The Hindu Business Line : Tax on Google's sale of website space for display of ads

GOOGLE Online India Private Ltd, a wholly-owned subsidiary of Google International LLC in the US, submitted an application before the Authority for Advance Rulings (AAR), New Delhi (Central Excise, Customs and Service Tax). Google Online said that the US company is in the business of providing Internet (Web) based search service, free of charge, and also giving, on payment, ad space to advertisers/clients for displaying names of their websites.

Google Online too proposed to provide similar services, and engage in "direct selling, syndication partnerships and reseller deals with agencies" in India, Pakistan, Nepal, Sri Lanka and other neighbouring countries.

Therefore, Google Online sought advance ruling on whether the activity of providing/selling space for advertisement on `Google Website' was classifiable as taxable service as advertisement, computer network, business auxiliary, or any other.

Google's arguments

For Google, Atul Gupta, along with CAs from Deloitte Haskins & Sells, submitted that the proposed services did not attract levy of service tax. "There is distinction between `providing of services connected with display or exhibition of an advertisement' and actual display or exhibition of an advertisement which is in effect the result of the media affording/providing a time or space slot whether on the radio or television or an Internet page," argued Google.

`AdSense for Search' and `AdSense for Content' did not result in providing add on services to the advertisers, said Google, countering the Department's view on this matter. No extra charges are to be paid by the advertisers for these optional services, said the company. "In the proposed system the advertiser chooses whether he wants his advertisement to also appear in a non-Google website," said Google Online.

The company would merely be engaged in space selling activity to advertisers; sale would be of "space on website being the consolidated space on Google's own website and other websites with whom Google has entered into syndication agreement," explained Google.

CPC and CTR

The company also clarified that no service was proposed to clients "in connection with or in the form of abetting making, preparation, display or exhibition of advertisements." Google disputed that it would charge its clients "on CPC (Cost Per Click) basis, which is a kind of performance-based advertising, because the method or mode of charging for a particular service has no correlation with the basic character of service."

Google Online said it would not be able to change the visibility or positioning of an advertisement as the same was determined by "an equation which takes into account the `Click Through Rate' (CTR; which refers to whether users elected to select the link and go to the advertiser's website) and value of the bids for space." The company explained that the proposed method was devised "to determine the positioning/ ranking of advertisements" and that it was applicable uniformly to all advertisements. As a result, neither the advertisers nor Google would have any say in the positioning of the advertisements!

Google also submitted that it was not to be involved with the contents of the advertiser's ad displayed on a Web page from a search result so long it was in line with the company's editorial policy.

"They would also not be involved in conceptualising or designing of the advertisement of the advertiser. What all it proposes to do, it would sell website space for display of the advertisement of the advertiser," explained Google.

Exhibitions and classifieds

What Google would provide was only `a technological platform' that could be used independently by an advertiser. "It is self-serve and automated system wherein the advertiser manages his own account," reads the text, narrating the representation of Google. The company drew, for its support, the Department's circular (F.No.345/4/97-TRU dated August 16, 1999) "that the service provided to advertisers by the print or electronic media which merely involves selling of space or time for the exhibition of advertisements, would not attract levy of service tax."

Another circular (F.No.B.II/1/2000-TRU dated July 9, 2001) was also relied upon "to show that the space/time selling activity does not fall within the purview of the service tax."

Google said that broadcasting service was introduced through Finance Act, 2001 to tax the amount charged by the television channel for displaying advertisement, and that there was no analogous provision for taxing as service the display or exhibition of advertisement on the Internet website.

It was also argued by Google that its service wouldn't come under `exhibition service', which covers trade fairs, road shows, and so on. "The search website which merely displays user search results along with the advertisers' links relevant to that search cannot be termed as exhibition," said Google. "On the same analogy, even classified product advertisements in the newspaper would also be subjected to service tax and the same result would follow treating publication of periodicals and journals as business exhibition."

While the purpose of exhibition is to exhibit, explain and showcase the exhibitor's specific products or services, the mere listing of website links accompanied by a 10-15 words introduction, as Google proposed, "was just like a classified advertisement in a newspaper or yellow pages," which cannot "by any stretch of imagination be termed as a business exhibition".

Analogous to trade fair

It was the stand of the Commissioner of Service Tax that Google's proposed service came under `advertisement service provided by an advertising agency'. He didn't agree with Google that the nature of services merely involved providing advertisement space or slot.

The Commissioner said that Google would be providing "a number of value-added services to its clients who advertise with it" and that these services constituted services provided by an advertising agency. A. K. Roy and Bipin Sapra argued for the Department's side at the AAR.

He also cited a circular (No. 341/43/96-TRU dated October 31, 1996) — that the scope of the service which is included in the tax net extends not only to any service connected with making, preparation of advertisements but also includes any services connected with display or exhibition of advertisements. "The product or service is the website itself for the purpose of advertising," said the Commissioner.

