AUTHORITY FOR ADVANCE RULINGS
(CENTRAL EXCISE, CUSTOMS & SERVICE TAX)
Tuesday, the Thirteenth December Two Thousand Five
Ruling No. AAR/30/2005
R U L I N G
(Hon'ble Mr. Justice Syed Shah Mohammed Quadri)
In this application under section 96C(1) of Chapter VA of Finance Act, 1994 (for short "the Act"), the applicant - M/s. Google Online India Private Limited - is a wholly owned subsidiary of M/s. Google International LLC (for short "Google USA"), a foreign company registered under the laws of the United States. In Annexure 1 to the application it is stated that the applicant's parent company is in the business of providing internet (Web) based search service which is rendered free of charge. Google USA also provides advertisement space to advertisers/clients to display the names of their websites on its sites on payment of charges. As is being done by Google USA, the applicant also proposes to provide service free of charge as well as to sell advertisement space slots on the Google search site to advertisers/clients in India. The applicant will engage in direct selling, syndication partnerships and reseller deals with agencies. All direct sales and reseller relationships will be managed locally and the contract will be with the applicant. Though most customers will be from India, the applicant may also engage in relationships with customers in Pakistan, Nepal, Sri Lanka and other neighbouring countries, which is a normal business practice within the TV/Print advertising industry in India. The applicant seeks advance ruling of the Authority on the following question:
"Whether the activity of providing/selling space for advertisement on 'Google Website' as proposed to be carried out by the applicant and as detailed in Annexure 1 of this application, is classifiable under any of the below mentioned heads of taxable services or as any other taxable service enumerated in Chapter V of the Finance Act, 1994:
1. Advertisement Services (as defined under section 65(105)(zh)[sic] of Chapter V of Finance Act, 1994).
2. Computer Network Service (as defined under section 65(105)(zh) of Chapter V of Finance Act, 1994).
3. Business Auxiliary Service (as defined under section 65(105)(zzb) of Chapter V of Finance Act, 1994).
4. Any other taxable service (as enumerated in section 65(105) of Chapter V of Finance Act, 1994)"
2. In annexure 4 to the application, the applicant, having noted the definition of taxable services 1 to 3 in the question, submits that the service proposed to be provided by it does not attract levy of service tax. In regard to any other taxable service (as enumerated in section 65 (105) of Finance Act,1994) - item 4 - it is pleaded that after examining the entire gamut of taxable services on which service tax is applicable under the Act, no other taxable service covers the activities which are proposed to be undertaken by the applicant.
3. In reply to the comments of the Commissioner, the applicant points out that there is distinction between "providing of services connected with display or exhibition of an advertisement" and actual display or exhibition of an advertisement which is in effect the result of the media affording/providing a time or space slot whether on the radio or television or an internet page. It is denied that the applicant would be providing a number of value added services as contended by the Commissioner. It is also denied that 'Adsense for Search' and 'Adsense for Content' result in providing add -on services to the advertisers. It is submitted that no extra charges are to be paid by the advertisers for these services which are optional. In the proposed system the advertiser chooses whether he wants his advertisement to also appear in a non-Google website. The applicant would merely be engaged in space selling activity to advertisers wherein the space essentially sold is space on website being the consolidated space on Google's own website and other websites with whom Google has entered into syndication agreement. No service is proposed to be provided by the applicant to its clients in connection with or in the form of abetting making, preparation, display or exhibition of advertisements. It is disputed that the applicant would charge its clients on CPC (Cost Per Click) basis which is a kind of performance based advertising, because the method or mode of charging for a particular service has no correlation with the basic character of service. The applicant would not be able to change the visibility or positioning of an advertisement as the same is determined by an equation which takes into account the 'Click Through Rate' (CTR) [which refers to whether users elected to select the link & go to the advertiser's website] and value of the bids for space. The proposed method devised by the applicant to determine the positioning/ranking of advertisements is applicable uniformly to all advertisements received by them. Neither the advertisers nor the applicant would have any say in the positioning of the advertisements. The applicant would not be involved with the contents of the advertiser's ad displayed on a web page from a search result so long it is in line with their editorial policy. They would also not be involved in conceptualizing or designing of the advertisement of the advertiser. What all it proposes to do, it would sell website space for display of the advertisement of the advertiser. The applicant would only be providing a technological platform which would be used independently by an advertiser; it is self serve and automated system wherein the advertiser manages his own account. The department's circular F.No.345/4/97-TRU dated 16.8.1999 is quoted in support of the submission that