Is WHT applicable on remittance made for advertisement on websites hosted outside India

Whether payment made to non-resident (if non-resident does not have any PE or Business Connection in India) for advertisement through online banners and other keyword-based searches on multiple websites outside India would be subject to Withholding of Tax?

To find out the answer one must analyzed the situation in accordance with the provisions under section 4 (charge of Income Tax) read with section 5(2) (Scope of Total Income) of the Income Tax Act, 1961 (hereinafter referred as “Act”), which provides for the taxability of income accruing or arising in India to a non-resident payee.

Section 5(2) of the Act provides for the taxability of income pertaining to the non-resident assessee. It specified that:

“Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which –

a) is received or is deemed to be received in India in such year by or on behalf of such person; or

b) accrues or arises or is deemed to accrue or arise to him in India during such year”

Thus, section 5(2) of the Act, defines the scope of taxability of income earned by a non-resident assesse and broadly classifies the taxable income into following three categories:

I. Income received or deemed to be received in India

This clause of Income Tax Act, 1961 seeks to tax any income received or deemed to be received in India by the non-resident assessee.

However, generally, the payment under such contracts is remitted outside India in foreign currency by Indian resident to non-resident therefore no income can be said to received or deemed to be received in India. Thus, payment outside India to the non-resident assessee falls outside the scope of the provisions of the afore-mentioned clause.

II. Income accruing or arising in India

Any Income that accrues or arises to a non-resident assessee in India shall be clarified as taxable income in accordance with the provisions of section 5(2)(b) of the Act and such income shall be subject to withholding of taxes as per other relevant provisions of the Act.

Since payment to be made to the non-resident assessee will accrue or arise on account of services to be rendered by such assessee outside India in pursuance of their business, which is also carried on outside India, no income accrues or arises in India to non-resident under the ambit of the provisions of this clause.

III. Income deemed to accrue or arise in India

The concerned clause seeks to tax the non-resident assessee on account of any income, which is deemed to accrue or arise to him in India. The scope of section 5(2) is further elucidated by section 9(1) of the Act, which provides the definition of the income deemed to accrue or arise in India. There are 7 types of transactions covered under 7 clauses of section 9(1) of the Act. These 7 clauses are as follows:

Clause of Section 9(1)

Nature of transactions covered

(i)

Income accruing or arising from business connection/property asset/source of income in India

(ii)

Salaries

(iii)

Salaries payable by the Government

(iv)

Dividend

(v)

Interest

(vi)

Royalty

(vii)

Fee for technical services

The concerned transaction do not falls into any of the clause mentioned in the above table.

Since non-resident does not have any Business Connection in India, transaction does not falls under section 9(1)(i). An advertisement cannot be considered as Royalty as the advertisement hosting services do not involve use or right to use by the assessee of any industrial, commercial or scientific equipment, neither it can be considered as fee for technical services as there is no provision of any kind of service which involve any human element. Therefore, it can be construed as the payment made to non-resident for the purpose of advertisement on various website outside India does not fall under the ambit of Income deemed to be accrue or arise in India. These views are supported by following case laws:

In case of ITO v. Right Florists Pvt. Ltd., the respected Tribunal has dealt with similar situation.

“The assessee, a florist, paid a sum of Rs. 30.44 lakhs to Google Ireland Ltd and Yahoo USA for online advertising. The AO held that the assessee ought to have deducted TDS and since there was a failure, the expenditure was not allowable u/s 40(a) (i). This was deleted by the CIT(A) on the ground that Google and Yahoo did not have a PE in India. On appeal by the department to the Tribunal, HELD dismissing the appeal:

U/s 5(2) (b), income accruing or arising in India is chargeable to tax in India. A website does not constitute a ‘permanent establishment’ unless the servers on which websites are hosted are also located in the same jurisdiction. As the servers of Google and Yahoo are not located in India, there is no PE in India. As regards the second limb of section 5(2) (b) of “income deemed to accrue or arise in India”, one has to consider section 9. Section 9(1)(i) does not apply as there is no “business connection” in India nor are the online advertising revenues generated in India serviced by any entity based in India. As regards section 9(1)(vi), it is held in Yahoo India (P) Ltd. (2011) 140 TTJ 195 (Mum) and Pinstorm Technologies (P) Ltd.(2012) 54 SOT 78 (Mum) that the advertising revenues are not assessable as “royalty”. As regards section 9(1)(vii), the services are not “managerial” or “consultancy” in nature as both these words involve a human element. Applying the rule of noscitur a sociis, even the word “technical” in Explanation 2 to section 9(1)(vii) would have to be construed as involving a human element. If there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1) (vii). On facts, the service rendered by Google & Yahoo is generation of certain text on the search engine result page. This is a wholly automated process. In the services rendered by the search engines, which provide these advertising opportunities, there is no human touch at all. The results are completely automated. Consequently, the whole process of actual advertising service provided by Google & Yahoo, even if it were a technical service, is not covered by the limited scope of section 9(1)(vii). Consequently, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Act or the India US and India Ireland tax treaty.”

Our View:

The payment to the non-resident for advertisement on websites hosted outside India is not covered under scope of taxation as defined under section 5(2) of the Act. Neither the income is received or deemed to be received in India nor the income accrues or arises in India. Further income is also not deemed to accrue or arise in India in the said transactions as per section 9(1) of the Act. The liability to withhold the tax on payment to be made to the non-resident assessee is provided for u/s 195 of the Act. However, since the concerned payment is in itself not chargeable to tax under section 4 read with section 5(2) of the Act, therefore, the question of withholding of tax under section 195 does not arise at all. Therefore, we can conclude that no tax is required to be withheld on the concerned payment to the non-resident payee.

Disclaimer: The write-up has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this write-up without obtaining specific professional advice. Author accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this write-up or for any decision based on it.

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