Payment to non-resident to purchase advertisement space for resale to advertisers in India constitutes Royalty

Google India (P.) Ltd. Vs Jt. DIT (ITAT Bangalore)

In terms of Google Adwords distribution agreement, assessee was licensed to use trademarks, brand features and other intangibles owned by Google Ireland though same not stood transferred to the assessee. Therefore, payments made by the assessee-company to Google Ireland for use of all the intangibles constituted ‘Royalty’ under section 9(1)(vi) and assessee was under an obligation to withhold tax under section 195. Therefore, disallowance made by AO was justified.

FULL TEXT OF THE ITAT JUDGMENT

These appealsare preferred by the assessees as well as the Revenue against the respective orders of the CIT(A) pertaining to assessment years 2007-2008 to 2015-2016. Since the issues involved in these appeals are  interconnected and interrelated, these were heard together and are being adjudicated through this single consolidated order for the sake of convenience. We, however, prefer to adjudicate them one after the other as under:

2. IT(IT)A Nos. 1190/Bang/2014, 949&950/Bang/2017

Though grounds raised in these appeals are almost similar, but for the sake of reference we extract the grounds raised in ITA No.1 190/Bang/2014 as under:

Based on the facts and in the circumstances of the case, the Ld CIT(A) and the Ld AO have:

1. Erred in holding the payment made by the Appellant to Google Ireland Limited in relation to purchase of advertisement space for resale to the advertisers in India under the Google AdWords Reseller Agreement (‘the Agreement’) to be in the nature of ‘Royalty’ under the Act and the India-Ireland Double Taxation Avoidance Agreement (‘lndia-lreland Treaty’) stating that the issue is covered under the appeals for earlier years.

2. Erred in holding that the amount payable towards purchase of advertisement space to be in the nature of ‘Royalty’ under the Act, even after acknowledging that the Appellant is distributing/reselling the advertisement space to the advertisers in India.

3. Erred in holding the amount payable by the Appellant to Google Ireland Limited as Royalty by attributing the same towards right to use of Trademark, even after concluding that the assesse company was permitted to use the trademarks of Google for the purpose of marketing and distribution of AdWords program.

4. Erred in holding that the Ad Words program is complex computer software, the right to use has been granted to the Appellant without appreciating the fact that Ad Words program is a standard advertisement service through which the advertiser is able to advertise its products or services on the Google webs ite.

5. Erred in holding that Google Ireland Limited has granted the Appellant the right to use of the AdWords program, which is a complex computer program without parting with the copyright, thus granting licence to use the software without appreciating the fact that the Appellant is only involved in marketing and distribution/resale of the advertisement space to the advertisers in India.

6. Erred in holding that the training provided in relation to the advertisement program, its functionality, tools available etc. to the distribution team of the appellant who markets and distributes the same to advertisers in India tantamount to rendering of services to the Appellant even after concluding that such training is restricted to use of the AdWords program and not how to develop the AdWords program.

7. Erred in confirming that the distribution rights granted under the distribution/ reseller agreement are itself ^–IP rights” covered by “similar property” used in Sec 9(1)(vi) of the Act, after holding that as per the distribution/reseller agreement Google Ireland Limited has agreed to provide advertisement space to the Appellant through AdWords program for distribution to the Indian Advertisers.

8. Erred in confirming that Distribution Agreement/Reseller Agreement cannot be read without the service agreement (ITES agreement) between the Appellant and Google Ireland Limited and the Appellant has been granted right to use intellectual property owned by Google Ireland Limited without appreciating the fact that ITES service agreement is a separate agreement under which the Appellant performs an independent global outsourcing function for Google Ireland Limited for which it receives arm’s length consideration and is not linked in any manner to the function of sale of advertisement space to the Indian advertisers being performed by the Appellant.

9. Without appreciating the facts of the case, erred in holding that the amount payable by the Appellant to Google Ireland Limited towards purchase of advertisement space to be in the nature of ‘Royalty’ under Section 9(1)(vi) of the Act.

10. Erred in upholding the order of the Ld JDIT that the amount payable by the Appellant to Google Ireland Limited is towards right to use of trademark and copyrighted computer program and process. hence is in the nature of ‘Royalty’ as per the Article 12 of the India Ireland Double Taxation Avoidance Agreement.

11. Erred in not following the principle laid down by Hon ‘ble Mumbai Tribunal in the case of Yahoo India Pvt Ltd (140 TTJ (Mumbai) 195) and Pinstorm Technologies Pvt Ltd (2012) 54 SOT 78 (Mumbai) on similar facts by stating that the facts and issues are completely different and at no stage the Mumbai Tribunal consider what exactly is the AdWords Program, nor did it have occasion to examine the right to use trademark or other IP rights.

12. Erred in not following the decision of the Calcutta Tribunal in the case of Income Tax Officer vs Right Florists Pvt Ltd (ITA No.1336/Ko1/2011) on similar facts.

The Appellant craves, to consider each of the above grounds of appeal without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.

3. In IT(IT)A Nos.949 &950/Bang/2017,the appellant has also assailed the order of the CIT(A) denying the benefit of beneficial ownership by raising following common grounds : –

Beneficial ownership of payments under the DTAA

Not adhering to the rule of consistency by not following the Ld CIT(A) ’s decision for AY 203-14 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 its world-wide income is taxed in Ireland
• Fact that there was neither any change in facts of the Appellant vis-а-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-а-vis the previous years, reasons for such contradictory views would need to be specified

4. During the course of pendency of the appeal, assessee has also moved an application for the admission of the following additional grounds:

“Withholding liability on Royalty to arise only on payment basis under the India-Ireland Double Taxation Avoidance Agreement (‘DTAA’)

13. Without prejudice to the argument that the payments made by the Appellant to Google Ireland are not in the nature of Royalty as per Article 12 of India-Ireland DTAA, the Learned Assessing Officer / Learned Commissioner of Income-Tax (Appeals) erred in holding that the Appellant is liable to withhold tax on amounts payable to Google Ireland disregarding that ‘Royalty’ income for a non-resident is taxable only on receipt basis under the India-Ireland DTAA.

The Appellant craves, to consider the above ground of appeal without prejudice to other grounds of appeal and craves leave to add, alter, delete or modify the above ground of appeal.”

5. Though various grounds are raised but they all relate to the characterization of the payment made by the appellant to M/s. Google Ireland Ltd., with regard to purchase of advertisement space for resale to the advertisers in India under the Google AdWords program distribution agreement. The facts in all these years are almost similar subject to variation in quantum. Therefore, we record the facts for the assessment year 2013-14 in IT(IT)A No. 1190/Bang/2014. The facts in brief borne out from the record in this regard are that the assessee company i.e., Google India Pvt. Ltd., (hereinafter called as “GIPL”), having its registered office at Bangalore was incorporated on 16.12.2003, as a wholly owned subsidiary of Google International LLC, US. The GIPL is engaged in the business of providing Information Technology (IT) and Information Technology enabled Services (ITES) to its group companies. It also acts as a distributor for AdWord programs in India. The assessee company’s activities was classified by the CIT(A) in its order in 3 segments which are as under:

> 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 For these services, GIPL, 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 provide 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, GIPL is remunerated at cost plus 15.5%.

> Marketing and distribution services for the AdWords 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 authorised distributor of AdWords program to the advertisers in India.

6. The main issue raised in this appeal is with regard to the non-deduction of TDS on payments made by the appellant to M/s. Google Ireland Ltd., as the AO characterized the payment made by the appellant to M/s. Google Ireland Ltd., as royalty. Under the Adword Program distribution agreement, the agreement was entered into between GIPL and Google Ireland Ltd., (hereinafter called as “GIL). The GIPL was granted the marketing and distribution rights of Adwords Program to advertisers in India and the GIPL is remunerated on cost plus market basis for the distribution services under Adword Programs.

7. On verification of the financial statements for the assessment year 2012-13, the AO noticed that GIPL had credited a sum of Rs.111,491,99,289/- to the account of M/s. Google Ireland Ltd., (GIL) without deduction of tax at source. The GIL had also not obtained the Nil deduction certificate on the sums payable to it from the Reliance upon the provisions of section 195 of the IT Act (hereinafter called as an “Act”) was placed according to which any person responsible for paying to non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under provisions of the Act (not being income chargeable under the head salaries) shall at the time of credit of such income to the account of the payee or at the time of payment there-of in cash or by the issue of cheque or draft by any other mode whichever is earlier, deduct income tax thereon at the rates in force, and the AO issued a show cause notice to the appellant (GIPL) as to why he should not be treated as assessee in default in respect of tax not deducted at source on sums payable to GIL under section 20 1(1) of the Act. The GIPL was asked to furnish details of sums paid or payable for the financial year 2012-13, relevant to the impugned assessment year and the deduction of tax at source thereon. In response thereto, the assessee has filed the submissions where from it was noticed by the AO that during the impugned assessment year, GIPL had credited a sum of Rs. 111,491,99,289/- to the account of GIL towards marketing and distribution rights of Adword Program without deduction of tax at source. A sum of  Rs.795,28,87,731/- had been remitted during the financial year 2012-13 and the balance of Rs.319,63,11,558/- was outstanding.

8. The AO has further observed that assessee company is an Indian company and the payee is foreign company based in Ireland, with their residential status being that of non-resident and as per section 5(2) of the Act, the total income of any previous year of any person who is a non-resident includes all incomes from whatever source derived which is (a) is received or is deemed to have been received in India in such year or by or on behalf of such person or (b) accrued or arised or is deemed to have been accrued or arised to him in India during such year.

9. The AO further observed that section 9 of the Act deals with the income deemed to accrue or arise in India and as per section 9(1)(vi) of the Act, inter alia, any income by way of royalty payable by a person who is a resident, shall be deemed to accrue or arise in India to the recipient except where the royalty is payable in respect of any right, property or information used or services utilised for the purpose of business or profession, carried on by such person outside India or for the purpose of making or earning any income from any source outside India.

10. The AO accordingly issued a show cause to the assessee to explain as to why the sum payable to GIL towards marketing and distribution rights of Adword Programme should not be treated as royalty as per provisions of section 9(1)(vi) of the Act. Assessee was also show caused to explain as to why provision of section 201(1) should not be invoked in this case and it be treated as assessee in default in respect of the tax not deducted at source. In response to show cause notice, the appellant filed the submissions on various dates where from it was observed by the AO that under the distribution agreement, the GIPL has acquired marketing and distribution rights over Adword Programmes for the territory of India from GIL. The distribution of Adword Programme involves 3 parties i.e., Licensor, the reseller or distributor and the advertiser. In this case, the licensor is GIL, the distributor or reseller is GIPL and the end users are the advertisers. The assessee has taken a stand that the amount payable to the GIL is not in the nature of royalty either under the Act or the India-Ireland Double Taxation Avoidance Agreement (hereinafter called as “DTAA”). The gist of submissions made by the GIPL are extracted by the AO in his order and for the sake of reference, we extract the same as under:

• As per Agreement between the assessee company and Google Ireland, GIPL is appointed as a mere non-exclusive Distributor/Reseller of Ad Words program to the advertisers in India;
• Distribution fee is payable to Google Ireland on distribution of Ad Words inIndia and is not in relation to any ‘transfer of any right’ or any ‘right to use’ any patent/ invention etc.;
• The Agreement does not involve any use of patents, invention, model, design, secret formula or process or trade mark or similar property. Further, all the rights, title and interest in and to all information & data including the user data (i.e. data provided by users) are owned by Google Ireland;
• Further, the distribution fee payable under the Agreement is not in relation to any knowledge concerning a patent or invention and is neither concerned with use or right to use of any scientific equipment.
• Reliance was placed on decisions of the Hon’ble Mumbai ITAT in the case of Pin storm Technologies Private Limited v. ITO(ITA No 4332/Mum/2009) and Yahoo India Pvt Ltd v DCIT [(2011) 59 DIR 1].
• Therefore the sums paid/payable are not taxable under the Income Tax Act,1961 (“Act”) and India-Ireland DTAA.

11. The AO has examined the explanations and the submissions explaining the functioning of the appellant but was not convinced with the contentions of the assessees and he concluded that the payments made by the assessee to GIL is the royalty payment for which assessee is under obligation to deduct tax at source as stipulated under section 195 of the IT Act. Since the assessee failed to discharge its obligations, the asesssee company/GIPL was held to be assessee in default in respect of tax not deducted at source on amounts credited to GIL. The AO accordingly worked out the tax liability of the appellant under section 201(1) and 201(1A) for the impugned assessment year and issued a demand notice of Rs.258,84,40,845/-.

12. Besides, it was also held by the AO that GIL is not the beneficial owner of the amounts received/receivable from the appellant in relation to sale of advertisement space under the agreement on the ground that Google Inc., owns the search engine and Adword Programm and other hodings are also involved in Adword program and are entitled to share the revenue generated under the Adword agreement

13. Aggrieved, assessee preferred an appeal before the CIT(A) and the CIT(A), on the point of characterization of the payment made by GIPL to GIL has held that it is a royalty payment, following its earlier order for the assessment year 2006-07 to 2012-13. Since there is no discussion in the order of the CIT(A) while holding the nature of payment by GIPL to GIL as royalty, except the reference of its earlier order for assessment year 2006- 07 to 2012-13,we are required to examine the findings given by the CIT(A) in that order. The order of the CIT(A) for 2006-07 to 2012-13 has already been confirmed by the Tribunal against which an appeal is pending before the Hon’ble High Court of Karnataka. The Hon’ble High Court of Karnataka has passed orders in ITA Nos.879/2017 and 898/2017 dated 15. .2017 and 20.11.2017 respectively that the present appeals are to be disposed off independently without being influenced with the order of the Tribunal dated 23.10.2017 passed for the assessment years 2006-07 to 2012-13. Therefore, we cannot look to the order of the Tribunal for assessment years 2006-07 to 2012-13, confirming the order of the CIT(A) in this regard but we are supposed to adjudicate the issues of nature of payment in the light of the finding of CIT(A) for assessment year 2006-07 to 2012-13 independently as it was relied on by the CIT(A) while adjudicating the impugned issue without being influenced by the order of the Tribunal. In appeal filed before the CIT(A) against the assessment orders for assessment years 2006-07 to 2012-13, the assessee has disputed the findings of the AO with regard to nature of payment made by GIPL to GIL.

14. The CIT(A) while adjudicating the characterization of nature of payment made by GIPL to GIL, has examined and analysed the agreement entered into by the assessee/appellant with GIL and Google AdWord Programs how it operates in the light of information available on internet and also in the light of various judicial pronouncements rendered by the Tribunal and held that nature of payment made by GIPL to GIL is royalty. The relevant observation of the CIT(A) are extracted hereunder for the sake of reference:

“Before I proceed to examine the issues raised before me, it is pertinent to give a proper finding with respect to the Adwords program. From the discussion reproduced in the body of this order, it is very clear that the Adword program is actually computer software by which the advertiser is able to publish an advertisement on the “Google Website”. And it is after utilizing a complex computer program, the clients gain access to the advertiser’s webpage. The contention of the assessee that Ad Words is an automated, self-serve system through which advertisers independently develop a set of keywords that relate to their business and manage their own account online from the Goodie website and therefore, it has simply rented out space on the “Goodie Website” and charged the advertiser as newspapers are akin to doing, is a fallacy. It is evident that the Adwords program is a complex computer program developed and owned by Google Ireland. A computer programme is a process when it executes instructions lying in it in passive state. It is built upon and uses sophisticated computer technology as under.–

“The AdWords system was initially implemented on top of the MySQL database engine. After the system had been launched, management decided to use Oracle  instead. The system became much slower, so eventually it was returned to MySQL. Eventually, Google developed a custom distributed Relational database management .system (RDBMS) known as Google Fl specifically for the needs of the Ad business, which requires strong consistency, high scalability across data centers and powerful SQL queries. The interface has also been revamped to offer better work flow with additional new features, such as Spreadsheet Editing, Search Query Reports, and better conversion metrics.”

10.2. Google Fl is a Relational Database Management System and it is undoubtedly a computer program within the meaning of the Act as is evident from the following illustration.–

10.3. As per Wikipedia, a computer program, or just a program, is a sequence of instructions, written to perform a specified task with a computer. A computer requires programs to function, typically executing the program’s instructions in a central processor. The program has an executable form that the computer can use directly to execute the instructions. The same program in its human-readable source code form, from which executable programs are derived (e.g., compiled), enables a programmer to study and develop its algorithms. A collection of computer programs and related data is referred to as the software.

10.4. The definition of computer program in the copyright Act of 1957, is as under:

“Section 2(ffc) “computer programme” means a set of instructions expressed in words, codes, schemes or in any other form, Including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.”

10.5. In a recent decision, the Delhi Bench of the Hon’ble Tribunal in Gracemac Corporation v. Assistant Director of Income-tax 008 ITR (Trib) 522 had an occasion to examine the term “Computer Program” vis-a-vis the term “Process” used in the Act as well as the Indo- US Tax Treaty and observed “It is a golden rule of interpretation of statutes that the language of the statute should be read as it is. The intention of the Legislature is primarily to be gathered from the language used, which means that attention should be paid to what has been said as also to what has not been said. As a consequence a construction which requires for its support addition or substitution of words or which results in rejection of words as meaningless has to be avoided.

Director General, Telecommunication v. T. N. Peethambaram [1986] 4 SCC 348 relied on. The use of punctuation marks cannot be said redundant.

The need for interpretation arises when words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. Where the word is plain and unambiguous, it is not for judges to invent fancied ambiguities as an excuse for failing to give effect to its plain meaning because they themselves consider that the consequences of doing so would be inexpedient, or even unjust or immoral.

The words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning unless that leads to some absurdity or unless there is something in the context, or in the object of the statute to suggest the contrary. If the language of the statute is not clear and there is need to resort to aids of construction, such aids can be either internal or external.

In the definition of “royalty” in clause (v) of Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961, the Legislature has used a comma after the word “copyright” indicating the legislative intent to treat “copyright” independently of the words “literary, artistic or scientific work”. Therefore, “copyright” cannot be read in conjunction with the words literary, artistic or scientific work by substituting the comma with the word “of’. The definition of “royalty” is inclusive. Deletion of the comma and addition of the word “of’ between words “copyright” and “literary” would limit the scope royalty only to copyright work relating to literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. The term “copyright” is wide enough to include other works such as dramatic or musical work, computer programme, cinematograph film and a sound recording as included in clauses (a), (b), (d) and (e) of section 14 of the Copyright Act, 1957. The language employed in clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act is plain, clear and unambiguous and is not capable of two meanings. Therefore, there is no need substitution of the comma by the word “of’.

The expression “copyrighted article” is not defined either in the 1961 Act or in th,7-. Double Taxation Avoidance Agreement between India and the U.S.A. (DTAA). Nor there a definition in the Copyright Act, 1957 of “copy-righted article” on the lines as in the Patents Act, 1970. The term “copy-righted article” is nowhere used in the Act or the Double Taxation Avoidance Agreement. The expression “copyrighted article” finds its origin in U. S. regulations and then in the OECD commentary. The OECD commentary or IRS Regulations of the U. S. A. would not be a safe or acceptable guide or aid for interpretation of provisions of the Income-tax Act, 1961 or the Double Taxation Avoidance Agreement between India and another country. The language used in Explanation 2 to section 9(1)(vi) of the Act or article 12(3) of the Double Taxation Avoidance Agreement defining the term “royalty” is not ambiguous. For the purposes of interpretation of the term “royalty” in respect of computer software reliance cannot be placed on the difference made in the OECD commentary or in the U. S. regulations between the expressions “the transfer of a copyright right” and “the transfer of a copyrighted article”. The question of royalty in respect of computer software has to be decided on the basis of provisions of the Act and the Double Taxation Avoidance Agreement. Hence for the purposes of income-tax a  copyrighted article cannot be treated as product.

CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC) applied.

A computer programme is a literary work under the Copyright Act, 1957 and the consideration received will be in the nature of royalty if it is in respect of the transfer of all or any rights (including the granting of a licence) in respect thereof under clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act. The definition of royalty in Explanation 2 to section 9(1)(vi) and article 12(3) of the Double Taxation Avoidance Agreement takes into its ambit both industrial as well as copyright royalties. It will not be appropriate to restrict the scope of the definition of royalty under the income-tax law only on the ground that since computer programme has been provided protection under the Copyright Act, the provisions of other intellectual property rights laws will not be applicable.

A computer programme is a process when it executes instructions lying in it in passive state. Therefore,  any  consideration made for the use of process would amount to royalty.

Explanation 2 has to be read as part and parcel of section 9(1)(vi) of the Act.

Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC) applied.

The second proviso to section 9(1)(vi) carves out an exception from the main section exempting lump sum payment made by a resident for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Export, Software Development and Training, 1986 of the Government of India. It cannot stand on its own and hence cannot be held a substantive provision. Therefore, section 9(1)(vi) from the very inception included computer software for the purposes of royalty. If royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer programme was not taxable under section 9(1)(vi) of the Act, Parliament would not have prescribed a special rate of income-tax in respect of royalty income in respect of any computer software under section 115A(1A). The provisions of section 9(1)(vi) have to be considered in the light of the provisions of section 115A(1A) of the Act. The use of the expressions “in respect of copyright in any book to an Indian concern” or “in respect of any computer software to a person resident in India” in section 115A(1A) shows that for the purposes of income-tax copyright in “computer software” is different from copyright in any “book” though both are literary works under the Copyright Act, 1957.

The Income-tax Act and the Copyright Act operate in different fields. The object of the Copyright Act is to provide protection to the copyrights in various works of the authors whereas the purpose of income-tax is levy and collect tax on various types of incomes. The provisions of the Income-tax Act cannot be explained by resorting to various provisions of the Copyright Act, 1957. However, a limited reference to understand the meaning of term “copyright” can be made to the Copyright Act, 1957 as this term has not been defined under the 1961 Act.

Under the Explanation inserted in section 9(1)(vi) of the 1961 Act with effect from June 1, 1976 by the Finance Act, 2007 and again substituted by the Finance Act, 2010 the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) irrespective of whether the non-resident has a residence or a place of business or business connection in India or the non-resident has rendered services in India. Therefore, once the consideration is received by a non-resident for the transfer or all or any rights including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or similar property or any copy-right literary, artistic or scientific work, the consideration received shall be deemed to accrue or arise in India and will be taxable in India. Hence, by virtue of the amended Explanation to section 9(1)(vi) royalty income will be taxable in India whether or not the non- resident has a residence or place of business or business connection in India. The effect of an Agreement made pursuant to section 90 of the 1961 Act is that if no tax liability is imposed under this Act, the question of resorting to the Agreement would not arise. No provision of the Agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by this Act, the Agreement may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and of an Agreement under section 90, the provisions of the Agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2) the provisions of this Act will apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the Agreement, it is the basic law, i. e., the Income-tax Act which will govern the taxation of income.

The definitions of term “royalty” in Explanation 2 to section 9(1)(vi) of the 1961 Act and paragraph (3) of article 12 of the Double Taxation Avoidance Agreement are identical. According to paragraph (7)(a) royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. If the person paying royalty has a permanent establishment or a fixed base there in connection with which the liability to pay the royalties is incurred and the liability is borne by such establishment or base the royalty is deemed to arise in the State in which the permanent establishment or fixed base is situated. According to paragraph (7)(b) royalties related to the use of, or the right to use, the right or property, in one of the Contracting States, shall be deemed to arise in that Contracting State. No conflict exists between the Income-tax Act and the Double Taxation Avoidance Agreement.

The language of article 12(7)(b) of the Double Taxation Avoidance Agreement between India and the United States of America is clear and unambiguous. The royalties or fees for included services shall be deemed to arise in that Contracting State in which the use of, or the right to use, the right or property, or the fees for included services is performed. The term “right” in article 12(7)(b) cannot be interpreted to mean “copyright” as used in the article 12(3)(a).

The Double Taxation Avoidance Agreement with the United States of America was entered on December 20, 1990. By an amendment to section 9(1) by insertion of Explanation with effect from June 1, 1976 the royalties will be deemed to accrue or arise in India whether or not the non-resident has a residence or place of business or business connection in India. Therefore, by this amendment the income by way of royalty will be deemed to accrue or arise irrespective of a contrary provision in the Double Taxation Avoidance Agreement.”

11. In this backdrop, the issues raised are considered individually :-

Distribution fee payable under the agreement is a relation to use or right to use Intellectual property,  knowhow, trademark & other brand features :

11.1. As is evident from the extracts reproduced from the assessment order earlier, the AO on examination of agreements came to the conclusion that the Google Ireland holds the intellectual property, knowhow, trademark and other brand features with respect to products and services offered by the Adwords_program. And vide the distribution agreement, the assessee company has been granted rights to market and distribute Adwords program in India In this process, Google Ireland has permitted the assessee company to access all intellectual property and confidential information which is utilized by the 1TES division of the assessee. He also observed that the job of the assessee does not end with marking and distribution of Adword program but also has to support existing customers by providing customer services to the advertisers in consonance with standards maintained by Google. It is also required to process customer queries related to advertisement issues and escalate the same to Google Ireland. The AO has also noted that before the advertiser ca-run his campaign, the same has to be cleared as per editorial and trademark guidelines, hence the assessee had to monitor advertiser activity and gather other information about advertisers as specified. The distribution agreement cannot be read without the service agreement and on combined reading, it is clear that the assessee company has been granted the right to use valuable business assets of Google Ireland which includes intellectual property in the products and services offered by Google Ireland. Therefore, the distribution rights granted are itself IP rights covered by “similar property used in section 9(1)(vi) of the Act”. Thereafter, he concluded since IP of Google resides in search engine technology, associated software and other features, logically the income received by it includes royalty for its IP from all its non-retail users viz., Advertisers and Intermediaries. Therefore, the assessee company being the intermediary has obtained the right to use the intellectualproperty, knowhow, trademark and other brand features owned by Google lreland.

11.2. The AO after examining Clause-1.5 & Clause-6 of the distribution agreement concluded that the assessee company was permitted to use the trademarks of Google for the purposes of marketing and distribution of Adwords program. Afterexamining Clause-3 of the agreement, he opined that Google Ireland is obliged toprovide advertising space through itsdistributor i.e. the assessee company and is also obliged to train the distributor, so that it can market and distribute the Adwords program. The Adwords platform runs on servers located outside India and the assessee company cannot perform its activities of marketing and distribution without training which amounts to transfer of knowhow. The training relates to internal tools and is provided to the staff of the assessee company only. Thus, he was of the view that technical knowhow was imparted to the assessee company for the purpose of marketing, sale of the Adword program as also maintenance of Adword accounts, after sales, service, billing, etc. Hence, the sums remitted to Royalty within the meaning of the Act. I have examined the facts and circumstances of the case.

11.3. The relevant provisions of the Act to be examined are as under :-

“In Sec.9(1)(vi) of the Income Tax Act, 1961, the term ‘royalty’ has been defined under Explanation 2 to mean “consideration (including lumpsum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘capital gains) for

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44Bal

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films;

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).

Explanation 3.—For the purposes of this clause, “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data;

Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium throuct which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with thepayer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

11.4. Intellectual property and trademark can be defined as under :-

“Intellectual property (p) is a legal  concept which refers to creations of the mind for which exclusive rights are recognized. [1] Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; discoveries and inventions; and words, phrases, symbols, and designs. Common types of intellectual property rights include copyright, trademarks,patents,industrial design rights,trade dress, and in some jurisdictions trade secrets.

A trademark, trade mark, or trade-mark[1] is a recognizable sign,design  or expression which identifies products or services  of a particular source from those of others. [2][3][4][5] The trademark owner can be an individual, business organization, or any legal entity. A trademark may be located on a package, a label, a voucher  or on the product itself. For the sake of corporate identity  trademarks are also being displayed on company buildings.”

11.5. As per the service agreement Google Ireland shares the Confidential information which is defined to be:

“Confidential Information” shall mean all data and information of a confidential ;;Mature, including know-holy and trade secrets, relating to the business, the affairs, the products, the development projects or other products or services of Google Ireland or its suppliers or its affiliate, including but not limited to intellectual Property.

11.6. Google Ireland as per the service agreement shares Confidential information in the following manner:

CONFIDENTIAL INFORMATION.

Access and Use of Confidential Information. During the course of performance of this Agreement; Google Ireland will disclose certain Confidential Information to Google India solely to permit Google India to perform its obligations under this Agreement. Except as otherwise provided in this Agreement, Google India agrees that such Confidential Information shall be kept secret by Google India during the term of this Agreement and after the expiration hereof Google India shall retrain from using or exploiting any and all Confidential Information for any purposes or activities other than those contemplated in this Agreement.

11.7. After considering the express terms in the service agreement, the finding of the AO with regard to right to use intellectual property as well as trademark is confirmed. The issue with respect to transfer of technical knowhow will be dealt later under the head “imparting of information”.

Use or right to use the process in Adwords program was granted by Google Ireland & That the fee  payable is for granting of a licence in respect of a copy right in the Adwords program :-  These two issues are taken together as they are interrelated. I have studied he Adwords program in detail and it is very clear to my mind that the Adwords program owned and developed by Google Ireland is a Computer Program within the meaning of Explanations — 3, 4 & 5 to section 9(1)(vi) of the Act. As per the Delhi Bench of the Hon’ble Tribunal (supra) the following principles emerge:- A computer programme is a process when it executes instructions I in it in passive state.  Therefore, any consideration made for the use of process would amount to royalty.  The term “copyright” is wide enough to include other works such as dramatic or musical work, computer programme,

The question of royalty in respect of computer software has to he decided on the basis of provisions of the Act and the Double Taxation Avoidance Agreement. Hence for the purposes  of income-tax a copyrighted article cannot be treated as product.  CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC) applied.

A computer programme is a literary work under the Copyright Act, 1957 and the consideration received will be in the nature of royalty if it is in respect of the transfer of all or any rights (including the granting of a licence) in respect thereof under clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act. The definition of royalty in Explanation 2 to section 9(1)(vi) and article 12(3) of the Double Taxation Avoidance Agreement takes into its ambit both industrial as well as copyright royalties. It will not be appropriate to restrict the scope of the definition, of royalty under the income-tax law only on the ground that since computer programme has been provided protection under the Copyright Act, the provisions of other intellectual property rights laws will not be applicable.

Therefore, section 9(1)(vi) from the very inception included computer software for the purposes of royalty. If royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer programme was not taxable under section 9(1)(vi) of the Act, Parliament would not have prescribed a special rate of income-tax in respect of royalty income in espect of any computer software under section 115A(1A). The provisions of section 9(1)(vi) have to be considered in the light of the provisions of section 115A(1A) of the Act. The use of the expressions “in respect of copyright in any book to an Indian concern” or “in respect of any computer software to a person resident in India” in section 115A(1 A) shows that for the purposes of krIcome-tax copyright “computer software” is different from copyright in any “book” though both are literary works under the Copyright Act, 1957.

Therefore, once the consideration is received by a non-resident for the transfer or all or any rights including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or similar property or any copy-right literary, artistic or scientific work, the consideration received shall be deemed to accrue or arise in India and will be taxable in India. Hence, by virtue of the amended Explanation to section 9(1)(vi) royalty income will be taxable in India whether or not the non-resident has a residence or place of business or business connection in India.

11.9. The Jurisdictional High Court in CIT Vs. Samsung Electronics (345 ITR 494) (Kar) had occasion to examine the term “royalty” vis-а-vis “computer software”. The Hon ’ble Court observed:-

“In view of the abovesaid definition of “royalty”, it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to “royalty” is as follows – payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work.

It has been universally accepted that a literary work is entitled to copyright and wherefore, a literary work is entitled to be registered as copyright. In India, the provisions of section 2(o) of the Copyright Act, 1957, defines “literary work” as under:

“‘literary work’ includes computer programmes, tables and compilations including computer databases”

Therefore, “computer software” has been recognized as copyright work is also.

Having regard to the above said definition of “royalty”, we have to consider• the contents of software licence agreement entered into by the nonresident with Samsung Electronics and also the respondents in the case represented by Sri Ganesh, learned senior counsel and Sri Aravind Dattar, wherein it is a case of purchase, sale or distribution or otherwise of the off-the-shelf software. It is described as a “software licence agreement”, wherein it is averred that customer accepts an individual, non-transferable and non-exclusive licence to use the licenced software program(s) on the terms and conditions enumerated in the agreement. It is further averred that the customer-Samsung Electronics-shall protect confidential information and shall not remove any copyright, confidentiality or other• proprietary rights provided by the nonresident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is. transferred under the said licence is the licence to use the software and the copyright continue to be Jvith the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclufive non-transferable licence within the territory for• which he is appointed and he has got right to distribute via resellers the software, upon payment of the licences set forth in exhibit A to the agreement only to end users pursuant to a valid Actuate shrinkwrap or other actuate licence agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or• otherwise distribute the software the documentation or any derivative works based upon the software or documentation in whole or in part. Distributor shall not reverse engineer, decompile, or otherwise attempt to derive or modem the source code for the software. The distributor shall have no rights to the software other than the rights expressly set forth in the agreement. The distributor shall not mods or• copy any part of the software or documentation. The distributor may not use subdistributors for firther distribution of the software and documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the distributor of the software as enumerated in exhibit A to the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges that actuate and its suppliers retain all right, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trade mark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. The distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the respondents with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement, as referred to above, and the nonresident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of copyright or any part thereof under the agreements entered into by the respondent with the nonresident supplier of software cannot be accepted…………….

It is well settled that in the absence of any definition of “copyright” in the Income-tax Act or the DTAA with the respective countries, in view of article 3 of the DTAA, reference is to be made to the respective law regarding the definition of “copyright”, namely, Copyright Act, 1957, in India, wherein it is clearly stated that “literary work” includes computer programmes, tables and compilations including computer (databases). Section 16 of the  Copyright Act, 1957, states that no personshall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with the, meaning of “copyright” reads as follows:

“14. Meaning of copyright.-For the purposes of this Act, ‘copyright’ means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely :

(a) in the case of a literary, dramatic or musical work not being a computer programme, (i) to reproduce the work in any material form including the storing of it in any medium by electronic means;

(ii) to issue copies of the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public;

(iv) to make any cinematograph film or sound recording in respect of the work ;

(v) to make any translation of the work;

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b) in the case of a computer programme, (i) to do any of the acts specified in clause (a);

(ii) to sell or give on commercial rental oil offer for sale or for commercial rental any copy of the computer programme:

…… Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.

(c) in the case of an artistic work, (0 to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three-dimensional work;

(ii) to communicate the work to the public;

(iii) to issue copies of the work to the public not being copies already in circulation;

(iv) to include the work in any cinematograph film;

(v) to make any adaptation of the work;

(vi) to do in relation to an adaptation of the work any of the acts specified in relation *to the work in sub-clauses (i) to (iv);

(d) in the case of a cinematograph film, (i) to make a copy of the film, including a photograph of any image forming part thereof;

(ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions;

(iii) to communicate the .film to the public;

(e) in the case of a sound recording, (i) to make any other sound recording embodying it;

(ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions;

(iii) to communicate the sound recording to the public.

Explanation. -For the purposes of this section, a copy which has been sold once shall be deemed to be a copy already in circulation.

“It may also be noted that under section 51 of the Act dealing with “When copyright — infringed” states that copyright in a work shall be deemed to be infringed-when any person, without a licence granted by the owner of the copyright or the Regisrr Copyrights under the Act or in contravention of the conditions of a licence so green or of any condition imposed by a competent authority under the Act does anytL the exclusive right to do which is by the Act conferred upon the owner of the copyright. Section 52 of the Act dealing with certain acts not to be infringement of copyright states that the following acts shall not constitute an infringement of copyright, namely :

“52.(I)(aa) the making of copies or adaptation of a computer programme by the lawfill possessor of a copy of such computer programme, Irvin such copy (i) in order to utilise the computer programme for the purpose for which it was supplied ; or

(ii) to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied.”

