If Google India pays Google Ireland to purchase internet advertising space to resell to Indian advertisers, there is no royalty due

Fact and issue of the case

The assessee has also filed a petition for admission of additional ground and we admit the additional grounds as in our opinion, all the facts are already on record and there is no necessity of investigation of any fresh facts for the purpose of adjudication of above ground. Accordingly, by placing reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC) we inclined to admit the additional ground for the purpose of adjudication as there was no investigation of any fresh facts otherwise on record and the action of the assessee is bonafide.

Facts of the case are that the assessee company, Google India Pvt. Ltd. (GIPL), having its registered office at Bangalore was incorporated on 16.12.2003 as a wholly owned subsidiary of Google International LLC, US. GIPL or Google India is engaged in the business of providing Information Technology and Information Technology Enabled services to its Group companies. Further Google India also acts as a distributor for Adwords program in India. The company’s activities could be classified into the following segments.

IT services :- GIPL has entered into a service agreement with Google Inc to render software development services. Google India’s research and development units at Bangalore, Hyderabad and Gurgaon provide IT services including application development, maintenance and testing services. For these services, GIRL, is remunerated at cost plus 17.5%

IT enabled services :-GIPL has entered into a service agreement with Google Ireland Limited (Google, Ireland) to render IT enabled services. Its service centre at Hyderabad and Gurgaon provides IT enabled services relating to the administration of advertisements in accordance with the guidelines provided by Google Ireland and provide customer support services. For these services, GIRL is remunerated at cost plus 15.5%.

Marketing and distribution services for the Ad Words

program :- Under the Google AdWords Program Distribution Agreement dated 12.12.2005 (Agreement) entered into between GIPL and Google Ireland, Google India is appointed as a non-exclusive authorized distributor of AdWords program to the advertisers in India.

With respect to the issue regarding payments made by the assessee to Google Ireland Ltd., being held to be Royalty under the Act read with the Treaty and liability to withhold tax fastened on the assessee, the assessee’s representatives fairly conceded before the ld CIT(A) that the issue is covered by CIT(A)’s earlier year order for assessment years 2006-07 to 2012-13. Following his earlier decision, the ld CIT(A) confirmed the action of the AO.

Further, the AO has observed that M/s. Google Ireland was not beneficial owner of the amount received from the assessee in relation to royalty amount. The Ld. CIT(A) observed that in relation to characterization of amounts payable to M/s. Google Ireland as royalty by placing reliance on earlier order of the ld. CIT(A) in assessment years 2007-08 to 2012-13 in relation to contention of AO that M/s. Google Ireland is not beneficial owner of receivable from M/s. Google India Ltd., the ld CIT(A) has rejected the same and upheld that M/s. Google Ireland is beneficial owner of the sums received from M/s. Google India Ltd. under the reseller agreement. Aggrieved by the order of the ld. CIT(A), assessee is in appeal before this Tribunal on the issue of charaterisation of the amount payable to M/s. Google Ireland as royalty and the revenue is in appeal before us in relation to issue as to whether M/s. Google Ireland is the beneficial owner of the amount received from M/s. Google India Ltd.

We have heard the rival submissions and perused the materials available on record. Admittedly, this issue came for consideration before this Tribunal in assessee’s own case in IT(TP)A No.1513 to 1516/Bang/2013 for the assessment years 2009-10 to 2012-13, the Tribunal vide order dated 19.10.2022 held as under:

We have heard rival submissions and perused the material on record. The issues involved in these appeals revolve around the taxability of payments received by GIL from the assessee, who is engaged in the business of online advertisement space to advertisers in India. The Revenue had sought to characterize these payments received by GIL to be royalty as defined in section 9(1)(vi) of the I.T.Act r.w. Article 12(3) of the India-Ireland Double Taxation Avoidance Agreement (India-Ireland DTAA) and thus chargeable to tax in India in the hands of GIL. The case of the assessee is that the said payments are in the nature of business profits, which are chargeable to tax in Ireland and not in India. Further, since the Department in these proceedings has never alleged that GIL had a Permanent Establishment (PE) in India in terms of Article 5 and accordingly by virtue of Article 7(1) of the India-Ireland DTAA, the right to tax these profits is solely with Ireland. Consequently, the assessee cannot be held to be an assessee in default u/s 201 of the I.T.Act for not deducting tax at source u/s 195 of the I.T.Act while making the subject payment to GIL.

For a proper adjudication of the above issue, it is necessary to briefly explain / examine the overview of the Google Adword Program, the role of the assessee under Adword Program distribution agreement and the service agreement (ITES). The undisputed fact on record is that Google.com is a search engine developed by Google LLC, USA available freely to the world at large providing information on any subject based on the search made by the user. The link to various websites related to the search are provided in the search result. Additionally, Google LLC, USA has also developed a computerised advertising program known as Google AdWords Program. Google Ireland Ltd (GIL) is the exclusive licensee and principal operator of the computerised advertising program i.e., “Google AdWords Program” for the whole world outside the USA. The Google AdWords program displays advertisements on Google’s search engine. It has a separate website in which the advertisers have to agree to certain terms and conditions including the consideration payable for the targeted Advertisements and provide appropriate keywords on searching of which the websites of the advertisers would be displayed on top of the Google search engine with the abbreviation “Ad”. For instance, pursuant to the search query

Observation of the court

Respectfully following the above order of the Tribunal, we inclined to decide the assessee’s appeal in IT(IT)A No.1190/Bang/2014 in favour of the assessee.

Since it was decided on payment made by GIPL to M/s. Google Ireland Ltd. for purchase of online advertisement phase for onward resale to India advertisers, in terms of distribution agreement dated 12.12.2005, were not in nature of royalty as defined u/s 9(1)(vi) of the Act read with Article 12(3)(a) of TTA between India and Ireland and observed that GIPL was not an assessee in default u/s 201 of the Act, for not deducting the tax at source, on the payment in question, under the section 195 of the Act and the issue of beneficial ownership which is consequential in nature and as such this issue became academic and the appeal of the revenue is not surviving. Accordingly, the appeal of the revenue is dismissed as infructuous.

Coming to IT(IT)A No.949 & 950/Bang/2017 & IT(IT)A No.978/Bang/2019, the issue is similar to that one considered in IT(IT)A No.1190/Bang/2014 above and applying the same ratio a discussed in earlier order of the Tribunal in IT(IT)A No.1513 to 1516/Bang/2013 dated 19.10.2022, the assessee’s appeals are allowed.

Further, the assessee has raised ground in ground No.8 in IT(IT)A No.949 & 950/Bang/2017 as below:

“Beneficial ownership of payments under the DTAA

8 Not adhering to the rule of consistency by not following the ld CIT(A)’s decision for AY 2013-14 in the appellant’s very own case and taking contradictory views without considering:

certificates issued by the Irish Revenue Authorities stating that GIL is a tax resident of Ireland and it’s world-wide income is taxed Ireland.

fact that there was neither any change in facts of the appellant vis-à-vis the previous year nor was any new material fact brought on record by the ld AO

not providing an opportunity of being heard to the appellant and thereby violating principles of natural justice

rule of consistency requires that when contradictory views are taken vis-à-vis the previous years, reasons for such contradictory views would need to be specified.”

This ground of the assessee is infructuous in view of our findings on merit of the issue raised by the assessee in its appeals before us and hence, these grounds are dismissed as infructuous.

In the result, the appeals of the assessee are allowed and the appeal filed by the revenue is dismissed. Order pronounced in the open court on 15th Dec, 2022.

Read the full order from here

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