature of taxation issue in the instant case, made an attempt to study the nature of services rendered. The Tribunal acknowledged that web pages like Yahoo and Google provided advertising services exclusively through software and codes, with no user intercession. Since Google Ireland and Yahoo USA had no connection with any business in India and no evidence was in existent to justify the contrary, the tribunal held that the taxability of the receipts of Google Ireland and Yahoo USA could not be taxed in India under Section 9(1)(i) of Indian Income Tax Act, 1961. Next the tribunal relied on the two judgements Pinstorm Technologies Pvt Ltd v. ITO [TS 536 ITAT (2012) Mum] and Yahoo India Pvt. Ltd v. DCIT Range, Mumbai, [ITA No.506/Mum/2008] to decide the instant case from the perspective of Royalty. In the above two cases, the tribunal held that banner web hosting did not entail the use or right to use any industrial, commercial, or scientific equipment by the Indian entity, and that there was no constructive act of use of these servers by the Indian enterprise; therefore, the charge was in the form of business income rather than royalty.

The tribunal also held that a website cannot be considered ‘Permanent Establishment’ as it involves software and electronic data. The said observation was made on the basis of OECD Commentary and the High-Powered Committee report on taxation of E-commerce. The main rationale underlying the same is the absence of a fixed place. However, if the network from which the website runs is a fixed place of operation, it is referred to as a "Fixed Place of business." In lieu of the same, the tribunal came to the conclusion that since Google Ireland and Yahoo USA did not have their servers in India they cannot be considered as ‘Permanent Establishment’ in India.

Although digital services can be given without any user interaction, the tribunal stated that a restricted methodology must be used for the purposes of Fees for Technical Services (FTS) as specified under Section 9 of the ITA. In the context of the same, the services provided by Google Ireland and Yahoo USA will be excluded from the horizon of FTS under the ITA Act as such services do not involve any human interference. Next the tribunal referred to the case of GE India Technology Centre Pvt Ltd v. CIT [ 327 ITR 456] wherein, the Supreme Court ruled that the person in charge of deducting tax will make his own decision if he is reasonably certain about the requirement. Based on this, the tribunal ruled that Section 195's duty to preserve taxes was not a necessary provision, that the payer had the right to measure tax liability on its own, and that there was no need to maintain tax if no tax liability had been established.


The Tribunal clearly held that, in the sense of the ITA, the important factor in the case of a tech support is some facet of social intervention, and that, in the absence of that, any bill for using such products should not be rendered a "fee for technical services" and therefore shouldn't be taxed in India. This is a major step up from a number of previous court rulings holding that payments made for operations using computer algorithms may be considered taxable in India. This would definitely give a smooth transition position for the E-business in India and will be acknowledged for the development of technology and its usages in the commercial or business transactions. The Tribunal also commented on the Indian government's reluctance to accept the OECD's position on websites being classified as a PE. Indian Government did consider the website as PE but it was only in a few circumstances and the specification of the same was absent. The Tribunal determined that the Government's reservations, as expressed now, could not be used in the judicial review of the case, describing them as an "unspecific position of the tax administration on this subject."

It is to be noted that the nature of technology equipment involved in usage of websites makes it controversial to decide the tax liability of such websites under the legal realm set forth especially under Indian Income Tax Act. When the position of law is not clear with respect to royalty to be considered in respect of usage of websites, it becomes imperative to clear the ambiguity regarding what fee shall be considered to be royalty and which fee does not. The judiciary providing for numerous interpretations of the provisions often leads to confusion and the only solution is to settle law in the regard to the position that is in question.

Thus, to conclude, even in the technological advancements and transformation happening, E-commerce will be one area which gets affected most. As the issue raised in the instant case, there is more likely possibility for other issues to raise up when developments are much ahead to cope with the laws that are lacking behind at present.



Viola Rodrigues

4th Year, BBA LLB (Hons.)

School of Law, CHRIST (Deemed to be University), Bengaluru.


  1. Karnika Seth, Computer Internet and New Technology Laws (Lexis Nexis 2016).

  2. Nishith Desai Associates, “Fee for Advertisements paid to Google and Yahoo not taxable in India”, April 2013, available at,India%20of%20such%20non%2Dresidents.

  3. Nishith Desai Associates, “E-commerce in India”, July 2015, available at:

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