It is clear from the abovesaid provisions of the Copyright Act that the right to copyright work would also constitute exclusive right of the copyright holder and any violation of the said right would amount to infringement under section 51 of the Act. However, if such copying of computer programme is done by a law fid possessor of a copy of such computer programme, the same would not constitute infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrink-wrapped/off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back-up copy and right to make a copy itself is a part of the copyright. Therefore, when licence to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear. that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. The decision of the Delhi High Court in CIT v. Dynamic Vertical Software India P. Ltd. [2011] 332 ITR 222 (Delhi) relied upon by Sri Aravind Dattar, learned senior counsel appearing for the respondents in some of the cases in support of his contention that by no stretch of imagination, payment made by the respondents to the non-resident suppliers can be treated as “royalty” is not helpful to the respondents in the present cases as in the said case, the Delhi High Court was considering the provisions of section 40(a)(0 of the Act and the order of the High Court reads as follows (page 223) :

“What is found, as a matter of fact, is that the assessee has been purchasing the software from Microsoft and sold it further in Indian market by no stretch of imagination, it would be termed as royalty.”

Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright under the impugned agreements or licences cannot be accepted. Accordingly, we hold that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under section 14(1) of the Act and licence is granted to use the software by making copies, which work, but for the licence granted would have constituted infringement of copyright and the licencee is in possession of the legal copy of the software under the licence. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of any part of copyright or copyright and transaction only involves sale of copy of the copyright software cannot be accepted It is also to be noted that what is supplied is the copy of the software of which the respondent-supplier continues to be the owner of the copyright and what is granted under the licence is only right to copy the software as per the terms of the agreement, which, but for the licence would amount to infringement of copyright and in view of the licence granted the same would not amount to infringement under section 52 of the Copyright Act as referred to above. Therefore, the amount paid to the non-resident supplier towards supply of shrink-wrapped software, or oche shelf software is not the price of the C. D. alone nor software alone nor the price of licence granted. This is a combination of all and in substance, unless licence is granted permitting the end user to copy and download the software, the dumb C. D. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music software as book and prerecorded music C D. can be used once they are purchased, but so far as software stored in dumb C D. is concerned, the transfer of dumb C D. by itself would not confer any right upon the end user and the purpose of the C. D. is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by non-resident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music C. D. or the C. D. containing software and in view of the same, the Legislature in its wisdom, has treated the literary work like books and other articles separately from “computer” software within the meaning of the “copyright” as referred to above under section 14 of the Copyright Act.

It is also clear from the abovesaid analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute “royalty” within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) of the Act as the definition of “royalty” under clause 9(1)(vi) of the Act is broader than the definition of “royalty” under the DTAA as the right that is transferred in the present case is the transfer of copyright; including the right to Make copy of software for internal business, and payment made in that regard would constitute “royalty” for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section – 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the non-resident companies would amount to “royalty” within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195 of the Act and consequences would follow as held by the hon’ble Supreme Court while remanding these appeals to this court. Accordingly, we answer the substantial question of law in favour of the Revenue and against the assessee by holding that on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was not justified in holding that the amount(s) paid by the respondent(s) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and wherefore, the respondent(s) were not liable to deduct any tax at source and pass the following order:”

11.10. The Delhi Bench of the Hon’ble Tribunal in Assistant Commissioner of Income-tax v. Amadeus India P. Ltd. (257 ITR 23) (AT) had occasion to examine the term “Computer Software” & “Computer Program” and defined the terms —

“Computer software” means “a computer programme recorded on any disc, etc., and includes any such programme which was transmitted from India to a place outside India by any means”

……….But once the scope of the words computer programme was not explained in section 801111 E, the global meaning of the word is to be taken into account. The doctrine of pari materia was relevant for this purpose. According to that doctrine, the meaning of a particular word could be imported if the same was not contrary to the provisions of the Act to which it is being imported. Therefore, in the absence of a specific definition of the word “programme” in the Income-tax Act, the expression “computer programme” should be understood as defined in the Copyright Act and should be interpreted broadly, liberally and consistently with other legislations of Government to include export of “data processing software” as well

……….The words “computer programme” has not been defined in the Income-tax Act but it has been defined in the Copyright Act, 1957, as amended in 1994. According to the definition, it means a set of instructions expressed in words, codes, schemes orany other forms including a machine readable medium capable of causing a compiler to perform a particular task or achieve a particular result.”

11.11. In Millennium IT Software Ltd., In re (338 ITR 391) (AAR), the Authoth ruled on the facts of the case that :-

“The applicant entered into a software licence and maintenance agreement (agreement) with Indian Commodity and Exchange Limited (ICEL) on March 27, 2009. Under the agreement the applicant allowed ICEL to use the software product (the licenced programme) owned by it. The’ licenced programme was to be installed into the computer machines designated by ICEL. The applicant was to deploy its’ personnel to the designated site to train the employees of ICEL. The applicant was required to provide at its own cost, maintenance and support services. For installation and implementation of the licenced programme, the applicant was to be paid Rs. 4 crore. The software became live on August 20, 2009. The licence to use the licenced programme was for four years and thereafter its renewal was left to the discretion of ICEL. The agreement provided for payment of licensing and maintenance fee from January 1, 2010 till December 31, 2014. The mode of the payment was a fixed amount of Rs. 50 lakhs per quarter plus an additional fee based on the utilization of the licenced programme by ICEL, so that the total amount payable would not exceed Rs. 150 lakhs per quarter. The licenced programme was developed by the applicant at its development centre in Sri Lanka. The rights granted’ under the agreement were non-excluSive, non-transferable, non-assignable, indivisible. The applicant had granted ‘GEL the right to make copies of the licenced programme to be installed on equipment only at designated sites of ICEL. Each copy was to carry copyright, trade mark and other notices relating to proprietary rights of the applicant. ICEL could not sell, distribute or disclose the licenced programme or associated documents to any third party., Use of the source code and reverse engineering of the licenced programme was strictly prohibited. On these facts the applicant sought an advance ruling on the questions whether the applicant was not taxable in India under the

Income-tax Act, 1961, with respect to implementation and licence and maintenance fees paid by ICEL to it under the agreement; whether the applicant was not taxable under the Double Taxation Avoidance Agreement between India and Sri Lanka (DTAA); whether the applicant providing maintenance service to ICEL could not be treated as having a permanent establishment in India; whether, if the applicant was not taxable in India for the fees paid by 10EL, it would later be required to withhold tax under section 195 of the Act on the fees, and if ICEL had deducted withholding tax, the applicant would be entitled to get refund; and assuming that the applicant had no other taxable income in India, whether the applicant would be absolved from filing a tax return in India under the provisions of the Act with respect to the fees.

The Authority on the stated facts ruled :

(i) That the fees paid by ICE”, to the applicant were taxable as royalty under clause (v) of Explanation 2 to section 9(1)6,0 of the Act.

(ii) That since the fees payable by ICEL to the applicant arose in India, they were taxable under article 12(2) of the DTAA in India.

(iii) That the applicant did not have a permanent establishment in terms of article 5 of the DTAA.

(iv) That the provision of withholding tax under section 195 would apply.

(v) That as the applicant was liable to tax in India, it was required to .file a return of income under the provisions of the Act.

Per V. K Shridhar (Member).-(i) Under Indian copyright law, computer programmes are considered to be literary works and accordingly entitled to copyright protection under section 14 of the Copyright Act, 1957. The definition of computer programme has been worded in liberal language. It defines computer programme as a set of instructions expressed in words, codes, schemes or in any other form. The use of this language signifies the legislative intent to award copyright protection to both the source code and the object code of the computer programme. During the process of registration of a copyright in ti computer programme, the author also files the object code of the software with the Registrar of Copyrights. Thus authorship of both the source code and the object code are protected by the Copyright Act as literary work.

(ii) Section 52 of the Copyright Act specifies the acts which do not constitute infringement of copyright. Section 52(aa) uses the term “lawfill possessor”. It thus, carves out an exception for lawful possessors of a computer programme as far as copies or adaptation for personal use is concerned. The purchase of software from a reseller is payment for use of intellectual property and not for the purchase of goods, unless the payment falls under the exception provided by the second proviso to sec 9(1)(vi) of the 1961 Act. What had been licenced squarely fell within the definition of computer programme under section 2(ffc) of the Copyright Act and was copyrightable subject mailer.

(iii) The scope of the agreement extended beyond installation and implementation 07-the licenced programme. The maintenance service in respect of the licenced programme was an integral part of agreement. In bifurcating the payments before and after installation and implementation, the nature of the payments remained royally for the use of the licenced programme and would not change from royalty to business income. If it was to be in the nature of business income the agree/hent would have been for sale and service of licenced programme and the fee paid would have been taxable as business income under article 7 of the DTAA, depending on whether or not the applicant had a permanent establishment in India under article 5 of the DTAA.

(iv)Therefore since without the agreement being in place, any usage of the computer programme by the customers would have amounted to copyright infringement, the payment made under the agreement was for Obtaining the right to use the’copyright lit the software and was taxable as royalty under the DTAA and the 1961 Act.

Per P. K. Balasubramanyan (Chairman).-(0 In terms of the InCome-tax Act, 1961 royalty means consideration for the transfer of all or any right, including the granting of a licence, in respect of any copyright or literary work. What the applicant had granted to ICIEL, was a licence to use the computer programme developed by it and owned by it and over which it had a copyright. This was done fora- consideration. This was a licence recognized by the Copyright Act and was ‘a known mode of exploitation of a copyright. The applicant had not parted with its title over the copyright in the software. It had conveyed to another a right to use the software over which it had a copyright. The right of user of software, thus given, involved the right to use the copyright. The user of a software created, over which a copyright is acquired cannot be divorced from the use of the copyright itself. The right granted for use of a copyrighted article for a consideration, would also be royalty. It was, therefore, not possible to accept the argument that what was involved was the mere permitting of the right to use a copyrighted article. Indian law does not diStinguish between copyrighted article and the copyright. What is needed to attract liability is the farming out of the right to use or of the right itself for consideration.

(ii) The definition of royalty contained in article 12(3) of the DTAA between India and Sri Lanka shows that it is a payment of any kind received as consideration for the “use of or the right to any copyright”. The definition in the DTAA is wider than the one found in the Act. For, it takes in even the consideration received for permitting another to use a copyright.

Even a right to use need not be conferred. It is not necessary even to grant the right to use the copyright if one were to look at it literally, though the grant of a right to use could be said to be included in the grant of a right in the copyright. In the present case, not merely the use was licenced but the licencee was given the right to copy it and use it wherever it needed it for its business. The right given to ICEL for a consideration to copy the copyrighted software and use it for its own purposes whenever and wherever needed by it, clearly attracted the definition of royalty to the consideration paid by ICEL to the applicant, though the right granted may be limited and did not take in a right to further transfer the right or its use.

Dassault Systems K K, In re [2010.1 322 ITR 125 (AAR) commented upon.”

11.12. In Citrix Systems Asia Pacific Pty. Limited, In re (343 ITR 01)(AAR), the Authority ruled on the facts of the case that :-

“When a software is created by a person who acquires a copyright for it, he becomes the owner of that copyright. He can transfer or licence that right either by himself or through an agent. When he sells or licences the software for use, he also sells or licences the right to use the copyright embedded therein. If a software is used without being lawfully acquired either by purchase or by licence, that would amount to an infringement of the copyright because of the copyright embedded in the software. The software is a literary work and the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licenced for use, there is involved an assignment of the right to use the embedded copyright in the software or a licence to use the embedded copyright, the intellectual property right in the software. It is not possible to divorce the software from the intellectual property right of the creator of the software embedded therein. Even the right to sell or give on rental, would amount to a copyright and would be a right to be dealt with as a copyright.

The definition of “royalty” in the Income-tax Act, 1961 is, consideration for transfer of all or any rights (including the granting of a licence) in respect of a pater: innovation, model, design, secret formula or process or trade mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work Licence is not confined to an exclusive licence. When a software, over which a copyright is acquired and thus owned, is licenced for use to another or sold to another for his own use, the licencee or the purchaser gets the right to use the software without being held guilty of infringement of the copyright. When the use of software, without anything more, would render the user liable for infringement of the copyright embedded in the software, the sale or the licensing of the software involves the grant of a right to use the copyright in the software and right to use the intellectual property embedded in the software. ‘Therefore, the licensing of a softwaresfbr use by the end-use customer, is not the mere sale of a copyrighted article.

The words within brackets, “including the granting of a licence” indicate an expansive’ definition. The word “includes” is an inclusive definition and expands the meaning. Therefore, licence cannot be restricted to transfer of a right dealt with earlier by the provision and should be understood as taking in the grant of a licence simpliciter.

Article 12 of the Double Taxation Avoidance Agreement between India and Australia (DTAA) defines “royalties” to mean “payment made as consideration for the use of or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right”. When the DTAA speaks of royalty, and defines it, it must be understood as it is commonly understood. The article speaks of the use of or the right to use any copyright. Use of a copyright takes place when the copyright is used. This is distinct front the right to use a copyright. The two expressions are used disjunctively and the expression used is “or”. The context does not warrant the reading of “or” as “and”. If so, the consideration receivedsfor permitting another to use a copyright is also royalty.

A copyrighted article is nothing but an article which incorporates the copyright of the owner, the assignee, the exclusive licencee or the licencee. So, when a copyrighted article is permitted or licenced to be used for a fee, the permission involves not only the physical or’ electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein.

That apart, article 12(3) of the DTAA defines royalties as payments, whether periodical or not and, however, described or computed, as consideration for “the use of, or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right”. The definition is wider than that contained in the Act. It also ropes in payment of consideration for the use of a copyright in addition to the consideration paid for the right to use a copyright, covered by the definition in the Act. Consideration paid for use of a copyrighted software is also payment for use of the copyright embedded in the software. There cannot be a use of software, over which exists a copyright, without a use of the copyright therein. The payment for such use can only be royalty.

The sale or licensing for use of a copy righted software amounts to the grant of a right to use a copyright.

P. No. 30 of 1999, In re 11999) 238 JTR 296 (AAR) relied on.A ruling by the Authority is based on the facts involved in the application leading to that ruling. The doctrine of precedent cannot be applied to a ruling under section 245R(4) of the Act. The Act has itself made it clear that the ruling is binding on the applicant in the application and the Revenue, in respect of that application and the transaction involved therein.

The applicant, a company incorporated in Australia and provider of software services, entered into agreements with Indian distributors for the distribution and sale of its software and hardware products in India. In the year 2006, the applicant entered into a distribution agreement with I, an Indian company engaged in the business of distribution of computer software and hardware, under which I was appointed non-exclusive distributor of the pro-ducts of the applicant in India. For the software product, Citrix XenApp, while sale and collection was made through the distributor, no physical delivery of the product was made to the distributor. On the basis of the demand of the customers, the distributor placed orders of purchase with the applicant and made payments to the applicant The applicant then di transmitted a “key” to the end-user customer who, on receipt of the key, downloaded the software from the server of the applicant. In addition, I also facilitated :if execution of the Citrix subscription advantage programme  between the applicant and its existing customers. The programme was a package of support services during the period of the programme, including product version updates, sub ‘scription advantage news and updates and secure portal access. The applicant sought an advance ruling on the taxability in India of payments made by I to it for the software product, Citrix XenApp and the subscription advantage programme. The questions framed by the Authority were whether the payments received by the applicant from the distributor for sale of the software product were in the nature of “royalty” within the meaning or the term in Explanation 2 to clause (vi) of section 9(1) of the Income-tax Act, 1961, or within the meaning of the term in article 12 of the Double Taxation Avoidance Agreement between India and Australia, whether the payments received by the applicant from the distributor for the right to download/receive version updates for the software products of the- applicant were in the nature of “royalty” within the meaning of the term in Explanation 2 to clause (vi) of section 9(1) of the Act, whether the payments received by the applicant from the distributor for the Citrix subscription advantage programme were in the nature of ‘fees for technical services” within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) of the Act, whether the payment received by the applicant from the distributor for the Citrix subscription advantage programme, was in the nature of “royalty” within the meaning of the term in article 12 of the DTAA and in the light of the declaration provided by.the applicant that it did not have a permanent establishment in India in terms of article 5 of the DTAA, whether the payment received by the applicant was chargeable to tax in India and would the receipts by the applicant from the distributor suffer withholding tax under section 195 of the Income-tax Act, 1961, and at what rate. The Authority on the stated facts, ruled :

(i) That the payments received by the applicant from the distributor for sales of the software products were in the nature of royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961.

(ii) That the payments concerned would be royalty as defined in article 12 of the DTAA between India and Australia.

(iii) That the payment received by way of subscription for the updates would also be payment received for grant of a right to use the copyright embedded in the subscription advantage programme and it will be royalty.

(iv) That it was not necessary to rule on the question whether the payment for subscription advantage programme would be in the nature of fees for technical services within the meaning of the Income-tax Act.

(v) That the payment received by the applicant from the distributor for the Citrix subscription advantage programme was royalty within the meaning of clause (a) of article 12(3) of the DTAA between India and Australia. It was not necessary to consider the question whether it would fall under clause (g) of article 12(3) of the DTAA.

(vi) Even accepting that the applicant did not have a permanent establishment in India, the amount was liable to be taxed in India under article 12(2) of the DTAA.

(vii) That the distributor I was required to withhold taxes in India at the time of making payments to the applicant in terms of section 195 of the Income-tax Act at the rate of 10 per cent. of the gross amount of royalty, as provided under article 12(2) of ^–the DTAA.”

11.13. In ThoughtBuzz Pvt. Ltd., In re (346 ITR 345) (AAR), the Authority ruled on the facts of the case that :-

“The applicant, a tax resident of Singapore, was engaged in providing social media monitoring service for a company, brand or product, through a platform for users to hear and engage with their customers, brand ambassadors, etc., across the internet. The applicant charged a subscription. Clients who subscribed could log in to its webs ite to do a search and the system operated by the applicant generated a report with analytics with inputs provided by the clients. The information for generation of report was obtained from various websites through the applicant’s own computer programme for data extraction that gathered and categorized information on the internet The applicant sought an advance ruling on the questions whether the amount received by offering subscription based service was taxable in India and whether tax was required to be deducted from such amount by the subscribers who were resident in India. The Authority on the stated facts ruled :

That the applicant was in the business of gathering, collating and making available imparting information concerning industrial and commercial knowledge, experience and skill and consequently the payment received from the subscriber would be royalty in terms of clause (iv) of Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. The subscription received was royalty liable to be taxed as such under the Act. Under the Double Taxation Avoidance Agreement between India and Singapore (DMA), it would qualify as royalty since it was the grant of the use for consideration or right to use for consideration, the process Or information concerning industrial, commercial or scientific experience and under the D1 AA the subscription received from the Indian subscriber would be taxable as royalty and taxable in India in view of paragraph (2) of article 12 of the DTAA, subject to the bene-fit conferred therein on the applicant on fulfilling the condition imposed by that paragraph. Tax was required to be deducted in terms of section 195 of the Act from the payment made to it by the subscribers who were resident in India.”

11.14. After considering these views, the facts of the instant case are that Google Ireland has granted the assessee company the right to use the Adwords program  which is a complex computer program,  without parting with the copyright, thus granting the licence to use the software in the garb of marketing and distribution. On exploitation of the Adwords program, revenues are generated through  advertisers and collected by the assessee company. The assessee company in return pays the”‘ share of these profits in the garb of distribution fee which is actually consideration on account of licence  to use / right to use a computer program I process. The assessee company cannot hide behind cryptic  clauses of the distribution agreement. The argument that Google Ireland has simply provided advertising space on its website to the assessee company is not tenable. As discussed above, it has  provided the right to use the Adwords program which is a computer program for a consideration  which squarely falls within the meaning of Royalty as per provisions of the Act.

11.15. Ground Nos. 10 & 11 relate to the action of AO in taxing’ the distribution fee as “Royalty” under Article 12 of the tax treaty. Article 12 of the DIM between India and Ireland is reproduced as under:

“The term “Royalties” as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes for radio or television broadcasting,any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience.”

11.16. There is no benefit available to the assessee from the provisions of the treaty, although  treaty provisions will override the Act, as the mischief is covered by the provisions of the treaty.  It covers right to use copyright of literary work which includes the computer program, trade mark and process. For reasons stated above, I have held that the right to use trade mark has  been transferred as also the right to use copyrighted computer program and process. Therefore,  the action of the AO in holding that the distribution fee is actually consideration received for the right to use / licence to use a computer program / process viz., Adwords program, is upheld.

11.17. The assessee ‘s representative strongly relied on two decisions of the Mumbai Bench of the Hon’ble Tribunal viz., (i) Pinstorm Technologies Pvt. Ltd. (ITA No. 4332/Mum/2009) & (ii) Yahoo India Pvt. Ltd. Vs. DCIT (140 TTJ 195). I have carefully gone through both the orders. The former blindly follows its decision in Yahoo India case. The facts of this case are that the Department of the Tourism, Government of India, hired the services of the assessee company to approach the foreign principal to provide uploading and display services for hosting the banner advertisement at Yahoo Hongkong portal. The assessee company hired the services of the principal for the same and made a payment without deducting tax at source. The Bench observed that banner advertisement hosting services did not involve use or right to use any industrial, commercial or scientific equipment and no such use was actually granted by the principal to the assessee company. Therefore, such payments did not amount Royalty. The facts and the issues in the case are completely different from the instant case. At no stage  did the Mumbai Bench consider what exactly is the Adword program, nor did it have  occasion to examine the right to use trade mark and other intellectual property rights. Hence, the decision rendered in that case is peculiar to the facts of its own and is not applicable in instant case.

That the fee payable was for imparting information concerning technics! industrial, commercial or scientific knowledge and experience & That the fee payable was on account of “right to use  industrial, commercial & scientific equipment” :-

11.18. The AO held that the Adwords platform is similar to a portal running on service and Adwords platform is based on the search engine technology of Google. Henc4 Adword program in one way is also a commercial-scientific equipment and without having access to servers running the Adwords platform. Without the use of the programme, the assessee company cannot perform its function as per distribution agreement. Hence, the distribution right also includes the right to use industrial, commercial & scientific equipments which are the servers.

11.19. I have already held that the Adwords program is a complex computer program and a process within the meaning of the provisions of the Act. The Adwords Program was developed by Google Ireland and no information concerning the technical, industrial, commercial or scientific aspects have been found to have been passed on to the assessee company. The assessee company simply has the right to use the Adwords program and thereafter, is involved in collection of advertisement revenue. It retains part of the collection on cost plus profit basis and the balance is remitted to Google Ireland. Hence, there is no question of any exchange of information nor was any equipment utilised by the assessee company. It cannot be said that the assessee’ company gained the right to use any kind of industrial, scientific equipment on the facts of the instant case. There has been the instance, that, Google Ireland has provided training to the staff of the assessee company, but such training is restricted to use of the Adwords program and not on how to develop the Adwords program. This is clear from the following observations of the AO:-

Google Ireland provides training to the sales team of Google India on the following:

Training on the AdWords program and how the AdWords program may benefit the advertisers in India

Training on the functionality of the tools available to optimize and follow an ad campaign on the AdWords system;

The new features/ additions made to the AdWords program and the implications for advertisers, etc.”

11.20. The term “Server” in context of Information Technology has been described by “VVikipedia” as, a system (software and suitable computer hardware) that responds to requests across a computer network to provide, or help to provide, a network service. Therefore, a server is nothing but computer software backed by necessary hardware. Thus, it cannot be said that the assessee gained right to use any scientific equipment. Since, Google Ireland has not parted with the copyright it holds, in the Adwords program, it cannot be said that any kind of technical knowhow has been transferred to the assessee company. Hence, without prejudice to my view in holding
that the remitted amount is Royalty on different grounds, I am not in an agreement with the AO on these issues.

The Google Ireland rendered services to enable the assessee company to market and distribute the Adwords program :

11.21. The AO after examining the agreement opined that training is an inherent part of grant of distribution rights of the Adwords program. The training is given to the staff of the assessee company at all stages of marketing and distribution of Adwords program. The relevant extracts from the AO’s order are reproduced to highlight the nature of training :-

2.2 …………..

Distributor will distribute AdWords Program in accordance with the training provided by Google. Failure to do so would constitute a material breach of this Agreement and shall be grounds for termination under Section 9.3.

2.6 After-Sales Support. Distributor will provide after-sales services to Advertisers is accordance with the broad instructions, training and standards of Google.

EXHIBIT C      Service Level Agreement

Issues that cannot immediately be resolved by Distributor based on training and procedures provided under the Agreement must be communicated promptly to Google by Distributor, and Google will assist Distributor in determining the best solution.

“Customer Queries” shall mean e-mails sent from Distributor to Google related to Advertiser issues, but excluding general communications between Distributor and Google (e.g. billing questions, training information) and technical issues that only Google can solve.

2.1 Further in the submission dated 15th Feb 2013 it was stated that:

Google Ireland provides training to the sales team of Google India on the following:

• Training on the AdWords program and how the AdWords program may benefit the advertisers in India
• Training on the functionality of the tools available to optimize and follow an ad campaign on the AdWords system;
• The new features/ additions made to the AdWords program and the implications for advertisers, etc.”

11.22. From the above observations of the AO, it is very clear that the training has been provided with respect to the Adwords program and it benefits the assessee who markets and distributes the program to advertisers in India. Functionality of tools available on software and new features made to the Adwords program have also been covered in the training process. This clearly tantamounts to rendering of services to the assessee company. Therefore, the finding of the AO on this point is confirmed.”

15. Before the CIT(A), the appellant has also challenged the AO’s finding that assessee is not a beneficial owner of sum paid/payable by the GIPL. The CIT(A) has extracted the observation of the AO on this issue and made a reference of certain judicial pronouncements in his order and concluded that the GIL is the beneficial owner of thesum paid/payable by the GIPL, having relied upon the certificate of the Revenue authorities of Ireland. The relevant observations are extracted hereunder for the sake of reference:

“9. In the instant case, the following facts are quite clear :-

(i) The Google AdWords Programme distribution agreement is between GIL & GIBL.

(ii) The assessee Distributor has made payments for acquisition of distribution rights to GIL alone.

(iii) The assessee has filed a notarized certificate of incorporation of GIL from the Irish Authorities to establish that the entity is incorporated in the Company Acts of Ireland. Thereafter, the Revenue Authorities of Ireland have certified that GIL files its corporation tax return in Ireland and is a resident of Ireland for tax purposes and duly is liable to Irish corporation tax on its worldwide income including that from India.

(iv) Although Circular No. 789 deals with the Indo Mauritius Treaty, the same was applied by the Mumbai Bench to the lndo Netherland Treaty.

9.1. Now, in this light, it will be relevant to analyze the AO’s attempt to distinguish the judgement of the Hon’ble High Court of Mumbai read with the decision of the Mumbai Bench of the Hon’ble Tribunal.

• Firstly, in the absence of agreement, it could not be ascertained whether the Dutch. company acted or did not act as an ‘agent’ or ‘nominee’ of other group companies or was a ‘conduit’ between one of the group companies and the Indian company. Therefore, on the given facts, the Tribunal could not have reached the legal finding which it did reach.

The AO has failed to establish that GIL was a conduit company for other group entities. It is very clear that the amounts in question have reached the financial statements of GIL and the same is subject to tax under Irish Revenue Loss. Absence of agreements was not held to be crucial in the case analysed above, The Apex Court in McDowell and Co. Ltd. v. CTO (154 ITR 148) was clearly of the view that Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen topay the taxes honestly without resorting to subterfuges.

There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction.

By the Court: “The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is ‘the large hidden loss’ to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not so skilful, advisers, on the other side. Then again there is the ‘sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it’. Last, but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the ‘artful dodgers’.”

In the instant case, the AO has failed to demonstrate whether the transaction constituted a colourable device so as to avoid tax. Hence, I cannot concur with him on this point at all.

• Secondly, the certificate of beneficial ownership furnished by the taxpayer is the interpretation arrived at by the Netherlands authorities. Indian Courts may not necessarily agree with the interpretation of the Netherlands authorities

Certificate of residency has been filed before me by the assessee which bears the stamp and seal of the Irish Revenue Authorities stationed at Dublin and the Mumbai Bench has clearly held that this constitute sufficient evidence regarding status of assessee.

• Thirdly, Circular 789 specifically deals with the India-Mauritius tax treaty. It cannot be applied to India-Netherlands tax treaty.

The wisdom of the Hon’ble High Court of this Country cannot be challenged by an AO.

• Fourthly and most importantly, the Tax Residency Certificate (TRC), which is subject matter of Circular 789 relied up on by the Court, has nothing to do with the beneficial ownership.

The wisdom of the Hon’ble High Court of this Country cannot be challenged by an AO.

9. For reasons mentioned, I am of the view that the case of the assessee is on `all fours” vis-a-vis a judgement of the Hon’ble High Court as mentioned and the action of the AO cannot be sustained in first appeal. Hence, all grow ids are covered and in the result, appeal filed by the assessee is allowed in part.”

16. Being aggrieved with the order of the CIT(A), assessee as well as the Revenue are in appeal before the Tribunal.

17. The learned Counsel for the assessee Shri. Percy Pardiwala, Sr. Advocate has invited our attention to certain facts explained by the assessee through affidavit filed by its Director Mr. Hari Raju with the submission that assessee company was incorporated on 16.12.2003 under the Companies Act and in 2004, assessee company set up its first office at Bangalore to provide Information Technology (IT) Services to Google Inc., USA (hereinafter called as “Google Inc”). Vide agreement dated 01.04.2004 entered into between the appellant company and GIL, the appellant company was to provide IT enabled services (ITES) to GIL. Pursuant to the same, the appellant company set up an ITES division in Hyderabad for provision of ITES services. The primary activity being carried out by the ITES division of the appellant company involves rendering of support services in administering the Google editorial and Government’s guidelines in relation to global advertisements (“Ad review”) manually before the advertisements can be placed on
Google Web properties. Thereafter, the appellant company entered into Google AdWords Program Distribution Agreement dated 12.12.2005 with GIL pursuant to which the appellant company was appointed as a non-exclusive, authorized distributor of online advertisement space to advertisers in India under Google AdWords Program.

18. Subsequently, the appellant company entered into a Google Reseller Agreement on 01.07.2012 with GIL, pursuant to which the earlier agreement dated 12.12.2005 was terminated and the appellant company was appointed as non-exclusive, authorized reseller
of online advertising space to advertisers in India under the Google AdWords Program.

19. The learned Counsel for the assessee further contended that the entire case of the Revenue is that the payment made by the appellant company to GIL amounts of consideration for the right to use copyright/trade mark/process/software. The case of the Revenue is also that the payment made by the Appellant Company to GIL amounts to consideration for the grant of distribution rights of Google AdWords Program and sincethe same is covered within the meaning of “similar property”, payments thereof is ‘Royalty’. It was further contended that the assumption on which the AO has proceeded on to conclude that the payments made by the Appellant partake the character of royalty, are unfounded and needless to state, were drawn owing to lack of proper enquiry and investigation by the AO. It was further submitted that the function of the appellant is that of mere distributor having no access to the alleged intellectual properties as alleged by the AO and any such access to such intellectual property is only the incidental to the distribution function, for which no separate payment is made.

20. The learned Counsel for the assessee further placed a reliance upon the affidavit dated 13.03.2018 filed by Mr. Hari Raju (Director of the Appellant Company) in which it is clarified that the activities performed by the Appellant Company, pursuant to agreement dated 01.04.2004, entered into with GIL are for the rendering of ITES services independently of the activities pursuant to agreement dated 12.12.2005 (superseded pursuant to agreement dated 12.12.2005) for distribution/reselling of online advertisement space to Indian advertisers and vice-versa. It has also been clarified through this affidavit that the Appellant Company does not have access to personal information of the user of any Google services offered on the internet and therefore is no capacity to provide access to anyone regarding such information.

21. The learned Counsel for the assessee Mr. Pardiwala further invited our attention to the fact that at different points of time, various law enforcement agencies in India approached the Appellant Company with a request for personal information about various users of Google services offered on the internet, to which the Appellant Company has no other option but to decline such request. In order to justify these facts, the assessee has filed the copies of communications exchanged between them and the law enforcement agencies. It was further contended that from these evidences, it is clear that the appellant company has no access to the personal information of users of Google services except information about advertisers using Google AdWord Programs.

22. It was further explained in the affidavit that approximately 94% of global advertisements i.e., advertisements to be published for advertisers across globe, are reviewed by an automated system based onservers/infrastructure located outside India and approximately 6% of the advertisements are routed by the automated system for manual review by ITES teams based globally out of which ITES division of the Appellant in India is one of such centre. Online advertisements flagged for manual review from around the
world are sent to any of such divisions located around the world based on language used in the advertisement and operative time of each such ITES centre around the world. The routing of advertisement for review is a purely system driven automated process with no
human intervention. It was further contended that while performing the manual Ad reviewvia its ITES division as specifically identified, has no control over choosing advertisements/advertisers for manual review, uploaded by a specific advertiser from a specific country. For providing these services, GIL pays a service fee to the Appellant in terms of the agreement dated 01.04.2004.

23. The learned Counsel for the assessee further invited our attention to certain facts with the submission that in order to carry out its distribution function under the distribution agreement, the appellant has a separate sales and marketing team working from its Gurgaon and Mumbai Office and its team operates independently of the ITES and other divisions of the Appellalnt and is dedicated purely to the distribution segment of the Appellant. The functions of this team are to ensure promotion of Google AdWord services, billing and collection of payments and other day to day business operations relating to the distribution segment of the Appellant’s business. It was further clarified that as per terms of agreement, GIL has also supplied online advertisement space to the appellant for online sales to the advertisers in India. The distribution team as part of its sales and marketing function, under Distribution Agreement, provides necessary support, clarifications and assistance to its customers in India (advertisers who have chosen to pay in INR) and in the course of providing aforesaid assistance, the team has access to the AdWords account created by that advertiser. In any case, the distribution team of the Appellant has no access to data/personal information pertaining to end user of any of the Google properties such as the Google Search Engine etc; like his name, age, gender, etc. The Appellant Company also does not even have access to the Internet Protocol (“IP”) address of users of any Google service and therefore is not in a position to share that with anyone/advertisers (including Government and law enforcement agencies).

24. It was further contended that the Appellant does not operate any platform or gateway or is not the proprietary/licencee of any technology/tools/features that are part of the Google AdWords Program and therefore does not have access to or control over the infrastructure or processes that are involved in running the Google AdWords Program. It was further clarified that while performing the distribution activities, the Appellant does not have access or capacity to control the display of advertisements online. Even in other products of Google for example, GMAIL (email services) a person accessing his GMAIL account may be exposed to certain advertisements, which an advertiser might have chosen to be displayed on GMAIL, however, the Appellant has no role to play in such display of advertisements on GMAIL. Only an advertiser using Google AdWords Program, in his sole discretion, can choose which web property to have his advertisement displayed and in what manner.

25. It was further contended that Google AdWord Program is a “selfserve”onlineadvertising service provided by Google (Google Inc./GIL) for businesses wanting to display advertisement in relation to their websites and products on Google online property or a third party online property. The advertisers are required to upload his/her billing information, without which he/she will not be able to conclude the account of creation process and his/her advertisement would not be displayed. Once the advertiser chooses India as his/her location and INR as his billing currency, he gets into a contract with the appellant, subject to him agreeing terms and conditions. The advertisers that use Google AdWords Program for advertising on Google Search Engine can create relevant advertisement by selecting anappropriate title and text to describe its business and the forms of text of the advertisement. The advertiser also selects keywords or phrases that may match with a “search query” (relevant to the business of such advertiser) that people input while using Google Search Engine. The keywords are used to trigger an advertisement that is relevant to the search query of the user. Multiple advertisers can choose the same Keyword. The keywords or phrases are neithersold or allowed to be used
exclusively by anyone advertiser.

26. It was further explained that the advertisement on the google search engine is displayed as “sponsored link” with a tab marked as “AD”. It may be displayed at the top of the organic search results that are linked to various websites that are relevant to the “search query” and user of the Google Search Engine has a input. The organic search results are ranked and displayed algorithmically on the basis of certain objectivecriteria amongst them being relevance. Clicking on a website link that is part of the organic search result does not result in any revenue for the appellant. The Google AdWords Program uses cost per click pricing methodology which means, for example that advertiser pays only when his/her advertisement in the form of “sponsored link”getsclicked by a user of the Google Search Engine. The price per click is determined by the advertiser in his/her sole discretion and the Appellant has no role in negotiating such price. The advertiser does not pay the appellant for the display of the advertisement.

