Payment made to Google Ireland under the Adwords Programme cannot be characterized as ‘royalty’ under the India-Ireland Tax Treaty: ITAT

Payment made to Google Ireland under the Adwords Programme cannot be characterized as 'royalty' under the India-Ireland Tax Treaty: ITAT

The Income Tax Appellate Tribunal, Bangalore Bench, ruled that the Payment made to Google Ireland under the Adwords Programme cannot be characterized as ‘royalty’ under the India-Ireland Tax Treaty.

Background 

The assessee (Google India Private Limited) (GIPL) acts as a distributor for Adwords Programme in India. 

The assessee had entered into Google AdWords Program Distribution Agreement with Google Ireland Limited (GIL). 

As per the agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to the advertisers in India. 

The Assessing Officer [Deputy Director (International Transaction)] initiated proceedings u/s 201(1) and 201(1A) of the I.T.Act in respect of the payments made by the assessee to Google Ireland Limited, since, no tax was deducted at source u/s 195 of the I.T.Act. 

Arguments 

The Appellant submitted that in the certain cases, the Tribunal had held that for purchase of online advertisement space cannot be characterized as “royalty” and hence, the same are not chargeable to tax in India, in the absence of PE of the non-resident in India.

It was contended that the judicial pronouncements relied on by the Revenue has been specifically overruled by the Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr.

It was further contended that since the DTAA between India and Ireland overrides the definition under the Income-tax Act, the phrase “similar property” being absent in the definition of “royalty” as provided under the DTAA, the entire reasoning and discussion in the impugned order of the A.O. and the CIT(A) to the extent of analysis around distribution right being classified as “similar property” is to be rendered redundant.

K.V. Aravind, standing counsel, appearing for the respondent, argued that on perusal of the various clauses of the adword program distribution agreement and service agreement, the substance over the form must be seen and the same needs to be interlinked.

It was contended that the note of assessee under the distribution agreement does not end with the uploading of online advertisement. 

He submitted that the obligation of assessee under the distribution agreement, including after sales customers support, necessarily entails use of IPR’s, which was provided by Google Ireland under the service agreement.

Ruling 

The two member bench of George George K, Judicial Member and Padmavathy S, Accountant Member, noted that 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 bench observed that the definition of the term “royalty” in Article 12(3) of the India – Ireland DTAA override the definition of “royalty” as provided in Explanation 2 to section 9(l)(vi) of the Act by virtue of section 90(2).

Therefore, it was held that the definition of the term “royalty” under the India – Ireland DTAA being more beneficial to the assessee must only be considered in these appeals.

The bench added that the findings of the AO and CIT(A) as regards the characterisation of the payments to Google Ireland as ‘Royalty’ under section 9(l)(vi) of the Act is therefore not relevant and consequently correctness of these findings need not be adjudicated in these appeals. 

The division bench found that none of the rights as per section 14(a)/(b) and section 30 of the Copyright Act, 1957 have been transferred by Google Ireland to the assessee.

The bench while reiterating the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. stated that mere use of or right to use a computer program without any transfer of underlying copyright in it as per section 14(a)/(b) or section 30 of the Copyright Act, 1957 will not be satisfying the definition of Royalty under the Act / DTAA. 

It was observed by the bench that the use of confidential information, software technology, training documents and others are all ‘literary work’ with copyrights in it owned by the foreign entity and there was no transfer or license of copyrights in favour of the assessee company. Hence, the impugned payments cannot be characterised as ‘Royalty’ under the DTAA.  

The bench held that the impugned payments cannot be regarded as royalty under the India – Ireland DTAA. 

“Unless the non-resident, who is engaged in sale of online advertisement space, has a PE in India, no portion of receipts earned by it from sale of online advertisement space in India can be brought to tax in India as Act read with the relevant DTAA” the bench said. 

Case title: M/s. Google India Private Limited v/s The Deputy Commissioner of Income-tax (International Taxation), Bangalore

Citation: IT(TP)A No.1513/Bang/2013

Click here to read the Order/Judgment 

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