Nov 29, 2022

Latest Development on Charge of Equalisation Levy Involving Payments by Intermediaries

Equalisation Levy (‘EL’) was introduced by the Indian legislature as its answer to the obsolete physical presence based permanent establishment (‘PE’) rules, which were not sufficient to tackle the taxability of income of ever evolving digitalised business models operating from outside India. As per Section 165 of the Finance Act, 2016, EL was made chargeable at the rate of 6% on the consideration received or receivable by a non-resident in lieu of providing ‘specified service’ to: (i) an Indian resident carrying on business or profession; or (ii) another non-resident which operated in India through a PE in India. The term ‘specified service’ has been defined to mean online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf.[1] Therefore, consideration paid by a non-resident, who does not have a PE in India, to another non-resident providing ‘specified service’, was specifically left out of the scope of EL. It is in this context, that a recent decision of the Income Tax Appellate Tribunal[2] (‘ITAT’), analyses the provisions of the EL law[3], being the first of its kind in India.

The dispute before the ITAT arose because of an Indian resident claiming payments made to a non-resident in lieu of availing online advertising services, as its business expenditure, which was rejected by the Income Tax Department (‘Department’). In the view of the Department, since no EL was deducted by the Indian resident on the consideration so paid, provisions of Section 40(a)(ib) of the ITA stood triggered, for disallowing the entire consideration as an expenditure, while assessing the taxable income of such Indian resident. This view of the Department seems to stem out of the strict interpretation of the provisions of the EL law and more specifically Section 165(1)(i) of the ITA, where consideration paid by an Indian resident to a non-resident is specifically made eligible to EL.

However, such a view did not find favour with the ITAT, since the Indian resident making the payment for online advertising to the non-resident, was acting on behalf of multiple non-residents and in that sense was only an agent/ intermediary. The view of the ITAT is based on the fundamental premise that since the principal transaction for sale and purchase of online advertising took place between two non-residents, with there being no allegation of existence of a PE of the non-resident payer, the provisions of Section 165 of Finance Act, 2016 had no applicability. Therefore, it is for the first time that a view has been taken by a quasi-judicial authority that provisions of EL would not apply qua an agent/ intermediary, despite there being no such exception under the EL law.

Interestingly, ITAT has also drawn support from the fact that the online advertisements in question were targeted on audience based outside India. While Section 165 of Finance Act, 2016 does not prescribe such an exception for the chargeability of EL at the rate of 6%, the ITAT nevertheless, took such a fact into consideration while rendering its decision. It seems that this observation of the ITAT is in line with Section 165A(1)(ii) of Finance Act, 2016, which prescribes a 2% rate for the chargeability of EL on a transaction between two non-residents for online advertising, wherein the audience being targeted is an Indian resident or a customer who accesses such advertisement through internet protocol address located in India.


[1] As on date, no other service has been specified by the Central Government.

[2] DCIT v. Prakash Chandra Mishra, ITA No. 305/JPR/2022, judgment dated October 07, 2022.

[3] Chapter VIII of Finance Act 2016.




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