27. It was further contended that the advertiser sets a daily budget, as per his own discretion, using the web interface of Google AdWords program, which, when achieved the advertisement of the advertiser stops displaying. The appellant has no role in negotiating such budget except for providing customer support services to the advertiser in order to familiarize the advertiser of various features of the Google AdWord Program. The Google AdWord Program is an independent product offered online to any one who wants to advertise its business. The pre-conditions for the proper use of Google AdWords Program are the requirement of having an e-mail account, a website for one’s business, who wishes to advertise and billing details. There are no other conditions for an advertiser to be able to use Google AdWords Program. Once the advertisement is created by the advertiser using the web interface of Google AdWords Program, the same is uploaded and stored on data servers outside India and advertisement uploaded by an Indian advertiser located in India or elsewhere may be reviewed by the ITES division of the Appellant, if routed to such division of the Appellant by the automated system, and the Appellant’s ITES division has no control over which advertisements are routed to it for review. The review process is only for ensuring that the advertisement does not violate editorial guidelines of Google and local Government regulations of the jurisdiction where advertisement needs to be displayed.

28. Mr. Pardiwala further contended that the fundamental submissions of the assessee which has been completely missed by the AO is that the revenue arising from the distribution agreement dated 12.12.2005 and superceded by the reseller agreement dated 01.07.2012 whereby the distributor or reseller’s rights were granted to the assessee owing to the nature of the business income in the hands of the non-resident and in the absence of the permanent establishment such non-resident in India no portion of such income could have been brought to tax. It was further submitted that the resort to section 9(1)(vi) of the Act is contrary to the legal position since 9(1)(vi) is applicable only to taxation of passive income. Thus in the absence of any permanent establishment, the income of non-resident was not chargeable to tax in India and consequently there arose no occasion for the applicability of section 195 and 201 of the Act. He further placed reliance upon the order of the Tribunal in the case of ITO Vs. Right Florist Pvt. Ltd., (2013) 25 ITR (T.) 639, Pinstrom Technology Ltd., Vs. ITO (2012) 54 SOT 78 (Mum. Trib.) and Yahoo India Pvt. Ltd., Vs. CIT 140 TTJ 195 (Mum.Trib.),in support of his contention that payment made to non-resident of India for purchase of online space to be in nature of business income or in the absence of permanent establishment (PE) of such non-resident it cannot be taxable in India.

29. In support of above contention, reliance was also placed upon the order of the Tribunal (Mumbai Bench) in case of Set India Pvt. Ltd., in ITA No.4372/Mum/2004 in which it has been held that right of distribution is purely a commercial right which is distinct from right to use copyright and hence payment to non-resident under distribution agreement does not constitute royalty. Reliance was also placed upon the judgment of Taj TV Ltd., in ITA No. 4678/Mum/2007 wherein it was held that distribution income payable to the assessee company is a business profit and cannot be taxed in India in the absence of permanent establishment of the recipient in India. It was further contended by the learned Counsel for the assessee that it is not open for the Tribunal to be dissuaded with the Coordinate Bench’s decision and to form a independent opinion without referring the matter to the special bench in the light of judgment of the Apex Court in the case of UOI Vs. Paras Laminates Pvt. Ltd., (1991) AIR 1991 SC – 696 and the order of the Tribunal in the case of DCIT Vs. Sumit Securities (2011) 11 ITR (T) 88 (Mum.Trib. Special Bench).

30. The learned Counsel for the assessee further invited our attention to the assessment order for the assessment year 2008-09 where the appellant was constituted a dependent agency PE of GIL i.e., non-resident. In that case, there was no whisper by the AO that receipt in the hands of non-resident par-took the character of royalty income. The absurdity of the whole situation further gets highlighted by the AO not even adverting the position of article 12 of the treaty where the provisions of article 12(4) specifically excludes the application of article 12 where there is a permanent establishment of nonresident in the house country. The learned Counsel for the assessee further contended that department needs to make up its mind whether the non-resident has a permanent establishment or not. It is only when certain determination is concluded, the article 12 can be applied to determine whether receipts are in the nature of royalty income.

31. The learned Counsel Mr. Pardiwala further invited our attention that from July 2016, the legislature in its wisdom has introduced the equalization levy. The whole purpose of bringing this levy was to avoid protected litigation on the existence of permanent establishment and to capture the income of non-resident who on account of absence of permanent establishment as per the existing provisions under treaty, escaped the net of taxation in India. It was further contended that in assessment year 2017-18, 2018-19, the department has taken a position that equalization levy is applicable on payment made by the advertiser to non-resident for the purchase of online advertisement space. These oscillating views taken by the department reflects the confusion behind department’s logic to bring to tax receipts under dispute tax in India and are thus devoid of any merit. Therefore, the order CIT(A) treating the remittance to GIL as royalty, deserves to be set aside.

32. The learned Counsel for the assessee further invited our attention to provisions of Finance Bill, 2016 with the submission that the legislature has introduced the equalization levy at 6% of the amount of consideration for specific service received/receivable by nonresident not having permanent establishment (PE) in India, from the resident in India who carries out business or profession or from a non-resident having permanent establishment in India with certain safe guards. Keeping in view the object of introduction of equalization levy on specific payments to non-AE, the payment made by the assessee to its AE under Distributor AdWord Agreement should be considered as business profit in the hands of non-resident.

33. The learned Counsel for the assessee has also invited our attention to provisions of article 12 of DTAA with Ireland with the submission that the term royalty used in this article means the payment of any kind received as consideration for the use of or the right to use, any copyright of literary, artistic, scientific work including cinematography, films, etc. As per the definition of word royalty as per DTAA, royalty can only be taxed on receipt basis in the hands of the recipient i.e., non-resident. In the instant case, the AO has treated the deemed income of royalty only on accrual basis. Therefore, the taxability of royalty in the impugned assessment year under section 9(1)(vi) is improper. In support of his contention, he placed reliance upon the order of the Tribunal in the case of Pizzahut International Inc., Vs. DCIT (2012) Taxmann.com 111 Delhi, Booz. Allen & Hamilton (India) Ltd. & Co. Kg.,Vs. ACIT in ITA No.4502 to 4508/Mum/2003 and judgment of the Bombay High Court in the case of DIT Vs. Siemens aktiengesellschaft in ITA
No.124/2010.

34. Mr. Percy Pardiwala had also placed a reliance upon the order of the Tribunal in the case of CSC Technologies Singapore Pte. Ltd., Vs. ADIT (2012) 19 Taxmann.com 123, National Organic Chemicals Industries Ltd., Vs. DCIT (2006) 5 SOT 317 Mumbai and Saira Asia Interiors Pvt. Ltd., ITA No. 673/2014 in support of his contentions that DTAA tax liability can arise only at the point of payment and not at the time of crediting the amount. Therefore, at the time crediting the amount, there cannot be an occasion for deduction or withholding the tax on such income.

35. The learned Counsel for the assessee further placed a reliance upon the judgment of Delhi High Court in the case of Formula One World Championship (2016) 76 Taxmann.com 6 (Del), and DIT Vs. Sherton International Inc., 313 ITR 267 in support of his contention that use of intellectual property (Trade mark ) as incidental to main purpose of agreement, does not enable the payment thereof to qualify under the definition of Royalty under the Act or by AO.

36. Mr. Percy Pardiwala further contended that assessee had a bonafide belief for nondeducting the TDS on the payment made on account of AdWord Program to the GIL, as there was no disallowance at earlier occasion. Moreover, the GIL has no PE in India therefore the assessee/appellant was under a bonafide belief that TDS is not required to be deducted on the payment to GIL which in fact is a business receipt in its hand. In support of his contention he placed a reliance of the judgement in the case of CIT Vs. Kotex
Securities Ltd., 383 ITR 0001 (SC).

37. In oppugnation, learned Standing Counsel for the department, Shri. K. A. Arvind invited our attention to the fact that in Google AdWord Program distribution agreement dated 12.12.2005, the GIPL was granted the marketing and distribution rights of AdWord Program to the advertisers in India. The amount credited by GIPL to the account of GIL could constitute sum chargeable under the provisions of the Act as the payment is in the nature of royalty for the purpose of licence to use intellectual property rights.

38. Mr. Arvind has further contended that the AO has considered the judgment of the Madras High Court in the case of Consine IndiaPvt. LTd., Vs. Google India Pvt. Ltd., dated 30.09.2010 in which the concept of search engine and its operation was explained, while adjudicating the issue of nature of payment made by GIPL to GIL. It was further contended that as per clause 2.6 of the AdWord Program Distribution Agreement, the distributor (GIPL) will provide after sales services to advertisers in accordance with broad instructions, training and standards of Google. Clause 3.1 of the AdWord agreement further provides for Google Ireland (GIL) to provide advertising space through the AdWord Programme for distribution by the distributor i.e., GIPL/Appellant to advertisers as set forth therein. As per clause 3.4, GILagrees to provide minimum level of service as specified in exhibit “C”. As per exhibit “C” all advertiser shall be instructed by the distributor to contact distributor directly for support and not to communicate directly with the GIL. Mr. Arvind has further invited our attention to clause 7 of the Agreement according to which disclosure of confidential and/or proprietary information disclosed hereunder, including the user data (including any aggregated user data), the existence and content of this agreement, and any information provided pursuant to this agreement shall be governed by the Google standard mutual non-Disclosure Agreement executed by the parties prior to or concurrently with this agreement. He further invited our attention to clause 8 of the agreement, according to which the distributor shall maintain all user data in accordance with the local laws and regulation applicable to such data and shall implement policies and procedures with respect to user data that are atleast as protective of the rights of the advertisers as is provided in the Google Privacy Policy set forth and all relevant policies employed therein.

39. The learned Standing Counsel further invited our attention to Services Agreement dated 01.04.2004 with the submission that from the reading of the Services Agreement it is clear that GIPL has been provided with confidential information as referred to in clause 1.2 of the Services Agreement and as per clause 3.3, the GIPL shall perform the services only for Google Ireland or its affiliates and consequently it shall not render any similar services to any other person. It was further contended that as per clause 6.1 of Service Agreement, the GIL will disclose certain confidential information to Google India solely to permit Google India to perform its  bligations under the agreement. It was also stipulated in the Service Agreement that the Appellant agrees that such confidential information shall be kept secret by the Appellant during the term of the Agreement and as per clause 12.5, on termination of the service Agreement, Google India shall discontinue using of confidential information, documentation, intellectual property and the software technology and shall have no further rights with respect thereto. On termination, the Appellant shall immediately return to Google Ireland or destroy all copies of confidential information, documentation and the software embodiments in its possession or control. Upon termination of this agreement, GIL will have the option in its sole discretion of “(1) electing at any time to fulfil any unfinished service itself or by contracting with other affiliates or third parties and / or (ii) permitting Google India to continue to provide any unfinished services and continue to use confidential information/documentation, intellectual property and the software to the extent necessary to provide such services pursuant to the limited licence agreement to be entered into between Google Ireland and
Google India, following such termination or expiration.

40. The learned Standing Counsel further contended that from the reading of all clauses of the service agreement in conjunction with Google AdWord Program Distribution Agreement, it is clear beyond doubt that Google India has been provided with thelicence to use IP for which Google India has agreed to make certain payments to Google Ireland and same is in the nature of royalty, as per provisions of section 9(1)(vi) of the Act read with DTAA. It was further contended that Google Ireland is allowing Google India to access all intellectual properties and confidential information and the same is being used by the Appellant (Google India) for the activities related to distribution agreement. The obligation/distribution of the services agreement would make it clear that both the documents cannot be separated from each other and are to be read together. Therefore, for the purpose of marketing and distribution activities, Google India is granted the right to use the valuable business asset of Google Ireland, which includes intellectual Property
in the products and services offered by GIL.

41. The ld. Counsel for the Revenue, Mr. Aravind, has further contended that contention of the assessee that Adwords Distribution agreement dated 12.12.2005 is entered into by the marketing & distribution services for Adwords program division and the service agreement dated 01.04.2004 is entered into by ITES division and they are not interrelated, cannot be accepted. It is an admitted position that the appellant has an obligation to the advertiser to provide pre-sales and post-sales services and the pre-sale and post-sale services can only be provided through ITES division of the appellant with access to the database and the confidential information owned by Google Ireland and licenced to Google India, the appellant. In view of the agreement being entered by Google India with Google Ireland either on 12.12.2005 or on 01.04.2004 for the same purpose, the division of services by Google India by different divisions does not take away the impact of reading of both the agreements together, therefore both the agreements are inseparable. By reading of the obligations of Google India in both the agreements, it makes it clear that both the agreements has to be read together and cannot be acted upon independent of each other. Hence the contention of the assessee that both the agreements are different is an after-thought and liable to rejected.

42. It was further submitted by Mr. Arvind that IP of Google resides in search engine technology, associated software and other features and hence right to use for performing various activities like accepting advertisements and providing after sales services would clearly fall within the ambit of “Royalty”. As per the terms of the distribution agreement, the appellant has been authorized to sell or offer for sale the Adword program to the advertisers which is nothing but granting of licence to appellant to sell or offer for sale to advertisers with certain rights. By acquiring the distribution and marketing rights, the appellant has been granted licence in respect of Adword’s program to sell or offer for sale certain rights to the advertisrs and such rights or the right to use the Adword program. Therefore, the licence to use the Adword program by the copyright holder is licenced to market and sell the Adword program. The licence to use the adword program (search engine) which is copyrighted by Google would amount to right to use the copyright.

43. Mr. Aravind further placed reliance upon the judgment of the jurisdictional High Court in the case of CIT v. Synopsis International Ltd. (2013) 2012 Taxman 454, CIT& Anr. V. Samsung Electronics Ltd., & Ors. 345 ITR 494, CIT v. CGI Information Systems and Management Consultants Pvt. Ltd., (2014) 226 Taxman 319 (Kar) and AAR judgment No.985/2010 dated 28.07.2015 in Skillsoft of Ireland Ltd., the order of the Bangalore Bench of the Tribunal in the case of Vodafone South Ltd. v. DDIT(IT) (2015) 53 taxmann.com 441 (Bang. Trib.) and ABB FZ-LCC (2017) 83 taxmann.com 86 (Bang. ITAT) in support of his contention that the amount paid towards licence to use IPR is in the nature of royalty and chargeable under section195 of the Act.

44. It was further contended that licence to sell presupposes licence being granted to the distributor (Google India) and licence to sell enables Google India to transaction the licence/right to use the Adword program. Therefore the consideration paid is for the licence to enable Google India to resell the licence/right to use to the advertisers would amount to payment of a royalty, because without licence if sale of advertisement space to the advertiser by the appellant in the search engine of Google, which is an IP would amount to infringement of the rights being enjoyed by Google Ireland.

45. The ld. Standing counsel Mr. Arvind further contended that under the distribution agreement, the appellant has been granted the right to use trademarks and brand features for the purpose of selling the advertisement space and the licence to use the IP being tool of the trade for the appellant, right to use Google trademarks and brand features without any ambiguity, would amount to licence to use IP and the consideration for its use constitutes royalty chargeable u/s. 195 of the Act.

46. It was further contended that under the distribution agreement, the appellant has been granted the distribution right involving the transfer of rights in process. The entire search engine technology on which licence has been granted to Google India for selling advertisement space to the advertisers is a “process” and the search engine technology is an IP. Hence consequential payment for the licence to use the process being an IP is royalty. In view of clause 3.1 of the distribution agreement, the appellant was granted transfer of know-how and has also been provided access to internal tools for performing the obligations under the Adword agreement. The statements recorded from the persons concerned of the Google India which is reproduced by the AO in his order, would make it clear that marketing, distribution and maintenance of the Adword program is a responsibility of Google India involving knowledge of tools and training on its usage, knowledge of trademark policy, add content policy, access to database and access to confidential information. Such knowledge has been imparted through extensive training by Google Ireland to the appellant which would amount to transfer of know-how and liable for tax u/s. 9(1)(vi) of the Act as royalty.

47. The ld. Standing counsel further invited our attention to nondisclosure agreement which is Exhibit-B of the distribution agreement with the submission that it clearly demonstrates that by virtue of the disclosure of the confidential information and access provided to the confidential information to the appellant by Google Ireland, the sums payable by Google India to Google Ireland is for information, know-how and skill imparted to Google India, i.e., the appellant. It was further contended that grant of distribution rights involves use of industrial, commercial and scientific equipment. Adword platform is similar to portal running on servers and Adword’s platform is based on search engine technology of Google. Hence Adword program is commercial and scientific equipment and without having access to the servers running on the Adword platform, the appellant cannot perform its functions/exploit its rights as per the distribution agreement. Hence the distribution rights includes the right to use the industrial, commercial and scientific equipment which are the servers. He further placed reliance upon the judgment of the AAR in the case of Cargo Community Network Ltd., 159 Taxman 243 in which it has been held that portal and server together constitute integrated commercial and scientific equipment and for obtaining internet access to airlines, the use of portal without server is unthinkable. Therefore it is a irresistible conclusion that payment for concurrent access to utilize the sophisticated services offered by the portal would be covered by the expression “royalty”.

48. The ld. Standing counsel further contended that though the above aspect has not been agreed by the CIT(Appeals), the reasons and the findings recorded by the AO could be relevant for considering the matter under the remaining heads like know-how, trademark and process. It was further contended that from a reading of the definition of royalty under the DTAA, it is clear that the amounts paid by Google India under the distribution agreement is towards royalty.

49. Mr. Arvind further placed a reliance upon the judgment of Hon’ble Madras High Court in the case of Verizon Communications Singapore Private Ltd. v. ITO, 361 ITR 575 in which it has been held that payment for licence to use the IPR amounts to a royalty. Reliance was also placed upon the judgment of AAR in the case of Citrix Systems Asia-Pacific Pvt. Ltd., 343 ITR 1 wherein it was held that payment from distribution for sale/licensing of software product which is copyrighted amounts to licence to use the IPR and is liable for tax under the Act as well as the DTAA as royalty. Further reliance was also placed upon the judgment of AAR in the case of Cargo Community Network Ltd. reported at 289 ITR 355 in which it was held that portal is a scientific equipment and amounts paid towards right to use in industrial, commercial and scientific equipment would be covered by the expression royalty under the Act as well as the DTAA. He further placed reliance upon the order of the Delhi Bench of the Tribunal in the case of Gracemac Corporation v. ADIT (2010)41 DTR 65 in which it was held that licence to use the copyright would fall within the ambit of royalty under the Act as well as the DTAA.

50. The ld. Standing counsel further invited our attention to the documents relating to functioning of Google Adword program from pages 416 to 528 of the Paper book filed by the appellant through which the assessee has tried to explain the functions of Google Adword program, with the submission that from the reading of the relevant material filed before the Tribunal, it is clear that the appellant has provided the following services in brief to the advertisers:-

a. Display network tab

b. Toolbar

c. Placement tool

d. Keyword Targeting

e. Location and Language Targeting(Target Entire country, target Metro areas, countries or cities, target a radius around the location)

f. Device Targeting

g. Contextual Targeting

h. Topic Targeting

i. Audience Targeting

j. Gender Targeting

k. Age-group Targeting

l. Manual and Automatic Bidding

m. Billing Information and backup credit card payment

n. Budget Targeting

51. These services cannot be provided without there being a licence or access to IPR and database. He further invited our attention to the agreement entered into with theappellant and customer/advertiser, according to which, the appellant has retained the option of accepting/rejecting the advertisement, continuation/termination of the advertisement and also the nature of billing system. This would demonstrate further access to the IPR which would amount to use the licence to use and the payment is in the nature of royalty.

52. The ld. Standing counsel further invited our attention to the statements of Shri Arijit Sarkar and Shri Vikas Agnihotri, who made it clear that the appellant was provided access to the tools which are in the nature of IPR for providing services in pursuance to the agreement by Google India with Google Ireland and the advertisers. It was further contended that Google India is providing AdSense services and generating revenue by utilizing licence to use IPR and hence payment for such use is royalty. He further invited our attention to the statements made by the assessee before the TPO dated 5.2.2013, copy of the same is placed at page 56 of paper book filed by the revenue, wherein the assessee has admitted that data processing work and review of the advertisement as per the editorial guidelines is carried out by the appellant. These services cannot be rendered by the appellant without licence/access to database/IPRs.

53. The ld. Standing counsel further invited our attention to the book of ‘Learning Google Adwords and Google Analytics’ authored by Benjamin Goldman with the submission that Mr. Benjamin Goldman was a co-founder & CEO at Loves Data and was the first trainer certified by Google both for Google Adwords and Google Analytics. As per the opinion of the author which can be considered an expert opinion, Google India in pursuance of distribution agreement and Adword sale agreement with the advertiser would be rendering the following services:-

a. Display Keyword Targeting

b. Placement Targeting.

c. Topic Targeting.

d. Interest Categories.

e. Remarketing.

f. Gender Targeting.

g. Age Targeting.

h. Parent Status Targeting.

i. Display Campaign Optimiser

j. Location Targeting, Network Targeting

k. Physical Location Targeting

l. Schedule Targeting

m. YouTube Targeting

n. Device Targeting

o. AdSense

54. He further invited our attention to the reply of the assessee dated 28.01.2013 filed before the TPO for the AY 2009-10 in which it has been clearly admitted that the payment for rendering ITES (pre and post sale services) are on the basis of the percentage of distribution fee from India. The above aspect further makes it clear that distribution agreement and the service agreement is interdependent and has to be read together and inseparable.

55. The ld. Standing counsel further contended that in view of the above position, it is clear that licence granted by Google Ireland in favour of the appellant is for exploitation of the search enginge being IPR and the IPR has been used by the appellant as tool of the trade and hence payment is in the nature of royalty liable to tax under the Act as well as the DTAA.

56. It was further contended that judgments relied upon by the assessee in the case of Right Florist Pvt. Ltd. (supra) is not applicable to the facts and circumstances of the case as in that case the advertisers had only placed advertisement in the search engine and no right in the IPR was conferred on the advertisers. Similar is the position with the judgment of Yahoo India (supra) on which heavy reliance is placed by the assessee. In that case the transaction does not involve licence to use any IPRs and no access to the server. The payment is only commission for procuring advertisement, whereas in the present case right from review of the ad, acceptance of the ad and uploading the same including the post sale services are being provided by the appellantand without involving use or right to use IPR the said obligation cannot be performed. Similar is the position with the decision of Pinstorm Technologies Pvt. Ltd. and Set India Pvt. Ltd. (supra). In those cases, the facts are entirely different as nowhere the assessee either involved to provide post sales service or licence to use the IPRs. Therfore, the judgments cannot be relied in favour of the assessee.

57. In so far as the reference made by the assessee to High Power Committee dated 16.12.1999 and Tax Treaty dated 01.02.2001, it was contended that payment by the advertiser directly to the owner of the search engine could not amount to royalty and there is no dispute on these facts, but the facts of the impugned cases are entirely different.

58. With regard to taxability of royalty as per DTAA, the ld. Standing counsel has contended that language of definition of royalty in DTAA does not suggest that amount paid to Google Ireland is taxable in the year of receipt and hence no obligation to deduct tax at source on credit basis. Section 195(1) of the Act imposes obligation on the assessee to deduct tax at source in respect of payment made to non-resident where the sum is chargeable under the provisions of the Act. It is held by the Apex Court in the case of GE India reported at (2010) 193 Taxman 234 (SC) and Ellie Lilly reported at (2009)178 Taxman 505 (SC) that provisions of section 195 has to be read along with charging provisions i.e., section 4, 5, 9 & 90 of the Act. On conjoint reading of the above provisions, it is clear that the amounts paid by the assessee to Google Ireland are chargeable under the Act on accrual basis. Hence contention of assessee that amount is chargeable in the hands of Google Ireland on receipt basis is misplaced.

59. It was further contended that if the language of definition of royalty under DTAA with Ireland under article 12(3)(a) is read, the wordings of the term “royalties” as used in this article means payment of any kind received as consideration for the use …..” would clearly and unambiguously makes it clear that payment received as consideration for the use would alone be considered as royalty. The words “payments of any kind received as a consideration for the use of” has to be read together and it would only mean the classification of the income and not the method of accounting. Hence the contention of the assessee is misplaced.

60. The ld. Standing counsel further invited our attention to the fact that the assessee has provided IT services IT enabled services to Google Ireland in addition to marketing and distribution services for the adverts program. The assessee will be receiving amounts for IT services and IT enabled services from Google Ireland according to services agreement and assessee will be paying Google Ireland in view of the marketing and distribution services for Adword program. It is an undisputed fact that the assessee is wholly owned subsidiary of Google. In view of the close connection between Google India and Google Ireland, the payments to be received by the assessee for IT services and IT enabled services from GIL can be adjusted towards payment made to GIL towards marketing and distribution services for Adword program.The fact that the assessee has not reflected the amounts paid to Google Ireland in the P&L account would further justify the above aspect.

61. In the above context if the language employed in article 12(3)(a) of the DTAA specifically with the words “means payment of any kind received” would mean the receipt of amount by virtue of adjustment/set off in the books of account of the assessee. Further “payment of any kind received” has to be read as any mode of payment either by book adjustment/credit or actual payment. Any other meaning would read the language redundant in view of the provisons of section 4, 5, 9, 90 & 195 of the Act. The DTAA does not determine the method of accounting and the year of taxability in respect of parties to the agreement. What the DTAA provides for is the extent of taxability of income and the percentage of the tax on the income liable for tax and the distribution of tax among the countries party to the DTAA. Hence the language employed in defining the meaning of royalty cannot be read to mean the method of accounting. The DTAA does not deal with the year of taxability or the method of accounting of either parties. The only section which has imposed obligation on the assessee is section 195(1) of the Act which obligates the assessee to deduct tax at source in respect of the income chargeable under the Act. The section does not empower the payer to examine the applicability of the DTAA to the payee. The language of section 90(2) of the Act makes it very clear beyond any doubt that option to exercise the benefit of either the Act or the DTAA is conferred on the non-resident. Hence at the stage of payment without there being any indication by the recipient, the payer cannot step into the shoes of recipient to exercise the option provided u/s. 90(2) and claim the benefit of DTAA. Therefore the contention of the assessee that receipt in the hands of Google Ireland is liable to be taxed on cash basis is completely baseless, also for the reason that Google Ireland itself has filed return of income for the AY 2007-08 and 2008-09 and has declared its method followed for accounting as mercantile system of accounting. It was further contended that in the case of Vodafone South Ltd., the Tribunal has categorically held that applicability of DTAA is not automatic and what is to be considered at the time of payment by the assessee is only regarding the chargeability of income under the Act and the assessee cannot be permitted to take shelter under the DTAA as the benefit of DTAA is conferred only on the non-resident recipient. He further placed reliance upon the judgment of the Apex Court in the case of Standard Triumph Motor, 201 ITR 391 wherein it has been held that method of accounting adopted by the recipient is irrelevant and credit in the books of account of the payer is sufficient to attract taxability. He also placed reliance upon the judgment of the Apex Court in the case of Palam Gas Service V. CIT reported at (2017) 81 taxmann.com 43 (SC).

62. The judgments relied upon by the assessee in support of his contention in the case of Siemens, Booz Allen, National Organic Chemicals, Pizza Hut, CSC Technology and Saira Asia are not applicable to the present case as the scope of section 90(2) of the Act and the effect of charging provisions of section 4, 5 & 9 have not been examined. In the absence of any authority in favour of the assessee, the assessee cannot presume that the non-resident would be claiming benefit under the DTAA.

63. If the terms of the payment as agreed between the parties is examined, it is clear that on periodic intervals the amounts are liable to be paid and in the light of these facts, the contention of the assessee are contrary to the claim that amount is taxable in the hands of the non-resident on receipt basis. He further placed heavy reliance upon the judgment of the Apex Court in the case of Vodafone International Holdings BV, 341 ITR 1 (SC) at para 67 & 68 with the submission that in order to examine the real transaction, the corporate veil is required to be lifted. If the agreement entered into between the assessee and Google Ireland is examined by bearing in mind the subsidiary relationship between the two, especially to Exhibit-A dealing with the payment terms &  conditions at para 6.1, distributor has to make the payments at mutually agreed intervals during the year and the final payment to be on the basis of duly audited accounts. Further as per clause 1 of the said terms & conditions, the payment is on the percentage agreed upon on the basis of the books of accounts of the distributor maintained in accordance with the Accounting Standards. In view of the above aspects, if the corporate veil is lifted and transactions are examined, it is clear that the contention of the assessee that liability to deduct tax at source would arise in the year of payment is contrary to the scheme of the Act and also to the agreements entered into by Google India with Google Ireland. In view of the above, the non-payment to Google Ireland by Google India utmost would be deferment of payment in view of the close relationship and will not have any bearing on the taxability in the year of accrual.

64. With regard to incidental use of trademark, the ld. Standing counsel has contended that the assessee has acquired a right under distribution agreement to sell the space in the search engine which is an IPR including the trademark. The assessee is using the distribution agreement coupled with IPR as tool of the trade and hence payment towards use of trademark is also in the nature of royalty and liable to tax under the Act as well as the DTAA.

65. With regard to judgment of the Hon’ble Delhi High Court in the case of Sheraton International 313 ITR 267, Formula One World Championship (2016) 76 taxmann.com 6 (Del) and the other judgments referred to by the assessee, the ld. Standing counsel has submitted that in those cases the main services provided was for the advertisement and no licence to use the IPR was involved, whereas in the present case, the use of IPR is involved. Therefore, the Hon’ble Court has held that use of trademark was incidental to the main purpose of the agreement which was referred to as advertisement, publicity and sales promotion, whereas in the instant case, the assessee was selling the Adword space to the advertisers with the use of IPRs for the said purpose.

66. With regard to equalization levy, the ld. Standing counsel has submitted that section 164 and 165 are introduced by Finance Act, 2016. The Parliament has proposed the equalization levy on the amount to be paid to the non-resident on digital advertising space and the same has to be considered as business income. First of all, the amendments are not applicable for the AY 2013-14 as the same are prospective. The equalization levy does not determine the classification of payment between royalty and business income. Equalisation levy is only a charge on the payment made towards digital advertisement space by the advertisers.

67. With regard to the affidavit filed by the assessee explaining the functioning of the Google Adword program, the ld. Standing counsel has submitted that it is mere repetition of the statements made before the lower authorities. The assessee has not come out with a specific functioning of the Google Adword program. Therefore, the functioning of Google Adword program can be ascertained from the relevant material placed during the course of hearing of these appeals.

68. The ld. Standing counsel further contended that in the light of the detailed evidence on record, the nature of payment under the distribution agreement and the service agreement is a royalty and the AO has rightly held the assessee to be in default on non-deduction of tax on such payments.

69. With regard to the contentions of the bonafide belief for non-deduction of TDS, the learned Standing Counsel has contended that the assessee has divided the entire AdWord Program into two agreements 1) Distributor Agreement and 2) Service Agreement, knowing fully well that the payment made under the AdWord Program on account of use of technology, access to IPRs, intangibles, derivative works as per the agreement, is a payment of royalty to GIL for which assessee / appellant is required to deduct the TDS. Therefore, it cannot be said that appellant was under a bonafide belief that he was not liable to deduct the TDS on such payment to GIL as it is a business profit in his hands.

70. In rebuttal, the ld. Counsel for the assessee, Mr. Percy Pardiwalla, has contended that the contentions of the revenue rather substantiate the averments of the appellant that nature of receipts are in the hands of non-resident was business income and in the  absence of any determination of Permanent Establishment of the non-resident in India in the order of the AO, there was no question of applicability of section 195 and consequently section 201 of the Act. For the AYs 2017-18 and 2018-19, the department has taken a position that equalization levy is applicable on payments made by the appellant to non-resident for the purchase of online advertising space. All these views undertaken by the department reflect the confusion with the department’s logic to bring to tax receipts under dispute to tax in India and are thus devoid of any merit. It was further contended that Adword is a registered trademark in the name of Google Inc., the Adword program is an auction based advertising program that lets advertisers deliver relevant advertisement targeting to such queries on web content across Google site and through the Google network. To clarify, Google Adword programmit was contended that there are following 5 parties involved as far as transaction involving Indian advertisers are concerned:-

1. Google Inc. USA – The program owner of the Adword and legal owner of Google web properties like Google search eninge.

2. GIL has got licence to exploit rates in Google web properties and commercially exploit Google Adword program globally, except America’s region.

3. GIPL – The appellant has got distribution rights under distribution agreement to sell online advertisement space to advertisers in India.

4. The advertisers and business owner wanting to advertise its product or services; and

5. The viewer/user who views the advertisement while using Google web properties like search engine.

71. The Indian advertiser who enters into contract with the appellant has to pay the appellant an amount fixed by the advertiser for every click the viewer makes on its advertisement.

72. With regard to the judgments of the jurisdictional High Court referred to by the revenue, the ld. Sr. Consel, Mr. Pardiwalla has contended that use of software necessarily results in payment of royalty is distinguishable because in all those cases, what was being examined by the Hon’ble High Court was taxability of the payment made by *shrinkwrap software and has no relevance or bearing on the issue at hand. Thus reliance placed on the decision does not support the case of the revenue. Nowhere the appellant has been granted licence to use the software. The ld. Counsel reiterated his contentions that ITES segment was set up in the year 2004 for providing back office support services which include ad review and review of the advertisement process is automatic process and the systems itself directs any flagged advertisement for manual review. There is no human intervention in the selection process as to where ad will get reviewed since, there are multiple locations providing this review. These ad review services are provided to GIL not to the advertisers. The ld. Counsel further contended that the argument of the revenue that right to modify the ads is not possible without the licence to use IPR is clearly baseless because the whole process of the advertising is that the advertiser chooses the keywords, form of advertisements, advertising contents that is reflective of the business to be advertised. Under the terms & conditions of the contract between the advertisers and the appellant, the advertisers grant all the intellectual property rights inherent in such advertisement whether a form or content of the appellant for which no consideration is paid by the appellant to the advertiser. Be that as it may, it is neither relevant nor determinative of the issue at hand i.e., payment made by the appellant to GIL.

73. With regard to the contention of the department that Google India has right to use Google brand features and therefore the payment made by the appellant is in the nature of royalty, the ld. Counsel for the assessee has submitted that the argument of the department is contrary to the precedent set by the Hon’ble High Court of Delhi in the case of Formula One World Championship (2016) 76 taxmann.com 6 (Del) and DIT Vs. Sheraton International Inc. 313 ITR 267 wherein the Hon’ble Delhi High Court has held that use of intellectual property that is incidental to the main purpose of agreement does not enable the payment made thereof to qualify under the definition of royalty under the Act or DTAA. It was further contended that use of Google brand feature is probably the only intellectual property granted to the appellant under distribution agreement, however, the same has been granted to the appellant for the purpose of appellant achieving its obligation under the said agreement. Therefore, use of Google brand feature under distribution agreement would not render payment of royalty under the Act or under India-Ireland DTAA in the light of judgments of Formula One World Championship (supra) and Sheraton International Inc. (supra).

74. With regard to contentions of the revenue that GIPL has access to database of GIL, the ld. Counsel has submitted that the appellant has no access to database of Google and in support thereof, he placed some documents to demonstrate that wherever investigating agencies have sought information regarding user of such products, the appellant has maintained a position of not being able to comply with such requests as it does not have such access. It is only GIL or Google Inc. USA which can comply with such requests. Therefore, the averment of the revenue is completely unsupported and factually incorrect.

75. The ld. Counsel for the assessee has also placed reliance upon the commentaries of The Organisation for Economic Co-operation and Development (OECD) and UN model as a guide for interpretation of treaty with the submission that this OECD commentary has been relied upon on by the Hon’ble Supreme Court and the various High Courts while deciding a number of cases. The OECD has set up a Technical Advisory Group (TAG) to examine the issue arising in characterization of e-commerce payment. TAG has categorizede-commerce transaction into 28 types including internet advertising. TAG has concluded that payment arising from the advertisement would constitute business profits falling under Article 7 rather than royalties. He also further placed reliance upon the High Power Committee report on ‘Electronics, Commerce and Taxation’ constituted by CBDT vide order dated 16.12.1999, wherein and the Committee has also held that payment arising from the advertisement would constitute profits and gains from the business or profession.