So, if Google was showcasing web addresses of these sites and charging only if the website was clicked then it was a case of business exhibition service, said the Commissioner.

"The goods in this case are not real but virtual websites. This is analogous to a trade fair where goods are displayed in different stalls depending upon the places of origin or type of product. Here too, goods are displayed depending on the Adword entered by the person searching," he explained. "The taxable service in the case of business auxiliary service is the service provided to an exhibitor by the organiser of a business exhibition in relation to business exhibition."

Value addition thru URLs

The Commissioner summed up his comments thus: that there are two categories of service in which the service offered by Google could fall, viz. advertising, and business exhibition, the latter being more specific. Google would not only be providing value-added service to its clients, but also be providing service with respect to preparation of advertisement, the Commissioner said.

"Its sales representatives personally help the clients design the advertisement in case the proposed expenditure is more than $4,000 a month as could be seen on the website http://services.google.com/ads inquiry/en," he said.

"When a client or an advertiser is spending more than $30 in a month, the applicant has `jumpstart' offer where the campaign is personalised and the applicant helps to create the campaign via e-mail (see http://adwords.gooqle.com/ select/iumpstartwelcome?)".

Through the jumpstart offer and providing sales representative's help, Google would be trying to create "a platform to provide service of an advertising agency to its advertiser," reasoned the Commissioner. Whether the advertisers actually used the facility or not is not an important factor, he said; what was important was that Google would be providing service of preparing advertisement campaign which is enough to make it chargeable to service tax.

As for the `business exhibition service' angle, the Commissioner said that the details of modes of payment available to the advertiser strengthened the fact that it was a business exhibition service.

"The cost per click which appears to be a major mode of payment means that an advertiser will only be charged in the case of Adwords being clicked, and the fixed fee is like a fixed fee for registration in a trade fair and the showcasing of the website, which is the virtual product in this case, is the exhibition of the product," he elaborated.

Depending upon the mode of payment, it will be either an advertising service or business exhibition service, he said.

Taxability presupposed

Justice Syed Shah Mohammed Quadri, Chairman, and AAR members Somnath Pal and B. A. Agrawal, heard the case and noted that the Authority cannot look into whether Google's service was taxable or not; however, the AAR could decide on the classification of taxable service.

Therefore, presupposing that Google's service was a taxable one, the Authority studied the classification question. "It would, therefore, be incongruous to argue that the service is not a taxable service and the contention is indeed contrary to the very postulate of the question," observed the Authority.

The AAR studied the CBEC (Central Board of Excise and Customs) circular and noted that services rendered in relation to a circular, label, documents, hoardings or any other audio-visual representation fall under `advertisement services', while services relating to actual exhibition or display of the product or services would fall under `business exhibition services'.

There is apparently no scope for importing into the ambit of `business exhibition services' the concept of `virtual' exhibition or display or even `virtual' goods, said the Authority.

Accordingly, "business exhibition service cannot be said to apply to a person who renders service connected with display or exhibition, of an advertisement or actually displays/exhibits an advertisement on an Internet website," reads the Authority's order dated December 13.

Advertisement defined

Definition of advertisement is an inclusive definition, noted the Authority. "Advertisement means to make something known to the public or segment of public, to announce publicly by a printed notice or broadcast to call public attention to, especially, by emphasising, desirable qualities so as to arise a desire to buy and patronise," said the Authority.

To this meaning are also added "notices, circular, label, wrapper, document, hoarding or any other audio or visual representation made by means of light, sound, smoke or gas." The AAR cited a 2005 decision of the apex court in ICICI Bank vs Municipal Corporation of Greater Bombay, where it was held that whether particular action is an advertisement or not would depend on whether the person wants to promote his product or service.

"If by any communication, the communicator tries to influence the people to buy his product or service or attract towards his product or service then it would be a guiding factor to identify whether a particular communication of the communicator tantamount to be an advertisement," explained the Authority.

From the Commissioner's reference to URLs, the AAR inferred that what Google offered was not the mere selling of slots on website but also assisting in preparation of advertisement and displaying/exhibiting advertisement, thus making the company "squarely fall within the meaning of advertising agency".

In the proposed activity, Google, even by merely providing/selling space for display or exhibition of an advertisement, would be providing a service to the advertisers/clients, opined the Authority, and ruled that `from this angle as well,' Google would be covered by the definition of advertising agency.

Tailpiece

"Since we have to step up security all over... "

"We can feel safe, right?"

"But my worry is whether there will be a new security tax!"

Detaxification@TheHindu.co.in

D. Murali

More Stories on : Taxation | Advertising | Internet | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
`Year of Farm Resurgence'

Dynamics of scarcity

Tax on Google's sale of website space for display of ads

Work awaits the new Tribunal

Water-rich, yet over-stretched

`Enlightened moderation' in Pakistan, really?

Holding on to relief