TaxTMI 
TaxTMI 
2026 (6) TMI 153
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.... of the overseas geographies catered to by the petitioner, the USA accounts for about 60% of the turnover. 3. A subsidiary named Zoho Corporation, USA (Zoho USA) functions as the re-seller of the petitioner's products within the USA. Within said geographical area, said subsidiary markets and resells Zoho Products to end users in consideration for the reseller margin. The main channel to market Zoho products through the online mode is by use of the Google AdWords Program, which is an online sales platform developed by Google. The Google AdWords Program was availed of by Zoho USA under an agreement entered into by it with Google. Google invoiced Zoho USA towards services provided and payments were made by Zoho USA to Google. The petitioner, thereafter, reimbursed Zoho USA towards marketing cost reimbursements of INR 332 crore in financial year 2016-17 and INR 550 crore in financial year 2017-18. 4. An equalization levy was introduced under Chapter VIII of the Finance Act, 2016, in relation to the provision of online advertising services by a non-resident to a resident of India or the permanent establishment (PE) of a non-resident carrying on business in India. Said equalization....
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.... incorporation of Zoho USA, the availing of advertising services by Zoho USA from Google USA, payments made by Zoho USA in respect thereof and the reimbursement of such costs by Zoho India were not devices to circumvent, evade or avoid equalisation levy. (iii) The Report of the Committee on Taxation of E-Commerce titled "Proposal for Equalisation Levy on Specified Transactions", which was submitted in February 2016, suggested and recommended, at paragraph 135 thereof, that reimbursement of expenses of the nature mentioned in the earlier entries in paragraph 135 should be made subject to equalization levy. Thereafter, specified services were defined in paragraph 193 of the report as including "reimbursement of expenses of the nature that are included in any of the above". In spite of said recommendation by the Committee, the Finance Act did not include reimbursement within the scope of specified service, thereby indicating the legislative intent to not tax reimbursement by a resident. (iv) Statements elicited during the survey operation have no probative value. In support of this proposition, the judgment of the Kerala High Court in Paul Mathews & Sons v. Commissio....
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....G.V.Films v. S.Priya Darshan, [2007] 163 Taxmann 74 (Madras) and the judgment of the House of Lords in Fire Stone Tyre and Rubber v. Lewellin, [1958 33 ITR 741 (HL), were relied on in support of this proposition. (v) Each assessment year is a distinct unit for assessment. In support of this proposition, the judgments of the Hon'ble Supreme Court in Radhasoami Satsang v. Commisioner of Income-tax, [1992] 60 Taxmann 248 (SC) and C.K.Gangadharan v. Commissioner of Income-tax, [2008] 172 Taxman 87 (SC), were relied on. 8. By way of a brief rejoinder, Mr.Balaji referred to the judgments of the Hon'ble Supreme Court regarding lifting or piercing of the corporate veil in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC OnLine SC 77 (Vodafone International) and to the judgment in Balwant Rai Saluja and another v. Air India Limited, [2014] SCC OnLine SC 638 (Balwant Rai Saluja). He also relied on the judgments of the Hon'ble Supreme Court in AV Fernandez v. The State of Kerala, 1957 (4) TMI 46, Commissioner of Sales Tax (AV Fernandez), U.P. v. Modi Sugar Mills Ltd, 1960 (10) TMI 65 and Union of India v. M/s.Playworld Electronics India P Ltd (SC), (1989) 3 SCC 1....
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...."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." 11. In this case, Google USA provided online advertising services to Zoho USA. Undoubtedly, the nature of service qualifies as a specified service as per the definition. Such service has, however, been provided by a non-resident (Google USA) to a non-resident (Zoho USA). Hence, on a textual reading of Sections 165 and 164, equalization levy cannot be imposed on the petitioner unless reimbursement also falls within the scope of specified service. I turn to this aspect next. 12. Therefore, the next question that falls for consideration is whether reimbursing Zoho USA for expenses incurred in relation to online advertising services provided by Google USA would attract equalization levy. The Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India formed the Committee on Taxation of E-Commerce (the E-Commerce Taxation Committee). Said Committee submitted a report in February 2016 titled "P....