76. It was further contended that prior to introduction of equalization levy, the amounts receivable by non-residents was considered to be business income and not taxable in India in the absence of Permanent Establishment in India. Considering the growth of the online advertisement industry and in line with OECD’s Action Plan-1 of the base erosion and proper shifting, the Govt. introduced equalization levy to tax the receipt which was not subject to tax in India in the absence of Permanent Establishment. The Memorandum of Finance Bill, 2016 proposed to insert a new chapter titled ‘Equalisation Levy’ in the Finance Bill. 2016 to provide for equalization levy of 6% of the amount of consideration for specified services received or receivable by the non-resident not having Permanent Establishment in India from a resident in India who carries out business or profession or form non-resident having Permanent Establishment in India.

77. The ld. Counsel for the assessee further contended that grant of distribution right in Adword program does not involve transfer of right in copyright. The appellant is a mere non-exclusive distributor or reseller of ad space through the Adword programe in India. The appellant merely purchases the advertisement space under the Adword program from GIL and distribute the same to advertisers in India. He quoted an example by saying that for advertisements in other mediums like newspaper magazine, the customer approaches an advertisement agency to have the advertisement public in one or more newspaper. The advertisement agency in turn approaches the respective newspaper entity or an entity that has bought media space for publishing of the advertisement of their customers. The consideration paid by the customer to advertisement agencies is in the nature of advertisement fees and the consideration paid by the advertisement agencies to the respective newspaper entity is also in the nature of advertisement fees, inspite of the fact that the advertisement may be displayed by considerable use of technology. Similarly, in the instant case, the consideration received by the appellant from the advertisers in India is in the nature of advertisement fees and consideration paid by the appellant to Google Ireland for purchase of advertisement space is also in the nature of advertisement fees, even though the advertisement would be displayed as a consequence of use of technology.

78. It was further contended that Adword program is not a computer program, but a title givento the facility/services provided by Google to the advertisers to advertise their products/services by displaying links/contents on the Google search engine. In fact Adword is a trademark registered by Google Inc. and not a copyright patent. The AO has placed reliance on the description of Adword program in Wikipedia and other articles appearing in worldwide web to hold Adword is complex computer program. The Hon’ble Supreme Court in various cases has observed that the information on Wikipedia can be entered by any person, as such it may not be authority and accordingly should not be relied upon for judicial decisions. Therefore the information available on Wikipedia should not be taken into account. The present non-exclusive right to distribute the ad space is a commercial space and not an intellectual property right, therefore the provisions of IT Enabled Services by the appellant is independent of the distribution/reseller of advertisement space under the Adword program by the appellant to advertisers in India. ITES division of the appellant is a separate outsourcing business segment for which it earns revenue under a separate outsourcing service agreement with GIL. The appellant was providing ITES services prior to the commencement of the distribution or resale activities. Further the amount receivable under the service agreement is not set off against the amount payable by the company under the distribution/resale agreement. Role of distribution/reseller function is limited to distribution/resale activities, whereas ITES performed functions inter alia are to ensure the advertisement placed by advertiser globally in conformity with the Google editorial guidelines/local Government regulations of the country, from where ad is to be displayed. These ad review services are not provided to the advertisers since the responsibility is of the appellantthat ads do not violate Government regulation in the web platform operator i.e., Google Ireland. There is no professional interaction between the distribution team and the ITES team since these are separate functions performed independent of each other. In fact they operate from separate location. ITES division operates out of units situated at Hyderabad and Gurgaon, whilstthe  istribution division operates out of Mumbai and Gurgaon. It was further contended that even under ITES agreement, only limited rights to use intellectual property of Google Ireland is granted to the appellant i.e., to carry out only specific services under the said agreement. Under the ITES agreement, there are no rights that are granted to Google India for commercial exploitation of such intellectual property. Under the ITES segment, providing such limited right to use intellectual property to Google Ireland is entered in April 1, 2004 which is much before the agreement for Adword program on 12.12.2005. The ld. Counsel for the assessee has further quoted example of Indian distributor of luxury car.

79. With regard to the judgments referred to by the revenue, the ld. Counsel for the assessee has contended that all the judgments are distinguishable on facts, therefore they cannot be relied on.

80. The ld. Counsel for the assessee further contended that since the lower authorities have not examined the issue in the light of various judicial pronouncements, the order of the CIT(Appeals) deserves to be set aside.

81. Having carefully examined the orders of lower authorities in the light of rival submissions and the material available on record, we find that in these appeals, the sole controversy revolves around an issue as to what is the nature of payment made by the appellant to Google Ireland Ltd. under the Google Adworddistribution/reseller agreement. The AO has examined the distribution/ reseller agreement along with the service agreement executed between the appellant and GIL in order to arrive at a conclusion with regard to the nature of payment made by the appellant to GIL. Therefore it has become necessary for us to adjudicate as to whether the distribution/ reseller agreement and service agreements are two independent and separable agreements or they are interconnected and interdependent agreements, without which the obligation under the distributor agreement cannot be discharged. Therefore we have to examine both the agreements minutely.

82. Undisputedly the service agreement was executed between the appellant and GIL on 01.04.2004 under which the appellant was required to render ITES services for GIL. Under the service agreement, GIL desired to avail services relating to information technology, information technology enabled services and software development related services from the appellant as per terms & conditions of this agreement. Under the head ‘Services’, the appellant agreed to perform certain information technology enabled services and software development services as requested by GIL from time to time with respect to products, utilizing GIL software technology and other appropriate technology from GIL or third parties which may be properly used for this purposes.

83. Under the head ‘Ownership’, the intellectual property shall be owned by GIL and Google India acknowledges and agrees that all such confidential information, intellectual property, software technology and documentation shall remain the exclusive property of Google Ireland. Similar is the position with regard to derivative works and software embodiment. The Google India, the appellant shall keep Google Ireland primarily informed of Google India developments of any derivative works works and software embodiment and hereby irrevocably agrees that such determinative networks and software embodiment shall be the sole and exclusive property of Google Ireland throughout the world from the date of its creation. From time to time promptly upon receipt of Google Ireland’s request, Google India shall provide Google Ireland with assignments, in substantiallythe form of Exhibit-B hereto, facilitate Google Ireland’sperfection of its rights in derivative works works and software embodiment in its jurisdiction in the world.

84. It is also noticed from the agreement that under the head ‘Confidential information’, during the course of performance of the agreement, Google Ireland will disclose certain confidential information to Google India, the appellant, solely to permit the appellant to perform its obligation under this agreement. Except as otherwise provided in this agreement, Google India agrees that such confidential information shall be kept secret by Google India during the term of agreement and Google India shall not disclose or facilitate disclosure of such confidential information to any person without the prior consent of Google Ireland. Upon Google Ireland’s request or upon termination of the agreement, all files, loose records, documents, drawings, specifications, equipment and computer programs which incorporate or refer to all or portion of the confidential information shall be promptly returned to Google Ireland. Upon termination of the agreement, Google India shall discontinue all use of confidential information, derivative works works and software embodiment, intellectual property and other software technology and shall have no further rights in respect thereto. The appellant shall immediately return to Google Ireland or to destroy all copies of confidential information, derivative works works and software embodiment in its possession or control. Meaning thereby the appellant has an access to the intellectual properties, confidential information, derivative works works and software embodiments and the software technologies of the GIL under the service agreement.

For the sake of reference, we extract the relevant clauses of Services agreement as under:-

“THIS SERVICES AGREEMENT (“Agreement”) is entered into as of 1st April ,2004 (the “Effective Date”), by and between Google Ireland Limited, a corporation organized under the laws of Ireland (‘ Ireland”) and having its office at Seagrave House, 19/20 Earlsfort Terrace, Dublin 02, Ireland, and Google Online India Private Limited, a company incorporated under the provisions of the Companies Act, 1956 and having its registered office at Prestige Sigma, 1st Floor, No. 3 Vittal Mallya Road, Bangalore 560001, India (‘Google India’) and having a branch office at RMZ Future, Block A, 4′” Floor Plot No. 14, Road No. 2, Hitec City Layout, Madhapur village, Ranga Reddy District, Hyderabad 500 081, Andhra Pradesh.

A. WHEREAS, Google Ireland is in the business of developing, licensing, selling, marketing and supporting certain Internet search, advertising system and information organization and management technology products_and services to provide information, advertising, search and related services via the Internet, corporate intranets and private networks (collectively, ‘Products”); and

B. WHEREAS, Google Ireland desires to avail services, relating to, information technology. Information technology enabled services and software development related services from Google India as per the terms and conditions of this Agreement; and

C WHEREAS, Google India has expertise in rendering the above services and is willing to render such services for Google Ireland as an independent contractor on the terms and conditions of this Agreement;

NOW. THEREFORE, in consideration of the mutual covenants and conditions contained herein.the parties agree as follows:

1. DEFINITIONS.

1.1 ‘Affiliate’ shall mean any Person, whether de Jure or de facto, that directly or indirectly participates in the capital, control or management of either party or is under common ownership with a party to this Agreement or other entity actually controlled by, controlling, or under common control with a party to this Agreement.

1.2 “Confidential Information’ shall mean all data and information of a confidential nature, Including know-how and trade secrets, relating to the business, the affairs, the products, the development or other projects or services of Google Ireland or its-suppliers or its affiliate, including but not limited to Intellectual Property. Confidential Information may be communicated orally, in writing, or in any other recorded, electronic or tangible form. Data and information shall be considered to be Confidential Information if (i) Google Ireland has marked them as such; (ii) Google Ireland, orally or in writing, has advised Google India of their confidential nature; or (iii) due to their character or nature, a reasonable person in a like position and under like circumstances would treat them as secret and confidential. Confidential Information does not -include information: (i) that is in the public domain through no fault of the receiving party, (ii) that was previously known by receiving party, as established by written records of the receiving party prior to receipt of such information from the providing party or (iii) that was lawfully obtained by the receiving party from a third party without any obligations of confidentiality to Google Ireland.

1.3 “Derivative works Work’ shall mean (i) for copyrightable or copyrighted material, any modification. derivative works work (as defined in 17 U.S.C. §101), translation, abridgment, revision or other form in which such material may be recast, transformed or adapted, (ii) for patentable or patented material, any improvement thereon, and (iii) for material protected by trade secret, any new material derived from such existing trade secret material, including new material which may be protected oy copyright, patent and/or trade secret.

1.4 ‘Documentation” shall mean any and all information, written or otherwise, provided by Goode Ireland to Google India describing the Intellectual Property or the Products and any updated, improved or modified version(s) of such materials, including information contained in published written materials, on magnetic media or communicated by electronic means.

1.5 “intellectual Property’ shall mean all intellectual, proprietary, and/or intangible property rights constituting, embodied in, pertaining to, used in or with respect to the business of Google Ireland, the Products, or the provision of related services and all tangible embodiments hereof, wherever located, including but not limited to the following: (i) all trademarks, trade names, service marks, logos or trade dress, including all registrations and applications therefor; (ii) all copyrights. Moral Rights (as defined below), and other rights in works of authorship including all registrations and applications therefor; (iii) all patents and patent applications. patentable Ideas, Inventions, innovations and improvements; (iv) all know-how and trade secrets; v) all design and code documentation, methodologies, processes, design information, design flows, encoding techniques, applications, product information, formulae, engineering specifications, technical data, testing procedures, drawings and techniques and other proprietary information and materials of any kind; (vi) all software programs in both source code and object code format, including all testing software and software tools; (vii) all documentation, records, databases, drafts, designs, codes, drawings and algorithms; and (viii) all confidential and proprietary information related to any of (i) through (vii) above. —

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1.10 “Software Embodiments” shall mean all designs, discoveries, inventions, Products, procedures, improvements, developments, drawings, notes, Documentation, information, materials, Intellectual Property and Derivative works Works made, conceived or developed by Google India alone or with others which result from or relate to the Services

1.11 “Software Technology” shall mean all Intellectual Property, Confidential Information, Documentation, Derivative works Works and other technical data used by Google Ireland that are required, used or appropriate for the design and development of Products, including the reproduction, use, testing, operation, maintenance and service of such Products.

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2. SERVICES

2.1 Request Google India hereby agrees to perform certain information technology, information technology enabled services and software development services, as requested by Google Ireland from time to time, with respect to Products, utilizing Google Ireland Software Technology and other appropriate technology from Google Ireland or third parties which may be properly used for these purposes. Google Ireland will specify the information technology, information technology enabled services and software development services to be_performed, the Products to be worked on or used, the time line for completion and the specific results to be achieved (the Services”).

2.2 Performance. Upon agreement between Google Ireland and Google India as to the Services and completion date for a particular Services project, Google India will perform the Services. Google India agrees to use commercialy reasonable efforts to perform the Services in a timely fashion and as described to it by Google Ireland. Google India may not subcontract work under this Agreement unless specifically and to the extent set forth in the Services. Google India shall, at all times, be responsible for work done by its subcontractors within the scope of this Agreement as it is for work done by its own employees. At the option of Google Ireland, Google India shall make Goggle Ireland a party to the agreements that Google India may execute with its subcontractors and Google Ireland shall have the right to pre-approve the terms and conditions of such agreements.

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5. OWNERSHIP.

5.1 Intellectual Property. Google India acknowledges the exclusive right, title and interest of Google Ireland and its licensors and/or suppliers in and to any and all Confidential Information, Intellectual Property, Software Technology and Documentation, and Google India will not at any time do or cause to be done any act or thing impairing or tending to impair any part of said right, title and interest. Google India acknowledgesand agrees that all such Confidential Information, Intellectual Property, Software Technology and Documentation shall remain the exclusive property of Google Ireland and, as applicable, its licensors and/or suppliers.

5.2 Ownership of Derivative works Works and Software Embodiments. Google India shall keep Google Ireland promptly informed of Google India’s development of any Derivative works Works and Software Embodiments and hereby irrevocably agrees that all such Derivative works Works and Software Embodiments shall forever be the sole and exclusive property of Google Ireland throughout the world from the date of its creation. As between Google Ireland and Google India no additional action shall be required to vest all right, title and ownership of such Derivative works Works and Software Embodiments in Google Ireland. Google India shall furnish to Google Ireland all such Derivative works Works and Software Embodiments developed by Google India as soon as they become available. From time to-time, promptly upon receipt of Google Ireland’s request, Google India shall provide Google Ireland with assignments, in substantially the form of Exhibit B hereto to facilitate Google Ireland’s perfection of its rights in the Derivative works Works and the Software Embodiments in any jurisdiction in the world. Google India shall also promptly make available to Google Ireland all Residuals. If Google India has any rights to Derivative works Works or Software Embodiments that cannot be assigned to Google Ireland under law, Google India hereby waives the enforcement of such rights; and if Google India has any rights which cannot be assigned or waived under law, Google India hereby grants to Google Ireland an exclusive, irrevocable, perpetual, worldwide, transferable, fully paid licence, with rights to sub licen.se and assign, to all such rights. Google India shall enter into agreements with its Representatives sufficient to permit Google India to make the foregoing grant of rights.

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6. CONFIDENTIAL INFORMATION.

6.1 Access and Use of Confidential Information. During the course of performance of this Agreement, Google Ireland will disclose certain Confidential Information to Google India solely to permit Google India to perform its obligations under this Agreement. Except as otherwise provided in this Agreement, Google India agrees that such Confidential Information shall be kept secret by Google India during the term of this agreement and after the expiration hereof. Google India shall refrain from using or exploiting any and all Confidential Information for any purposes or activities other than those contemplated in this Agreement.

6.2 Agreement Not to Disclose Confidential Information. Google India shall not disclose or facilitate disclosure of such Confidential Information to any Person without the prior consent of Google Ireland, except to its Representatives, and then only to the extent necessary for the performance of the activities contemplated by this Agreement. Google India shall cause each of its Representatives with access to the Confidential Information to enter into a nondisclosure agreement in a form approved by Google Ireland. Google India shall use the highest standard of care currently employed by any developer or distributor of high technology products in order to
avoid disclosure or misappropriation of such Confidential Information.

6.3 Ownership and Return of Confidential Information. All files, lists, records. documents, drawings, specifications, equipment and computer programs which incorporate or refer to all or a portion of the Confidential Information shall remain the sole property of Google Ireland or its licensors and suppliers. Such materials shall be promptly returned: (i) upon Google Ireland’s reasonable request, or (ii) in accordance with Section 12 upon termination of this Agreement, whichever is earlier.

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12.5 Rights and Duties on Termination.

(a) Upon termination or expiration of this Agreement.

(i) Google India shall have the right to retain any sums already paid by Google Ireland under this Agreement and Google Ireland shall pay all sums accrued, but not yet paid, that are due under this Agreement as of the date of such termination;

(ii) Google India shall discontinue all use of the Confidential Information, Documentation, Intellectual Property and other Software Technology and shall have no further right with respect thereto.

(iii) Google India shall (except as specified in subsection (b) below) immediately return to Google Ireland or (at Google Ireland’s request) destroy, all copies of the Confidential Information, Documentation and other Software Embodiments, in its possession or control. Google India hereby expressly waives and agrees not to assert any right of detention whatsoever with respect to the foregoing.”

85. The amended and restated Google Adword program distribution agreement was executed on 12.12.2005 between the appellant and Google Ireland through which the appellant was appointed as a Adword Program distributor. This distributor agreement was further renewed under different title of agreement i.e., Google Reseller agreement on 01.07.2012. Though nomenclature of agreement is changed, but the functions and obligations of the appellant almost remain the same. In distributor agreement the appellant was called as a ‘distributor’, and in reseller agreement the appellant was called a ‘reseller’. Besides change of nomenclature, the obligation upon the appellant remained the same. Therefore we discuss the clauses of distribution agreement in order to understand the Google Adword program and duties and obligations cast upon the appellant in discharge of its functions. In this distribution agreement, a reference was made that the GIL and distributor desire to terminate the prior agreement and further desired that this agreement supersedes and replace the prior agreement in its entirety. But before us, a copy of the prior agreement which was superseded by this agreement has not been filed. But this fact is clear that before this agreement, there was some other agreement under which the appellant was performing certain functions. Through this agreement, the appellant was appointed as non-exclusive authorized distributor of Google Adword program to advertisers in accordance with the terms & conditions set forth in this agreement. It has been clarified that distributor shall conduct its business for its own account, in its own name, and not as an agent, employee, partner or franchisee of Google i.e., Google Ireland. It was also made clear that distributor may not solicit business from and shall not distribute Adword program to (even if unsolicited) any entity that does not have a principal place of business within the territory, meaning thereby the appellant was appointed as distributor of Google Adword program to conduct its business relating to the said Google Adword program within the territory of India within the broad guidelines provided by Google with its reasonable commercial expertise, sale force and customer service infrastructure. Distributor shall perform its obligation hereunder in a professional and workman-like manner consistent with reasonably applicable industry standards and in accordance with this agreement. Distributor will distribute Adword program in accordance with the training provided by Google (GIL). Further, as per clause 2.3 under the head ‘Adword program Sign up process’, distributor shall be responsible for uploading of advertisers information that is required by Google
for participation in the Adword program. Under clause 2.5 distributor or the appellant shall conduct the business in a manner that reflects favourably at all times on the Adword program and on Google’s goodwill and reputation and agrees to adhere to minimum levels of service as specified in Exhibit-C and breach of this section will constitute material breach of this agreement. Under clause 2.6, distributor will provide after sales service to advertisers in accordance with the broad instructions, training and standards of Google.

86. Under the head ‘Google obligations’, Google agrees to provide advertising space through Adword program for distribution by distributor to advertisers as set forth herein. GIL has also agreed to train the distributor. Under the head ‘Reporting requirements’, Google will make available to distributors online information about advertisers activity on aggregate and individual basis which information shall contain include:-

1. Total number of keywords purchased by advertisers

2. Number of impressions of advertisersadvertisements delivered across Google network.

3. Number of clicks delivered at Google network for advertisers/advertisements.

4. Cost of click delivered across Google network for advertiser’sadvertisements.

87. The distributor must set up Adword program advertisement accounts in order to receive such online information. Google reserves the right, but has no obligation to send the report about advertisers activity directly to such advertiser. If the advertiser makes a request to distributor to receive user name and password to access such advertisers individual Adword program account activity, distributor will grant such request after approval from Google. Under the head ‘Brand feature’, Google grants to distributor or the appellant non-exclusive and non-sublicensable licence during the term to display google brand features solely for the purpose of distributor’s marketing and distributing Google Adword program under the terms and subject to the conditions set forth in this agreement. It is also made clear that distributor will submit all material of any kind containing the brand features of Google for written approval prior to release to the public. Furthermore, distributor agrees to adhere to Google’s then-current Brand features use guidelines and any content referenced or included therein.

88. Under the head ‘Confidentiality’, disclosure of confidential information or proprietary information disclosed herein include the user data (including any aggregated user data), the existence and content of this agreement and any information provided pursuant to this agreement shall be governed by Google Standard Mutual Non-Disclosure agreement executed by the parties prior to or  oncurrently with this agreement, according to which, each party acknowledges and agrees that it will obtain the other party’s prior written approval which shall include approval of any proposed text, before making any public announcement or communication, including, but not limited to any press release, online publishing or direct mailings concerning or related to the existence or terms of this agreement. It has been clarified that Google owns all right, title and interest in and to all information and data, including the user data collected by Google relating to advertisers in connection with the provisions of the Adword program. Distributor shall maintain all user data in accordance with the local law and regulation applicable to such data and shall implement policies and procedures with respect to user data, that are atleast as protective of the rights of the advertisers as is provided in the Google privacy policy set forth and all relevant policies implied therein. Upon termination or expiration of this agreement, all rights and licence granted by one party to other including but not limited to rights to use the other party’s brand features shall cease immediately and each party shall promptly return to the other party or destroy and certify the destruction of all confidential information as defined in the non-isclosure agreement and section 7 of this agreement of the other party. As per the terms & conditions, the distributor will make payment at mutually agreed intervals during the year and make the final trued-up payment on the basis of duly audited accounts to Google.

89. As per service level agreement which is Exhibit C to this agreement, the distributor shall be solely responsible for providing all customer service to advertisers according to the procedures and in compliance with the standards provided by Google. All advertisers shall be instructed by the distributor to contact distributor directly for support and not to communicate directly with Google (GIL). The distributor agrees that it shall provide atleast certain minimum level of services. As per the nondisclosure agreement, which is a part of distribution agreement, the party may disclose certain information, which it considers confidential and proprietary (confidential information) to other party including, but not limited to tangible, intangible, visual, electronics, present or future information such as:

(a) trade secret,

(b) financial information including pricing,

(c) technical information including research, development, procedure, algorithms, data, design and know-how,

(d) business information including operations, planning, marketing, interests and products;

(e) the terms of any agreement entered into between the parties and the discussions, negotiations and proposals related thereto; and

(f) information acquired during any facilities tours.

90. It was further contended that the party receiving confidential information ( a recipient) will only have a duty to protect confidential information disclosed to it by the other party. It was also further agreed that the recipient will use the confidential information only for the purpose described above i.e., business. The recipient will use the same degree of care, but no less than a reasonable degree of care, as the recipient uses with respect to its own information of a similar nature to protect the confidential information.

91. So far as the intellectual property rights are concerned, no party acquires any intellectual property rights under this agreement, except the limited rights necessary to carry out the purpose as specified under this agreement. This agreement is available in the Paper book filed by the assessee at pages 185 to 199and the relevant clauses are extracted hereunder for the sake of reference:-

“Amended and Restated Google AdWords Program Distribution Agreement

This Amended and Restated Google AdWords Program Distribution Agreement (“Agreement”) is entered into as of December 12, 2005 (the “Effective Date”) by and between Google Ireland Limited, with offices at 1st & 2nd Floors Gordon House, Barrow Street, Dublin 4 Ireland (“Google”),and Google Online India Private Limited, a company incorporated under the Indian Companies Act, 1956 and having its registered office at 1st Floor, Prestige Sigma, No. 3 Vittal Mallya Road, Bangalore 560 001 (“Distributor”).

WHEREAS

1. Google wishes to enter into the Distribution Agreement for its AdWords Program with Distributor;

2. Whereas Google Inc., a Delaware corporation, and Distributor entered into a Google AdWords Program Distribution Agreement, dated as of December 12, 2005.(the “Prior Agreement”), and Google Inc. assigned its rights and obligations under the Prior Agreement to Google; and

3. Google and Distributor desire to terminate the Prior Agreement and further desire that this Agreement supersede and replace the Prior Agreement in its entirety;

NOW, THEREFORE, in consideration of the promises and the mutual covenants, agreements, representations and warranties hereinafter set forth, Google and Distributor hereby agree as follows

1. Definitions. The following capitalized terms shall have the meanings set forth below.

1.1 “Advertiser” means an individual or business resident or having its principal place of business located within the Territory (as defined herein), where principal place of business is determined by the place of an entity’s registration.

1.2 “AdWords Program” means the advertising program currently offered by Google under the name “AdWords.’

1.3 “Brand_features” means the trade names, trademarks, service marks, logos, domain names, and other distinctive brand features of each party, respectively, as secured by such party from time to time.

1.4 “Designated Contact” means those contacts designated by each party as the point of contact or contacts for a particular function area related to this Agreement.

1.5 “Google Brand Features” means the Google trade names, trademarks, service marks, logos, domain names, and other distinctive brand features, with some but not all examples at “http://www.google.com/permissions/trademarks.html” (or such other URL that Google may provide from time to time), and such other trade names, trademarks, service marks, logos, domain names, or other distinctive brand features that Google may provide to Distributor for use solely under this Agreement.

1.6 “Intellectual Property Rights” shall mean any and all rights existing from time to time under patent law, copyright law, semiconductor chip protection law, moral rights law, trade secret law, trademark law, unfair competition law, publicity rights law, privacy rights law, and any and all other proprietary rights, as well as, any and all applications, renewals, extensions, restorations and re-instatements thereof, now or hereafter in force and effect worldwide.

1.7 “Keywords” means words chosen by an advertiser through the AdWords Program for a given set of one or more advertisements that are used to target those advertisements to potential customers.

1.10 “User Data” means all data and information provided by users via the AdWords Program, including all registration data, names, email addresses, other addresses, contact information, and other identifying information.

2. Appointment of Territory and Distributor Obligations.

2.1 Appointment of Territory. Google appoints Distributor as a non-exclusive authorized Distributor of Google AdWords Program to Advertisers, all under and in accordance with the terms and conditions set forth in this Agreement. Distributor shall conduct its business for its own account, in its own name, aid not as an agent, employee, partner, or franchisee of Google. Distributor may not solicit business from and shall not distribute AdWords Program to (even if unsolicited), any entity that does not have a principal place of business within the Territory. For the avoidance of doubt, an entity’s principal place of business will be determined by the place of such entity’s registration. All inquiries by any such entity for sale of advertising space shall be referred to the designated Google contact within three (3) business days of receipt by Distributor of such inquiry.

2.2 Distribution & Marketing of AdWords Program. Distributor agrees to market and distribute AdWords Program to Advertisers in the designated Territory, within the broad guidelines provided by Google, with its reasonable commercial expertise and own sales force and customer service infrastructure. Distributor shall not subcontract any of its functions or obligations under this Agreement to any third parties. Distributor shall perform its obligations hereunder in a professional and workmanlike manner consistent with reasonably applicable industry standards and in accordance with this Agreement. Distributor will distribute AdWords Program in accordance with the training provided by Google. Failure to do so would constitute a material breach of this Agreement and shall be grounds for termination under section 9.3.

2.3 AdWords Program Sign Up Process. Distributor shall be responsible for uploading all Advertiser information that is required by Google for participation in the AdWords Program.

2.4 Licences; Approvals. Distributor shall be responsible for obtaining all licences and permits and for satisfying all formalities as may be required to enter into this Agreement and to perform its obligations in accordance with then-prevailing laws and regulations, including without limitation those necessary to enable Distributor to make payments to Google in U.S. dollars. Distributor will promptly secure all governmental approvals as may be required in the Territory or performance of its obligations under this Agreement.

2.5 Compliance with United States and Other Applicable Law; Conduct of Business. Distributor will comply with all United States and local laws and regulations applicable to the distributor of the goods and services, including but not limited to the Foreign Corrupt Practices Act and U.S. regulations of international boycotts. Distributor shall (a) conduct business in a manner that reflects favorably at all times on the AdWords Program and on Google’s goodwill and reputation, and (b) agrees to adhere to the minimum levels of service as specified in Exhibit C. Breach of this Section 2.5 will constitute a material breach of this Agreement.

2.6 After-Sales Support. Distributor will provide after-sales services to Advertisers in accordance with the broad instructions, training and standards of Google.

3. Google Obligations.

3.1 Advertising Space. Google agrees to provide advertising space through the AdWords Prograrn for distribution by Distributor to Advertisers as set forth herein.

3.2 Training. Google agrees to train Distributor.

3.3 Non-Exclusivity. This Agreement shall constitute a non-exclusive relationship between Google and Distributor.

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5. Reporting Requirements.

5.1 Information Provided by Google. Google will make available to Distributor online information about Advertiser activity, on an aggregate and individual basis, which information shall contain include (i) the total number of Keywords purchased by Advertisers, (ii) the number of impressions of Advertisers’ advertisement delivered across the Google network, (iii) the number of clicks delivered across the Google network for Advertisers’ advertisement an (iv) the cost of clicks delivered across the Google network for Advertisers’ advertisement. Distributor must set up AdWords Program advertising accounts in order to receive such online information. Google reserves the right, but has no obligation, to send reports about an Advertiser’s activity directly to such Advertiser. If an Advertiser makes a request to Distributor to receive a user name and password to access such Advertisers individual AdWords Program account activity, Distributor’ will grant such request after approval from Google.

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6. Brand features. Each party shall own all right, title and interest, including  without limitation all Intellectual Property Rights, relating to its Brand Features. Google grants to Distributor nonexclusive and nonsublicensable licence during the Term to display Google Brand Features solely for the purpose of Distributor’s marketing and distribution of AdWords Program under the terms and subject to the conditions set forth in this Agreement. Notwithstanding the foregoing, Distributor will submit all materials of any kind containing the Brand Feature(s) to Google for written approval prior to release to the public. Furthermore, Distributor agrees to adhere to Google’s then-current Brand Features use guidelines, and any content referenced or included therein, which may be found at the following URL: http://www.google.com/permissions/guidelines.html (or such other URL that Google may provide from time to time) and to such other guidelines or restrictions provided by Google in writing to Distributor in connection herewith. Except as set forth in this Agreement, Distributor shall not acquire any right, title orinterest in or to the Google Brand Features. All use by Google of Distributor Brand features (including any goodwill associated therewith shall inure to the benefit of Distributor and all use by Distributor of Google Brand Features (including any goodwill associated therewith) shall inure to the benefit of Google. No party shall challenge or assist others to challenge the Brand Features of the other party (except to protect such party’s rights with respect to its own Brand Features) or the registration thereof by the other party, nor shall either party attempt to register any Brand Features or domain names that are confusingly similar to those of the other party.

7. Confidentiality; Limitation on Public Announcements. Disclosure of confidential and/or proprietary information disclosed hereunder, including the User Data (including any aggregated User Data), the existence and content of this Agreement, and any information provided pursuant to this Agreement, shall be governed by the Google Standard Mutual Non-Disclosure Agreement (introductory paragraph and Sections 1 through 12, inclusive), executed by the parties prior to or concurrently with this Agreement (the “NDA”), which is attached hereto as Exhibit B, and which is incorporated by reference herein. Each party acknowledges and agrees that it will obtain the other party’s prior written approval, which shall include approval of any proposed text, before making any public announcements or communication, including, but not limited to, any press releases, online publishing or direct mailings concerning or related lo the existence or terms of this Agreement. In addition, Distributor agrees to waive all claims against and release Google (and its affiliates, partners and representatives) from any claims or losses in connection with any above publications made by Google.

8. User Data. Google owns all right, title, and interest in and to all information and data, including the User Data, collected by Google relating to Advertisers in connection with the provision of the AdWords Program. Distributor shall maintain all User Data in accordance with local law and regulation applicable to such data, and shall implement policies and procedures with respect to the User Data that are at least as protective of the rights of the Advertisers as is provided in the Google Privacy Policy set forth at http://www. qoogle.com/privacy.html and all relevant policies implied therein.

…….…….

9.4 Effect of Termination. Upon any termination or expiration of this Agreement, (i) all rights and licences granted by one party to the other, including but not limited to rights to use the other party’s Brand Features shall cease immediately, (ii) each party shall promptly return to the other party, or destroy and certify the destruction of all Confidential Information as defined in the NDA and Section 7 of this Agreement) of the other party, and (iii) except for a termination pursuant to Section 9.2 or Section 9.3 above, Google will continue to serve advertisements as provided in this Agreement up to the earlier date to occur of (x) the date that the services provided by Google exhaust any amounts prepaid by Distributor, or (y) the date that is thirty (30) days after expiration or termination of the Agreement. Termination or expiration of this Agreement, in part or in whole, shall not limit either party from pursuing other remedies available to it, nor shall Distributor be relieved of its obligation to pay all charges that have accrued or are otherwise owed under this Agreement. Termination of this Agreement does not prevent Distributor from participating in the AdWords Program pursuant to the general terms and conditions made publicly available by Google from time to time in its sole discretion.

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EXHBIT C

Service Level Agreement

Distributor shall be solely responsible for providing all customer services to Advertisers, according to the procedures, and in compliance with standards, provided by Google. All Advertisers shall be instructed by Distributor to contact Distributor directly for support, and not to communicate directly with Google. Distributor agrees that it shall provide at least the following minimum levels of service: Business hours phone support to all Advertisers. E-mail queries from Advertisers shall be responded to within one (1) business day with immediate resolution of any issues when possible. Issues that cannot immediately be resolved by Distributor based on training and procedures provided under the Agreement must be communicated promptly to Google by Distributor, and Google will assist Distributor in determining the best solution.

Google agrees that it shall provide at least the following minimum levels of service to Distributor:

Customer Queries (as defined below), up to the E-Mail Escalation Limit (as defined below), shall be responded to within one (1) business day

“Customer Queries” shall mean e-mails sent from Distributor to Google related to Advertiser issues, but excluding general communications between Distributor and Google (e.g. billing questions, training information) and technical issues that only
Google can solve.

“E-Mail Escalation Limit”‘ shall equal five (5) e-mails per month for every one hundred (100) Advertisers serviced by Distributor, provided, however that the EMail Escalation Limit shall only apply beginning thirty (30) days after the completion of tile training.

Timing for responses to Customer Queries from Distributor beyond the E-Mail Escalation Limit shall be at Google’s sole discretion.

Distributor agrees that Google will have the right, to review samples of communications sent to Advertisers to assess the quality of responses and modify communications accordingly. Google shall also have the right to send questionnaires to Distributor’s customers to ensure that Distributor is providing an adequate level of service.

Mutual Non-Disclosure Agreement

This Mutual Non-Disclosure Agreement (“Agreement”) is made and entered into between Google Ireland Limited, for itself and its subsidiaries and affiliates (“Google”), and “Participant’ identified below, individually referred to as a “Party” and collectively referred to as the “Parties”. The Parties wish to exchange Confidential Information (as defined below in Section 2) for the following purpose(s): a) to evaluate whether to enter into a contemplated business transaction; and b) if the Parties enter into an agreement related to such business transaction, to fulfill each Party’s confidentiality obligations to the extent the terms set forth below are incorporated therein (the “Purpose”). The Parties have entered into this Agreement to protect the confidentiality of information in accordance with the following terms:

1. The Effective Date of this Agreement is December 12, 2005.

2. In connection with the Purpose, a Party may disclose certain information it considers confidential and/or proprietary (“Confidential Information”) to the other Party including, but not limited to, tangible, intangible, visual, electronic, present, or future information such as: (a) trade secrets; (b) financial information, including pricing; (c) technical information, including research, development, procedures, algorithms, data, designs, and know-how; (d) business information, including operations, planning, marketing interests, and products; (e) the terms of any agreement entered into between the Parties and the discussions, negotiations and proposals related thereto; and (f) information acquired during any facilities tours.