the service provided to advertisers by the print or electronic media which merely involves selling of space or time for the exhibition of advertisements, would not attract levy of service tax. The department's circular F.No.B.II/1/2000-TRU dated 9.7.2001 is also relied upon to show that the space/time selling activity does not fall within the purview of the service tax. It is submitted that the broadcasting service was introduced through Finance Act, 2001 to tax the amount charged by the television channel for display of advertisement under the head of broadcasting service but no analogous service for displaying or exhibiting advertisement on the internet website is subjected to levy of service tax. It is stated that the intent of introducing exhibition service is outlined in circular No.80/10/2004-ST which covers trade fairs, road shows, etc. The search website which merely displays user search results alongwith the advertisers' links relevant to that search cannot be termed as exhibition. On the same analogy, even classified product advertisements in the newspaper would also be subjected to service tax and the same result would follow treating publication of periodicals and journals as business exhibition. The business exhibitions are intended to have a definite theme say, industrial products, like machinery, plastics, etc. or consumer products like cosmetics, electronic items, etc. The purpose of exhibition is to exhibit, explain and showcase the exhibitor's specific products or services. Therefore, mere listing of website links accompanied by a 10-15 words introduction just like a classified advertisement in a newspaper or yellow pages cannot by any stretch of imagination be termed as a business exhibition. It is submitted that the service proposed to be provided by the applicant does not fall either under advertising services or business exhibition services.
4. In his comments the Commissioner of Service Tax has stated that the service proposed to be offered by the applicant would fall under advertisement service provided by an advertising agency. He has disputed the contention of the applicant that the nature of services provided by the applicant merely involves providing advertisement space or slot. According to the Commissioner, the applicant would be providing a number of value added services to its clients who advertise with it. These services constitute services provided by an advertising agency, he contends. Reliance has also been placed by the Commissioner on CBEC's Circular No. 341/43/96-TRU dated 31.10.96 in support of his stand that the scope of the service which is included in the tax net extends not only to any service connected with making, preparation of advertisements but also includes any services connected with display or exhibition of advertisements. It is further stated that the product or service is the website itself for the purpose of advertising, so if the applicant is showcasing web addresses of these sites and charging only if the website is clicked then it is a case of business exhibition service; the goods in this case are not real but virtual web sites. This is analogous to a trade fair where goods are displayed in different stalls depending upon the places of origin or type of product. Here too, goods are displayed depending on the Adword entered by the person searching. The taxable service in the case of business auxiliary service is the service provided to an exhibitor by the organizer of a business exhibition in relation to business exhibition. While summing up the comments, it is submitted that there are two categories of service in which the service offered by the applicant can fall - the advertising service and the business exhibition service - and that the business exhibition service appears to be a more specific heading than advertising service. In his additional comments, the Commissioner states that the applicant will not only be providing the value added service to its clients who advertise with it with respect to display or exhibition of an advertisement but will also be providing service with respect to preparation of an advertisement; its sales representatives personally help the clients design the advertisement in case the proposed expenditure is more than $ 4000 a month as could be seen on the website http://services.google.com/ads inquiry/en. When a client or an advertiser is spending more than $ 30 in a month, the applicant has 'jumpstart' offer where the campaign is personalized and the applicant helps to create the campaign via e-mail (see http://adwords.google.com/select/jumpstartwelcome?). Thus it is clear that through jumpstart offer and with the help of sales representative, the applicant would be trying to create a platform to provide service of an advertising agency to its advertiser. Whether the advertisers actually avail the facility or not is not an important factor; what is important is the fact that the applicant would be providing service of preparing advertisement campaign which is enough to make it chargeable to service tax. In regard to business exhibition service, it is submitted that the details of modes of payment available to the advertiser strengthens the fact that it is a business exhibition service. The cost per click which appears to be a major mode of payment means that an advertiser will only be charged in the case of Adwords being clicked and the fixed fee is like a fixed fee for registration in a trade fair and the showcasing of the website, which is the virtual product in this case, is the exhibition of the product. Thus, depending upon the mode of payment, it will be either an advertising service or business exhibition service.
