Distribution Fees Paid By Google India To Google Ireland, For Distribution Of AdWords Programme In India, Not 'Royalty' : ITAT

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the distribution fees paid by Google India to Google Ireland under a Distribution Agreement, under which Google India was appointed as a distributor of AdWords programme to advertisers in India, is not in the nature of 'Royalty' under the India-Ireland DTAA. The Bench of George George K (Judicial Member) and Padmavathy S (Accountant Member) held that unless the non-resident, who is engaged in the sale of online advertisement space, has a Permanent Establishment (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 under the Income Tax Act, 1961 read with the relevant DTAA. The assessee - Google India Private Limited entered into a Service Agreement and a Google AdWords Program Distribution Agreement with Google Ireland Limited. Under the said programme/ Distribution Agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to advertisers in India, i.e., a non-exclusive distributor of online advertisement space in India. Accordingly, distribution fee was paid by the assessee to Google Ireland under the said programme. The Assessing Officer (AO) held that the distribution fees paid by the assessee to Google Ireland was in the nature of royalty on which no tax was deducted at source under Section 195 of the Income Tax Act, 1961. Thus, the AO passed an order under Section 201(1) and 201(1A) of the Income Tax Act against the assessee. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) CIT(A). The CIT(A) upheld the finding of the AO that the distribution fees paid by the assessee was a consideration for the right to use or the license to use a computer program/process i.e., AdWords program. Thus, the CIT(A) ruled that the amount remitted by the assessee was in the nature royalty. The assessee filed an appeal before the ITAT challenging the order of the CIT(A). The assessee Google India submitted before the ITAT that purchase of online advertisement space cannot be characterized as 'Royalty' and hence, the same is not chargeable to tax in India, in the absence of a Permanent Establishment (PE) of the non-resident in India. Therefore, the assessee contended that the said payments were in the nature of business profits, which were chargeable to tax in Ireland and not in India. The revenue department contended that under the distribution agreement, the assessee was not only required to upload the online advertisement but that it was also obligated to provide after sales customer support, involving the use of IPR's, which was provided by Google Ireland under the service agreement. The revenue department argued that the assessee Google India received confidential information from Google Ireland under the service agreement, which was in turn used by the assessee for carrying out its obligations under the distribution agreement. Therefore, it contended that the payment made by the assessee to Google Ireland under the distribution agreement tantamounted to royalty. The ITAT noted that the "Google AdWords Program" is a computerised advertising program that displays advertisements on Google's search engine. Further, Google Ireland is the exclusive licensee and principal operator of the Google AdWords Program for the whole world outside the USA. The Tribunal observed that in order to accommodate Indian advertiser(s) desirous to pay in Indian Rupees instead of foreign currency, Google Ireland entered into the Google AdWords Program Distribution Agreement with the assessee, whereunder the assessee Google India was appointed as a non-exclusive distributor of online advertisement space in India. However, Indian advertisers who were willing to pay in foreign currency, continued to transact directly with Google Ireland. Noting that the Google AdWords Program and its features remain the same whether the Indian advertiser purchases the online advertisement space from Google Ireland or its authorised distributor i.e., Google India, the ITAT took into account that no payment is made by the advertiser(s), unless the said Ad is clicked by an end-user. The ITAT held that, in view of Section 90(2) of the Income Tax Act, the definition of the term "royalty" in Article 12(3) of the India - Ireland DTAA overrides the definition of "royalty", as provided in Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Therefore, since the definition of the term "royalty" under the India - Ireland DTAA was more beneficial, it was attracted in the case of the assessee. The ITAT observed that under Article 12(3)(a) of the India - Ireland DTAA, the term 'Royalty' includes the consideration received for use of or the right to use any copyright of literary, artistic or scientific work, including any cinematograph film(s) or ...

Distribution Fees Paid By Google India To Google Ireland, For Distribution Of AdWords Programme In India, Not 'Royalty' : ITAT

Parina Katyal

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