3. The Party receiving Confidential Information (a “Recipient”) will only have ‘ a duty to protect Confidential Information disclosed to it by the other Party (“Discloser”): (a) if it is clearly and conspicuously marked as “confidential” or with a similar designation; (b) if it is identified by the Discloser as confidential and/or proprietary before, during, or promptly after presentation or communication; or (c) if it is disclosed in a manner in which the Discloser reasonably communicated, or the Recipient should reasonably have understood under the circumstances, including without limitation those described in Section 2 above, that the disclosure should be treated as confidential, whether or not the specific designation “confidential” or any similar designation is used.

4. A Recipient will use the Confidential Information only for the Purpose described above. A Recipient will use the same degree of care, but no less than a reasonable degree of care, as the Recipient uses with respect to its own information of a similar nature to protect the Confidential Information and to prevent: (a) any use of Confidential Information in violation of this agreement; and/or (b) communication of Confidential Information to any unauthorized third parties. Confidential Information may only be disseminated to employees, directors, agents or third party contractors of Recipient with a need to know and who have first signed an agreement with either of the Parties containing confidentiality provisions substantially similar to those set forth herein.

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6. This Agreement imposes no obligation upon a Recipient with respect to Confidential Information that: (a) was known to the Recipient before receipt from the Discloser; (b) is or becomes publicly available through no fault of the Recipient; (c) is rightfully received by the Recipient from a third party without a duty of confidentiality; (d) is independently developed by the Recipient without a breach of this Agreement; (e) is disclosed by the Recipient with the Discloser’s prior written approval; or (f) is required to be disclosed by operation of law, court order or other governmental demand (“Process”); provided that (i) the Recipient shall immediately notify the Discloser of such Process; and (ii) the Recipient shall not produce or disclose Confidential Information in response to the Process unless the Discloser has: (a) requested protection from the legal or governmental authority requiring the Process and such request has been denied, (b) consented in writing to the production or disclosure of the Confidential Information in response to the Process, or (c) taken no action to protect its interest in the Confidential Information within 14 business days after receipt of notice from the Recipient of its obligation to produce or disclose confidential information in response to the Process.………………………….

11. No Party acquires any intellectual property rights under II Agreement (including, but not limited to, patent, copyright, and trademark rights) except the limited rights necessary to carry out the Purpose as forth in this Agreement.

12. Each Party acknowledges that damages for improper disclosure Confidential Information may be irreparable; therefore, the injured Party is entitled to seek equitable relief, including injunction and preliminary injunction, in addition to all other remedies available to it.

92. While providing advertisement space to the customers or advertisers, the appellant has entered into agreement with the advertisers, which is called a Google Advertising Agreement and in this agreement, the appellant has been termed as Google and as per this agreement, Google may decide at any time, in its sole discretion to change, suspend or discontinue all or any aspect of its advertising program, including their availability and shall notify the customer material changes or discontinuation. Google shall have no liability for such decision. As per the terms of payment, if Google or the appellant at any time feels itself insecure with respect to customers/advertisers ability to meet its  financial obligations under this Adword agreement (SA), Google shall have the right to require prepayment of total amount due for the SA in advance of the target start date or otherwise requested by Google. The customer/advertiser must remit all payment under this SA agreement by the due date indicated in the invoice and in the event of nonpayment, Google reserves the right to immediately terminate this SA upon written notice to customers and immediately suspend the entire customer account. This Google advertising agreement is available in revenue’s paperbook at pages 1 to 6. The relevant
clauses of this agreement are also extracted hereunder for the sake of reference:-

“This Adwords Agreement (‘SA’) shall be governed by terms and conditions (‘Terms and Conditions) available at the following URL:
http:l/www.google.co.in/ads/adwordsterms.html

All terms contained in the Terms and Conditions are made a part of this SA through incorporation by reference. The signatory of this Service Agreement represents that she has read and agrees to such Terms and Conditions and the terms of SA. There shall be no force or effect to any different or additional terms of any related SA, purchase order or sales document.

Google may decide at any lime, in its sole discretion, to change, suspend or discontinue all or any aspect of its advertising programs, including their availability, and shall notify Customer of material changes and discontinuations. Google shall have no liability for such decision.

By signing below, Customer represents and warrants that all client information, including but not limited to credit card information and invoicing information, provided herein is complete and accurate and that no additional information is necessary for payment of Google invoices.

Customer’s campaign(s) may go live upon posting, at which time Google shall send Customer an email notifying customer it has 72 hours to modify Customers campaign keywords and settings as posted. During those 72 hours, Google is only liable to Customer for keywords or settings discrepancies if Customer can certify to Google by its contemporaneous documental (evidence that Google posted keywords or settings other than those requested by Customer. The account (as modified by Customer, or if unmodified, as initially posted) will be deemed approved by Customer 72 hours after it initially posts.

Terms of Payment. If Google, at any time, deems itself insecure with respect to Customer’s ability to meet its financial obligations under this SA, Google shall have the right to require pre-payment of the total amount due for the SA in advance of the Target Start Date or as otherwise requested by Google. Customer must remit all payments under this SA to Google by the due date indicated on the Invoice(s). In the event of nonpayment, Google reserves the right to immediately terminate this SA upon written notice to Customer and immediately suspend the entire Customer account. Late payments are subject to interest payments as set forth in the Terms and Conditions.

Methods of Billing:

Monthly Invoicing: Customer will be billed at the end of the month, based on the actual number of clicks or other billing methods Customer may choose to participate  in as described in the FAQ (e.g. cost per impression programs). Customer’s credit must first be approved by Google in order for this billing method to apply.

Prepayment: Customer will pay the total agreement budget prior to any campaign launch. Acceptance and terms of prepayment are at Google’s sole discretion. Prepayment does not obligate Google to deliver any Ad Words ads notwithstanding acceptance of prepayment by Google. Unused portions of prepayments will be returned to Customer after the end date to the extent that there are no amounts still due to Google.

Right To Reject Advertisement: All advertisements submitted by Customer are subject to Google’s approval. Google reserves the right to review, reject or remove any SA, advertisement, or URL link, except that Google will not cancel placement of an SA, advertisement, or URL link due to inventory demand for other advertisers. Customer pre-authorises Goo gle to modify or rearrange the text elements in advertising creative submitted by Customer.”

Google India Private Limited Advertising Program Terms

2. The Program. Customer is solely responsible for all: (a) ad targeting options and keywords (collectively “Targets”) and all ad content, ad information, and ad URLs (“Creative”), whether generated by or for Customer; and (b) web sites, services and landing pages which Creative links or directs viewers to, and advertised services and products (collectively “Services”). Customer shall protect any Customer passwords and takes full responsibility for Customer’s own, and third party, use of any Customer accounts. Ads maybe placed on (y) any content or property provided by Google (“Google Property”), and unless opted-out by Customer (z) any other content or property provided by a third party (“Partner”) upon which Google places ads (“Partner Property”). With respect to Adwords online auction-based advertising, Google may send Customer an email notifying Customer it has 72 hours (“Modification Period”) to modify keywords and settings as posted. The account (as modified by Customer otherwise as initially posted) is deemed approved by Customer after the Modification Period, and Google is_only liable to Customer for discrepancies if Customer can certify by contemporaneous documentary evidence that Google posted ads not approved by Customer. With respect to all other advertising, Customer must provide Google with all relevant Creative by the due date set forth in that advertising Program’s applicable FAQ or otherwise communicated by Google. Customer grants Google permission to utilize an automated software program to retrieve and analyze websites associated with the Services for ad quality and serving purposes, unless Customer specifically opts out of the/ evaluation in a manner specified by Google. Google or Partners may reject or remove any ad or Target any time for any or no reason. Google may modify the Program or these Terms at any time without liability and your use of the Program after notice that Terms have changed indicates acceptance of the Terms.

…………………………

…………………………

4 Prohibited Uses; Licence Grant; Representations and Warranties. Customer shall not, and shall not authorize any party to: (a) generate automated, fraudulent or otherwise invalid impressions, inquiries, conversions, clicks or other actions; (b) use any automated means or form of scraping or data extraction to access, query or otherwise collect Google advertising related information from any Adwords website or property except as expressly permitted by Google; or (c) advertise anything illegal or engage in any illegal or fraudulent business practice. Customer represents and warrants that it holds and hereby grants Google and Partners all rights (including without limitation any copyright, trademark, patent, publicity or other rights) in -Creative Services and Targets needed for Google and Partner to operate Google’s advertising programs for Customer (including without limitation any rights needed to host, cache, route, transmit, store, copy, modify, Perform. display, reformat, excerpt, analyze, and create algorithms from and derivative works works of Creative or Targets) in connection with this Agreement (“Use”). Customer represents and warrants that (y) all Customer information is complete, correct and current; and (z) any use hereunder and Customer’s Creative, Targets, and Customers’s Services will not violate or encourage violation of any applicable laws, regulations, code of conduct, or third party rights (including, without limitation, intellectual property rights). Violation of the foregoing may result in immediate termination of this Agreement or customer’s account without notice and may subject Customer to legal penalties and consequences.”

93. We have also examined the statement of Shri Arijit Sarker, Director, India Operation, Head of Information Technology Enabled Services, GIPL, and he explains the functions of outsource ad reviews by stating that advertisers upload the ads which resides in data servers outside of India and these ads are reviewed in accordance with Google policies. 94% of these ads are automatically reviewed by the system, 6% of ad comes from manual review which is done through proprietary web application (approval bin) by the ad review team. Here the dispute is raised with regard to the 6% of ads which comes for the manual review to the appellant. The ad review team consists of 100 Google employees and 200 vendor employees, they are graduates from various colleges in India.

94. In reply dated 15.02.2013 available at pages 56 to 61 of revenue’s compilation, it was explained by the appellant that appellant renders information Technology Enabled Services to its group companies which primarily involves approving and administering advertisements to conform to Google editorial guidelines and responding to customer queries. This division of appellant is involved in performing back office functions as described. The relevant reply through this letter is extracted hereunder for the sake of reference:-

“February 15, 2013

The Deputy Director of Income-tax, (International Taxation),
Circle-1(1),
No-14/3A, 6th Floor, Rashtrothan Parishad Bhavan,
Nrupathunga Road,
Bangalore

Dear Sir,

Sub: Response to show cause for non-deduction of tax at source on payments to nonresidents

Re: Letter No: F.No.GIPL/Cir1(1)/2012-13 dated February 8, 2013 PAN: AACCG0527D; AY: 2006-07 to AY 2012-13

We refer to the above captioned notice dated February 8, 2013 (copy of the notice is enclosed as Annexure 1 for ease of reference), where in your goodself has requested Google India Private Limited (`GIPL’ or the ‘Company’) to submit certain information/documents. In this regard, we wish to submit the following for your favourable consideration:

1. Whether service tax/ sales tax was paid by Google Ireland or Google India on behalf of Google Ireland for marketing and distribution of AdWords Program.

In this regard, we wish to submit that Google Ireland Limited (`Google Ireland’) was not liable to pay service tax/ sales tax for the marketing and distribution of the AdWords Program.

2. Details of service rendered by the ITES division of GIPL to Google Ireland and clarification as to whether the services rendered by ITES division of GIPL is in any way related to AdWords program.

GIPL renders Information Technology Enabled Services (‘IT enabled services’) to its group companies, which primarily involves approving and administering advertisements to conform to the Google aloha, guidelines and responding to customer queries. This division of GIPL is involved in performing back office functions as described below:

• Response to the queries of client’s customers: The queries generated by the customers of Google entities flow from customers through a workflow based on pre-determined parameters. On receiving the query, the team responds to the query. The response to is routed through Google Ireland; and
• Reviewing advertisements for the purpose of running the same on the Google website: These services mainly involve IT enabled data processing work. The data comes from the customer and is routed to GIPL through a workflow based on language and tier. On receiving the data, the team reviews the advertisement to ensure that the advertisement conforms with the Google editorial guidelines. If the advertisement does conform, the customer’s advertisement can then be viewed on the websites of Google or its partners located outside India.
• GIPL reviews the advertisement on accordance with the company law and the local law regulation, through various software. These are automated software which provides assistance by filtering the content of the ads with specified keywords and helps GIPL in reviewing the content of the ads.

Further, we wish to submit that the provision of IT enabled services is independent of the distribution of the AdWords program to the advertisers in India, since the IT enabled services rendered by GIPL include the following:

• Review of the search results to ensure the outcome of the desired results or to improve upon the quality of search results;
• Evaluation of Google services and tools for efficiency, bugs, performance, failure, etc.;
• Data processing work i.e. once the advertiser registers for the AdWords through an online process, the advertisement is sent to the IT enabled services team to review for conformation with the editorial guidelines. These services are primarily carried out for AdWords services of other group entities outside India and not only for the advertisement from India.

Thus, the IT enabled services rendered by GIPL are to ensure that the advertisements conform with the editorial guidelines and is not linked to the distribution services.

3. Complete details of training given to GIPL for distribution of AdWords Program as per Clause 2.2 of the Distribution Agreement.

As submitted on point no. 7 in our response to the questionnaire dated January 31, 2013, we wish to submit that, Google Ireland provides training to the sales team of GIPL on the following:

• Training on the AdWords program and how the AdWords program may benefit the advertisers in India
• Training on the functionality of the tools available to optimize and follow an ad campaign on the AdWords system;
• The new features/ additions made to the AdWords program and the implications for advertisers, etc.”

95. We have also examined the statement of Shri Vikas Agnihotri, Director Sales, recorded by the AO on 19.02.2013 and in his statement, he has explained that Google has an internal tool where available registered trademarks information is uploaded. All new ads have to go through the review process and the tool identifies such trademark violation in the ad text and rejects the ad from being served. The tool is an integral part of Google operating platform and accessible to review team in India and said tool is for internal review process and hence not available to advertisers. The relevant question and reply of Shri Agnihotri is extracted hereunder for the sake of reference:-

“Q9. In reference to contract with customer clause 2 of the contract sub-part as stated “Customer grants Google permission to utilize and automated software program to retrieve and analysis websites associated with the services for ad quality and serving purposes, unless customer specifically opts out of the evaluation in a manner specified by Google”.What is the program utilized by Google for the above.

Ans. The tool used in the applicable cases is Google Analytics and the same is available online. The same can be access by people who have been given user Id and passwords by the respective customer.

Q10. Under what conditions and circumstances a ad is disabled and what are the tools used for the same Google disables ads which are in non-conformity with the local law and also not in accordance with Google ad policies. The compliance in this context is looked into by a central support team of GIPL and they take appropriate action. I will revert on the exact technicalities of disabling the ad serving and the team responsible.

Q11. What are the tools available to the sales team for optimization of the ad campaign

Ans. The sales team uses Google Analytics tools for the optimization as well as Google Adword and Adwords editor.

Q12. What is the policy regarding the usage of trademarks as keywords?

Ans. GIPL allows advertisers to bid on competitor’s key words as well as registered trademark so long as the specific competitor key word or trademark is not a part of the ad text being shown by the said advertiser.

Q13. What tools is used to achieve the above.

134. Ans. Google has an internal tool where available registered trademarks information is uploaded. All new ads have to go through the review process and the tool identifies such trademarks violations in the ad text and rejects the ad from being served. The tool is integral to the Google operating platform and accessible to the review team in India. To the best of my knowledge, the said tool is for internal review process and hence not available to the advertisers.

………………………….

Q21 As per your experience of working with GIPL as Director Sales for Adword Program, BFSI & Travel vertical, and in light of the above statements is it possible to market, sell and maintain Adword program and accounts without the use of internal tools.

Ans In continuation of my earlier statements, the internal tools mentioned by the very nature and as the word tool means are there to assists and guide advertisers to better manage their Adwords program. The Advertisers may choose to run the Adword program without using these tools. From the GIPL perspective the internal tool of which the reference was given for trademark and content related question, the said tool is not specifically used for marketing or selling the Adwords program. However, it is used to monitor the policies governing trademarks and related to approvals for the Adword campaign.”

96. We have also examined the TP documentation filed by the assessee. During the course of assessment proceedings while explaining the profile of the appellant, it was stated by the appellant that Google India was incorporated in December, 2003 with its registered office in Bangalore and Branches in Hyderabad, Delhi and Mumbai and this company was wholly owned subsidiary of Google Intenrational Inc. USA. The ownership structure of Google India is as under:-

The ownership structure of Google India is as under:

97. With regard to QA engineering services, it was explained that this involves evolution of Google services and tools for efficiency, bugs, performance, failure and other aspects. The software is tested at Hyderabad unit of Google India before it is ready for release. These services mainly involve IT enabled data processing. The data comes from the customer and is routed through Hyderabad unit through a workflow based on language and tier. On receiving the data, the Adword team reviews the advertisement according to company policy and thereafter advertisement can be viewed on websites of Google or its partners located outside India. While explaining the profile of AE i.e., Google Ireland Ltd., it was explained that Google Ireland Ltd., is the wholly owned subsidiary of Google Ireland Holdings. It is an operating company of Google group and deals in business of selling, marketing and supporting certain internet search, advertising system and information organization and management technology products and services. Pursuant to licenceagreement with Google Netherland Holdings BV which in turn has a licence agreement with Google Ireland Holdings, GIL makes use of Google intangible assets and pays an arms’ length royalty to Google Netherland Holdings BV which in turn pays royalty to Google Ireland Holdings.

98. The complex functioning of the online advertisement was examined by the Tribunal in the case of ITO v. Right Florists Pvt. Ltd. (supra) and for the sake of reference, we extract the relevant portion as under:-

“5. To adjudicate on the issue in appeal, we will have to first understand the nature of services rendered by the Google and Yahoo. Both these companies own popular search engine websites, namely Google and Yahoo, and the advertising is done in the results generated by the search results against agreed keywords or by placing the advertising banners on websites. Yahoo and Google, as internet search engines, have brought about an information revolution and the entire conventional business model of businesses reaching out to the potential customers has undergone paradigm shift. Nicholas Negroponte, in his classic book ‘Being Digital’ published in January 1995, had said that “Information about information is more important than information” and illustrated this with an example, which looks too simplistic today, that “the fact that TV Guide makes more money than all the four major networks combined”. It was around this time that the search engines “Jerry and David’s Guide to the World Wide Web” and “backrub”, former avatars of Yahoo and Google respectively, made the business of information about information, which is what these search engines are really involved in- with sophisticated technology and process of great value proposition, a reality. The services offered by Yahoo and Google are of the same nature, but, for the sake of convenience, we will take up Google’s case as an illustration for the nature of services. Google is a web search engine. The way it works is this. A web search engine is basically software code that is designed to search for information on the World Wide Web. When an internet user needs information about, inter alia, a product or service, he visits the website of the search engine and keys in the search words. The software and database embedded in the search engine than produces a large number of results, such as addresses of the related websites so that internet user can then visit those website for further information on that product or service. This query need not be about a service or product only, it may relate to virtually anything under the sun. These search engine results are sometimes in thousands, are generally presented in a web pages, images, information and other types of files. While producing these results, there are  ponsored search results also, which is de facto advertising, and these sponsored search results help those advertisers visibility of their respective websites. Unlike web directories, which are maintained only by human editors, search engines also maintain realtime information by running an algorithm on a web crawler, and, therefore, the advertising services offered by these search engines are practically without any human touch and entirely automated. When we use these search engines, the search results are produced which are termed as ‘search engine result pages’, and, as we have seen a little while ago, these SERPs also include sponsored search results or online advertising. The online advertising on SERPs is a part of the business of search engines like Google. To an advertiser, it is generally a three step process – advertiser creates advertisement and chooses keywords, which are words or phrases relating to his business. When people search on Google using one of the assigned keywords, the advertisement may appear next to the search results. The advertisements are then before an audience which is already interested in the related product or service. People can simply click on these advertisements and they will reach the related website so as to make a purchase or learn more about the product or service. The functioning of this form of online advertising can indeed be explained in such simple terms, but actual rendering of this service is a highly technical process. To search engines, providing this online advertising service, is a complex technical activity and rendering of a highly technical service which works with the use of software code that is designed to search for information on the World Wide Web, and generate, alongwith the search results, sponsored search results – the service which is paid for by the sponsors of those results, like this assessee before us. On one hand, a web search engine like Google, as we have noted earlier also, maintains real-time information by running an algorithm on a web crawler, and, on the other hand, produces, in the search results to the internet users, advertisement sponsored. It is primarily for this service that the Google is paid for. An online advertising could also be by way of a web banner or banner advertisement is a form of advertising on the World Wide Web delivered by an adserver, an expression which refers to technology and service that places advertisements on web sites. The content of the adserver is constantly updated so that the website or webpage on which the ads are displayed contains new advertisements, when the site or page is visited or refreshed by a user. The purpose of ad serving is to deliver targeted ads that match the website visitor’s interest. This form of online advertising entails embedding an advertisement into a web page. It is intended to attract traffic to a website by linking to the website of the advertiser. An ad server, which is at the core of this form of online advertising, is a computer server, specifically a web server, that stores advertisements used in online marketing and delivers them to website visitors. Whichever be the form of advertising service, whether by sponsored results or by web banner or by any other similar mode, there can hardly be any dispute on the proposition that these search engines or ad servers, which are patented and provide valuable services, which are essentially technical in nature. It is this kind of advertising service for which the payments were made by the assessee. Let us, for example, take the case of a florist in Shillong who intends to use these services. His potential customer is a person looking for a florist in Shillong. When such a person actually uses the search words ‘florist’ and ‘Shillong’ in Google, the search engine result page could be like this:

99. The above search engine result page shows several sponsored results, termed and marked as “ads” and it is for these sponsored results being shown on the search engine result page that the Google charges a fees. The mechanism for this online advertising could be further appreciated by the following screenshots:

100. During the course of hearing, the ld. Standing counsel had placed reliance upon the book of “Learning Google Adwords and Google Analytics” authored by Benjamin Mangold, who was the first trainer certified by Google for both Google Adwords and Google Analytics in which he explained the functioning of Google Adword program. According to the author, the following services are required to be provided under the Adword program:

a. Display Keyword Targeting

b. Placement Targeting.

c. Topic Targeting.

d. Interest Categories.

e. Remarketing.

f. Gender Targeting.

g. Age Targeting.

h. Parent Status Targeting.

i. Display Campaign Optimiser

j. Location Targeting, Network Targeting

k. Physical Location Targeting

l. Schedule Targeting

m. YouTube Targeting

n. Device Targeting

o. AdSense

101. During the course of hearin, though ld. Counsel for the assessee has contended that service agreement was executed between the appellant and GIL before execution of distribution agreement under which the appellant was to render ITES services to GIL for which it was duly compensated, but during the course of hearing, a specific query was raised to the ld. Counsel for the assessee to demonstrate with evidence as to what other ITES services were rendered apart from the services rendered for the Google Adword program. But no specific reply was furnished by the learned Counsel for the assessee. It was simply contended that the service agreement was executed prior to the Adword Distribution Agreement. Even in the affidavit of Shri. Hari Raju, Director of the appellant company filed pursuant to the direction of the Tribunal to explain the function of the Appellant under AdWord Program, it has not been clearly spelt out as to what other services besides AdWord Program were rendered by the Appellant to GIL.

102. Now in the light of material available on the record in the form of literature, submissions and orders of the authorities below we will try to understand as to how the Adword program works. The Google AdWord Program is a complex program and has various benefits viz., a) relevant ads of people b) target of select audience c) it causes minimum advertisisng expenses d) it is only payable when people are engaged. It gives advertiser the access to the tools of the AdWord Program which can be accessed through the gateway of Google India/Appellant through the use of patent technology. AdWord Program gives the advertiser to choose the preferred time, season of the year when the ads are to be shown. Once advertiser accepts the terms, the appellant gives access to the various tools of AdWords Program. The time zone and display time of the advertisement is identified and allocated by the appellant to the advertiser with the help of Google AdWord Program. AdWord Program is more focused and targeted in advertisement campaign which results into more attention, engagement, delivery and conversion which is only possible on the Google network with the access of tools of search engine and google analytics. Appellant is having the access to IP address at desktop or laptop or IP address of the tablet, photographs, time spent on website, eating habits, wearing preferences. With the help of IP address, Google search engine is having access to various information and data pertaining to the user of the website in the form of name, sex, city, state, country, phone number, religion, etc. Besides the above basic information, Google is also having the access of the history of the user as well as the behaviour of the person searching in google engine. Based on various inputs mentioned above and contents of more than 2 million website, the Appellant was able to provide the effective focus ad campaign to the advertiser. The AdWord Program and tools therein gives the advertiser to pick up the keywords, phrases which are similar in nature and germane, and in a digitalised and tabulated form and grouped together. The advertiser is having the access to this Google Analytics Program through the appellant. Whenever one particular keyword is searched, the targeted ad will be shown ot the consumer and by clicking on the ad, the consumer will be landed on a webpage. The selection and display of the keyword, play a pivotal role in the advertising campaign and for this purpose appellant has provided the optimization and technique to the advertiser. The appellant being a service provider under the agreement uses its expertise and the information within its domain and control, to suggest the keywords based on recent marketing material and need of the advertiser. The appellant also suggests a periodical review of the website homepage, product and services which can be bundled together.It also suggests the traffic forecast of the list of keywords, multiple keywords placed to get the new keyword ideas. Based on the initial keywords the advertiser enters, the tools shows various keywords suggestion automatically grouped into different adgroups. This is only possible if the Appellant is permitted to use information, data and keyplanner to the advertiser which is patent and protected software of the Google. The keyword planner also suggests the suitability of the keywords which are useful in the particular
month of the year. The advertiser is able to plan its campaign for optimization or for the purpose of getting more information and conversion based on keyword planners. Based on this information and forecast, the advertiser is able to build on the keywords.

103. The display of the advertisement based on the keywords, is dependent upon the auction price paid by the advertiser. The keywords bid at the highest rate by the advertiser would be shown at the top of search result and therefore, is likely to fetch more visibility and attention. With the help of tools of Google, the advertiser as well as the appellant have an access to the impact of change of keywords on the likely impressions of the advertisement. With the help of keywords matching, various approaches are being adopted by the Google AdWord Program i.e., broad match, phrase match and exact match. The exact match for example allows the advertiser to focus on the optimization phrase on the individual keywords and it yields the best results possible. Whereas, the phrase match is more processing than broad match and the broad matchm provides the greatest possibility of coverage of the advertisement.

104. The appellant facilitates the advertisers to start the campaign of advertising initially with the help of broad match thereafter with the phrase match and thereafter with the exact match. With the help of keyword management, the Google AdWord Program takes care of misspelling, singular, plural, abbreviation, achronynms, stemming, etc. For example, if the advertisement shows the formal shoes, then the keywords are the formal plus shoes. If it is broad match keywords then the advertisement will show formal shoes, sports shoes, black shoes, party shoes, etc. However, if the advertiser had only opted for exact word match, then search result will show only a formal shoe.

105. The appellant helps the advertiser with the help of tools of AdWord Program to include or delete various variation of keywords in the realm of advertisement compaign and similarly the advertiser may with the help of Google tool can avoid the unnecessary traffic on its website. For example, if an advertiser does not want the visit of a surfer who is searching the service apartment on rent basis and only wants the person surfing to buy the apartment, then the Appellant can help him by putting negative words of rent in the keyword search. Therefore, the only person who is searching for service apartment would be lending on the advertisers website and the person who is searching for rented service apartment, would not be visiting the website of the advertiser i.e., advertisement would not be displayed to him in the searched result. Likewise, if the advertiser is selling leather cover for iPhone, then the advertiser may not like that the person who is looking for leather cover for another brand or item may visit the website of the advertiser. For that, negative words can be used to avoid to improve the CTR (clicked through rate) with the help of tools of Google. By using these tools, the Appellant has been giving various suggestions to the advertisers to improve various keywords.

106. The Google AdWord Program is also having Google Analytics which is connected with the Google AdWord Program and which is a potential patented tool to target the keywords and the negative keywords. This is the USP of the Google AdWord Program, which is maintaining thousands of different keywords used by people to search the website and based on this user behaviour, the Google Analytics suggests the appropriate keywords to be used by the advertiser for encouraging the traffic on the website. Similarly, the Google Analytics also uses the same data to filter out the negative keywords on the basis of which an unattended or unwarranted person have landed on the website of the advertiser. The Appellant is using all these tools in conjucture with the advertisers at the time of granting the backhand services to advertisers, as the Appellant is having access to all these data, information, etc.

107. On the basis of the above, we are of the view that the agreement between the assessee and GIL is not only in the nature of providing the space for advertisement and display the advertisement to the consumers. If we look into the advertisement module of the AdWord Program, we will come to an irrestitable conclusion that it is not merely an agreement to provide advertisement space but it is an agreement for facilitating the display and publishing of an advertisement to the targeted customers.

108. We have also examined the obligations cast upon the appellant under the agreements and found the obligation cast upon the appellant under the Google Adword distribution agreement can only be discharged with the help of the ITES division. Therefore, the Google Adword distributor agreement and the service agreement are to be read together as they are interconnected with the navel cord and without resorting to the service agreement the terms and conditions under the Google AdWord Distribution Agreement cannot be complied with. Therefore, in order to understand the function of Google Adword program, we have to read both the agreements together.

109. Now the question comes as to whether the payment made by the appellant to Google Ireland is in the nature of payment of royalty or a business profit in the hands of Google Ireland. In this regard, our attention was invited to the fact that Google Ireland is a non-resident and does not have any Permanent Establishment in India, therefore the payment made to Google Ireland is in the form of business profit and not taxable in India. But the revenue has treated the payment made by the appellant to Google Ireland after retaining a particular percentage of advertisement receipts as a payment of royalty and is chargeable to tax u/.s 9(1)(vi) of the Act. Since the appellant has not deducted tax at source on such payments u/s. 195 of the Act, the AO had treated the assessee to be in default and raised the demand under section 201 and 201A of the Act.

110. The AO has also held that the GIL is not the beneficial owner of the sum paid/payable by GIPL and therefore the rate of tax as provided under India-Ireland DTAA @ 10% cannot be applied. He further held that GIL which is claimed to be the beneficial owner of the sum paid/payable by GIPL is controlled and managed from Bermuda with whom India has not entered into DTAA. Therefore, rate of tax on royalty paid/payable by GIPL under the Act will have to applied. Accordingly, royalty was taxed @ 10.556% under section 115A of the Act.

111. During the course of hearing, the learned Counsel for the assessee has invited our attention to various judicial pronouncements with the submissions that similar type of payments made by the advertisers to the non-residents, who owns the search engine was considered to be the business profit of the non-resident and in the absence of their permanent establishment in India, the business profit was not liable to be taxed in India. Therefore, we prefer to examine the judgments referred to by the assessee in support of his contention as to whether the judgments apply to the present facts of the case or not. Heavy reliance was placed upon the order of the Tribunal in the case of ITO Vs. Right Florist (supra) in which the Tribunal has held that the payments made by the advertiser to Google and Yahoo is a business profit in the hands of the recipient and in the absence of the permanent establishment of the non-resident, the business income cannot be taxed in India. In that case, the facts culled out by the Tribunal are that the assessee is a florist who uses such advertising with search engine through Google and Yahoo to generate business. Whenever, anyone does a web search on a respective search engine in looking for a particular website and uses certain keywords, the advertisement of the assessee is shown along with the search results. The assessee has made certain payments in respect of online advertising to US based entities viz., Google Ireland Ltd., and overture service Inc., USA (Yahoo USA). No taxes were withheld from these payments and during the course of assessment proceedings, the AO required the assessee to show cause as to why these payments are not to be disallowed as deduction in computation of its income under section 40(a)(ia) of the Act. The stand of the assessee was that these payments are made to foreign entities who did not have any permanent establishment in India. Therefore, the same were not taxable in India. The AO rejected the claim of the assessee. The assessee’s contention that even under section 9(1) of the Income Tax Act, only so much of the income of the non-resident can be brought to tax as reasonably attributable to the operations carried out in India were rejected by the AO and he observed that irrespective of whether or not, in assessee’s opinion, the income was taxable in India, the assessee ought to have approached the AO under section 195 prior to making the foreign remittance. Assessee’s failure to do so, according to the AO, was contrary to the law laid down by the Hon’ble Supreme Court in the case of Transmission Corporation of AP Ltd., Vs. CIT 239 ITR 587. With these observations, AO has disallowed the payment made by the assessee under section 40(a)(ia) of the Act. Assessee carried the matter before the CIT(A) but did not find favour with him and finally the matter travelled to the Tribunal. The Tribunal, having examined the nature of the advertisement programmes and the services rendered by the non-resident, was of the view that receipt in respect of online advertisement on Google and Yahoo cannot be brought to tax in India under the provisions of the Income Tax Act and also in the absence of their permanent establishment in India, under the provisions of India-USA and India-Ireland tax treaty.
The relevant observations of the Tribunal are as under:

“28. In view of the above discussions, we are of the considered view, on the limited facts of the case as produced before us„ the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Income Tax Act, as also under the provisions of India US and India Ireland tax treaty. This  observation is subject to the rider that so far as the PE issue is concerned, we have examined the existence of PE only on the basis of website simplicitor, and on no other additional basis, as no case was made out for the same. In any case, revenue has not brought anything on record, either at assessment stage or even before us, to suggest that Google or Yahoo had a PE in India, and as held by a Special Bench of this Tribunal in the case of Motorola Inc Vs DCIT (95 ITD 269 SB), “DTAA is only an alternate tax regime and not an exemption regime” and, therefore, “the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA”. No such burden is discharged by the Revenue. Accordingly, there is no material before us to come to the conclusion that Google or Yahoo had a PE in India, which, in turn, could constitute the basis of their taxability in India.

29. Now that we have come to the conclusion that Google and Yahoo did not have any tax liability in India, in respect of the advertising revenues in question, the next question that we need to deal is whether or not assessee still had a tax witholding obligation in respect remittances for these online advertising payments, and whether assesse’s failure to withhold taxes even when the recipient did not have tax liability could be visited with disallowance under section 40(a)(i). It is only elementary that when recipient of an income does not have the primary tax liability in respect of an income, the payer cannot have vicarious tax withholding liability either. This position is independent of the payer having moved an application under section 195 or not, or on the payer or the payee having obtained an advance ruling in their favour or not. The law is now very well settled in this regard by Hon’ble Supreme Court’s judgment in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456) wherein Their Lordships have categorically held that, “where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof”. In the said case, Their Lordships have, rejecting revenue’s reliance on Hon’ble Supreme Court’s judgment in Transmission’s case (supra) – which has also been referred to by the Assessing Officer, observed as follows:

…….In Transmission Corporation case (supra) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the nonresident included an element of income which was exigilble to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TDS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TDS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented “income chargeable to tax in India”, then it was necessary for him to make an application under Section 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TDS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TDS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the “principle of proportionality”. The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context that the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TDS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the I.T. Act.

30. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that there was no failure in deduction of tax at source by the assessee before us inasmuch as the assessee did not have any obligation to deduct tax at source under section 195 for the simple reason that income embedded in impugned payments was not exigible to tax in India. Accordingly, the disallowance under section 40(a)(i) was uncalled for. Learned CIT(A) rightly deleted the impugned disallowance.We uphold the conclusions arrived at by the CIT(A) and decline to interfere in the matter.”

112. In this order, the Tribunal has placed a reliance upon the other order of the Tribunal in the case of Pinstorm Technologies Pvt. Ltd., Vs. ITO (supra).

