Decoding equalisation levy and its impact

Presently, the equalisation levy has been made applicable only to certain specified services, which include online advertising, any provision for digital advertising space or any other facility or service for the purpose of online advertisement

We are living in a world today which is connected increasingly by technology and there has been an onslaught of online platforms/digital media. Human intervention for various services has been reduced to a large extent in such a scenario. Human interaction is now more technology driven rather than personal interface.

Law being a set of regulations which really determines human interaction also thus has to evolve. With a spate in online trading platforms, research engines, social media, startups, advertising and various other modes, economic laws particularly taxation laws have to keep abreast with this change.

The taxation of e-commerce has assumed great importance. As a result, in many countries, including India, Finance Act, 2016 has introduced a new levy called the Equalisation Levy, 2016 as a self contained code to tax digital e-commerce transactions under Chapter VIII. This is in line with India’s action on Base Erosion Profit Sharing (BEPS) agenda relating to digital economy wherein India has played a significant role in incorporating various tax options in the Action Plan. This article will briefly analyse the provisions of this levy and its likely impact on some industries:-

• • DEFINITIONS AS PER FINANCE ACT, 2016 Chapter VIII

Section 164(d) of the Finance Act, 2016 defines “equalisation levy” to mean the tax leviable on consideration received or receivable for any specified service under the provisions of this Chapter.

According to Section 164(f) “online” “means a facility or service or right or benefit or access that is obtained through the Internet or any other form of digital or telecommunication network;”

According to Section 164(g) “permanent establishment” “includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;”

According to section 164(i) of the Finance Act, 2016 “specified service” “means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the central government in this behalf.”

From a plain reading of the above it is clear that this levy will be levied only on the consideration which is received or receivable for any specified service under the provisions of the relevant chapter.

This levy has been effective from June 1, 2016 and is charged at the rate of 6% on consideration received/receivable by a non resident for specified services not having a permanent establishment (PE) in India.

• • AMBIT OF THE EQUALISATION LEVY

Presently, the equalisation levy has been made applicable only to certain specified services, which include online advertising, any provision for digital advertising space or any other facility or service for the purpose of online advertisement. However in future there will be an inclusion of further services within the ambit of this levy. It is further provided that no income tax is payable in respect of income on which equalisation levy is chargeable.

This levy of 6% is to be withheld by the payer who makes the payment to a non-resident who provides the specified services.

• • PROCEDURAL  ASPECTS

The Central Board of Direct taxes (CBDT) has by Notification dated 27^th May, 2016 notified Equalisation Levy Rules, 2016 (hereinafter referred to as Rules) which lay down the procedure to be followed for the compliance of this levy by the payer. The Rules further provide appellate remedies in respect of any penalty which may be payable by the payer before CIT(A) under section 174 r.w Rule 8 of the Finance Act, 2016 and the said Rules. A further appeal has been provided to the Income-Tax Appellate Tribunal (ITAT) against the CIT(A)’s order under section 175 r.w Rule 9 of the Finance Act, 2016 and the said Rules. The compliance procedure and appeal procedure has been enumerated from section 166 to section 176 of the Finance Act, 2016.

• • JUDICIAL VIEW PREVALENT ON ONLINE ADVERTISING IN INDIA 

1. 1. Yahoo India Private Limited vs Deputy Commissioner of Income Tax. 140 TTJ 0195. 

In this case the assessee and Indian company, remitted Rs. 34,86,947/- (Rupees Thirty-Four Lakhs Eighty-Six Thousand Nine Hundred and Forty-Seven Only) to Yahoo Holdings (Hong Kong) Ltd. for placing banner advertisements on the web portal of Yahoo Hong Kong. Since the assessee company did not deduct tax at source from the payment, the Assessing Officer (A.O) disallowed the deduction claimed by the assessee under section 40(a) of the Income Tax Act, 1961 (the Act) and further imposed a penalty u/s 271(1)(c) of the Act of Rs. 12,50,942/- (Rupees Twelve Lakhs Fifty Thousand Nine Hundred and Forty-Two Only) which was sustained by the Commissioner of Income Tax Appeals (CIT-A). The CIT(A) further held, that the payment made for the use or right to use any industrial, commercial or scientific equipment was in the nature of royalty chargeable to tax in India. Aggrieved, the assessee filed an appeal before the Tribunal.

