Subscription Revenue From Advertising Services Provided By Non-Resident To Indian Customers Are Not FTS: Bombay HC

The High Court passed such a ruling while observing that a tax residency certificate is sufficient to determine proof of residency and income-tax authorities cannot ignore a valid tax residency certificate issued by the governing authority of the other contracting state.

The Division Bench of Justice K.R Shriram and Justice Firdosh P. Ponniwala observed that where services provided by non-resident assessee to Indian Customers are limited to the provision of an E-commerce platform for advertising of products/services in India, then subscription revenue from those services are not taxable as FTS.

The Bench further added that when an Indian entity is not dependent agent PE, then in view of Explanation 2, r/w proviso to sec 9(1)(i), the income of non-resident assessee cannot be held to be deemed to accrue or arise in India in terms of sec 9(1)(i).

Advocate P.C. Chhotaray appeared for the Appellant, whereas Senior Advocate P.J Pardiwalla appeared for the Respondent.

In the present case, the return filed by the assessee (Appellant), a Singapore resident company, was selected for scrutiny and was denied the benefit of the India-Singapore DTAA. The denial was made by holding that the assessee is merely an intermediary between the Indian subscribers and Alibaba.com Hong Kong Limited. The AO neither accepted the certificate of incorporation nor the Tax Residency Certificate (TRC) issued to the assessee by the authorities in Singapore. The AO also held that the assessee had a 'business connection' in India by way of its agreement with Infomedia 18 Pvt. Ltd., an Indian company, and therefore, the assessee's income was taxable in India as per section 9(1)(i) of Income-tax Act. The AO also held that in the alternative, the payments made by the Indian subscribers to the assessee were also taxable in India as Fees for Technical Services (FTS).

After considering the submission, the Bench observed that since the entire control and management of the company is from Singapore, therefore, in terms of Article 4 of India-Singapore DTAA, it is a tax resident of Singapore, holding a valid 'tax resident certificate'.

“The entire structure of various holding companies of the 'Alibaba.com Group' shows the immediate holding company is 'Alibaba.com International (BVI) Holding Ltd.', a company incorporated in British Virgin Island and the ultimate holding company is 'Alibaba.com Ltd.', a company incorporated in Cayman Island. During the years under consideration, the assessee has transacted with 'Alibaba.com Hong Kong Ltd.' (Alibaba Hong Kong) by way of availing of Web Hosting and related services. It has been clarified that Alibaba Hong Kong is not the parent company of the assessee as has been wrongly mentioned and presumed by the AO”, added the Bench.

Thus, the Bench highlighted that the entire subscription revenue is received by the assessee from the customers/subscribers all over the world including from the Indian subscribers and it alone is the beneficial and legal owner of the entire revenue collected on which it pays the taxes in Singapore.

The High Court explained that as correctly noted by the ITAT, the entire focus of the AO is that the website www.alibaba.com is registered in Hong Kong and is the trademark of Alibaba Hong Kong, and the AO has completely denied the existence of the assessee as an independent entity as if the assessee was only a front or a shadow entity of Alibaba Hong Kong.

The High Court, therefore, questioned that if the AO was so convinced that the entire activity in India to various subscribers was carried out by Alibaba Hong Kong and not by the assessee, then he was expected to do something to Alibaba Hong Kong and not the assessee.

On the issue as to whether the assessee has any business connection in India in the form of Infomedia and whether Infomedia constitutes a dependent agency PE for the assessee in India, the Bench noted that the ITAT has concluded that assessee has a limited role as its role is confined to facilitate the posting of the advertisement or displaying of the information about the product and services in the electronic form into the web portal.

The Bench also highlighted that while coming to its conclusion on the independence of Infomedia, the ITAT has concluded that activities highlighted by the AO are not carried out by the assessee at all and the services provided by the assessee to the Indian Customers were merely that of displaying/storing of data of Indian Subscribers, such services are limited to the provision of an E-commerce platform for advertising of products or services in India.

The Bench accepted the factual finding of the ITAT that the arrangement between the assessee and the subscribers was for the provision of services for standard facility and not for "rendering of any technical, managerial or consultancy services" as provided in section 9(1)(vii) r/w Explanation 2 of the Act.

Therefore, the High Court concluded that the grounds of the Revenue were correctly rejected in coming to a finding that no technical services had been provided by the Assessee to treat the subscription fees as to be like fees for technical services.