113. In the case of Pinstorm Technologies Pvt. Ltd., the facts culled out by the AO are that the assessee company was engaged in the business of digital advertising and internet marketing. It utilizes the internet search engine such as Google and Yahoo, etc., to buy space in advertising on the internet on behalf of its client. The search engine carries out its own programme whereby the assessee books certain words called “keywords”. Whenever any person searches through the net of specific keywords, the advertisement of the assessee or its client is displayed. The price charged for such bookings depends on type of its phrase, its popularity, usage, etc. The search engine renders the services world wide basis and thus is not relatable to any specific country. The entire transaction takes place through the internet and even the invoice is raised and payment is made through internet. During the year under consideration, the assessee company had made a payment of Rs.1,09,35,108/- to Google Ireland Limited and the said payment was claimed as advertisement expenses. While making the said payment, no tax at source was deducted by the assessee on the ground that amount paid to Google Ireland Limited constituted business profit of the said company and since the said company did not have a permanent establishment (PE) in India, the amount payable was not taxable in India. According to AO, the services rendered by the Ireland company to the assessee was in the nature of technical services and hence the assessee company was liable to deduct tax at source from the payment made against the said services. Since no such tax at source was deducted by the assessee, the deduction claimed by the assessee on account of expenditure incurred on payment of advertisement charges to M/s. Google Ireland was disallowed by the AO by invoking the provisions of section 40(a)(ia) of the Act. The disallowance was challenged before the CIT(A) and the CIT(A), while confirming the disallowance has held that payment made by the assessee to Google Ireland for the services rendered was in the nature of royalty, chargeable to tax in India and assessee is therefore liable to deduct tax at source from the said payment. The matter went to the Tribunal and the Tribunal, relying upon the order of the Tribunal in the case of Yahoo India Pvt. Ltd., (supra) has held that the amount payable by the assessee to Google Ireland for the services rendered for uploading and display of banner of advertisement on its portal was in the nature of business on which no tax was deductible at source since the same was not chargeable in India in the absence of any permanent establishment (PE) of Google Ireland Ltd., in India.

114. Since this case was adjudicated by the Tribunal in the light of order of the Tribunal in the case of Yahoo India Pvt. Ltd., (supra) therefore, it has become necessary for us to examine the facts in the case of Yahoo India Pvt. Ltd. In the case of Yahoo India Pvt. Ltd., the facts culled by the Tribunal in its order are that the assessee company is fully owned subsidiary of Yahoo Inc., USA which is engaged in the business of providing consumer services such as search engine content and information on wide spectrum of topics, email, chat, etc. During the course of assessment proceedings, it was noticed by the AO that assessee has made a payment of Rs.34,86,947 to Yahoo Holdings (Hong Kong) Ltd., being cost of services/research material/ advertisement media. Yahoo Holding (Hong Kong) Ltd., is engaged in the business of providing internet services, technological tools, marketing solutions for business to customers in Hong Kong. It provides banner advertisement and Microsoft hosting services on Yahoo Hong Kong portal. The banner advertisement is also known as web banner which is a form of advertisement on the world wide web page. During the year under consideration, the Department of Tourism of India, through an advertisement agency media turf world wide intended to display a banner advertisement during the period from 18.02.2004 to 15.03.2004 on the portal owned by Yahoo Holding (Hong Kong) Ltd. For this purpose, it hired the services of assessee company to approach Yahoo Holding (Hong Kong) Ltd., to provide uploading and display services for hosting the banner advertisements at Yahoo Hong Kong portal. Accordingly, the assessee company entered into the contract in the form of media insertion order for display of impressions with the Department of Tourism. The total consideration for the same was agreed for Rs.65,11,500/- out of which assessee company agreed for granting agency discount to media turf of 25%. The assessee company in turn hired the services of Yahoo Holdings (Hong Kong) Ltd., for uploading and display of banner advertisement on its portal and the consideration for the said services was agreed at US$75,464, equivalent to Indian Rs.34,86,947/-. The said payment to M/s. Yahoo Holding (Hong Kong) Ltd., was made by the assessee during the year under consideration without deducting tax at source. The stand of the assessee, as taken before the AO was that since the services/operation performed by the Yahoo Holdings (Hong Kong) Ltd., was entirely outside India and since Yahoo Holdings (Hong Kong) Ltd., had no presence in India, the amount paid by them for the services rendered outside India was not taxable in India and no tax therefore was required to be deducted at source from the payment of the said amount. According to the AO, the income attributable to the services claimed to be rendered outside India has accrued in India as per provisions of section 9 and the same is being taxable in India. Therefore, the assessee is required to deduct the tax at source before remitting the said amount to Yahoo Holdings (Hong Kong) Ltd. Since no tax was deducted by assessee company from the payment remitted to Yahoo Holdings (Hong Kong) Ltd., deduction claimed by the assessee on account of the said payment was disallowed by the AO by invoking the provisions of section 40(a)(ia) of the Act.

115. Aggrieved, the assessee preferred an appeal before the CIT(A) but did not find any favour with him and ultimately the matter reached the Tribunal and the Tribunal held that since the banner advertisements hosting service did not involve use or right to use by the assessee of any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo Holdings (Hong Kong) Ltd., limited to the assessee company and uploading and display of the banner advertisement on its portal was entirely the responsibility of the Yahoo Holdings (Hong Kong) Ltd., the assessee company was only required to provide the banner advertisement to Yahoo Holdings (Hong Kong) Ltd., for uploading the same on its portal. Thus the assessee had no right to access the portal of Yahoo Holdings and there is nothing to show any positive act of utilization or employment of the portal of the Yahoo Holdings by the assessee company. In the light of these facts, the Tribunal came to the conclusion that payments made by the assessee to Yahoo Holding (Hong Kong) Ltd., for the services rendered for uploading and display of banner advertisement to the Department of Tourism on its portal was not in the nature of royalty and the same was in the nature of business profit and in the absence of any permanent establishment (PE) of Yahoo Holdings (Hong Kong) Ltd., in India, it was not chargeable to tax in India. Therefore, the assessee was not required to deduct TDS from the payment made to Yahoo Holdings (Hong Kong) Ltd., for services rendered. Therefore, the payment so made cannot be disallowed by invoking the provisions of section 40(a)(ia) for non-deduction of TDS.

116. In all these cases, the assessee was either an advertiser or act on behalf of some other advertiser and has purchased space from the owner of search engine to display its  advertisements online. Therefore, the payment made by the assessee to the owner of the search engine was considered to be business receipt / business profit in the hands of the owner of search engine who is non-resident and in the absence of permanent establishment (PE) in India, the business profits / business receipts received by them were not chargeable to tax in India. But in the instant case, appellant has not purchased the advertisement space for putting its advertisement online from the GIL. The assessee has been duly appointed a distributor under the Google Adword Distribution Agreement to distribute and sell the advertisement space obtained from the GIL under the Distribution Agreement. Under the distribution agreement, appellant was under obligation to provide pre-sale and after sale services with the help of ITES division. While providing after sales services / technical services, the assessee had access to the intellectual property rights and tools and informatives, derivative works owned by the GIL. In the instant case, assessee is not a simpliciter buyer of AdWord Space for putting the advertisement either for himself or for others which was the position in the aforesaid cases referred to by the assessee. Therefore, we are of the view that the facts of the case referred to by the assessee i.e., Pinstorm Technologies Ltd., Right Florist and Yahoo India Ltd., are different than the facts of the instant case. Thus the ratio laid down in those cases would not be applicable to the present facts of the case.

117. The learned Counsel for the assessee has also emphatically argued that the issue involved in these appeals is squarely covered by the aforesaid judgments in the case of Right Florist, Pinstorm Technologies Ltd., Yahoo India Ltd., Therefore, issue may be decided following the ratio laid down in the aforesaid cases. If the Tribunal takes a view contrary to the view taken in the aforesaid cases, the matter may be referred to larger bench. In this regard, we have carefully perused the facts of the aforesaid cases and we find the facts of those cases are different and therefore the ratio laid down therein cannot be followed in the instant case. Hence we do not find any merit in the contention of the assessee for making a reference to larger bench if contrary view is required to be taken. We therefore reject these contentions of the assessee.

118. A reference was also made upon the order of the Tribunal in the case of Taj TV Ltd., (Supra), and on its perusal, we find in para 3, the Tribunal has recorded the facts of the case according to which Taj TV Ltd., has appointed Taj India as distributor vide agreement dated 01.03.2002 to distribute an encrypted advertiser and/or subscription supportive television programme services known as Ten Sports for cable systemsolely for exhibitions to subscribers in India. As per the said agreement, the distribution revenue collected by Taj India will be split in the ratio of 60:40 between Taj TV and Taj India. The amount payable by Taj India to Taj TV shall be net of Indian Income Tax. Taj TV is registered in Mauritius and also does not have any branch office in India. Further telecasting is being done from outside India. It was contended in that case that Taj TV does not have permanent establishment in India and the transaction entered into by Taj TV are on principal to principal basis at arm’s length price. Taj India does not have any authority to enter into any contract on behalf of Taj TV and all the advertisements, sale contracts are entered into between the advertisers and the Taj TV. The commission of 10% in respect of advertisement revenue is fair and consistent with the industry practice. The Tribunal examined the Revenue’s contention for treating the payment to be royalty and came to the conclusion that the assessee only makes available the content to the cable operator which are transmitted by them to the ultimate customer/viewer and under the Distribution Agreement, assessee has not been granted any licence to use any copyright to the distributor or to the cable operator. The rights over the content at all times lies with the assessee company and are never made available with the distributor or cable operator. Therefore, impugned income will not constitute royalty. The relevant observation of the Tribunal in this regard is extracted hereunder for the sake of reference:

“So far as ground No.3 is concerned, that the distribution of income should be taxable as ‘royalty’ under section 9(1)(vi) up to 12th July, 2002, we are unable to concur with the divergent stand taken by the AO that for three months e payment will constitute ‘royalty’ and for balance nine months, the payment will constitute ‘business income’. It has also been brought to our knowledge that in the subsequent years the AO has treated ‘distribution income’ as business income and not as royalty. Thus, prior to period 12th July, 2002, also when assessee was not registered under the Laws of Mauritius then also it will not affect the nature of income. In any case, as stated earlier, under the distribution agreement, the assessee company has not granted any license to use any copyright to the distributor or to the cabreoperators. The assessee only makes available the content to the cable operators. operators which are transmitted by them to the ultimate customer/viewers. Further, rights over the content at all times lies with the Assessee Company and are never made available with the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute `royalty’.”

119. Whereas in the instant case, assesse was appointed as distributor under the AdWord Distributor Agreement with the condition that assesse would provide on sale and after sale service which required the involvement of technical know-how, IPRs, derivative workss, etc. In the case of Taj TV, the Taj TV has simply appointed the distributor and no licence was given to the distributor to use the technology developed by Taj TV. The distributor was simply allowed to further transmit the programs to the viewers/customers. Therefore, facts of Taj TV Ltd., and the facts of the assesse are entirely different and the ratio laid down in this case cannot be applied to the facts of the present case.

120. A reference was also made in the case of DDIT Vs. Set India Pvt. Ltd., (supra) and on its perusal, we find that a consideration was paid by the assesse to Set Satellite Singapore Pte. Ltd., for acquiring non-exclusive right to distribute set and set max channels. The Revenue has treated it to be in the nature of royalty taxable at 15% on the gross basis under article 12 of India-Signapore DTAA  hereas the assesse treated it to be the business profit. The facts of the case are that Set Satellite Singapore Pte. Ltd., is a company registered in Singapore and the said non-resident company operates television channels viz., Set and Setmax in India. The said non-resident company also converts ad air times for the said channels and also entered into agreement for distribution of TV channels in India. As per the agreement, 70% distribution revenue is received by non-resident company and 30% of distribution revenue is taken by assesse
company as consideration for the distribution of non-resident TV channels in India. The said non-resident company does not have any permanent establishment in India and as per article 5 DTAA its business profit is not taxable in India. While adjudicating the issue, the Tribunal has come to the conclusion that non-resident company has granted non-exclusive distribution agreement rights to the channels to the assessee or has not given any right to use or exploit any copyright. The assessee no way concerned whether programs broadcast by the non-resident are copyrighted or not. The Tribunal further observed that said distribution is purely a commercial right which is distinct from the right to use copyright. The Tribunal has placed the reliance upon the clause 6.3 of distribution agreement entered between the assessee company and non-resident which states as right granted to the assessee under the agreement is not at all and shall not be construed to grant of any licence or transfer of any right or any copyright. The Tribunal further observed that cable operator only re-transmits the TV signals transmitted to it by broadcaster without any editing delays additions and therefore payment made by the assessee to the non-resident company is not for use of any copyright and cannot be characterized as royalty. But in the instant case, assesseee was not appointed as a distributor simpliciter. The obligation was also cast upon the appllant under the distribution agreement to provide onsale and after sale services and these services could not be provided without resorting to technical support of the ITES division including the access to technical know-how, IPRs, copyright, derivative works etc. Therefore, facts of the case of Set India Pvt.Ltd., and facts of the instant case are not similar. Thus, the ratio laid down in that case will not apply to the present case.

121. A further reliance was also placed upon the judgment of the Delhi High Court in the case of DIT Vs. New Sky Satellite (2016) 68 Taxmann.com 8 Delhi and on its perusal we find that the assessee is a company incorporated in Thailand was engaged in the business providing digital broadcasting services as well as consultancy services to its customers who consisted of both residents of India and non-residents. The assessee company provided its services through its satellite T. In the course of assessment proceedings, the AO opined that income earned by assessee in India was taxable under 9(1)(vi) and the assessee would not get benefit of article 12 of India-Thailand DTAA. The Tribunal, relying upon the judgment of Delhi High Court in the case Asia Satellite Telecommunication Company Ltd., Vs. DIT 332 ITR 340 in which it has been held that receipts earned from providing data transmission services to space segment capacity on satellite did not constitute royalty within the meaning of section 9(1)(vi) and while providing transmission services to its customers, the control of satellite always remained with the satellite operator and the customers were only given access to the transponder capacity, held that the receipt of the customers earned from providing data transmission service did not fall within the term of royality under section 9(1)(vi) of the act. The matter travelled to the Hon”ble High Court and the Hon’ble High Court, while adjudicating the issue has taken the cognizance of the amendments brought in section 9(1)(vi) of the Act and has held “that it is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously farther
their case in an international treaty. Therefore mere amendment to section 9(1)(vi) cannot result in change. It is imperative that such amendment brought about in the agreement as well. Any attempt short of this even if it is evidence of state’s of discomfort at letting data broadcast revenue’s ship will be insufficient to persuade this court to hold that such amendments are applicable to DTAAs”. Their Lordship further held that “since the Finance Act 2012 will not effect article 12 of DTAA, it would follow that the first determinative interpretation given to the word ‘royalty’ in Asia Satellite,when the definition were in fact pari-materia (in the absence of any contouring explanation), will continue to hold the field for the purpose of assessment year precedent to the Finance Act, 2012 and in all cases which involve DTAA, unless the said DTAA are amended jointly amended by both the parties to incorporate income from data transmission services as par-taking the nature of royalty. In the instant case, assessee was appointed as a distributor with certain obligations and the obligations cannot be fulfilled without having access to technical know-how, trade mark, derivative works, brand features, etc., of the GIL. Therefore, the ratio laid down in this case will not apply to the present case. We have also examined the other judgments referred to by the assessee during the course of hearing and we find that facts of those cases are different from the facts of the instant case. Therefore, no assistance from those cases in favour of the assessee.

122. We have also examined the judgements referred to by the Revenue and in the case of CIT Vs. Synopsys International Old Ltd., (supra). We find that Synopsys US, was the owner of the copyright of electronic design and automation (EDA), Tool/software in certain geographies. It granted a licence to Synopsys International Ltd., Ireland, the assessee. The technical licence agreement is for a consideration to enable the assessee to use and commercially exploit the IP in EDA, tools and software in certain geographies. Synopsys US specially required the assessee to enter into end user software licence agreement (EULA) with the customers. The EULA between the assessee and the Indian customers has elaborate and restrictive clause, primarily with the object of protecting the owner’s right in the product, documentation and IP in the software. The reading of the agreement shows that Indian customers had purchased the licenced product i.e., electronic design automation (EDA), tools /software from the assessee for its use as a tool on application software. The EDA tool support the design and production of integrated circuit (ICs).As fabrication process is an extensive process, IC manufactures meticulously follow the design flow process before fabrication of the I.C is taken up. EDA tools are used in this design flow process. Design flow is a procedure which contain several sub-procedures.

123. The assessee received US $9,98,098, US $ 33, 53, 253 and US $ 20,97,003 respectively for 3 assessment years i.e., 2001-02, 2002-03 and 2003-04 from Indian customers. The notice under section 147 was issued. The assessee filed a return for all 3 years declaring Nil income but applied refund. The AO however held that assessee is liable to pay tax under section 9(1)(vi) and 20% on gross basis for first 2 sassessment year and 10% for the third assessment year. An appeal was preferred before the CIT(A). The CIT(A) has held that the software given in use to Indian customers was named in the agreement as ‘Synopsys software’. Had this software been itself got through licence from other companies, the name of software company would have borne the name of that company from which it was received. The CIT(A) further observed that what is transferred through the agreement was a licence to use the synopsys software i.e. a copyright owned by the appellant itself and not the copyright of the copyrighted article. Hence the receipt squarely fell under definition of royalty and therefore taxable in India.

124. Aggrieved, assessee preferred an appeal before the Tribunal with the contention that it is goods and not by way of licence agreement, the software only was allowed to use. In other words a copyrighted article was transferred and no transfer was made in respect of copyright. Being not convinced with the contention of the assessee, the Tribunal held that fees received by the assessee could not be treated as royalty as defined under section 9(1)(vi) of the Act. Revenue preferred an appeal before the Hon’ble High Court and before the Hon’ble High Court the following question was raised:

1. Whether consideration paid by Indian customers or end users, to the assessee for transfer of right to use the software/computer programme is in respect of the copyright and falls within the mischief of royalty as defined under sub-clause (v) to explanation 2 to clause (vi) of section 9(1) of the Act.

125. The Hon’ble High Court extensively dealt with the issue in the light of various judicial pronouncements. The Hon’ble High Court has observed that the licence is a permission to do something that would otherwise be unlawful and the question arise therefore as to what legal permission is granted by the software licence. For transfer of such right, if consideration is paid, it is not a consideration for transfer of copyright but for use of IP embedded in the copyright and therefore it is for the transfer of one of those rights of the owner of the copyright. It is not a copyright but it is in respect of a copyright. When copyrighted article is sold and the end user gets the right to use the intellectual property embedded therein, it is not a right in the copyright as such. Therefore, the mode adopted or the terminology given is not decisive to decide the nature of transfer, ultimately it is substance which is to be looked into. The relevant observation of the Hon’ble High Court in this regard is extracted hereunder for the sake of reference:

“43. A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use confidential information, and in virtually in all cases it will be a permission to copy a copyright work. If the software has been kept secret by the producer, or only supplied on conditions of confidentiality and has not been published too widely, then the software licence will be akin to a licence of confidential information or know-how. The owner or licensor of a copyright, has a right to t permission to use the software or a computer programme, in respect of which they have a copyright, without transferring the right in
copyright. It is one of the right of a copyright. owner or licensor. Without such right being transferred, the end-user has no right to use the software or computer programme. If he uses it, it amounts to infringement of copyright. For transfer of such right if consideration is paid, it is not a consideration for transfer of a copyright but for use of intellectual property embedded in the copyright, and therefore it is for transfer of one of those rights of the owner of the copyright. It is not a right in copyright but it is in respect of a copyright. When a copyrighted article is sold also, the end-user gets the right to use tile intellectual property embedded in the copyright and not a right in the copyright as such. Therefore the mode adopted or the. terminology given is not decisive to decide the nature of transfer. Ultimately, it is the substance which has to be looked into.

44. Therefore, it is necessary to look into the terms of the agreement entered into between the parties, as it would be purely question of fact to be decided on the basis of the intention of the parties as could be gathered from the written words used in theagreement.”

126. Having examined the contents and substance of end user software licence agreement executed between Synopsys International Ltd., and Athena Semiconductor Pvt. Ltd., Bangalore, India (end user), the Hon’ble High Court has come to the conclusion that from the description of the agreement, it is an end user software licence agreement, according to which software licence synopsys grant licencee a non-exclusive non-transferrable licence without right of sub-licence to use the licenced software in design techniques only in the quantity of authorized by licencee in accordance to documentation in the use area. Their Lordship further held that even if it is not transfer of exclusive right of copyright, the right to use the confidential information embedded in the software in terms of aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of a copyright possess in the said computer
software programme in respect of copyright owned. In terms of the DTAA, the consideration paid for the use or the right to use the said confidential information in the form of computer programme software itself constitutes royalty and attract taxes. The relevant observation of the Hon’ble High Court is extracted hereunder for the sake of reference:

“As is clear from the description of the agreement it is an end-user software licence agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques onlyin the quantity authorized by a licensee in accordance with the documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used in the said licence it does not take away the software out of the definition of the copyright. The word licenced software has been defined. Similarly, the words design, design technique is also defined. The word documentation is also defined and it is not in dispute what is granted is a license. Even if it is not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the aforesaid licence makes itabundantly clear that there is transfer of certain rights which the owner of copyright possess in the said computer sotware /programme in respect of the copyright owned. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It is not necessary that there should be a transfer of exclusive right in the copyright as contended by the assessee. The consideration paid is for rights in respect of the copyright and for the user of the confidential information embedded in the software/computer programme. Therefore, it falls within the mischief of Explanation (2) of clause (vi) of sub-section (1) of section 9 of the Act and there is a liability to pay the tax.

46. If there was any doubt regarding the taxability of this income the parliament by Finance Act, 2010 has substituted the explanation to section 9 which gives a clear intention of the legislature insofar as the liability of tax under this provision is concerned. A perusal of the said explanation makes it clear that as there was a doubt earlier, they want to remove the doubts by introducing this explanation. By the explanation they have declared that for the purpose of section 9 which deals with income deemed to accrue or arise in India, under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the nonresident, whether or not (i) the non-resident has a residence or place of business or business connection in India, (ii) the non-resident has rendered services in India. Therefore, the object is to levy tax on the income of a non-resident, if it has accrued or arisen in India and one such income is the income from royalty.”

127. In the instant case, under the AdWord Distribution Agreement, certain obligations were cast upon assessee in order to provide efficient on sale and after sale services which are only possible with the aid of ITES division. Under this AdWord Agreement and the Service Agreement, the assessee was given licence to use the confidential information, technical know-how, trade mark, brand features, derivative works, etc. Though the ownership of these intangibles remains with the GIL or the Google Inc., but the assessee was given the licence to use it in order to provide better service. Therefore, the facts of this case are similar to that case of Synopsys International Ltd. Hence the ratio laid down by the jurisdictional High Court in that case apply to the present case.

128. It was emphatically argued by the learned Counsel for the assessee that the payments made by the assessee under the AdWord Distributor Agreement was in fact a business profit in the hands of the GIL as it was paid on account of purchase of AdWord space,though the AdWord Advertisement space was further sold to different advertisers. The nature of payment remains the same i.e., the payment for purchase of AdWord space. Thus it should be the business profit in the hands of the GIL. It was further argued that there was no transfer of technical know how or trade mark, intellectual property rights or any process in favour of the appellant under the AdWord Distribution Agreement. Therefore, the payment made under AdWord Distribution Agreement cannot be termed to be payment of royalty and is chargeable to tax under section 9(1) (vi) of the Act as deemed income accrued in India. Whereas, according to Revenue, it was not a payment simpliciter towards the purchase of AdWord space for its resale to advertisers. The payment was made after deducting a particular percentage form the advertisement receipts,received from the advertisers, though as per services agreement, the assessee has rendered certain technical services but that too for the AdWord Programs only, for which assessee has to receive certain payments as per terms of service agreement from GIL. But the entire aspect is to be looked into in the light of both the distribution agreement and service agreement and the obligations cast upon the appellant under Adword distribution agreement.According to Revenue, the after sales services and the Ad review are not possible without the aid of ITES division. Therefore, the payment made to GIL by the assessee was on account of usage of their trade mark, intellectual property rights, process, derivative workss, etc., and thus nature of payment is royalty.

129. In order to adjudicate the nature of payment, we are required to examine the AdWord Distributor Agreement and the Service Agreement. In foregoing paras, we have already concluded that the AdWord Distributor Program and Services Agreement are interconnected with the navel cord and they cannot be segregated or separated. Without resorting to service agreement, the obligation cast upon the assessee under the AdWord Distribution Agreement cannot be fulfilled. Therefore, we have to examine the relevant clauses of the AdWord Distributor Agreement and the Service Agreement. Under the AdWord Distributor Agreement, the appellant was responsible for uploading all advertisers’ information that is required by Google for participation in the AdWord Program. As per clause 2.3, the distributor shall provide after sales service to the advertisers in accordance with the broad instructions, training and standards of Google. The appellant’s employees were also required to be technically trained by the Google. As per clause 9.4, upon the termination or the expiry of the agreement, all rights and licences granted by one party to other including but not limited to use the other parties brand features shall seize immediately and each party shall promptly return to the other party or destroy and certify the destruction of all confidential information as defined in the non-disclosure agreement and section 7 of this agreement on the other party. The brand features and the confidential information has been defined in this agreement and the same were also extracted in the foregoing paras of this order according to which the brand features includes the title, interest and intellectual property right relating to brand features and the confidential information means the confidential information shared by one party to other as per this agreement meaning thereby under the AdWord Distributor Agreement, the appellant has access to the confidential information, intellectual property rights and the brand features of the GIL in order to provide effective services under the AdWord Distributor Agreement. The technical services are required to be provided by the appellant under the AdWord Distributor Agreement as per services agreement, according to which the confidential information means all data and information of confidential in nature including technical know how and trade secrets relating to the business, the affairs, the product, the development projects or the products or services of Google Ireland or its suppliers or its affiliates including but not limited to intellectual property rights andconfidential information be communicated orally in writing or in any other recorded electronic or tangible forms.As per the service agreement data and information shall be considered to be confidential information. In the Service Agreement, derivative works is also defined and it means for copy writable or copyrighted material, any modifications, derivative works, translation, abridgment, revision of the form in which such material may be recast, transmitted or adopted. The intellectual property rights was also defined in the Services Agreement according to which it means all intellectual, proprietaries and/or intangible property right consulting, embodied in, pertaining to, used in or in respect of business of Google Ireland, the products or the provision related to services and all tangible embodiments thereof wherever located including but not limited to the followings :

(1) all trade marks, trade names, service mark, logos or trades data bases including all registration and applications therefor.

(2) All copy rights, nodal rights as defined therein and other rights in works of authorship including all registrations and applications therefor

(3) All patents and patent application patentable ideas, invention, innovations and implements

(4) All know-how, trade secrets

(5) All designs and code documentation, methodologies, process, design information,etc.

130. We have already reproduced relevant clauses of the service agreement in the foregoing paras for reference. Therefore, we do no prefer to extract the same again here while dealing with the issue. Under this service agreement, ownership of intellectual property, confidential information, software technologies, documentation shall remain the exclusive property of the Google Ireland but the Google India, the appellant, was allowed under the licence to use it in order to fulfil the obligations cast upon it under the AdWord Distributor Agreement. Upon termination, either of the parties are required to either destroy all copies of information, information, documentations and other software embodiments in its possession or control and not to use the same after the expiration or the termination of the agreement.

131. From the careful perusal of this AdWord Distribution Agreement and the Service Agreement, we find that appellant has not only purchased the advertisement space from the GIL and resold it to the advertisers against certain advertisement charges but the appellant was required to provide on sale and post sale technical services to the advertiser and the GIL, which are not possible without resorting the service agreement. In fact, the assessee obtained the advertisement space under the AdWord Distribution Agreement and resell it to different advertisers along with on sale and after sale services. With the aid of ITES division, the appellant is required to execute the programs and also provide all technical support to the advertisers and GIL. As per the agreement with the advertisers, the advertisers are required to approach only the appellant and not the GIL. Appellant is in fact required to sort out all glitches to be faced by the advertisers while putting the ads on the AdWord Program. Having examined functioning of the appellant from the submission on behalf of the appellant and the revenue, the literatures in the form of book viz., Learning AdWord and Google Analytics by Benjamin Mangold and the snap shots placed before us, we find that Google AdWord Program is a complex program or rather it can be called to be a portal or software developed by Google Inc. While discharging its obligation under the Google AdWord Programs and Service Agreement the appellant has an access to the trade marks, IPRs, derivative works, brand features and the confidential information of the GIL. Therefore, it cannot be called that whatever payments were made by the appellant to GIL was simpliciter a payment towards the purchase of AdWord space from the GIL for its resale to advertisers.

132. In order to examine whether this payment is a business profit of GIL or it was a payment of royalty to GIL, we have to examine the definition of royalty given in explanation below section 9(1)(vi) of the Act, according to which the royalty means the consideration received for transfer of any rights including the granting of licence in respect of patent, invention, model, designs, secret formula or process or trade mark or similar property or for imparting of any information concerning the working of or the use of patent, invention, model, design, secret formula or process or trade mark or similar property or use of any patent, invention, model, secret formula or process or trade of mark or similar property, etc. For the sake of reference, we extract the explanations below section 9(1)(vi) of the act as under:

“Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—

would be the income of the recipient chargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

57[(iva) the use or right to use any industrial, commercial or scientific equipment58 but not including the amounts referred to in section 44BB;]

(v) the transfer of all or any rights (including the granting of a licence) in respect of’s any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to 57[( iv), (iva) and] (v).

“[Explanation 3.—For the purposes of this clause, “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.]

60[Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—

(a)the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

Explanation 6—For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process- secret;]”.

133. As per explanation 3 below, section 9(1)(vi), the computer software means any computer program recorded in disk, tape, perforated media or the information storage, device and includes any such programme or customized electronic data and as per explanation 5, the royalty includes the consideration in respect of any right, property or information whether or not the possession or control of such right, property or information is with the payer, such right or property, information is used directly by the payer, location of such property or information is in India. As per explanation 6, the word process is also defined and shall be deemed to have included transmission of satellite.

134. Royalty is also defined under article 12 of Double Taxation Avoidance Agreement (DTAA) with Ireland. According to which, the term royalty means payment of any kind received by consideration for use or right to use any copyright of literary, artistic or scientific works including cinematograph films or tapes used for video or television broadcasting, any patent, trade mark, design or model plan, secret formula, process or for the use of or the right to use industrial, commercial or scientific equipment. For the sake of reference, we extract article 12 as under:

“ARTICLE 12 :ROYALTIES AND FEES FOR TECHNICAL SERVICES

1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.

3. (a) The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience;

(b) The term “fees for technical services” means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.”

135. If we examine the nature of services performed by the assesse with the aid of ITES division we would find that the assessee has an access to patent, technical know-how, IPRs, trade mark, the process, derivative works, brand features, etc., of the GIL, therefore the payments of advertisement fees made by the assesse after retaining a particular part of it to GIL is not the payment simpliciter towards the purchase of AdWord space which may be treated as business profit in the hands of the recipient but it is a payment of royalty to the GIL in the light of definition of royalty given under the Act and the DTAA. Therefore, we conclude that the payment made by the assesse to GIL is a payment of royalty and as per provisions of section 9(1)(vi) of the Act, it is an income deemed to accrue or arise in India.

136. Ld counsel for the asseessee has also raised an argument that Royality can only be taxed on receipt basis in the light of definition given in Article 12 of DTAA and not as per domestic law. In this regard.We have examined the judgment of the Apex Court in the case of Palam Gas Service Vs. CIT [2017] 81 taxmann.com 43 (SC) referred to by the Revenue in which their Lordship have examined the scope of provisions of section 40(a)(ia) in respect of word payable occurring therein. Their Lordship having examined the various provisions and have held that section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. In this behalf one has to keep in mind the purpose with which section 40 was enacted and the provisions of section 194C and 200 of the Act. Once it is found that the aforesaid section mandates the person to deduct tax at source not only the amount payable but also when the sums are actually paid to the contractor, any person who does not adhere to the statutory obligation has to suffer the consequences which are stipulated in the Act itself. The relevant observation of their Lordship is extracted hereunder for the sake of reference:

“15. We approve the aforesaid view as well. As a fortiorari, it follows that Section 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. In this behalf, one has to keep in mind the purpose with which Section 40 was enacted and that has already been noted above. We have also to keep in mind the provisions of Sections 194C and 200. Once it is found that the aforesaid Sections mandate a person to deduct tax at source not only on the amounts payable but also when the sums are actually paid to the contractor, any person who does not adhere to this statutory obligation has to suffer the consequences which are stipulated in the Act itself. Certain consequences of failure to deduct tax at source from the payments made, where tax was to be deducted at source or failure to pay the same to the credit of the Central Government, are stipulated in Section 201 of the Act. This Section provides that in that contingency, such a person would be deemed to be an assessee in default in respect of such tax. While stipulating this consequence, Section 201 categorically states that the aforesaid Sections would be without prejudice to any other consequences which that defaulter may incur. Other consequences are provided under Section 40(a)(ia) of the Act, namely, payments made by such a person to a contractor shall not be treated as deductible expenditure. When read in this context, it is clear that Section 40(a)(ia) deals with the nature of default and the consequences thereof. Default is relatable to Chapter XVIIB (in the instant case Sections 194C and 200, which provisions are in the aforesaid Chapter). When the entire scheme of obligation to deduct the tax at source and paying it over to the Central Government is read holistically, it cannot be held that the word ‘payable’ occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellant herein, then even when it is found that a person, like the appellant, has violated the provisions of Chapter XVIIB (or specifically Sections 194C and 200 in the instant case), he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences. The Punjab & Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects. We would again quote the following paragraphs from the said judgment, with our complete approval thereto:

“26. Further, the mere incurring of a liability does not require an assessee to deduct the tax at source even if such payments, if made, would require an assessee to deduct the tax at source. The liability to deduct tax at source under Chapter XVII-B arises only upon payments being made or where so specified under the sections in Chapter XVII, the amount is credited to the account of the payee. In other words, the liability to deduct tax at source arises not on account of the assessee being liable to the payee but only upon the liability being discharged in the case of an assessee following the cash system and upon credit being given by an assessee following the mercantile system. This is clear from every section in Chapter XVII.

27. Take for instance, the case of an assessee, who follows the cash system of accounting and where the assessee who though liable to pay the contractor, fails to do so for any reason. The assessee is not then liable to deduct tax at source. Take also the case of an assessee, who follows the mercantile system. Such an assessee may have incurred the liability to pay amounts to a party. Such an assessee is also not bound to deduct tax at source unless he credits such sums to the account of the party/payee, such as, a contractor. This is clear from Section 194C set out earlier. The liability to deduct tax at source, in the case of an assessee following the cash system, arises only when the payment is made and in the case of an assessee following the mercantile system, when he credits such sum to the account of the party entitled to receive the payment. 28. The government has nothing to do with the dispute between the assessee and the payee such as a contractor. The provisions of the Act including Section 40 and the provisions of Chapter XVII do not entitle the tax authorities to adjudicate the liability of an assessee to make payment to the payee/other contracting party. The appellant’s submission, if accepted, would require an adjudication by the tax authorities as to the liability of the assessee to make payment. They would then be required to investigate all the records of an assessee to ascertain its liability to third parties. This could in many cases be an extremely complicated task especially in the absence of the third party. The third party may not press the claim. The parties may settle the dispute, if any. This is an exercise not even remotely required or even contemplated by the section.”

16. As mentioned above, the Punjab & Haryana High Court found support from the judgments of the Madras and Calcutta High Courts taking identical view and by extensively quoting from the said judgments.

17. Insofar as judgment of the Allahabad High Court is concerned, reading thereof would reflect that the High Court, after noticing the fact that since the amounts had already been paid, it straightaway concluded, without any discussion, that Section 40(a)(ia) would apply only when the amount is ‘payable’ and dismissed the appeal of the Department stating that the question of law framed did not arise for consideration. No doubt, the Special Leave Petition there against was dismissed by this Court in limine. However, that would not amount to confirming the view of the Allahabad High Court (See V.M. Salgaocar & Bros. (P) Ltd. v. Commissioner of Income Tax, (2000) 243 ITR 383 and Supreme Court Employees Welfare Association v. Union of India, (1989) 4 SCC 187.

18. In view of the aforesaid discussion, we hold that the view taken by the High Courts of Punjab & Haryana, Madras and Calcutta is the correct view and the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642 did not decide the question of law correctly. Thus, insofar as the judgment of the Allahabad High Court is concerned, we overrule the same. Consequences of the aforesaid discussion will be to answer the question against the appellant/assessee thereby approving the view taken by the High Court”.