5. Mr. Atul Gupta, Consultant, who appears for the applicant would submit that the service provided by the applicant does not fall under advertising service nor does it fall in computer network service, nor under business auxiliary services; indeed it does not fall in any other service enumerated in section 65 (105) of the Act. It is argued by Mr.Gupta that the Commissioner, in his comments, sought to bring the service in question under advertising service and business exhibition service and more particularly under the latter but the applicant is not an advertising agency and that there is a subtle distinction between providing services connected with display or exhibition of an advertisement and actual displaying or exhibition of an advertisement which is in effect the result of the media affording/providing time slots whether on the radio or internet page. It is submitted that the applicant would not be providing any service which involves making, preparation and display of an advertisement; it would merely be engaged in the space selling activity on Google's own website and other websites with whom the applicant has entered into syndication agreement. The applicant will not be involved in providing any value added service; it would only provide technological platform which is self serve and automated system wherein an advertiser manages its own account independently. He relied on the circular F.No.345/4/97-TRU, dated 16.8.1999 of the department and the judgement of the Madras High Court in Advertising Club Vs.CBEC1. Another contention putforth is that the broadcasting service was introduced through Finance Act, 2001 and that there is no analogous taxable service in the Act whereunder advertisements displayed or exhibited on the internet website could be subjected to service tax. The Circular of the department F.No.B.II/1/2000-TRU, dated 9.7.2001 clearly shows that the activity of sale of space/time slot does not fall within the purview of the Act and that only broadcasting through television or radio is subjected to service tax under the category of broadcasting service. The service proposed to be offered by the applicant does not also fall under the business exhibition service which was introduced to nullify the decision in ITPO vs.CCE2. The scope of business exhibition service has been outlined in Circular no.80/10/2004-ST dated September 17, 2004 of the department. The plea of the department that the applicant would be conducting the business exhibition is wholly erroneous.
6. Mr. Bipin Sapra, Joint Commissioner appearing for the Commissioner, has argued that the category of service provided by the applicant is akin to business exhibition service and advertisement service. The definition of advertisement service is wide enough to include providing service of advertisement on internet by the applicant. Even mere providing/selling of space for advertisement, is itself a service connected with the display or exhibition of advertisement & hence would come within the tax net as advertisement service. The value added service given by the applicant is similar to making, preparation, display and exhibition of advertisement. In as much as the service provided by the applicant is in connection with the display or exhibition of an advertisement, the actual display of the advertisement on the internet of the applicant is consequence of that service.
7. It may be noted that classification of taxable service is well within the jurisdiction of the Authority under section 96C (2) (a) of the Act. However, whether a service provided by an applicant is a taxable service or not, cannot be the subject matter of advance ruling of the Authority under section 96C (2) of the Act. The frame of the question in the application as to under which of the four categories of services enumerated in the question, will the service proposed to be provided by the applicant fall, presupposes that the service in question is a taxable service and the Authority is approached for a proper classification of the service. It would, therefore, be incongruous to argue that the service is not a taxable service and the contention is indeed contrary to the very postulate of the question. Be that as it may, of the four categories of service which have been enumerated in the application, the Commissioner classified the service proposed to be provided by the applicant as falling under "business exhibition service" and/or "advertisement service". We shall, therefore, consider under which category of taxable service, will the service proposed to be provided by the applicant fall? Section 65 (105) of the Act defines taxable service to mean any service provided or to be provided to a person enumerated in clauses (a) to (zzzh) thereof. Clauses (e) and (zzo)of sub-section 105 of section 65 of the Act are relevant for the present discussion, which are in the following terms:
"SECTION 65. Definitions. - In this Chapter, unless the context otherwise requires, -
xx xx xxx xx
(105) "taxable service" means any service provided or to be provided
xx xx xx xx xx
(e) to a client, by an advertising agency in relation to advertisement, in any manner.
