Google got relief with the Income Tax Appellate Authority (ITAT) Bangalore bench’s ruling that the payments made by the company to its unit in Ireland are not royalty.
Google India Private Limited (GIPL), the assessee engaged in the business of providing Information Technology (IT) and Information Technology Enabled Services (ITES) to its group companies and also acts as a distributor for the Adwords Programme in India.
Google AdWords Program Distribution Agreement dated December 12, 2005, was with Google Ireland Limited (GIL). As per the agreement, the assessee was appointed as a non-exclusive distributor of the AdWords programme to advertisers in India.
The department issued a show-cause notice to Google proposing to treat the payments made by Google India to Google Ireland as royalty payments where the assessee stated that the payments were not like ‘royalty’ under the Income Tax Act and India-Ireland Double Taxation Avoidance Agreement (DTAA), but like advertisement fees.
The assessing officer rejected the contention and held that the activities performed by the assessee under the distribution agreement are complemented by those performed under the service agreement. It was held by the AO that the transfer of distribution rights is itself IP rights covered by ‘similar property’ as per the definition of ‘royalty’ under Explanation 2 to Section 9(l)(vi) of the IT Act.
A Coram of Shri George George K, JM & Ms Padmavathy S, AM observed that merely because the marketing, distribution and ITES activities are carried out in India and revenues are generated from India or Indian advertisers don’t define under the royalty.
“Use of Google Brand Features, etc are de hors any consideration payable to Google Ireland and further they are incidental and ancillary for achieving the main purpose of marketing and distributing the Google Adwords Program. Hence, the lower authorities were not right in treating the payments as royalty,” ruled the Tribunal.
It was observed that various ITAT decisions have held that income from the sale of advertisement space on a website is not taxable in India if there is no PE of the foreign enterprise in India. Online advertisement is now covered under EL. If the online advertisement was already covered under the definition of royalty, then bringing it as part of the EL scheme would not arise.
While allowing the appeal, the Tribunal held that the impugned payment cannot be characterized as royalty under the India Ireland DTAA.
Sri.Percy Pardiwala, Sri.Anmol Anand and Miss.Priya Tandon, Advocate & Sri. Vinay Mangla, CA appeared on behalf of the appellant and Sri.K.V.Aravind appeared on behalf of the respondent.
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