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....e possibility of avoiding the Equalization Levy by having the payment made by a third party outside India, which is subsequently reimbursed by the actual user, with a claim that no Equalization Levy is payable on reimbursements, it may need to be clarified that the Equalization Levy will be also payable on any payments made by a payer in India for reimbursements of expenses incurred by a third party outside India in respect of services covered under this levy. Lastly, it would need to be clarified that the Equalization Levy will become applicable once a payment is credited or paid-whoever is earlier, to the beneficial owner in the books of accounts, irrespective of when and how the actual payment is made." 14. Eventually, at paragraph 193, the recommendations of the ECommerce Taxation Committee included the following definitions of specified services: "193. Specified services may be defined as following: (i) online advertising or any services, rights or use of software for online advertising, including advertising on radio & television, (ii) digital advertising space (iii) designing, creating, hosting or maintenance of website (iv) di....
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....provisions of the taxing statute, no tax may be imposed by inference or analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter." Equally pertinent are the observations in Murarilal Mahabir Prasad v. B R Vad, (1975) 2 SCC 736, where the Supreme Court held as under: "29. [...] There is no equity about a tax in the sense that a provision by which a tax is imposed has to be construed strictly, regardless of the hardship that such a construction may cause either to the treasury or to the taxpayer. If the subject falls squarely within the letter of law he must be taxed, howsoever inequitable the consequences may appear to the judicial mind. If the Revenue seeking to tax cannot bring the subject within the letter of law, the subject is free no matter that such a construction may cause serious prejudice to the Revenue. In other words, though what is called equitable construction may be admissible in relation to other statutes or other provisions of a taxing statute, such a construction is not admissible in the interpretation of a charging or taxing provision of a taxing statute." 17. Whether such equalization....
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....al/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold." 18. Said doctrine was also considered in Balwant Rai Saluja, wherein it was held as under: "70. The doctrine of "piercing the corporate veil" stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd. Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case, stated that: (AC pp. 30 & 31) "[a company] must be treated like any other independent person with its rights and liabilities [legally] appropriate to itself... whatever may have been the ideas or schemes of those who brought it into existence." Most of the cases sub....
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....Google USA raised invoices on Zoho USA. Even in the period prior to the introduction of equalisation levy, after making payments to Google USA, Zoho USA requested for and received reimbursement from the petitioner / Zoho India. This practice was continued after the introduction of equalisation levy. This evidence clearly leads to the conclusion that Zoho USA was not set up for purposes of evading liability in relation to equalization levy. Significantly, the above documents also establish that the petitioner was in the practice of reimbursing advertising expenses incurred by Zoho USA for the Google AdWords Program much prior to the introduction of equalization levy. 21. The rationale underlying the reimbursement by the petitioner of costs incurred by Zoho USA towards advertising services provided by Google USA is easy to discern. Zoho USA appears to be functioning as a re-seller of products developed by the petitioner in a particular geography. The US subsidiary markets such products in the geographical territory assigned to it and receives a sales margin as consideration/commission. Hence, all expenses incurred by it for marketing the products of the petitioner in the USA are r....
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....f survey proceeding could not be a basis for making any addition in the block assessment, vide decision of this court in T. C (A) No. 2620 of 2006 (between CIT v. S. Ajit Kumar (2008) 300 ITR 152 (Mad.) (v) Finally, the word "may" used in section 133A(3)(iii) of the Act, viz., "record the statement of any person which may be useful for, or relevant to, any proceeding under this Act, as already extracted above, makes it clear that the materials collected and the statement recorded during the survey under section 133A are not conclusive piece of evidence by itself. For all these reasons, particularly, when the Commissioner and the Tribunal followed the circular of the Central Board of Direct Taxes dated March 10, 2003, extracted above, for arriving at the conclusion that the materials collected and the statement, obtained under section 133A would not automatically bind upon the assessee's we do not see any reason to interfere with the order of the Tribunal." Given the position of law, statements recorded in course of survey cannot be relied on to fix liability on the petitioner. In the impugned order, the Deputy Commissioner of Income-Tax relied on statements rec....