ITAT Holds Google AdWords Payments are Advertising Contracts and Not Technical Services

The Income Tax Appellate Tribunal (ITAT) Hyderabad has held that payments made to Google India Pvt. Ltd for availing advertisement services under the Google AdWords programme are in the nature of advertising contracts and not fees for technical services (FTS).

The assessee, Head Digital Works Private Limited, is engaged in operating the online gaming platform ace2three.com. During the assessment year 2018-19, it took advertising services through the Google AdWords programme and made payments to Google India Private Limited after deducting tax at source at the rate of 2% under Section 194C, treating the payments as an advertising contract. A survey under Section 133A of the Income Tax Act, 1961, was conducted to verify compliance with TDS provisions.

The AO observed that Google AdWords involved algorithms, real-time bidding and data analytics, and, therefore, the services constituted “Fee for Technical Services” under Section 194J read with Explanation 2 to Section 9(1)(vii). Accordingly, the AO passed an order under Sections 201(1) and 201(1A), treating the assessee as an “assessee in default” and raising a demand towards the short deduction of tax amounting to Rs 2.55 crore along with interest of Rs 57.75 lakh.

The CIT(A) deleted the demand holding that the payments were merely for advertisement services covered under Section 194C. Aggrieved by the relief, the revenue preferred an appeal to the tribunal.

The Tribunal observed that for a payment to qualify as a “fee for technical services” under Section 194J read with Explanation 2 to Section 9(1)(vii), the services should be managerial or technical in nature; it held that mere use of sophisticated technology or automated systems does not amount to technical services. The Tribunal further observed that advertising contracts are specifically covered under Section 194C. Relying upon CBDT Circular Nos. 714 and 715, it held that where a specific provision exists for advertising contracts, the Revenue cannot apply the general provisions of Section 194J only because the advertisements are delivered through electronic media or advanced technology.

Accordingly, the Tribunal upheld the order of the CIT(A) and held that the payments made by the assessee to Google India Private Limited for the Google AdWords programme were only a simple advertising contract falling under Section 194C. Since the assessee had rightly deducted tax at source at 2%, the demand raised under Sections 201(1) and 201(1A) was unsustainable.

Consequently, the appeal filed by the revenue was dismissed.