xx xx xx xx xx
(zzo) to an exhibitor, by the organiser of a business
exhibition, in relation to business exhibition
xx xx xx xx xx
Clause (e) relates to service provided or to be provided to a client, by an advertising agency in relation to advertisement, in any manner and clause (zzo) relates to service provided or to be provided to an exhibitor by the organiser of a business exhibition in relation to business exhibition. As much emphasis is laid by the Commissioner on business exhibition service, we shall first consider the scope of "business exhibition service"
8. Before proceeding to discuss this aspect it will be useful to recount the proposed service offered by the applicant. The applicant proposes to provide the following services:
Free or Non chargeable services:
Search service where a user can locate sites containing required information by typing in the key words:
(i) To sell advertisement space to the advertisers/clients in India. This would be through direct selling, syndication partnership and reseller deals with agencies, which will be managed locally and contract will be with the applicant.
(ii) Marketing and promotional activities to sell space slots on the Google sites.
The applicant shall provide/sell advertisement space to its clients whereby it would allow its clients to display their links on the websites of Google. The links to the advertiser's websites would be displayed on the Google website as a result of the search query of the users. Once the advertisers' link is opened, their products can be bought online by potential customers or sold to them by their direct sales representative or sales agents.
Google USA has developed various tools which in effect are the methodologies adopted for sale of such space/slots. Similar tools/methodologies shall be employed by the applicant for providing advertisement products to potential clients. A brief description of these tools is as follows:
Google's Adwords product specifically relates to a search engine query. Under this methodology in response to a key word typed in by the user, for instance, "flower" the Google search engine will display the most relevant links to this word, i.e. 'Flower'. AdWords is a mechanism for the advertisers to provide search-specific advertising to the users. On the Google website, AdWords ads are located on the top and to the right side of the search results. Adwords is an automated, self-serve system through which advertisers independently develop a set of keywords relating to their business, manage their own account online from the Google website and determine a daily or periodic advertising budget for AdWords on CPC basis. CPC implies a unit price or the advertising fee paid each time a user selects or "clicks" the advertiser's advertisement to access the advertiser's web page. ( In other words the advertiser is required to pay the charges on the basis of no. of times his weblink (advertisement) has been opened and seen by any person. The advertising fees per click are also fixed by the advertiser himself).
The "rank" or positioning of an advertisement on the top of a website would be determined by placing AdWords on top of the page which usually command a greater end- user interest. Such a position is determined by an equation which takes into account both the value of the bid and the "click-through rate" (CTR). CTR refers to whether users chose to access the link and go to the advertiser's web page. In this way, Google allows users to determine a website's relevance to given search word. Hence, the highest bidder may not always appear first amongst the CPC ads, if its CTR is low.
(In other words depending upon the popularity of site and on the the payment for the advertisement, the websites are displayed on the top in response to a search query).
(II) AdSense for Search
Under this methodology the applicant's search-based technology is based on queries performed on a website other than Google.com property. In such cases Google enters into "syndicate agreements" with third portals to provide CPC ads on the portal's website whereby it expands Google's advertisers' reach through the portal's user base. In this mutually beneficial arrangement, Google acquires web traffic, adding to its end-user base, which enhances its appeal to advertisers. The portal benefits by receiving a percentage of the ad revenue generated from the CPC business generated from the partner's web page. It is stated that Google's syndication agreements exist with major portals like AOL, Ask Jeeves and Earthlink. It is further stated that some portals utilize Google's search services, in which case users on the portal's sites actually employ Google search technology while surfing. Other portals only purchase targeted advertisements from Google, in which case a user's search results will come from non-Google technology, but Google's customer advertisements will appear according to the ranking system adopted by Google. (In other words Google enters into agreement with other Portals (big websites) to display the advertisements booked by Google which are to be advertised through them on those portals. The earnings are shared between Google and that portal.)
(III) AdSense for content
Under this methodology the website owner is an online publisher and not a portal as under AdSense for Search. Under this methodology Google serves text-based ads precisely targeted to the content on the publisher's website. In such an arrangement when readers click on an ad shown on the left of the web page, the publisher is paid a percentage of revenue earned by Google from the advertisers. It is contended that since publishers are not limited to large portals, this offering is used by thousands of website publishers. (In other words Google's website would give text-based ads which when clicked would directly link the publisher's website). The earnings from such advertisements are shared between the publishers and Google.
