Net Ads under Tax Web?

It came as a shocker for Google India-and also for other
portals operating in India-when the Authority for Advance Ruling (AAE), in a
case between Google India and CST, ruled that portals displaying advertisements
online would now be classified as advertising agency.

The AAE ruling reads: "Providing services or selling space
for display and exhibition of advertisements on a website and the activity of
assisting in the preparation and display of such advertisements will now be
covered within the ambit of the definition of advertising agency under the
service tax law."

In the case of Google, the AAE held that the scope of services
earlier classified under 'advertising agency's services' would now also
include 'services connected with display or exhibition of advertisements'
and that the space-selling activity on the Internet was related to display or
exhibition of advertisements.

According to Ernst&Young India partner, Vivek Mishra,
"This clearly means that display of advertisement by portals would now be
classifiable under advertising agency's services." A subsequent
application for modification of the order by Google India on the basis of
mistake of facts or law was rejected on the grounds that the issues raised in
the review application were not raised at the time of filing original
application for advance ruling.

However, the question that is worrying most other portals with
offices in India is whether the ruling would now imply that they too would be
liable to pay service tax under the category of 'advertisement agency's
services' as defined by the AAE.

PricewaterhouseCoopers ED and head, Indirect Tax Practice, S
Madhavan, clarified, "The ruling in the case has been based on a particular
set of facts and hence the outcome of the ruling cannot be generalized."
According to him, the taxability vis-à-vis the business activities may vary on
case-to-case basis.

However, experts suggest that such a ruling could hold
persuasive value for the lower authorities and they may try to charge service
tax from all portals displaying advertisements.

Even as the recent Google ruling cannot be generalized for other
search engines, it however does not imply that the search engines will not be
liable to pay any service tax.

Madhavan points out that the Finance Act, 2006 has already
introduced a new taxable service, namely 'sale of space or time for
advertisement services'. These services are taxable with effect from May 1,
2006.

"The new taxable service includes within its purview
provision of space or time in video programs, television programs, motion
pictures, music albums or on billboards, public places, buildings, conveyances,
cell phones, ATMs and the Internet," says E&Y Partner Vivek Mishra.

"Therefore it can be safely said that those search engines
which engage in space selling activity on the Internet would squarely be covered
within the purview of the new taxable service," Madhavan of
PricewaterhouseCoopers said.

With the AAE dismissing Google India's petition, the ball is
now in the government's court to decide whether it wishes to impose service
tax on the Internet search engines under the category of advertisement services.
However, it seems that the pendulum is increasingly swinging to the negative
side for the portals.

Stuti Das

stutid@cybermedia.co.in