The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the distribution fee paid by the tech-giant Google India to its Associate Enterprises cannot be treated as royalty/FTS.
Quashing the additions and the penalty orders for the year 2008-09, a Two-Member Tribunal comprising Shri George George K. (Judicial Member) and Ms. Padmavathy S (Accountant Member) has observed that “the issue of taxing the distribution fees by treating the same as Royalty / FTS has already settled in favour of the assessee by the coordinate bench in assessee’s own case from the perspective of applicability of provisions of section 201 and accordingly there cannot be any disallowance u/s.40(a)(i) on this count.”
Earlier, the AO held that the distribution fee of Rs.119,82,61,994 is to be disallowed u/s. 40(a)(ia) since the assessee has remitted the amount without deducting tax at source u/s. 195. The AO held that the distribution fee is chargeable to tax in India for the reason that assessee being a Dependent Agent Permanent Establishment (DAPE) of GIL in terms of Article 5(6) of India-Ireland Double Taxation Avoidance Agreement. Alternatively, the AO held that the distribution fee is to be held as royalty/fees for technical services as per Article 12 of DTAA. Accordingly, the AO disallowed the entire amount of distribution fees in the hands of the assessee.
On first appeal, the CIT(A) upheld the disallowance by stating that the amount paid by the assessee to GIL is chargeable to tax as the AO has established the DAPE between the assessee and GIL and therefore the assessee is liable to deduct tax u/s. 195.
The Tribunal noted that the assessee has reflected, in the books, the entire sale proceeds on net basis.
“In our considered view when the assessee has presented the results of the impugned transactions that reflects the substance of the transaction we see no reason for the AO not to be satisfied with the correctness or completeness of the books of accounts of the assessee. The ld AR during the course of hearing drew our attention to the observations of the coordinate bench of the Tribunal where by virtue of Grounds No. 2 to 4 (refer para 176 of order dated 11.05.2018) the issue was decided in favour of the Assessee. It was further brought to our attention that the said finding of this Hon’ble Tribunal was never challenged in appeal by the Department and that this issue was not the subject matter of appeal before the Hon’ble High Court of Karnataka which means that the same has attained finality. From these factual findings and given that there is no adverse finding with regard to the books of accounts, in our view the action of the AO by rejecting the books to recast the P&L with an intention to disallow distribution fee paid by the Assessee to GIL is not tenable,” the Tribunal observed.
Holding that the assessee is not a DAPE of GIL, “the stand of the revenue for making the addition is not tenable since each assessee has to be assessed in respect of income that accrues or is received by it, unless by a statutory enactment, the income of another is permitted to be assessed in the hands of a person. Therefore, the Assessee can only be assessed in respect of the amount it retains pursuant to the contract, which it has entered into with GIL and therefore the addition made by applying the notional rate of profit in the distribution fees is not sustainable.”
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