ITAT rejects equalization levy for jurisdictional reasons, a setback for IT

In a setback for the Department of Income Tax (IT), the appeals court dismissed the department’s appeal seeking dismissal of the advertiser for failing to charge an equalization levy, commonly known as the Google tax. , on payment made to Google Singapore for jurisdictional reasons.

In a landmark decision, the IT Appellate Tribunal (ITAT) in Jaipur ruled that an assessee is not liable for refusal under section 40(a)(ib) for failing to charge a levy of equalization on payment made to Google Singapore for AdWords.

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

The court ruled that the said transaction did not entail a levy because the advertisers and the target audience were located abroad.

One assessee – a provider of online advertising, digital marketing and web design services for consultancy fees – was denied Rs 8.89 crore for failing to charge an equalization levy on AdWords fees paid to Google Singapore, which does not have a permanent establishment (PE) in India.

The Department of Finance however argued that the payment made for digital advertising fell under Section 165(1) of the Finance Act 2016 and did not attract the exceptions of Section 165(2).

Prior to ITA, the matter was taken to the Commissioner of Information Technology (Appeals), or CIT(A), who observed that the assessee was acting as an intermediary for its overseas customers where the target audience was also located abroad and India was only the jurisdiction for funds

transfer, thus arguing that the recipient was not liable for an equalization levy.

CIT(A) further observed that the legal requirement for service recipients to be an Indian resident carrying on business or profession in India or a non-resident with a PE in India was not met in this case. .

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

“The taxpayer here was just a mere agent of Google Singapore who acted as an intermediary to channel the funds, and the recipients of the services were also outside India. For an online ad, a compensatory levy will be There is a legal requirement for a service recipient to be an Indian resident having a business or profession in India or a non-resident having a PE in India.

“However, these criteria were not met in this case since the target audience and the people paying for the online advertising were overseas and had no connection with India,” said Amit Maheshwari, tax partner, AKM Global – a tax advisory firm.

The equalization levy of 2% on revenue exceeding Rs 2 crore applies to e-commerce businesses that do not have a PE in India.

This is on top of a 6% tax on payments for digital advertising services introduced in 2016.

The court also pointed out that the revenue department could not dispute this: the person running the ad, the person displaying the ad and the person using that ad are all outside India.

ITAT adamantly maintains that in essence, the person being assessed is only acting as a conduit to channel the funds of the person wishing to advertise on Google.

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