9. Now we shall advert to the definition of "business exhibition service" contained in section 65(19a) of the Act.
"(19a) "Business exhibition" means an exhibition, -
(a) to market; or
(b) to promote; or
(c) to advertise; or
(d) to showcase,
any product or service, intended for the growth in business of the producer or provider of such product or service, as the case may be;"
A plain reading of the definition, quoted above, shows that "business exhibition service" means a service providing an exhibition to market, promote, advertise or to showcase any product or service, intended for the growth in the business of the producer or provider of such product or service as the case may be. The import of the service has been well explained in the department's circular No.80/10/2004-ST dated September 17, 2004. The relevant portion of the circular reads as follow:-
Business exhibition services.
4.1 Business exhibition service is a service rendered to an exhibitor by an organizer of a business exhibition that intends to market, promote, advertise or showcase products or services for growth in business of the producers or providers of such products or services. Thus, organizers of events such as trade fairs, road shows, fashion shows, display show-cases kept in airports, railway stations, hotels etc. would be covered under this new levy. A display of consumer goods in shops or shopping centers for customers to select and purchase would normally not attract any service tax, as normally no separate charges are collected by the shop-keepers for displaying such goods. However, in case an amount is collected for merely displaying an item, the same would be chargeable to service tax.
4.2 While event management service (a currently taxable service) also relates to organizing such events, but in that case, the services are rendered to the organizer by an event manager in relation to planning, promoting, organizing etc. Thus, an organizer of a business exhibition is not covered under Event Management Services, but would be covered under the new levy of "Business Exhibition Services". Similarly, while services rendered in relation to a circular, label, documents, hoardings or any other audio visual representation of a product or service falls under "advertisement services", the services relating to actual exhibition or display of the product or services would fall under the category of "Business Exhibition Services".
10. From the perusal of the above extract of the circular it is amply clear that the business exhibition service must be rendered to an exhibitor by an organizer of a business exhibition that intends to market, promote, advertise or showcase products or services for growth in business of the producers or providers of such products or services. The Circular refers to events such as trade fairs, road shows, fashion shows, display show-cases kept in airports, railway stations, hotels etc. which would be covered under that category. The list is not exhaustive but illustrative. Nonetheless it furnishes the genre of events to which the service relates. The Circular further clarifies that while services rendered in relation to a circular, label, documents, hoardings or any other audio-visual representation falls under "advertisement services", the services relating to actual exhibition or display of the product or services would fall under the category of "business exhibition services". The distinction drawn between display or exhibition of an advertisement of a product or service and the actual display or exhibition of the product or service is clear. There is apparently no scope for importing into the ambit of "business exhibition services" the concept of 'virtual' exhibition or display or even 'virtual' goods. Having carefully considered all aspects we are of the view that business exhibition service cannot be said to apply to a person who renders service connected with display or exhibition of an advertisement or actually displays/exhibits an advertisement on an internet website.
11. Now it remains to be considered whether the proposed service satisfies the requirements of 'advertisement service'. To comprehend the scope of this service it would be necessary to refer to clause (e) of sub-section (105) of Section 65, quoted above. Two terms in clause (e) -"advertisement" and "advertising agency" -are the key terms. They are defined in sub-section (2) and sub-section (3) respectively of section 65 of the Act. They may be noted here.
"SECTION 65. Definitions. - In this Chapter, unless the context otherwise requires, -
(1) x x x x x
(2) "advertisement" includes any notice, circular, label, wrapper, document, hoarding or any other audio or visual representation made by means of light, sound, smoke or gas;
(3) "advertising agency" means any commercial concern engaged in providing any service connected with the making, preparation, display or exhibition of advertisement and includes an advertising consultant."