137. Our attention was also invited to judgment of the Bombay High Court in the case of Director (International Taxation) Vs. Siemens aktiengesellschaft (supra) in ITA No. 124/2000 in which the Hon’ble High Court has upheld the view taken by the Tribunal holding that the royalty and fees of technical services should be taxed on receipt basis. We have also examined the order of the Tribunal in the case of Saira Asia Interiors Pvt. Ltd., Vs. ITO (supra) and Naitonal Organic Chemicals Vs. DCIT in which it was held that under the related DTAA, tax liability can only arise at the point of payment and the income embedded in the payment is not taxable at the point of time of crediting the amount.

138. In order to adjudicate an issue of chargeability of tax on royalty we have examined the provisions of section 9(1)(vi) of the Act according to which, it shall be deemed to accrue or arise in India when it has become payable by a person who is resident of India. Whereas as per article 12 of DTAA, the royalty means payment of any kind received as consideration for the use of or the right to use any copyright of literary, artistic scientific work including cinematograph films etc. It was emphatically argued by Sr. Advocate Mr. Percy Pardiwala that wherever there is a conflict between the domestic law and DTAA, the provisions of DTAA will only prevail. Therefore, royalty only means when it is received as consideration for the use of or the right to use any copyright of literary, artistic, etc. We have also examined the judgment referred to by the parties on this issue and we find that it has to be taxed on receipt basis but in the instant case, the nature of AdWord Agreement and the Service Agreement is quite complexed. Under the Service Agreement, assessee would be paid by the GIL whereas under AdWord Agreement, the appellant is required to make payment of advertisement charges after deducting a particular percentage to the GIL. Though the assessee has contended that ITES division is exclusively involved in providing technical services to GIL as per the Services Agreement and its marketing division is involved in providing services as per AdWord  Program but in order the examine the actual services rendered by the appellant under the AdWord Program, one has to read both the agreements together. In the foregoing paras, we have already adjudicated and concluded that both these agreements are connected with the navel cord and they cannot be segregated. Therefore, both the agreements are to be read together in order to find out the actual functioning of the appellant, as held by jurisdictional High Court in the case of Synopsys International Ltd., (supra) that it is necessary to look into the terms of the agreement entered into between the parties as it would be purely question of fact to be decided on the basis of the intention of the parties as could be gathered from the written words used in the agreement. During the course of hearing, our attention was also invited to return filed by the GIL for the assessment year 2009-10 in which the GIL has shown its method of accounting as mercantile system of accounting. Once the GIL has itself has declared the method of accounting as mercantile system it cannot claim that for the purpose of royalty, system of accounting should be on cash/reciept basis. Moreover, the adjustment entries are to made in the books of accounts of the appellant as well as GIL with regard to the payment under Service Agreement and AdWord Program Agreement. It is also an admitted fact that in view of clause 6.1 of EXHIBIT-A attached to Distributor agreement, payments are to be made during the year on short intervals and the final trued-up payment on the basis of audited accounts of GIL. The appellant could not demonstrate that the royalty was not paid to or received by the GIL and it was simply credited to its accounts in the books of accounts of the appellant. Under these situations, we do not find any merit in the contentions of the assessee that royalty cannot be taxed in the impugned assessment year as it was not received by the GIL and therefore is not chargeable to tax in India as a deemed income accrued. Since the payment made under the distribution agreement to GIL by the appellant is held to be the payment of royalty, appellant is required to deduct the TDS on such payment.

139. On the point of equalization levy, we find that by the Finance Act, 2016, equalization levy was introduced and as per its definition, equalization levy means tax leviable on consideration received or receivable for any services specified under the provisions of the chapter. They have also defined specified service which means online advertisement, any provision for digital advertisement space or any other facility of service for the purpose of online advertisement and includes any other services as may be notified by the Central Government in this behalf. It was further clarified that from the date of the commencement there shall be charge on equalization levy @ 6% on the amount of consideration for any specified services received or receivable by a person being a non-resident from a person resident in India carried on business or profession or non-resident having a permanent establishment in India. Meaning thereby, the Legislature has introduced the equalization levy to tax the considerations paid by resident to a non-resident who is not having a permanent establishment in India. No doubt, it may be business profit in the hands of the recipient and the Legislature intend to tax the business profit as it has arisen out of the activities performed in India. But it does not effect other kind of services in which technology,the know-how, copyrights or IPRs are involved. From this argument, the learned Counsel for the assessee intend to demonstrate that since the intention of the Legislature to treat the payment by the advertisers to the non-resident is a business profit in the hands of the recipient the same should be treated in other cases also where the payments are made by the residents to non-residents for a consideration of use of technical know-how, IPRs, copyrights, derivative workss and other intangibles. But we do not find any merit in this argument as the equilization levy is to charged only on consideration for specified services and not others where there is use of IPR, copyright and other intangibles. In the instant case, under AdWord Distribution and Service Agreement, the appellant has acquired licence to use IPRs, copyright and other intangibles to provide better services either to GIL or to advertisers. Therefore, the introduction of equilisation levy would not convert the nature of payment made by the appellant to GIL.

140. With regard to another limb of argument of the learned Counsel for the assessee that in providing a space on Google AdWord Program to the advertisers, the trade mark or the GIL was not involved therefore consideration paid by the appellant to GIL is not royalty, we find that the AdWord was registered with the Registrar of Trade Marks, Mumbai in the name Google Inc., but the programme is known as Google AdWord Program owned by the Google Inc., under which GIL has provided space to appellant for its sale to the various advertisers. The learned Counsel for the assessee in this regard has contended that if the trade mark is used as incidental to the main activity, it cannot be called that there was a transfer of trade mark or licence to use the trade mark. In support of his contention, he has invited our attention to the judgment of Delhi High Court in the case of Director of Income Tax Vs. Sherton Internaitonal Inc., (2009) 178 Taxmann 84 Delhi and on its perusal we find that assessee company is incorporated in USA and non-resident under the Indian Tax Laws. The assessee is engaged in providing services to hotels in various parts of the world. On 27.01.1979 the assessee entered into one such agreement with ITC Ltd., for providing services to 3 of its hotels i.e., Welcome Group Mourya Sherton, New Delhi, Welcome Group Mugal Sherton, Agra and Welcome Group, Chhola, Sherton Madras. The scope of services envisaged in the agreement was publicity, advertisement and sales including reservation services. In consideration of the services which the assessee was required to render, ITC Ltd., agreed to pay a fee @ 3% of the room sales to the assessee. According to Revenue what the assessee was making available to the ITC hotels was technical and consultancy service; provision of training to its employees’ the use of its trade mark (even though they were free of cost, these were services according to him linked to the trade mark), making available the technical know-how, documentation and manuals for which while the assessee was not charging a lumpsum fees the consideration received by the assessee was relatable to the business concluded by its client-hotels and the reservation network. Based on these observations, the AO has concluded that assessee had a business connection with India and hence fees received on account of services rendered by the assessee were deemed to accrue or arise in India and therefore assessee’s case was covered under section 9 of the Act. While adjudicating the issue CIT(A) has classified services rendered by the assessee into three categories. According to the CIT(A), the fee received by the assessee for the followingthree categories constituted payment of royalty under article 12(3)(a) of the DTAA; “ (1) use of trade mark, trade name and the stylized S service mark, even though the agreement allowed its use at no cost it being a colourable device the payment received by the assessee had to be attributed to the user of the said intangible assets ;2) Payments towards reservation service and “(3) lastly payments towards maintenance of high international standards.” In respect of last category of service which were in the nature of publicity, marketing and promotion activities and had been rendered outside India, according to CIT(A), they constitute a commercial income and in the absence of PE in India the said payments could not be brought to tax.

141. The matter was carried to the Tribunal and the Tribunal examined the arguments and the related nature of services and came to the conclusion that the main service rendered by the assessee to its client was advertisement, publicity and sales promotion,keeping in mind the mutual interest and in that context, the use of trade mark, trade name or the stylized ‘S’ or other illuminated sereivces referred in the agreement with the assessee were incidental to the main service. Accordingly, Tribunal has held that payment received was neither in the nature of royalty under section 9(1)(vi) read with explanation 2 nor in the nature of fee for technical service under article 12 of the DTAA. The Revenue went in appeal before the Hon’ble High Court and the Hon’ble High Court has confirmed the view of the Tribunal.

142. In the instant case, appellant was not engaged in the advertisement, publicity of any particular activities of the GIL. Appellant was appointed as a distributor under the AdWord Distribution Agreement with certain obligations towards the advertisers and the GIL and that obligations cannot be fulfilled without the aid of ITES division and having access to the IPRs, technical know-how, trade mark, derivative workss and other intangibles of the GIL. Thus the facts of the aforesaid case and that of the appellant’s case are entirely different. Therefore the ratio laid down in that case will not be applicable in the present case.

143. We have also been carried through other judgments of Delhi High Court in the case of Formula One World Championship Ltd., Vs. CIT (Supra) and from its perusal we find that assessee i.e., Formula One World Championship Ltd., was a UK tax resident company. Consequent to the agreement entered into between the Federation Internationale Automobile (FIA an International Motor Sports Event Regulating Association) Formula One Asset Management Ltd., (FOAM) and FOWC, FOAM licenced all commercial rights in FIA Formula One World Championship (Championship)to FOWC for hundred years terms effecting from 01.01.2011. Assessee entered into risk promotion contract (RPC) dated 13.09.2011 by which it granted to Jaypee Sports right (Right) to host, stage and promote formula one, Grand Prix of India, event foraconsideration of USD 40 millions and art work licence agreement (ALA) contemplated in RPC was also entered into between the FOWC and the Jaypee the same day i.e., 13.09.2011 permitting the use of certain marks and intellectual property  belonging to FOWC for a consideration of USD 1. Every F1 racing event is hosted, promoted and staged by a promoter with whom FOWC as the a right holder enters into contract and whose event is nominated by the CRH (a contract right holder which in effect FOWC) to the FIA for inclusion in the official F1 racing calendar. In other words FOWC an exclusive nominating body at whose instance the event promoter is permitted participation.

144. The FOWC and Jaypee Sports both approached the AAR on issue whether the payment of consideration receivable by FOWC outside India in terms of RPC from Jaypee was or was not royalty as defined in article 13 India-UK DTAA. The AAR having examined the contents of the agreement in the light of rival submissions have concluded that firstly the amount paid was royalty secondly FOWC had no fixed place of business nor was doing any business activity in India and had not authorized any organization or entity to conclude contracts on their behalf and therefore had no PE in India. The assessee moved to the High Court against both the observations of the AAR and with regard to question whether the payment made by Jaypee to FOWC is in the nature of royalty under DTAA for the use of later’s trade mark. The Hon’ble High Court has examined the facts of the case and have come to the conclusion that from the tenure of the agreement, the main purpose of the RPC is not for grant of trade mark rights or privilege or licence to use, and the payment made to it under RPC are not the royalty either in the Act or the DTAA, they most certainly are not for the use of the trade mark or the IP rights, but rather for the grant of privilege of staging, hosting and promoting the event at the promoters racing circuit in Noida. The relevant observation of the Hon’ble High Court are extracted hereunder for the sake of reference:

“ 65. FOWC and Jaypee argue that the rights given to the latter under the RPC was the grant of a bundle of rights the basic objective of which were to enable it, as the promoter to stage a motor racing event in India at its circuit, the Buddh International Circuit, that would be an official round of the FIA Formula One World Championship, in which all participant teams and drivers in that Championship would therefore compete. The permission to use the F1 marks for purposes limited to advertising the Event was incidental to the grant of that principal right to enable hosting of the event. They also argue that under the terms of the RPC and the ALA Jaypee had no independent right of commercial exploitation of the marks. Therefore, the two independent contracting parties agreed that no consideration was payable to FOWC in relation to the use of the marks. Though the right included the right to name the event specifically, it was predominantly in the nature of a pure commercial right. It was argued that the payment to FOWC was the dominant purpose of securing the right to “put on” (i.e. host, stage and promote) at its circuit and as its own commercial venture, an official round of a globally popular international sporting series. The consideration was not paid for the use of any copyright, trademark or other intellectual property mentioned in the definition of ‘royalty’, whether W.P.(C) 10307/2016, W.P.(C) 9509/2016 & W.P.(C) 10145/2016 Page 56 under second Explanation to Section 9(1)(vi) of the Act or Article 13(3) of the India-UK DTAA. The ALA was incidental to and a mere consequence of the RPC. Its purpose was to ensure that the use of Fl and related marks would be strictly controlled and limited to the sole purpose of promoting the event(s), and that Jaypee and other third parties would not be permitted to use the marks in connection with any other unauthorized activity or commercial venture that could damage or dilute the reputation and prestige of the Championship. FOWC and Jaypee therefore urge that the AAR‟s finding that the payment amounted to “royalty” is contrary to law. They argue that the AAR also erred in distinguishing and not following Sheraton(supra). The revenue on the other hand, supports the AAR‟s conclusions and findings; it urges that the terms of the ALA and the RPC clearly show that the payment of US$ 40 million was to enable Jaypee the use of the F1 trademark and logo; they point out that these marks figured prominently in the trackside advertisements and the tickets that were printed. The use of the logo, to promote the event,therefore meant use of the F1 marks. The nomenclature or terms of an agreement are not always determinative of the true nature of the transaction; in this case, it clearly was to permit the use of the F1 mark. The character of the event would have been different had the F1 marks not been used by Jaypee. It was held that the popularity of the event is a result only of the use of the Marks, and that without those marks it would not enjoy its popularity otherwise.

66. Under trademark law, particularly in India, trademark use even for advertisement purposes is to be preceded by prior consent of the proprietor and any unauthorized use of the trademark without such prior permission of the proprietor could lead to an infringement of the trademark (in India, under section 29 of the Trade Marks Act,1999). To secure registration for the marks in India from the Trademark Registry, FOWC and Jaypee entered into the ALA. The function of the ALA was (a) to provide for a strictly limited usage of the marks i.e. only for advertisement and promotion of the Indian Grand Prix Event; (b) to provide for restrictions on usage of such marks, i.e. not for any commercial purposes such as use on merchandise, etc.

67. The grant of a right, in the form of license to use the trademark is primarily to be utilized in the licensee‟s product. In a typical case of licensing, the trademark proprietor W.P.(C) 10307/2016, W.P.(C) 9509/2016 & W.P.(C) 10145/2016 Page 57 does not wish to mark its products in an area; it licenses the mark, to be used by the licensee‟s products, subject to limitations. The licensee has no right to initiate legal proceedings, in the event of infringement, unless specifically authorized; the property in the mark always vests with the owner. Even the use of the mark by the licensee inures to the owner, as the latter‟s continuous use, in terms of Section 48 of the Trademarks Act. Typically, therefore when a trade vendor or establishment sells branded goods, it is incorrect to state that the income earned by the vendor is generated from the brand or mark, associated with the product, rather than from sale of the product itself. It would be incorrect therefore, to conclude that income earned is not from the sale of the product, but from marketing intangibles connected with the reputation of the mark, though that reputation guarantees a high demand for the product, from which the seller benefits. Likewise, in the case of distribution, a distribution agent is under an agreement with the manufacturer to sell its good; it also possesses the right to advertise the goods and brands of the manufacturer.

This implies a license of the manufacturer‟s trademark. In such an event, the distributor need not pay for the right to use the intellectual property under which the goods are sold; he merely pays for obtaining the exclusive commercial right to sell the goods he buys from the manufacturer for enabling onward sale.

68. Para 10.1 of OECD commentary on Article 12 of the Model Convention states that payments solely made in consideration for obtaining the exclusive distribution rights of a product or service in a given territory are not royalty, since the resident distributor does not pay for the right to use the trade name or trade mark under which the products are sold but merely obtains the exclusive right to sell in his state of residence the product that he is agreeing to buy from the manufacturer; such payments will be characterized as business income.

69. It is relevant here to consider the conditions in the RPC and the ALA, which FOWC entered into with Jaypee. Under recital B to the RPC, FOWC clearly has the exclusive right to exploit the commercial rights in the championship and to award Jaypee the right to host, stage and promote F1 Grand Prix events. Clause 17, states that FOWC would through reasonable endeavors ensure that at least sixteen cars participate in the Event. Clause 18 forbids Jaypee from making any audio or visual image of the event;

W.P.(C) 10307/2016, W.P.(C) 9509/2016 & W.P.(C) 10145/2016 Page 58 likewise there are restrictions in clause 19 of the RPC. Clause 23.2 permits FOWC to make incidental use of I.P. rights solely for the limited purpose of facilitating Jaypee to promote the event. Under the RPC Jaypee remains liable to pay the full contractual amount in the year of termination and in the subsequent year, the right to use trademarks, logos and IP Rights ceases instantly, the moment termination takes place. This is a strong pointer to the fact that the amounts payable by Jaypee to FOWC under the RPC are really for the privilege of hosting and staging the championship race and not for the IP rights, which in any event, could be utilized by it only to promote the race and for no other purpose.

70. Clauses 23.3 and 23.4 of the RPC are to be read in conjunction with the ALA. The ALA does not confer any additional rights, neither was a license nor any form of right to use the trademark given to Jaypee by FOWC which resulted in royalty payment within the meaning of Article 13 of the DTAA.

71. The judgment in Director of Income Tax v. Ericsson A.B. [2012] 343 ITR 470 (Del), held that a lump-sum payment which is not based on or connected with the extent of the user of the IP rights would not constitute “royalties” within the meaning of the DTAA. In the present case, the payments made under the RPC were separate lump-sum amounts in respect of the three separate race events held in each of the three (3) years 2011 to 2013. It is not a payment, which is based on either the number of tickets sold or the total amount of revenue earned by Jaypee in each of the said years or indeed on any other measure. In the present case, the lump sum payable to FOWC by Jaypee would likewise, not constitute royalties. Importantly, recital (B) of the ALA specifically stated that FOWC wished to grant a license to Jaypee permitting only the incidental use of certain IP rights and artwork “solely for the limited purpose of facilitating the hosting, staging and promotion of the event”. The definition of “permitted use” in clause 1.1 of the ALA states that it means only the incidental use of the licensed marks and materials “for the purpose of hosting, staging or promoting the event, but for the avoidance of doubt, not to include use for any merchandising or other products or services whatsoever, whether distributed free of charge or for sale”. Clauses 2.2 and 6.2 of the ALA provide that the ALA will continue only until the RPC terminates or expires; Clause 2.3 of the ALA W.P.(C) 10307/2016, W.P.(C) 9509/2016 & W.P.(C) 10145/2016 Page 59 prohibits Jaypee from using any of the licensed marks, or as part of the name of the circuit, any corporate name, any domain name, website address or other URL identification or equivalent used in association with Jaypee. Jaypee thus has no IP rights whatsoever independently of the staging and hosting of the event. The undertakings given by Jaypee, set out in Clauses 3.1(e) and 3.6 of the ALA too reinforce this conclusion. These are strong indications that the parties did not intend, through the RPC and the ALA, to license the trademark. Thus, it does not amount to royalty under the DTAA. The court is in agreement with FOWC‟s position on the definition of “royalty” as set out in the second Explanation to Section 9(1)(vi) of the Act; it is significantly broader than the definition of “royalties” set out in Article 13(3) of the India-UK DTAA. The definition in the Act specifically covers and includes lump-sum payments, whereas Article 13(3) of the DTAA only refers to payments.

72. The impugned order neither contains any discussion nor finding whatsoever on this crucial issue even though it goes to the root of the entire case. The entire tenor of the agreement- even the main purpose of the RPC, is not for the grant of trademark rights or privilege or license to use. The payments made to it under the RPC are not “royalty” either under the Act or the DTAA, they most certainly are not for the use of trademarks or IP rights, but rather for the grant of the privilege of staging, hosting and promoting the Event at the promoter’s racing circuit in Noida(NCR). FOWC under the RPC, made available to Jaypee all of the elements which constitute the event. In particular, this includes nominating (to FIA) the promoter’s event for inclusion in the official F1 racing calendar; after such inclusion the F1 racing teams with their F1 cars and drivers were bound to participate in Jaypee’s event held at the Promoter’s racing circuit, strictly in conformity with the requirements of the F1 Sporting and Technical Regulations and the FIA Sporting Code. Therefore, the grant of F1 rights by the FOWC to Jaypee is merely incidental to the hosting and staging of the event by it, and this is clear from the fact that the use of rights by Jaypee has been strictly confined and limited to use only for the promotion of the event, and for no other purpose and in no other manner whatsoever. “

145. But in the instant case, assessee is not involved in advertisement activities of GIL and for same reasons as discussed in the foregoing para, we are of the view that since the facts are not similar to the facts of the appellant’s case, the ratio laid down in this case would not apply to the present case.

146. With regard to the bonafide belief of the appellant we find that the agreements relating to Google AdWord Program i.e., Google AdWord Distributor Agreement and Service Agreement were prepared in such a way to give a different colour of transaction, whereas under the Google AdWord Program, the Appellant is required to sell the ad space to the Advertiser with the technical support onsale and post sale and the technical support to the Advertisers are not possible without the use of technical know-how, IPR, derivative workss, intangibles, information and copyrights owned by the GIL or its parent holdings. Since the appellant has access to technical know-how, IPRs, derivative workss, intangibles, information and copyrights of the GIL or its parent holdings, the payment made in lieu of that is certainly a payment of royalty on which appellant is required to deduct TDS. These facts were known to the appellant since the execution of both the agreements. Therefore, it cannot be said that appellant was under the bonafide belief for non-dedcution of TDS. The facts in the case of Kotak Securities Ltd.(supra), are different as in that case the appellant was under bonafide belief with regard to nature of payments as no dispute was ever raised by the Revenue in earlier years. But in the instant case, the appellant was aware of the nature of payments since the execution of agreements at different points of time as to what kind of services were required to be provided by the appellant to the GIL under the Google AdWord Program and the Revenue has disputed the nature of claim raised by the appellant since beginning. Therefore, the ratio laid down in the case of Kotak Securities will not apply to the present facts of the case.

147. We have also carefully examined the judgment of the Apex Court in the case of GE India Technology Cen. Pvt. Ltd., Vs. CIT 327 ITR 456, CIT Vs. Eli Lilly and Co., (India) Pvt. Ltd., (supra) and Transmission Corporation of AP Ltd., Vs. CIT (supra), in which it has been repeatedly held that liability of deducting tax at source is in the nature of vicarious liability which pre-supposes existence of primary liability, the said liability is a vicarious liability and the principal liability is of the person who is taxable. It was also observed in those judgments that the plea of bonafide belief cannot be taken for non-deducting of TDS when it is clear that TDS is required to be deducted as per section 195 of the Act. The plea of bonafide belief can only be considered while adjudicating the issue of penalty to be levied under section 271C of the Act.

148. In the case of GE India Technology Cen. Pvt. Ltd., (supra), their Lordship of Apex Court have held that section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the Act to deduct income tax at the rate in force unless is liable to pay income tax thereon as an agent. It was further held that payment to non-resdients by way of royalty and payment for technical services rendered in India are common examples for sums chargeable under the provisions of Income Tax Act, to which the aforesaid requirement of tax deduction at source applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of section 200 r.w.r. 30 of the Income Tax Rules, 1962. We have carefully examined the facts of the instant case in the light of various judicial pronouncements referred here in above and the AdWord Distributor Agreement and the Service Agreement together and we find that under these agreements assessee was licenced to use the trade marks, IPRs, brand features, derivative workss and other intangibles etc, though it may not be transferred in favour of the appellant.Therefore the consideration paid by the assessee is on account of usage of all these intangibles in order to provide better services to the GIL or to the advertisers is certainly in the nature of payment of royalty and is chargeable to tax under section 9(1)(vi) of the Act and under article 12 of the DTAA. Since the assessee has not deducted the tax at source as per provisions of section 195 of the Act, assessee was rightly held to be in default under section 201(1) of the Act. We therefore confirm the order of the CIT(A) upholding the ordert of the AO passed under section 201(1) and 201(1A) of the Act in this regard.

149. IT(IT) A No. 1295/Bang/2014

Through this appeal, the revenue has assailed the order of CIT(Appeals) inter alia on the following grounds:-

“1. The learned CIT (Appeals) has erred in partly allowing the appeal of the assessee which is opposed to law, equity, facts and circumstances of the case.

2. The learned CIT (A) erred in fact by not appreciating the Assessing Officer’s conclusion based on the material available on the record that the Google Ireland Limited (GIL) is not the beneficial owner of the Royalties paid by the Google India Private Ltd(GIPL)

3. The learned CIT (A) erred in fact and law by holding that the M/s.Google Ireland Limited (GIL) is the beneficial owner of the royalties paid by the GIPL and the rate of TDS is at 10.556%.

4. The learned CIT (A) erred in not appreciating the reliance of the AO in the statement made under Oath before the Public Accounts Committee, House of Commons, British Parliament by Mr. Matt Brittin of Google UK Ltd and the various articles appearing in WWW,which shows that the transaction of assessee company constitutes a colourable device.

5. The learned CIT (A) erred by not considering the fact that onus is on the assessee to establish with the reliable documentary evidence that the recipient (GIL) is the beneficial owner of royalty.

6. The learned CIT (A) has not appreciated the Assessing Officer’s reliance on the agreements entered between the entities to decide the beneficial owner of the Royalties which were neither produced before the AO nor the Ld.CIT(A).”

150. Though various grounds are raised, but they all relate to the issue as to whether GIL is the beneficial owner of the payment received in the form of royalty.

150. We have carefully examined the orders of the lower authorities and we find that the AO has taxed the royalty @ 10.56% (including education cess and surcharge) under section 115A of the Act having rejected the contention of the assessee that GIL is the beneficial owner of the royalty and royalty will be taxed at 10% as per Article 12 of DTAA.

151. The assessment order was challenged before the CIT(Appeals) in AY 2013-14 and the CIT(Appeals) has accepted the contention of the assessee and has held that GIL, the recipient of royalty, is the beneficial owner, therefore royalty will be taxed at 10% only; and this order of CIT(Appeals) is challenged before us.

152. In other succeeding years i.e. AYs 2014-15 & 2015-16, the assessment order denying the benefit of beneficial ownership to GIL was approved by the CIT(Appeals) and the assessee is in appeal before us in ITA no 949& 958 /Bang/17 against the confirmation of the order of the AO. Therefore, we have to adjudicate the issue in the light of evidence placed before the lower authorities and also before us. While disallowing the claim of assessee, the AO has examined the concept of beneficial ownership and the surrounding circumstances and also in the light of tax residency certificate issued by the revenue authorities to GIL. The AO has examined the concept of beneficial ownership in the light of UK Trust of Laws and UN Model of Convention and was of the view that the object of this concept is to identify the true owner of income or asset with ultimate rights of enjoyment. There is no definition available either under UN Model of Convention or under domestic tax laws of India. The AO further observed that the concept of beneficial ownership was introduced in the tax treaties as a counter measure against the treaty shopping to confine bargain only to the contracting states which were intended to benefit from the treaty. The concept of beneficial ownership is a tool to protect the bargain between the two contracting states. None of the country would intend to relinquish its tax base without getting something back for it. The beneficial owner is used to confine the bargain to the parties who were intended to benefit from it.

153. The AO further noticed in India-Ireland treaty that the treaty does not use the general term ‘owner’, but uses specific term ‘beneficial owner’. Therefore treaty intends to give benefit of withholding tax at the reduced rates only to the person who can be loosely described as a ‘final’ owner of income. The concept of final owner of income can be elaborated with the help of attributes of ownership of income. The AO further observed that income ownership has several attributes such as right to possess, use or manage income, power to alienate and ability to consume waste or destroy, the risk of depreciation and hope of appreciation. It is possible to split these attributes among different persons by entering into a legal or contractual arrangement to avail benefit of the favourable treaty without losing ownership of income. Therefore, beneficial owner is the one who has more attributes of ownership of income than others. He further placed reliance upon the explanation by Charles Du Toit describing that beneficial owner is the person whose ownership attributes outweighs those of any other person. Besides he has also placed a reliance on the Bulletin for International Taxation, Vol. 64 (2010) no.10, pages 500 – 509.

154. During the course of assessment proceedings, the AO has asked the assessee to furnish evidence in support of its claim that GIL is the beneficial owner of the royalties payable by GIPL. In response thereto, the assessee has filed a Tax Residency Certification (TRC) issued by the revenue authorities of Ireland and the financial statements of GIL for the year ending 31.12.2012. Reliance was also placed upon the statement of Finance Minister on 01.03.2013 in which it was clarified that TRC produced by the resident of the contracting state will be accepted as evidence that the person is a resident of that contracting state and the income-tax authorities will not go behind the TRC to question the resident status of that person. The AO was not convinced with the explanation furnished by the assessee and he observed that TRC of GIL has never been questioned. The GIPL was asked to prove whether GIPL is the beneficial owner of amounts payable by GIPL under Article 12 of the treaty. The AO further observed that TRC is essential to prove that person is a resident of a contracting state in order to claim the treaty benefits. He has also examined the statement of Hon’ble Finance Minister on the proposed insertion of section 90A(5) and noted that TRC certifies that you are a resident, but it does not certify you are a beneficial owner. The AO has also examined the different layers of holdings involved in these transactions. The legal owner of Intellectual Property (IP) in the Adword program is Google Inc. USA , which has in turn given the rights to use the IP in the Adwords program to the group entity Google Ireland Holdings (GIH). GIH in turn by license agreement given the rights to use the Adwords program to Google Netherlands Holding, BV (GNHBV), a Netherlands based subsidiary, for which GNHBV pays royalty to GIH. GNHBV in turn by license agreement has given the rights to use the Adwords program to GIL for which GIL pays royalty to GNHBV. The AO has depicted the relationship diagram in his order and for the sake of reference, we extract the same hereunder:-

155. The AO accordingly asked the assessee to furnish (1) the agreement between GNHBV and GIL, (2) the agreement between GIH and GNHBV, and (3) the agreement between Google Inc. and GIH; but the assessee did not furnish the copies of agreement before the AO and the AO observed that it would be difficult to accept the claim that GIL is the beneficial owner of royalties payable by GIPL to GIL as the terms and conditions under which GIL was given the licensing rights over Adwords program is not known. He further observed that GIL is an operational company, but this fact alone is not sufficient to state that GIL is the beneficial owner of the amounts paid/payable by GIPL. In the absence of these agreements, the AO has examined the various material on the Google group in the World Wide Web in order to understand the relationship between different entities of the Google group. He has also examined the Nineteenth report of Session 2012-13 of House of Commons, Committee of Public Accounts in which the Committee has recorded the explanation furnished by Google and the statement of Mr. Matt Brittin, Google’s Vice President for Sales & Operations in Northern & Central Europe, summoned by Public Accounts Committee and took note that profits derived by GIL are transferred to entity GIH which is controlled and managed from Bermuda, a tax haven. The relevant observations of the AO are extracted hereunder for the sake of reference:-

“The transactions of Google UK Ltd in relation to distribution of Adword program in UK were analysed by the Public Accounts Committee, House of Common of the United Kingdom. Mr. Matt Brittin, Google’s Vice President for Sales and Operations in Northern and Central Europe, was summoned by the Public Account Committee and his statements were recorded under Oath. The deposition of the Chie Executive Officer of Google UK Ltd forms part of the report of the House of Commons Committee of Public Accounts, FIMRC Annual Report 2011-12, Nineteenth Report of Session 2012-13, dated 28th Nov 2012 which is available on the WWW. The relevant part of the report are reproduced as under:

10. Google explained in its responses that it minimised tax within the letter of the law and that low tax areas or tax havens influenced where it located its group companies. The vast majority of Google’s non-USA sales are billed in Ireland. Goodie makes money from business to business advertising, adverts which can be targeted to the UK website and to UK Google users. In the UK,Google Ltd recorded revenues of £396 million in 2011, from Google Ireland, but paid corporation tax of only £6 million. Google Ireland paid for the services provided by the 1,300 staff in the UK. Google had approximately 700 staff who undertake marketing work in the UK as part of their activities, but only 200 of Google’s Irish staff of 3,000 were involved in marketing Google in the UK.

11. Google accepted that profits should be taxed in the jurisdictions where the economic activity generating those profits occurred but it asserted that its underlying economic activity arose from the innovative software technology underlying its Google search engine generated by the US company. Goodie also confirmed that it had an entity based in Bermuda to protect its intellectual property. We consider that the company undermined its own argument since it remits its non-USA profits (including from the UK) not to the USA but to Bermuda and therefore may be depriving the USA of legitimate tax revenue as well as the UK. Subsequently, Google told us that there were no outstanding issues with HMRC about Google UK’s accounts. HMRC is currently carrying out a review of the tax returns filed by Google. UK for 2005-11 inclusive and Google told us this is standard practice and that it is co-operating fully with that review.

Q472 Chair: You very helpfully told us that about 700 people sell into the UK—marketing people— compared with 200 in Ireland. What I do not understand is that the Irish guys pay a fee to Google Netherlands Holdings BV. Is that to save withholding tax?

Matt Brittin: There was an arrangement in place to do that, but I understand that it is no longer necessary.

Q473 Chair: But was it put in place to save withholding tax?

Matt Brittin: That is my understanding.

Q474 Chair: It was. Thank you. That is a very direct answer, and the first we have had today. But it is no longer necessary. Does it therefore go to Google Ireland Holdings?

Matt Brittin: That is correct.

Q475 Chair: Which is registered in Ireland but administered from Bermuda.

Matt Brittin: That is correct.

Q476 Chair: So if that happens, your profits go to Bermuda. How much is sitting in Bermuda?

Matt Brittin: I do not know the number, but it is true that Bermuda is part of our operations, and the reason is that when an international company sets up operations outside your domestic market, which in our case is the US, you look for where to locate your operations. Within the European Union, we chose to locate in Ireland, for the reasons I have explained, but you also need to protect your intellectual property, and to set up operations in countries around the world to do that. We have an entity in Bermuda to do that.
……………………..

Q545 Austin Mitchell: What cannot be fiddled through is paid at 12.5%, but the 12.5% is not paid on most of it. It then goes on to the Netherlands, and then it goes to Bermuda. Now, the interesting question is what that does for the shareholders. As Fiona said, it does not benefit them—they cannot get their hands on it because 30% tax would have to be paid for it to be repatriated to America, to the shareholders. It sits there in a cash mountain. It makes no contribution to all the research and development—the new technologies that you have been telling us about—that is carried on in California; it just sits there. It is probably lovely to visit it, walk round it, look
at it, and think, “Ha ha ha,” but what contribution does it actually make? Matt Brittin: It is a matter for the board of Google, but I imagine that, if the resources are needed to be used, they can be used.

……………………..

1. Could you provide information about how your shareholders benefit from the Bermuda holdings? (Q527, Fiona McTaggart) During the hearing, several Members suggested that shareholders only benefit if Google pays dividends back to shareholders. This is not the case. Google Inc has not paid dividends to shareholders at any point in the past and we have no current intention to do so. The funds held can be used to expand Google Inc’s business operations outside of the U.S, which should in turn benefit Google’s shareholders.

6.1 The subsequent deposition of Mr. Matt Brittin forms part of the report of the House of Commons, Committee of Public Accounts, tiled “Tax Avoidance – Google, Nineteenth Report of Session 2013-14”, dated 10th June 2013 which is available on the WWW. The relevant parts of the report are reproduced as under:

……………

Q143 Stephen Barclay: On that point, where is the intellectual property owned on the work those engineers are doing?

Matt Brittin: I think it depends on the specific projects that they are working on. The intellectual property for Google is licensed, as you know and referred to earlier, to Google Ireland, in order that Google Ireland can sell that aspect of the product that is saleable—the advertising platform.

Q144 Stephen Barclay: So some of the intellectual property is owned in Ireland on that work?

Matt Brittin: Ireland have the right to sell those products.

Q145 Stephen Barclay: Is some of it also owned in Bermuda?

Matt Brittin: Yes.

…………………..

Q150 Stephen Barclay: Right. What tax rate do you pay on transfers from Ireland to Bermuda?

Matt Brittin: I don’t think we pay a tax rate on Ireland to Bermuda. We talked about Bermuda in the last hearing, and I confirmed that we do use Bermuda. Obviously, Bermuda is a low-tax environment.

