Payments to a foreign company for uploading banner advertisements on portals are not liable to be taxed in India, the Income Tax Appellate Tribunal (ITAT) has ruled in an appeal filed by software company Yahoo India.

Such payments are not in the nature of royalty and, therefore, do not come under the tax net in India, the ITAT order said. The appeal was against the order of the Income-Tax department which held these as royalty payments. Under laws governing cross-border taxation, royalties attract tax in India.

Yahoo India, a 100% subsidiary of Yahoo USA , is in the business of providing services on a spectrum of services such as email chat and search engine. The assessing officer, during the course of his assessment, came across a payment of Rs 34 lakh to Yahoo Hong Kong for the services rendered by the latter for advertisement, media, etc.

The payment was related to an advertisement uploaded on behalf of the Department of Tourism of India , which sought the services of Yahoo India for uploading its banner advertisement on a portal owned by Yahoo Hong Kong. Yahoo India hired Yahoo Hong Kong and made the payment to Yahoo Hong Kong without withholding the taxes.

Yahoo India said since services rendered by the Hong Kong unit were outside India, tax is not required to be paid in India. Yahoo India also contended that the Hong Kong company does not have any permanent establishment in India, a key factor in determining tax liability in India. Further, the payment is also not in the nature of royalty fee as the taxpayer is not in possession of any equipment of the Hong Kong company or used these equipment.

The Tribunal, relying on the AAR decision in the case of ISRO Satellite and Dell International Services , agreed with Yahoo India's contention that the payment is not royalty. ITAT held it as business income. (Economic Times)