Equalisation levy was introduced in India by the Finance Act, 2016 with a view to tax income earned by a non-resident on specified services - being online advertisement, provision of digital advertisement space or any other facility or service for the purpose of online advertisement. Subsequently, the Equalisation levy was also introduced on e-commerce supply of services by the Finance Act, 2020.
Since the introduction of this levy, the industry participants were seeking answers on whether Equalisation levy provisions would be attracted when a non-resident derives income from another non-resident for online advertisement but through a person resident in India.
In this article, we have discussed a recent decision (on this issue) of the Jaipur Bench of Income Tax Appellate Tribunal (‘ITAT’) in the case of Deputy Commissioner of Income Tax (‘DCIT’) v Prakash Chandra Mishra (‘Assessee’) interpreting the provisions of Finance Act, 2016 dealing with Equalisation levy. This judgment was pronounced on 07 October 2022.
Brief facts of the case and decision of the ITAT:
The assessee was a premier partner of Google Asia Pacific Pte. Ltd. (‘Google Singapore’) and was engaged in providing support services for online advertisement, digital marketing and web designing, through his proprietorship concern M/s Oan Media and Web Solutions. In other words, the assessee was engaged in preparing advertisement campaigns for his clients and assisting them in running online advertisements on Google.
In running of the online advertisement, as a premier partner of Google Singapore, assessee’s role was simply limited to providing login credentials of the Google website to his clients, who could in turn run their advertisement online on the Google website. The online advertisements on Google website were run (independently) by the clients who were required to input the geographical locations where they wanted to run the advertisements, target audience for such advertisements and the duration for which they wanted to run these advertisements etc. The assessee had no role in making these decisions.
For the support services, assessee used to receive from his clients, consultancy charges for preparing advertisement campaigns and also a lumpsum amount for running the online advertisement on Google, which the assessee then used to pay the same to Google Singapore.
During FY 2017-18, the assessee rendered support services (including providing login credentials) to non-resident clients, i.e., clients who were not in India. The gross fee received from non-resident clients was recorded as income in the books of account and the amounts paid to Google Singapore was recorded as an expense.
The tax assessing officer (‘AO’) on observing that the payments were made to Google Singapore without deduction of Equalisation levy under Section 165 of the Finance Act, 2016, sought to disallow such expense by issuing a show cause notice.
In response thereto, the assessee submitted the following arguments in favour of non-applicability of Equalisation levy:
that the assessee was only an agent of Google Singapore
that the assessee was merely a conduit for receiving money from non-resident clients and paying the same onwards to Google Singapore
that the assessee had no control over the online advertisements
that online advertisements were run by the non-resident themselves with no inputs/ decision made by the assessee
that the online advertisement pertained to non-resident clients whose businesses were entirely outside India
that the target audience of the advertisements was also outside India
that Equalisation levy under Section 165 of the Finance Act, 2016 was not applicable in this situation
The AO disregarded submissions of the assessee and disallowed the amounts paid to Google Singapore as expenses alleging that:
the assessee was not an agent of Google Singapore as the agreement that was entered into referred the assessee as the customer and not the agent
there was no indication that the assessee was receiving commission as the invoices were raised by the assessee and not Google Singapore i.e., the assessee had booked the revenue received from non-resident clients as gross receipts and the amounts paid to Google Singapore as an expense
there was no exception in Section 165 of the Finance Act, 2016 for non-applicability of Equalisation levy if the payment was made for online advertisements run outside of India and when the target audience of such advertisement was also outside India
Aggrieved by this decision, the assessee preferred an appeal before the Appellate Authority who after considering the facts that the clients were non-residents having business outside India, advertisements were run outside India, target audience of such online advertisements was outside India, held that Equalisation levy is not applicable and hence the amounts paid to Google Singapore should not be disallowed as expenses.
In response to this order of the Appellate Authority, the Income Tax Department preferred an appeal before the ITAT.
ITAT upheld the order of the Appellate Authority, on the following grounds:
that the assessee had no control over the online advertisements
that online advertisements were run by the non-resident themselves with no inputs/ decision made by the assessee
that the online advertisement pertained to non-resident clients whose businesses were entirely outside India
that the target audience of the advertisements was also outside India
Conclusion:
This is the first decision of ITAT on Equalisation levy since its introduction. The decision should have far-reaching implications as the ITAT has delved into the objectives of this levy and applicability of Section 165 of the Finance Act, 2016 in specific business situations. Business connection with India is being considered as a primary parameter, amongst other factors for Equalisation levy to apply.
One of the reasons for ITAT to pass a favourable order was availability of agreements, advertisement details, jurisdiction where the advertisements were run, etc which clearly demonstrated no linkage of client’s business with India. Given this evaluation criteria, businesses (having such income from non-resident clients and not making a deduction towards Equalisation levy) will need to relook at their documentation, understand the business of their clients, take relevant declarations before determining the appropriate tax position.
Authors: Deni Shah and Dhaval Jariwala
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