Payment made for online banner advertisement on the portal of a foreign company not taxable as royalty

 ITAT MUMBAI BENCH ‘L’

Yahoo India (P.) Ltd. v. Deputy Commissioner of Income-tax, Range 7(3), Mumbai

IT APPEAL NO. 506 (MUM.) OF 2008 [ASSESSMENT YEAR 2004-05]

JUNE 24, 2011

ORDER

P.M. Jagtap, Accountant Member. –

This appeal filed by the assessee is directed against the order of the learned CIT(A) XXX, Mumbai dated 19-10-2007 whereby he confirmed the disallowance of Rs. 34,86,947 made by the Assessing Officer under section 40(a) on account of payment made by assessee to Yahoo Holdings (Hong Kong) Ltd., without deducting tax at source.

2. Assessee company in the present case is a fully owned subsidiary of Yahoo Inc., USA, which is engaged in the business of providing consumer services such as search engine, content and information on wide spectrum of topics, e-mail, chat, etc. It filed the return of income for the year under consideration on 30-10-2004 declaring total income of Nil after adjusting the brought forward losses to the extent of Rs. 3,91,47,123. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has made a payment of Rs. 34,86,947 to Yahoo Holdings (Hong Kong) Ltd., being cost of services/research material/advertisement media. Yahoo Holdings (Hong Kong) Ltd., is engaged in the business of providing internet services, technological tools and marketing solutions for business to customers in Hong Kong. It provides banner advertisement and microsite hosting services on the Yahoo Hong Kong Portal. The banner advertisement is also known as web banner, which is a form of advertisement on the world wide web. This form of online advertising entails embedding an advertisement into a web page. During the year under consideration, the Department of Tourism of India through an advertisement agency Media Turf Worldwide intended to display a banner advertisement during the period from 18-2-2004 to 15-3-2004 on the portal owned by Yahoo Holdings (Hong Kong) Ltd. For this purpose, it hired the services of the assessee company to approach Yahoo Holdings (Hong Kong) Ltd., to provide uploading and display services for hosting the banner advertisement at Yahoo Hong Kong portal. Accordingly, the assessee company entered into a contract in the form of media insertion order for display of impressions with the Department of Tourism. The total consideration for the same was agreed at Rs. 65,11,500 out of which assessee company agreed for granting agency discount to Media Turf of 25 per cent. The Assessee company in turn hired the services of Yahoo Holdings (Hong Kong) Ltd. for uploading and display of banner advertisement on its Portal and the consideration for the said service was agreed at US $ 75,464 equivalent to Indian Rs. 34,86,947. The said payment to M/s. Yahoo Holdings (Hong Kong) Ltd., was made by the assessee during the year under consideration without deducting tax at source. The stand of the assessee as taken before the Assessing Officer was that since the services/operations performed by Yahoo Holdings (Hong Kong) Ltd., were entirely outside India and since Yahoo Holdings (Hong Kong) Ltd., had no presence in India, the amount paid to them for the services rendered outside India was not taxable in India and no tax, therefore, was required to be deducted at source from the payment of the said amount. According to the Assessing Officer, the income attributable to the services claimed to be rendered outside India had accrued in India as per the provisions of section 9 and the same being taxable in India, the assessee was required to deduct tax at source before remitting the said amount to Yahoo Holdings (Hong Kong) Ltd. Since no such tax was deducted by assessee company from the payment remitted to Yahoo Holdings (Hong Kong) Ltd., the deduction claimed by assessee on account of the said payment was disallowed by the Assessing Officer by invoking the provisions of section 40(a).