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ITAT rejects equalisation levy over jurisdictional grounds, setback for I-T

New Delhi, October 10, 2022

Assessee was subjected to disallowance of Rs.8.89 cr for not charging EQ on the AdWords charges paid to Google Singapore

In a setback to the income-tax (I-T) department, the appellate tribunal has dismissed the department’s appeal seeking disallowance from the advertiser for not charging an equalisation levy, commonly known as Google tax, on the payment made to Google Singapore on jurisdictional grounds.

In an important ruling, the I-T Appellate Tribunal (ITAT) of Jaipur held that an assessee is not liable for disallowance under Section 40(a)(ib) for not charging equalisation levy on payment made to Google Singapore for AdWords.

AdWords is an advertising system Google developed to help businesses reach online target markets.

The tribunal held that the said transaction did not attract the levy as advertisers and target audience were located abroad.

An assessee — a service provider of online advertisement, digital marketing, and web designing for consultancy charges — was subject to disallowance of Rs 8.89 crore for not charging an equalisation levy on AdWords charges paid to Google Singapore, which does not have a permanent establishment (PE) in India.

The revenue department, however, argued that the payment made for digital advertisement fell within the ambit of Section 165(1) of the Finance Act, 2016, and did not attract the exceptions of Section 165(2).

Before ITAT, the matter went to the Commissioner of I-T (Appeals), or CIT(A), who had observed that the assessee acted as a conduit for his foreign clients where the target audience was also situated abroad and India was only the jurisdiction for fund

transfer, thereby maintaining that the assessee was not liable to charge equalisation levy.

CIT(A) further observed that the statutory requirement for service recipients to be an Indian resident with business or profession in India or non-resident having PE in India were not satisfied in the case.

ITAT, while pronouncing the ruling, said that the only dispute in the revenue department’s appeal is whether online advertisements, which are in a non-jurisdictional area, are subject to levy.

“The taxpayer here was a mere agent of Google Singapore who was acting as a conduit to channel funds, and service recipients were outside India as well. For an online advertisement, an equalisation levy will be applicable. There is a statutory requirement for a service recipient to be an Indian resident with business or profession in India or a non-resident having PE in India.”

“However, these criteria were not satisfied in this case since the target audience and persons paying for the online advertisement were overseas and had no relation with India,” said Amit Maheshwari, tax partner, AKM Global — a tax consulting firm.

The equalisation levy of 2 per cent of revenue exceeding Rs 2 crore applies to e-commerce firms that do not have a PE in India.

This is in addition to a 6 per cent levy on payments for digital advertisement services introduced in 2016.

The tribunal also highlighted that the revenue department could not controvert that: the person running the advertisement, the person displaying the advertisement, and the person using that advertisement are all outside India.

ITAT categorically holds that in substance, the assessee is only acting as a conduit for channelling the funds from the person wanting to advertise on Google.

[The Business Standard]

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