The tribunal held that the payment was made by the assesee to a foreign company for services which were rendered through its portals which was entirely the responsibility of Yahoo Holdings (Hong Kong) Ltd. The assessee company was only required to provide the banner Ad to Yahoo Holdings (Hong Kong) Ltd. for uploading the same on its portal. Assessee thus had no right to access the portal of Yahoo Holdings (Hong Kong) Ltd. and there was nothing to show any positive act of utilization or employment of the portal of Yahoo Holdings (Hong Kong) Ltd. by the assessee company. Thus it was held that the payment was in the nature of business profit and not royalty and since the recipient was a foreign company having no Permanent Establishment (PE) in India, the assessee was not liable to deduct tax at source from the payment for such services and the same could not be disallowed by invoking the provisions of section 40(a)(i) for non-deduction of tax

2. 2. PINSTORM TECHNOLOGIES PVT. LTD. vs. INCOME TAX OFFICER 154 TTJ 0173

The assessee, engaged in the business of digital advertising and internet marketing, utilises Internet search engines such as Google, Yahoo, etc to buy space in advertising on the internet on behalf of its clients. Google does such online advertising business in Asia from its office in Ireland. During the year under consideration, the assessee company had made a payment of Rs 1,09,35,108/- (Rupees One Crore Nine Lakh Thirty-Five Thousand One Hundred and Eight Only) to Google Ireland Ltd. without deducting tax at source and the said amount was claimed as ‘advertisement expenditure’. According to the Assessing Officer (A.O.), the services rendered by the Ireland company to the assessee was in the nature of ‘technical services’ and hence the assessee was liable to deduct the tax at source form the payment made. As a result of which, the deduction claimed by the assessee on payment of ‘advertisement charges to M/s. Google Ireland Ltd. was disallowed by the A.O. by invoking the provisions of section 40(a)(i). Which was upheld by the Commisiioner of Income tax CIT(A). The CIT(A) further held that the payment made by the assessee to Google Ireland Ltd. for the services rendered was in the nature of ‘royalty’ chargeable to tax in India and the assessee therefore was liable to deduct the tax at source from the said payment.

Following the decision in the case of Yahoo India Pvt. Ltd, the Tribunal held that since there was nothing to show any positive act of utilisation or employment of the portal of Google by the assessee company, the amount paid by the assessee to M/s. Google Ireland Ltd. for uploading and display of banner advertisement on its portal was in the nature of business profit on which no tax was deductible at source since the same was not chargeable to tax in India in the absence of any Permanent Establishment (PE) of Google Ireland Ltd. in India.

3. 3. Income Tax Officer vs. Right Florists Pvt Ltd I.T.A. No.: 1336/Kol/2011.

The assessee, a florist used the online advertising services of two US based entities, namely  Google Ireland Limited (Google Ireland) and Overture Services Inc USA  (Yahoo USA), on their search engines Google and Yahoo, to generate business. The assessee had made payments aggregating to Rs 30,44,166/- (Rupees Thirty Lakhs Forty-Four Thousand One Hundred and Sixty-Six Only) in respect of online advertisements without withholding taxes from the payments. The Assessing Officer (A.O) disallowed the deduction claimed by the assessee under section 40(a) of the Income Tax Act, 1961 (the Act) since no tax was withheld by the assesee on the said payments under Section 195 of the Act. Aggrieved, the assesee filed an appeal before the Commissioner of Income Tax Appeals (CIT-A), who reversed the order of the A.O. Aggrieved, the A.O. filed an appeal before the Tribunal.

The tribunal relied on the case of Yahoo India Pvt. Ltd, and Pinstorm Technologies Pvt. Ltd and held that since the assesee had no right to access the portal of either of the search engines, the payment could not be claimed as royalty. It was further held by the tribunal that since the services were provided by Yahoo USA and Google Ireland by automated systems without any human intervention, the payment for same cannot be brought to tax as fees for technical service and further since the recipients were foreign companies having no Permanent Establishment (PE) in India during the year under consideration, the assessee was not liable to deduct tax at source from the payment for such services and the same could not be disallowed by invoking the provisions of section 40(a)(i) for non-deduction of tax.

RATIONALE FOR INTRODUCING LEVY

 The rationale behind the imposition of the above levy seems to be that the government is trying to create a level playing field between multi-national companies who do not have a PE in India and those who have a PE in India.

In the budget speech the Finance Minister very categorically stated that payments of over Rs. 1 Lakh a year for advertising to ‘foreign e-commerce companies’ without PE would attract a levy of 6%.

The above levy is also in a way a step taken by the government to get over the judicial decisions discussed above wherein it has been held that ‘payments made for online advertisement on search engines are not taxable in India because such payments would not be considered to be fees for technical services in the absence of human intervention in the course of providing these services and neither can they be treated as royalty since there was only use of the facility and not the equipment in itself i.e there was no positive act of utilization, application or employment of the equipment by the assesee.’

As a result thereof the government was finding it very difficult to bring these services under the tax net and thus the equalisation levy has been levied.

However the question which needs to be answered in future is whether the aforesaid levy will prove to be a regressive or progressive levy.

Presently India being the only country to impose such a levy, may serve as a deterrent factor for startup industries and ventures which rely heavily on online advertising services for the promotion and marketing of their business.

However on the brighter side, the leakage of revenue as a result of multinational companies who do not have a PE in India is being plugged in. The best policy at this point of time would be thus to ‘Wait and Watch’ and see how the impact of the aforesaid levy pans out.