The assessee – an individual (proprietor of Oan Media and Web Solutions) was a service provider of online advertisement, digital marketing and web designing for consultancy charges. During the assessment year 2018-19, the assessee had made payment towards advertisement (AdWords) charges to M/s. Google Asia Pacific Pte. Ltd., Singapore [‘Google Singapore’), a non-resident, having no Permanent Establishment (PE) in India.

It was the contention of the Assessing Officer (‘AO’) that Section 165 of the Finance Act, 2016, relating to equalisation levy @ 6% was attracted in the assessee’s case, regarding the above transaction.

Section 165 of the Finance Act, 2016 provides that:

“165. (1) On and from the date of commencement of this Chapter, there shall be charged an equalisation levy at the rate of six per cent of the amount of consideration for any specified service received or receivable by a person, being a non-resident from—

1. a person resident in India and carrying on business or profession; or
2. a non-resident having a permanent establishment in India.

                  (2) The equalisation levy under sub-section (1) shall not be charged, where—

1. the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment;
2. the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or
3. where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession”

As such, the AO, while passing the assessment order, made a disallowance u/s 40(a)(ib), on the ground that payment was made by the assessee, on behalf of his clients, to a Non-Resident, for advertisement purposes, in the digital mode and no tax was deducted by the assessee, towards equalisation levy on the said payment. This action attracted the provisions of sec.165(1) of the Finance Act, 2016 and the conditions mentioned therein. The AO also contended that the assessee’s case does not fall within the exceptions provided u/s 165(2) of the Finance Act, 2016.

The AO further pointed out that the equalisation levy is not part of income tax and therefore, any payment on which equalisation levy is applicable will not fall within the provisions of the Double Tax Avoidance Agreement (DTAA) and the taxpayer will have to pay equalisation levy, regardless of the provisions of the DTAA and the country the recipient belonged.

On appeal, the NFAC passed an order in favour of the assessee and held that the entire target audience/target location of these online ads, was outside India and had no connection with India. The assessee was only acting as a conduit for channelising payments received from his clients located outside India to Google Singapore, on behalf of these clients. These clients, for whose benefit the online ads were run on Google and who were the ultimate beneficiaries of the online ads, were neither residents of India nor could they be called as Non-residents having a PE in India. The entire business related to these online ads was carried out outside India. The assessee was merely working on behalf of these ultimate beneficiaries, who were his clients.

The Hon’ble Jaipur ITAT, while passing its order in the Revenue’s appeal, agreed with the observations of the NFAC, that the role of the assessee was that of an agent of Google Singapore and that the assessee was merely a conduit for getting the advertisement run on Google. It was not the assessee, but the person running the advertisement, who decided where the advertisement was to be run, on which geographical location, who would be the targeted audience and for how much duration such advertisement was to be run. All these people were not in the jurisdiction of India and this fact was never disputed by the Revenue. The Hon’ble ITAT, therefore, did not find any reason to interfere with the order of the NFAC, Delhi and passed a ruling in favour of the assessee.

FMA Comments

The above ruling provides much-needed clarity on the non-applicability of the relatively new provisions of the Equalisation Levy, especially where the payment that is being made towards digital advertising to advertisers located outside India, clearly pertains to situations where the ultimate beneficiary of the ad as well the advertisers, are both located overseas. The ruling has correctly reiterated the classic ‘’substance over form’’ dictum and should help taxpayers in planning their business activities, more definitively, going forward.