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Search engines selling ad space may be taxed

22-December-2005
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Search engines selling ad space may be taxed

Google Online India told to pay service tax by Authority for Advance Rulings.

The Authority for Advance Rulings has said that Google Online India Pvt Ltd, a wholly owned subsidiary of US-based Google International LLC, will have to pay service tax for selling advertisement space on its search site to Indian entities. This can set a precedent for search engines with offices in India falling in the ambit of the tax.

The advance ruling last week noted that the proposed activity of Google India to sell space on its site tantamount to providing a service to advertisers and clients. “From this angle, the applicant will be covered by the definition of advertising agency,” it said.

When contacted, Google executives said they were still examining the ruling and did not wish to comment on it.

A ruling by the advance authority is binding on the company with immediate effect unless it decides to appeal against the verdict.

The search engine had approached the Advance Ruling Authority in August this year, seeking clarifications on whether providing selling space for advertisement on the Google website would be exempt from service tax or was classifiable as advertisement service, computer network service, business auxiliary service or any other taxable service.

In its application, Google had said the service it proposed to provide did not attract service tax. The company had argued that it was not providing any service involving “making and display of advertisements but was merely engaged in space-selling activity” on Google’s own website and other websites with which it had entered into a syndication agreement.

The Commissionerate of Service Tax, in its argument, pointed out that the definition of advertisement space was wide enough to include providing of advertisement service on the Internet by the applicant.

“Even mere providing or selling of space for advertisement is itself a service connected with display or exhibition of advertisements and hence will fall within the tax net as advertisement service,” the commissionerate said.

The advance ruling authority pointed out that the finance ministry, in 1996, had made it clear in the context of the “advertising agency” definition to the effect that “the scope of the service which is included in the tax net, extends to not only any service connected with the making and preparation of advertisements but also includes services connected with display or exhibition of advertisements.”

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