It may be seen that the definition of advertisement is an inclusive definition. Advertisement means to make something known to the public or segment of public , to announce publicly by a printed notice or broadcast to call public attention to, especially, by emphasizing, desirable qualities so as to arise a desire to buy and patronize. To this meaning of the term, the definition, quoted above, adds notices, circular, label, wrapper, document, hoarding or any other audio or visual representation made by means of light, sound, smoke or gas. An advertisement is generally of goods and services and is an information intended for the potential customers. Recently, the Supreme Court in ICICI Bank vs. Municipal Corporation of Greater Bombay3 held that whether particular action is an advertisement or not would depend on whether the person wants to promote his product or service. If by any communication, the communicator tries to influence the people to buy his product or service or attract towards his product or service then it would be a guiding factor to identify whether a particular communication of the communicator tantamount to be an advertisement.
Advertising agency is defined to mean any commercial concern engaged in providing any service connected with the making, preparation, display or exhibition of advertisement and includes an advertising consultant. To attract the provisions of clause (e) of sub-section (105) of section 65, it must be shown that: (a) commercial concern is engaged in providing a service; (b) the service is connected with (i) the making, (ii)preparation, (iii) display or exhibition of advertisement; or (c) the commercial concern is an advertising consultant. It needs no emphasis to bring home the point that making, preparation, display/exhibition are alternative and not cumulative. A commercial concern engaged in providing a service connected with any one of those functions, would be within the ambit of advertising agency.
It is a common ground that the applicant would be providing: (1) service free of charge; and (2) service on payment of charges, and that it is a commercial concern. That the applicant would be providing/selling space for display or exhibition of advertisement is not the subject matter of the controversy and this is enough to satisfy the requirements of the term "advertising agency". However, what is asserted by the applicant is that it will not be providing any service connected with the display or exhibition of advertisement. This has been controverted by the Commissioner in his additional comments who referred to websites: (1) http://services.google.com/ads/inquiry/en and (2) http:adwords.google.com/select/jumpstartwelcome. The websites support the plea that the applicant proposes to provide not only the value added service to its clients who advertise with it with respect to display of an advertisement but would also provide services with respect to preparation of an advertisement and that its sales representative would personally help clients to design the advertisement in case the proposed expenditure is more than $ 4000 a month and where a client or an advertiser would be spending more than $ 30 in a month, it has jumpstart offer where the campaign is personalized and its sale representative would help treat a campaign via e-mail. The applicant would also have a say on the contents of the advertiser's advertisement to be displayed on the applicant's web page in case such contents are found to be not in line with their editorial policy. From the service to be offered by the applicant, we are of the view that the applicant would not merely be selling the slot on website but would also be assisting in preparation of advertisement and displaying/exhibiting advertisement; thus it squarely falls within the meaning of advertising agency. It is also clear that it is proposing to provide to a client service in relation to making, preparation, display and exhibition of an advertisement. In fact, without prejudice to the factual position stated above, any service to a client connected with even any one or more of the four activities mentioned above, would be sufficient to bring the commercial concern providing such service, within the ambit of the definition of advertising agency. This has been made clear in the Ministry of Finance, letter F.No. 341/43/96-TRU dated 31.10.96 in the context of the definition of 'Advertising Agency' to the effect that the "scope of the service which is included in the tax net extends not only of any service connected with making, preparation of advertisements but also includes any services connected with display or exhibition of advertisements".
It is true that broadcasting service was inserted in the Act by Finance Act 2001 and selling slot/time for displaying or exhibiting advertisements on the internet website has not specifically been included as a taxable service in the Act, but that, in our view, will not militate against classifying it under advertisement service when all the requirements of that service are satisfied. In the proposed activity, the applicant, even by merely providing/selling space for display or exhibition of an advertisement, would be providing a service to the advertisers/clients. From this angle as well, the applicant would be covered by the definition of advertising agency. Therefore, it follows that the service provided by the applicant clearly falls within clause (e) of sub-section (105) of section 65 of the Act which has a very wide coverage in as much as it means any service provided or to be provided by an advertising agency to a client in relation to advertisement, in any manner.
For the aforementioned reasons, we rule that the activity of providing/selling space for advertisement on 'Google Website', proposed to be carried out by the applicant as detailed in Annexure 1 of the application, and as found by us above is classifiable under section 65(105)(e) of Chapter V of Finance Act, 1994.
Pronounced in the open Court of the Authority on this 13th day of December , 2005.