Q151 Stephen Barclay: Sure. So, what, you just transfer from Ireland toBermuda without any tax implications?

Matt Brittin: I would need to check, but I think that is my understanding.

…………………….

Q150, 151. What tax rate do you pay on transfers from Ireland to Bermuda/Do you just transfer from Ireland to Bermuda without any tax implications?

We do not make direct transfers of royalty payments or other payments subject to withholding tax from Ireland (ie, Google Ireland Ltd. or “GIL”) to Bermuda (ie, Google Ireland Holdings or “GIH”). Rather, we make transfers from GIL to Google Netherlands Holdings BV (“GNBV”), and from GNBV to GIH. No withholding taxes are payable on these transfers.

Our use of GNBV as part of our corporate structure is a legacy from when we set up our international business over a decade ago. We structured it that way because of concerns about potential Irish withholding taxes. As mentioned in our previous testimony we do not believe that our use of GNBV has a material effect on royalty payments or other payments subject to withholding tax from GIL, primarily because of changes made in 2010 to Irish tax laws and regulations.

…………………

Q154 Stephen Barclay: The crux of my point is that you are depriving the US taxpayer of significant funds, because this is economic activity in the US, and technology developed in the US, which I presume was then sold to an operation in Bermuda, probably in 2001 or 2002. The tax you save on that deprives the US taxpayer of significant sums. The significance to us in the UK is that the tax you save on those non-US profits is then used for a competitive distortion to allow you, in essence, to compete against UK companies, because you have a huge amount of profit on which you are not paying tax. Matt Brittin: No, I don’t think that is right. The money that goes to Bermuda can be used for funding our growth outside the US, so that money can be used for R and D expenses, acquisitions and investment in data centres or buildings. In fact, since we met last time, we have committed £1 billion to investment in King’s Cross to increase our presence in the UK, and we could fund that from Bermuda. Thousands of companies, including many British companies, use arrangements such as ours in Bermuda, which allow us to invest in the growth of our business outside the US. Large sums are spent on R and D, acquisitions, investments in buildings and, as I have mentioned, we have just committed to King’s Cross.

6.2 It is evident from the Report of the Public Accounts Committee of the House of Commons that the profits derived by GIL are transferred to the entity GIH which is controlled and managed in Bermuda, a tax haven. Even in the case of India the revenue earned by GIPL on sale of advertising space are routed through the same structure and the profits finally end up with GIH which is controlled and managed in Bermuda. The structure has been used by Google in order to avoid tax.

6.3 The fact that the profits from advertising services end in the tax haven Bermuda also appears in the discussion between the one of the Directors of OECD and the Irish Legislators in the WVVW in the link http: / oireachtasdebates .oireachtas.ie/ debates % 20authoring/DebatesWebPack.nsf/comm itteetakes/ FI520130723 00005?opendocument. This link is regarding Global Taxation Architecture: Discussion with Director of the OECD Centre for Tax Policy and Administration Mr. Pascal Saint-Amans and the Irish legislators. At page 9 in the link, the Irish Legislator Deputy Richard Boyd Barett describes the term “Double Irish” sandwich in relation to Google which is reproduced below for reference:

Deputy Richard Boyd Barrett: Yes; it is double Dutch. The only explanation Mr. Saint-Amans seems to be giving is that our low corporate tax rate seems to attract companies involved in this aggressive tax avoidance, For the benefit of peopletrying to understand this situation, is the following briefdescription, given to me by former Google workers, an accurate description of how Ireland functions as a facilitator of tax avoidance? Google’s advertising is a digital product. They sell that product to customers in Europe, the Middle East, and Africa from their Dublin HQ – and as such don’t have to pay taxes on that anywhere except Ireland because the sale of that good is deemed under internation all awtohavet akenplaceinIreland. The profit they make from all those advertising sales is eaten up by a charge levied by Google Ireland Limited’s holding company – which (conveniently) tends to be almost the exact amount of profit they make. The little bit that is left is charged at the standard 12.5%.

The holding company’s profits aren’t taxed because of Irish law waiving corporation tax on certain profits made from intellectual property royalties and/or because the company isn’t managed or controlled in Ireland. That money then tends to be routed through further subsidiaries in Holland before moving to the Caribbean.

6.4 Relevant part of the article Ireland’s For Sale Sign: The 12.5% Corporation Tax Rate by Donald Brennan appearing in the Irish Left Review Journal, January 2013 wherein the Double Irish structure used by Google is explained, is reproduced below forreference:

In effect it requires the creation of two Irish holding companies. A US corporation has the ability to own ‘non-US’ intellectual property, in an Irish company which is not an Irish tax resident. As the company is incorporated in Ireland, it’s seen as Irish from a US point view, but from Irish Revenue’s perspective it is a foreign company and therefore not subject to withholding tax. This conveniently ignores the fact that the non-resident Irish company is in a tax haven like the Cayman Islands or Bermuda. It then enters into a licensing agreement with an Irish incorporated and Irish tax-resident company (the second holding company), which from Irish revenue’s point of view is subject to corporation tax. This second holding company acts as the EMEA hub where, nominally,pass through. However, for the money to flow to the Cayman Islands or Bermuda it requires the use of the Netherlands. In the Netherland’s another company is created called Netherlands Holdings B.V, for example.

The case of Google is perhaps the best known, although the structure exists for many, if not potentially all companies. We know, for example, that the two ‘Irish’ holding companies are Google Ireland Holdings and Google Ireland Limited. So, when a French, Egyptian or Indian customer buys services from Google (such as Adwords or Adsense) their credit card is debited to a bank account located in Dublin and appears as a sale in Google Ireland Limited. While Google Ireland Limited takes the sale, it has to ‘buy’ the rights for the Google algorithm or Google trademark from Google Ireland Holdings, which is nominally in Bermuda. However, rather than the money moving directly to Bermuda it goes to a holding company in the Netherlands, Google Netherlands Holdings B.V, from which it is passed hack to Google Ireland Holdings. The Netherland’s entity, according to Bloomberg, “pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show.”

This odd structure and the way it is treated by Irish revenue is put in place because of the perspective of US tax law. As Prof Edward Kleinbard put it in a 2071 academic paper published in the Florida Tax Review:

“…from a US tax point of view, neither Ireland Limited nor Google BV exists at all. The United States sees only an Irish (not Bermuda) company (Irish Holdings) with a Bermuda branch, where most of its net income comes to rest.”

It’s important to remember that while we are mentioning geographical places no physical movement actually occurs. As the Bloomberg report showed the Amsterdam-based subsidiary lists no employees. Similarly, Goggle Ireland Holdings has no employees.. It’s a registered company in Bermuda: number 4531144 and is owned by Google Bermuda Unlimited. According to the French investigative magazine OWNI, “Google Bermuda only consists of a mailbox held by Conyers Dill & Pearman, a company which specializes in offshore arrangements. The firm is composed of several local business lawyers, working on behalf of multinational companies interested in this tax haven’s benefits” 45. Its unlimited status is important, as in Irish law this means that it doesn’t have to publish its accounts. Google Bermuda Unlimited owns Google Ireland Holdings also an unlimited company, which owns Google Ireland Limited and Google Europe. However, the ‘Bermuda’ company Google Ireland Holdings and Irish company Google Ireland Limited are both registered at the office of a certain Dublin solicitor. Google Ireland Holdings has to be registered in Ireland for it to be considered under US tax law as an ‘Irish company’.

6.5 Reference is drawn to the Article by Jesse Drucker dated Oct 21, 2010 appearing in the website Bloomberg Technology, the extracts of which are reproduced below: Google Inc. cut its taxes by $3.1 billion (in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”

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The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. Countless Companies

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Transfer Pricing

The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries   ………..

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The Double Irish

As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.

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Boosting Earnings

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Taxpayer Funding

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Arm’s Length

Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a lowtax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay “arm’s  length” prices for the rights — or the amount an unrelated company would.

Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.

After three years of negotiations, Google received approval from the IRS in 2006 for its transfer pricing arrangement, according to filings with the Securities and Exchange Commission.

The IRS gave its consent in a secret pact known as an advanced pricing agreement. Google wouldn’t discuss the price set under the arrangement, which licensed the rights to its search and advertising technology and other intangible property for Europe, the Middle East and Africa to a unit called Google Ireland Holdings, according to a person familiar with the matter.

Dublin Office

That licensee in turn owns Google Ireland Limited, which employs almost 2,000 people in silvery glass office building in central Dublin, a block from the city’s Grand Canal. The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent o, its $12.5 billion in non-U.S. sales in 2009.

Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.

Law Firm Directors

7 This Bermuda-managed entity is owned by a pair of Google subsidiaries that list as their directors two attorneys and a manager at Conyers Dill & Pearman, a Hamilton, Bermuda law firm.

Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like
Bermuda, avoiding Irish taxes.

To steer clear of an Irish withholding tax, payments from Google’s Dublin unit don’t go directly to Bermuda. A brief detour to the Netherlands avoids that liability,because Irish tax law exempts certain royalties to companies in other EU- member  nations. The fees first go to a Dutch unit, Google Netherlands Holdings B. V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.

The Dutch Sandwich

Inserting the Netherlands stopover between two other units gives rise to the “Dutch Sandwich” nickname.

“The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.

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Getting Profits Out

“You accumulate profits within Ireland, but then you get them out of the country relatively easily,” Stewart said. “And you do it by using Bermuda.”

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Once Google’s non-U.S. profits hit Bermuda, they become difficult to track. The subsidiary managed there changed its legal form of organization in 2006 to became a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.

“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.

Deferred Indefinitely

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Administration Concerned

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To contact the reporter on this story: Jesse Drucker in New York at jdrucker4@bloomberg.net.

6.6 the above Article describes that Google uses the “Double Irish sandwich” in order to transfer the profits earned from advertising services to Bermuda which is a tax haven. Google Ireland Holdings (“GIH”) which though registered in Ireland is controlled and managed from Bermuda and therefore the profits from sale of advertising space through the Google Adwords Program lands up in Bermuda.

6.7 It is apparent that Double Irish structure is used by Google to transfer the profits from its advertising services arising in the different parts of the world, including India, to the tax-haven Bermuda. GIPL has not been able to substantiate that GIL is the beneficial owner of the amounts payable even after numerous opportunities were given. GIPL was given an opportunity to defend its claim by giving it an opportunity to furnish all relevant documents and agreements. These agreements would have helped in understanding whether GIL is the beneficial owner. However GIPL declined to furnish the same. Accordingly GIL cannot avail
the India-Ireland Treaty benefits and the Treaty rate of 10% cannot be applied in the instant case.

6.8 The Judiciary in India has addressed the issue of beneficial ownership by focusing on the issue of substance of the transaction and the entities involved. In a landmark judgment in Aditya Birla Nuvo Ltd. V, Dy. DIT (International Taxation) [2012] 342 ITR 308, the Hon’ble Bombay High Court held that a Mauritius entity holding shares in the Indian company is not the “beneficial owner” but it was only the US parent which is the “beneficial owner” of such shares. Accordingly benefits under Indo-Mauritus tax treaty were denied on the basis of applying look through approach. The Court observed that the voting rights, rights of management and rights of sale or alienation of shares were vested with the US entity and hence the same is the “beneficial owner”

6.9 The Hon`ble AAR dealt with the issue of beneficial ownership in the case of Nat West Securities B.V. v. Dy. CIT [2005] 1 SOT 503 (Mum.), X Ltd., In re [1996] 220 ITR 377/86 Taxman 252 (AAR-New Delhi). A British bank incorporated its subsidiaries in Mauritius and routed investments into India through those subsidiaries and claimed benefits of Indo Mauritius tax treaty against dividend income etc. AAR observed that Mauritius subsidiaries are not beneficial owners of the shares, AAR rejected application on the ground that transaction was designed to avoid taxes. The facts placed before the AAR led to the inference that the purposeof investment through subsidiaries was only for avoidance of taxes and availing lower tax rates through Indo-Mauritus tax treaty. As the substance of Mauritus entities could not be established, the same were not treated as beneficial owners of the investments.

6.10 Therefore the Indian Judiciary has adopted the substance over form approach in relation to beneficial ownership. Based on this approach and relying on the transfer pricing documentation for AY 2009-10, the statement made under Oath before the Public Accounts Committee, House of Commons, British Parliament by Mr. Matt Brittin of Google UK Ltd and the various articles appearing in WWW it is seen that GIL is not the beneficial owner of the amounts paid/payable by GIPL. The amounts paid/payable by GIPL to GIL end up in Gill which is controlled and managed in the tax haven Bermuda. Thus GIH is the beneficial owner of the amounts paid/payable by GIPL.

7 India does not have a Tax Treaty with Bermuda. Hence the rates under the Act will apply. Section 206AA of the Act requires the deductee to furnish the Permanent Account Number (“PAN”) to the deductor failing which the deductor shall deduct tax at source at higher of the following rates:

(i) the rate prescribed in the Act;

(ii) at the rate in force i.e., the rate mentioned in the Finance Act; or

(iii) at the rate of 20 per cent.

7.1 In the notice dated 21st Dec 2013 the assessee company GIPL was given an opportunity to submit the Permanent Account Number (“PAN”) of GIH. In the submission dated 26th Dec 2013 it was stated by GIPL, that Section 206AA makes it mandatory for the person who is entitled to receive the amount and not the beneficial owner of the amount to furnish PAN to the deductor. It was further stated that GIL is the person that is entitled to receive the amount as per the Distribution Agreement and since GIL has already obtained a PAN the provisions of Section 206AA are not applicable.

7.2 According to GIPL the person referred in Section 206AA(1) “any person entitled to receive any sum or amount on which tax is deductible ……..” cannot be equated with person who is the beneficial owner of the sum or amounts. However such understanding is based on the incorrect interpretation of the person referred in Section 206AA(1).

7.3 In the instant case GIPL has not established that GIL is the person entitled to receive any sum or amount since as explained in the preceding paragraphs the sums received by GIL are transferred to the group entity GUI which is controlled and managed in Bermuda.

7.4 GIPL did not avail the opportunities given to furnish the agreement between GIL and GNHBV, agreement between GNHBV and GIH in order to substantiate its claims that GIL has all the attributes of ownership over the sums paid/payable by GIPL. The Assessee company, GIPL has merely furnished the Financial statements of GIL to claim that GIL is the actual beneficiary of the sums paid/payable to it but the agreements between GIL and GNHBV and GNHBV and GIH have not been furnished. These agreements contain the terms and conditions under which GIL has been given the licensing rights over the Adwords program. These agreements also contain the stipulations that decide the royalty payments that have to be made by GIL on the sale of Adwords programs. GIL under the agreement may be required to transfer all the revenues from sale of Adwords programs to GNHBV after keeping a small sum to meet the administrative expenses. Therefore the submissions of the financial statements of GIL the year ending December 2012 only shows that GIL is an operational company but it does not say anything with respect to the ownership and control over the sums paid/payable by GIPL. Hence the claim of GIPL that GIL is the beneficial owner of the sums paid/payable, is not acceptable and it is GIH which is entitled to receive the sums from GIPL.”

156. The AO has also examined the information available in public domain in this regard and finally concluded that GIL is not the beneficial owner of the royalty received from GIPL and accordingly taxed the royalty at 10.556%.

157. Aggrieved, the assessee preferred an appeal before the CIT(Appeals) and the CIT(A) being convinced with the contentions of the assessee, accepted the claim of assessee and held that GIL is the beneficial owner of the royalty received.

158. Now the revenue is before us and during the course of hearing, the ld. Standing Counsel has invited our attention to the Report of House of Commons, Committee of Public Accounts, who have recorded the statement of Mr. Mett Brittin, VP of Google Sales & Operations, Northern & Central Europe. The ld. Standing Counsel has also contended that assessee was asked to furnish the agreements executed between GNHBV & GIL, GIH & GNHBV and Google Inc. and GIH, in order to understand that how much right was conferred upon the other companies through license agreement. Undisputedly, Google Adwords program is owned by Google Inc. USA. It was licensed by Google Inc. to Google Ireland Holdings (GIH) which in turn was further licensed to Google Netherlands Holding BV (GNHBV) and in turn GNHBV licensed it to Google Ireland Ltd. (GIL). Since there are four layers of holdings of this Adwords program, it is not clear how much right in license were conferred to different holdings and how the revenue collected on Adwords program is to be distributed amongst the above holdings. The assessee has claimed that GIL is the beneficial owner of the payment of royalty, therefore onus is upon it to place evidence on record that out of the total revenue collected on account of Adwords program, major share goes to GIL. But the assessee did not discharge its obligation and raised a vague argument.

159. The ld. Standing Counsel further placed reliance upon the Hon’ble Finance Minister’s clarification on Tax Residency Certificate (TRC) dated 01.03.2013 on which the assessee has placed heavy reliance with the submission that through this clarification it has been made clear that TRC produced by a resident of contracting state will be accepted as evidence that he is a resident of that contracting state and income-tax authorities in India will not go behind the TRC and question the resident status. He also invited our attention to the clarification regarding the taxation of income from dividends and capital gain under Indo-Mauritius Double Tax Avoidance Convention (DTAC) with the submission that the clarification was issued with regard to taxation from dividends and capital gains under Indo-Mauritius DTAC. Though it has been clarified that wherever certificate of residence is issued by Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. Therefore the clarification issued would not apply to the income received in the form of royalty. Moreover, the AO has made out a case that different layers of holdings were involved in the Adwords program and the revenue has to be shared amongst them, therefore it cannot be presumed only on the basis of TRC that GIL is the beneficial owner. Therefore, the CIT(Appeals) has wrongly concluded that GIL is the beneficial owner under the facts and circumstances. In succeeding year, the CIT(A) has concurred with the view of the AO. The ld. Standing Counsel further placed a reliance upon the judgment of High Court of Australia in the case of Google Inc. v. Australian Competition and Consumers Commission[2013] HCA 1 249 CLR 435 in which it was held that Google is the owner of the search engine and the Adwords programs which were later on given to license to other holdings.

160. The ld. Counsel for the assessee, Mr. Percy Pardiwalla, Sr. Advocate, has placed heavy reliance upon the clarifications given with regard to Indo-Mauritius DTAC with the submission that the Circular No.789 dated 13.04.2000 in this regard continued to be in force at the time when the press release was issued on 01.03.2013 by Finance Ministry with regard to clarification on tax residency certificates. Therefore, in the light of this clarification, the TRC in respect of GIL submitted by the assessee is sufficient to hold that GIL is the beneficial owner of the royalty received. Therefore, it should be charged to tax only @ 10%.

161. The learned Counsel for the assessee further contended that the GIL was controlling the AdWord Program and has given a distributor right to the Appellant under the Google AdWord Program. Whatever revenue is generated under this Google AdWord Program it was remitted to GIL by the Appellant after deducting its share as per the Distribution Agreement. It was further contended that it has been repeatedly held that the residency certificate is a beneficial ownership certificate and on its filing the Revenue will not make any further enquiry with regard to the residential status of the non-resident. In support of his contention, he has placed reliance upon the following judgments:

•  ADIT Vs. Universal International Music BV reported at (2011) 45 SOT 219 (Mum.)
•  Authority of Advanced Ruling, New Delhi P.No.13 of 1995 (1997) 94 Taxman 171 (AAR-New Delhi)
• Alibaba.com ecommerce Pvt. Ltd., Vs. ADIT ITA No.3332 to 3334/Mum/2015 dated 30.11.2016
•  Authority of Advanced Ruling, New Delhi Ex.Ltd., in re. (1996) 86 Taxman 292 (AAR-New Delhi)
•  Velcro Canada Inc., Vs. R reported at 2012 TCC 57 Tax court of Canada
•  Vodafone International Holding BV Vs. UOI 341 ITR 1 (SC)
•  Director of Income Tax Vs. Universal International Music BV (2013) 31taxmann.com 223 (Bombay)

162. With regard to the report of House of Commons, Committee of Public Accounts, the ld. Counsel for the assessee has contended that report was prepared in different context, therefore it cannot be relied on while examining the beneficial ownership character of GIL. He however placed reliance upon the order of the CIT(Appeals) for the AY 2013-14.

163. Having carefully examined the orders of lower authorities in the light of rival submissions, we find that in AY 2013-14, the CIT(Appeals) has accepted the contention of the assessee that GIL is the beneficial owner of the royalty received, whereas in the succeeding years, the CIT(Appeals) has concurred with the view of the AO that GIL is not the beneficial owner. Now the assessee and revenue are before us on this issue.

164. During the course of hearing, we have directed the assessee to produce the agreements executed between Google Inc. USA and GIH, GIH & GNHBV and GNHBV & GIL. In response thereto, the ld. Counsel for the assessee has stated that they have no access to these agreements. He however filed the license agreement executed between GIL and GNHBV. It is also noticed from the record that GIPL is a 100% subsidiary of Google International LLC and GIL is the subsidiary of GNHBV. GNHBV is a subsidiary of Google Ireland Holdings and Google Ireland Holdings is a subsidiary of Google Inc. USA. Therefore, all these companies are interconnected and inter-related, therefore contention of assessee cannot be accepted that it has no access to license agreements executed between different holdings with regard to Adwords program. From a careful reading of operating license agreement executed between GNHBV and GIL, we find that GIL has acquired certain right to use certain proprietary technology as well as certain trademark and intangible including those described in Exhibit-A and Exhibit-B. Through this license agreement, the license to use, license trademarks, license technology, license improvements was given by GNHBV to Google Ireland Ltd. It is also clear from a reading of various clauses that the licensee i.e., GIL is not the legal owner of the license trade marks and the license technology, meaning thereby that GIL is not the owner of license technology and license trademark which include Adwords program and GIL has only acquired certain rights in intangibles from GNHBV. Though there is a clause for license fee statement, it is not clear as to how much license fees is to be paid by GIL to GNHBV on account of sub-license of Adword program. If we compare this agreement with the distributor agreement executed between GIPL and GIL, we would find that in both the agreements, the licensee have admitted that IPRs and the intangibles are owned by licensor. For the sake of reference, we extract the relevant clauses of the aforesaid agreement as under:-

“OPERATING LICENSE AGREEMENT

THIS LICENSE AGREEMENT (this “Agreement-) is effective as of January 1, 2004, by and between Google Netherlands Holdings B.V., a company organized under the law, of the Netherlands (the “Licensor”), and Google Ireland Limited, a company organized under the laws of Ireland (the “Licensee”).

RECITALS

A. Licensor has the right to use and commercialize certain proprietary technology, as well as certain tradenames, trademarks and other intangible property including as more fully described below and on Exhibits A and B hereto.

B. Licensor wishes to provide Licensee with all rights necessary to use the proprietary technology and intangible property in its business within the Territory and to license those rights to Licensee for the Territory, and Licensee wishes to license those rights as provide herein.

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1. Definitions.For purposes of this Agreement, the following terms shall have the meanings set forth below:

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“LICENSED MARKS” means those trademarks, service marks and trade names owned or used by Licensor as of the Effective Date of this Agreement, including those specifically listed on EXHIBIT B.

“LICENSED TECHNOLOGY” means any and all technologies, procedures, processes, designs and design rights, inventions, discoveries, know-how, patents (including utility models and the like, and patent applications pending before any relevant authority worldwide, with any additions, continuations, continuations-inpart, divisions, reissues or extensions based thereon), copyrights (and other rights of authorship), mask work rights, trade secrets, computer programs (in source code and object code form), flow charts, formulae, enhancements„ updates, translations, adaptations, information, specifications, designs, process technology, manufacturing requirements, quality control standards and any other intangible property owned or licensed in, in whole or in part, by Licensor and in existence as of the Effective Date of this Agreement, including but not limited to those items listed in EXHIBIT A.

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2. Grant of License.

a. General Terms of Grant. Upon the terms and subject to the conditions of this Agreement:

(i) Licensor hereby grants to Licensee, and Licensee hereby accepts, a limited non-exclusive, non-transferable (except as provided herein) license to utilize the Licensed Technology to conduct research and development activity and process development activity and to utilize the Licensed Technology within its Territory (1) to manufacture, market, distribute, sell, license or exploit Products, (ii) to use the Licensed Technology to provide advertising, technical support, training, consulting or other services and (iii) to sublicense the Licensed Technology to third parties for any of the foregoing purposes; provided, however, that any such activities taken by Licensee shall be in a manner reasonably consistent with that of Licensor in Licensor’s territory; and

(ii) Licensor also hereby grants to Licensee, and Licensee hereby accepts, a limited non-exclusive, non-transferable (except as provided herein) license to utilize the Licensed Marks solely in conjunction with Licensee’s manufacturing, marketing, distribution, sale, lease, licensing, use and exploitation of the Products, and such other products as may be authorized in writing by Licensor from time to time during the continuance of this Agreement, within the Territory, solely in accordance with the terms and conditions herein. Licensee hereby acknowledges and agrees that, except as specifically provided in this Section 2, Licensee shall acquire no rights whatsoever with respect to any of the Marks, Licensee shall not utilize any of the Marks (i) outside of the Territory, or (ii) in connection with any products other than the Products.

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c. Sublicenses. Subject to the terms and conditions herein, Licensee shallhave the right to sublicense the licenses granted to it by Licensor. Any sublicenses granted by Licensee under this Agreement shall provide for termination or assignment to Licensor, at the option of Licensor, of Licensee’s interest therein upon termination of this Agreement and contain provisions which obligate the sublicensee to Licensee to at least the same extent that Licensee is obligated to Licensor under this Agreement.

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f. Ownership of Licensor Intangibles

(i) Licensor Ownership of the Licensed Technology. Licensee acknowledges that it is not the legal owner of the Licensed Technology and that the Licensed Technology is not proprietary to, or does not constitute a trade secret or  confidential information of, Licensee. Licensee agrees not to contest Licensor’s ownership of its interests in the Licensed Technology or Licensor’s right to license the use of the Licensed Technology on the terms and conditions of this Agreement.

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3.2 Licensor Ownership of Licensed Marks Acknowledged. Licensee acknowledges that it is not the legal owner of the Licensed Marks and that its only rights in the Licensed Marks are those granted under this Agreement. Licensee agrees not to contest Licensor’s ownership of its interests in the Licensed Marks or Licensor’s right to license the use of the Licensed Marks on the terms and conditions of this Agreement.

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f. License Fee Statement. On the date that each payment is due under the terms of this Agreement, Licensee shall concurrently deliver to Licensor a written statement setting forth the computations made in calculation of the License Fees due in such calendar quarter (including a computation of Licensee’s gross revenue attributable to the Products for the applicable three month period), whether or not License Fees were actually earned by Licensor for the applicable three month period, along with any other related information necessary to compute the amount of License Fees, if any, that is due.

g. Currency and Transfer of Funds. All payments due under the terms of this Agreement shall be payable in U.S. Dollars or Euros or such other currency determined by the mutual agreement of the Parties, and may be transferred in such manner as the Parties may mutually agree. In addition, Licensor agrees that it will pay, on an annual basis, based on financial statements prepared in accordance with U.S. GAAP (as implemented by Licensor), an amount, to be treated as an adjustment to the license payment, equal to any net foreign exchange loss incurred by Licensee. Conversely Licensee agrees to pay to Licensor any net foreign exchange gain computed on the same basis and on the same terms.

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6. Additional Covenants And Agreements Of The Parties.

a. Confidential Information. The term “Confidential Information,” as used herein, shall mean for each party all information that relates to any or all of the Products, the Licensed Technology, Licensee Improvements and Licensed Marks, or to the business, finances, technology, plans, affairs or activities of the Party. Confidential Information may be disclosed or revealed orally, visually or in writing or other tangible form. All information disclosed or revealed under this Agreementshall be deemed to be Confidential Information if (i) it is in written or other tangible form, and has been marked “confidential”, (ii) a Party has been placed on notice, orally or in writing that such information is confidential, or (iii) in view of the nature or character of the information, a reasonable person, under similar circumstances, would treat it as confidential.

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7. Intellectual Property Management.

a. Patent Prosecution And Maintenance.

(i) Licensor shall be solely responsible for the preparation, filing, prosecution and maintenance of patents or patent applications included in the Licensed Technology, including all payment obligations, provided that Licensor shall not be required to prosecute or maintain any such patents.”

165. Other agreements executed between Google Inc and GIH and GIH & GNHBV were not placed before us. Therefore, in the absence of these agreements, it is very difficult for us to decide as to how much share GIL will get out of the revenue collected in the form of royalty under the Adwords Distribution agreement and services agreement from the GIPL. Since the onus is upon the assessee to establish that GIL is the beneficial owner, assessee could not place any evidence except the oral submission.

166. We have also examined the clarification issued by the Ministry of Finance through Circular No.789 dated 13.04.2000 and the press release dated 01.03.2013. Through Circular No.789, it has been made clear that wherever certification of registration is issued by Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC. Through Press Release dated 01.03.2013, it has been clarified that the Tax Residency Certificate (TRC) produced by a resident of a contracting state shall be accepted as evidence that he is a resident of that contracting state and income-tax authorities in India will not go behind the TRC and question the resident status, meaning thereby, through this Press Release, it has been made clear that Tax Residency Certificate (TRC) is the final word with regard to resident status of the party and the Revenue cannot go beyond it unless and until they have some other evidence.

167. We have also examined the various judgments referred by the learned Counsel for the assesse. In the case of ADIT Vs. Universal International Music BV (supra), the Tribunal has held that once the resident certificate issued by the Netherland Tax authority is not doubted by the AO, the assessee has to be treated beneficial owner of royalty in view of such certificate even if no agreement with repartiore companies regarding acquisition of rights by assessee has been filed.

168. The Authority of Advanced Ruling in P.13 of 1995 (supra) has observed while dealing with the issue of beneficial ownership that “the agreements require ABC to utilize all the expertise at its disposal – whether its own or acquired from others – in the execution of the contract and for these services it receives payments which are in the nature of royalties or fee for technical services. The circumstances that, for discharging its functionsunder the contracts, the ABC in turn may have to seek similar help from others and pay for it cannot detract from the beneficial ownership of the ABC over the royalties and technical fees it receives from XY. On the other hand, it is because the ABC has such beneficial ownership that it is able to utilize the payments received from XY for making payments to its suppliers if not already made. In fact, ABC may or may not be passing on to its suppliers the same amounts which it receives from XY. Nor may it be passing on the expertise acquired by it from the various suppliers in the same form to XY as it has to modify, synthesise and integrate them so as to suit the needs of the manufacturing plant and industrial complex and supply the technologies to XY as a single source. Hence, unless the processes and expertise referred to are supplied directly to XY by the affiliates and third parties – which is not envisaged under the agreements – royalties and technical fees paid by XY to the ABC will belong to the latter and be in its beneficial ownership. Question Nos. 5 and 6 modified as indicated above are answered accordingly.”

169. In the case of Alibaba.com E-Commerce Vs. ADIT (supra), the Tribunal has observed that tax residency certificate is sufficient to determine the proof of residency and the Income Tax Authorities cannot ignore the valid tax residency certificate issued by the Government authority of the other contacting state. The Tribunal has also taken a cognizance of the judgment of the Apex Court in the case of Vodafone International Holding BV Vs. UOI (supra) in which the court has held that the tax residency certificate (TRC) does not prevent enquiry into a tax fraud, for example where an OCB is used by Indian resident for wrong tripping or any other illegal activities and nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of OCB in the entire transaction and held that without any evidence the Revenue cannot treat the assessee merely conduit of Alibaba.com, Hong Kong contrary to the material on record.

170. The Authority of Advanced Rules in X Ltd., (supra) did not answer the questions posed before them and restored the matter with the direction that more factual data should be obtained before the assessee companies are held not to be beneficial owners of shares held by them. In the case of Velcro Canada Inc., Vs. R (supra), the tax court of Canada has held that Velcro Netherlands to be the beneficial owners of the royalties because it had the possession, use, risk and control of the funds. It was also contractually bound to pay an amount equal to 90% of the royalties to Velcro Antilles but entitled to deal with the actual payment received from Velcro Canada as its profit. They further held that if Velcro Antilles choose to enforce the license agreement, the payment was still made to Velcro Netherlands and Velcro Netherland had no power to bind Velcro Antilles and was therefore not its agent.

171. We have carefully examined the facts of the instant case in the light of ratio laid down through various judgments by different judicial authorities and the Hon’ble Supreme Court and the High Court and we find that in the instant case the tax residency certificate was filed at page No.586 to 587 of the compilation filed by the assessee in which it has been mentioned that the Google Ireland files its corporation tax return in Ireland on the basis that it is resident for tax purposes in Ireland. As such the company is liable to Irish Corporation Tax on its world-wide income, profit and gains including any income, profits and gains from its sales in India. In the certificate there is no mention with regard to the beneficial ownership of the Google AdWord Program of which distributorship was given to the Appellant.

172. In the instant case, the AO has made out a case that different layers of holdings were involved in the receipts received by the GIL from GIPL, the Appellant, under the Google AdWord Program. Undisputedly, the search engine and Adwords program belong to GIL as is clear from the judgment of High Court of Australia in which it has been held that Google Inc. operates the well known internet search engine “Google”. In that judgment, they have also described how the Google engine functions and how the search results are obtained. In that judgment, it was also held that Adwords Program is a program which allows advertiser to create, change and monitor the performance of sponsored links. Google provides advertisers with access to the Adwords program through Adwords accounts. Worldwide, hundreds or thousands of advertisers use the Adwords program. It was also observed that Google derives most of its revenue from its online advertising business, which involves publishing or displaying advertisements as sponsored links on its search results pages. It was also made clear in that judgment that participation in the Adwords program is subject to Google’s Terms of Service, the Adwords Program Terms and applicable Google policies, etc. From the reading of the judgment, it is clear that Google Inc. is the ultimate body which controls the Google Adwords program and they also share some part of revenue collected on account of Adwords program. It is also undisputed fact that Google Inc. has licensed the Adwords program and other intangibles to Google Ireland Holdings (GIH), who in turn licensed to Google Netherlands Holdings B.V. (GNHBV) and in turn GNHBV further licensed the Adwords program and intangibles to Google Ireland Ltd. (GIL), who finally has given the distributor rights of the assessee for selling the Adwords space to advertisers, meaning thereby, whatever revenue is generated on account of sale of Adwords space to different advertisers, the revenue is to be distributed amongst all the holdings as they have some beneficial interests therein. But before us, the assessee has not filed license agreements executed between Google Inc. USA and Google Ireland Holdings (GIH), GIH and GNHBV. Only one license agreement between GNHBV and GIL was filed and from its careful perusal, we find that out of the rights acquired in the Adwords program and intangibles, GNHBV has sub-licensed certain rights to GIL for Adwords program. On the basis of that license, GIL executed Adwords Distributor agreement with the appellant for selling the Adwords space to advertisers. Since other parent holdings of GIL were involved in the Adwords programs directly or indirectly, they have a right to share the revenue generated under the Adwords Distributor Agreement. Though the onus is cast upon the appellant to place the relevant evidence in order to establish that GIL is the beneficial owner of the royalty received, but it could not place any evidence on record in this regard, except the oral submissions. Whereas, the AO has made out a case that so many holdings are involved in this Adwords program, therefore the revenue collected on account of royalty payment is to be shared amongst the other holdings. The assessee rather could not place the agreements executed between Google Inc. & GIH and GIH & GNHBV and GNHBV and GIL before the AO despite his repeated requests. He has simply filed the operating license agreement executed between GNHBV and GIL berore us and for the remaining he has contended that he has no access to it. This contention of the assessee cannot be accepted inasmuch as all Google companies are inter-related and subsidiary of others. From a reading of this agreement, it is not clear as to how much revenue is shared by different holdings. In the absence of the relevant evidence either in the form of agreement executed between the various holding companies or otherwise, it is not clear as to whether the GIL has full control over the receipt received under Google AdWord Program or the GIL was acting as a conduit of its parent holdings. We therefore are of the view that this aspect requires a fresh look by the AO in the light of all the relevant evidences. We accordingly restore the matter to the AO after setting aside the order of the CIT(A) in this regard in all these appeals to readjudicate the issue of beneficial ownership in the light of the license agreements executed between the parent holdings of the GIL. We accordingly direct the appellant to extend all sort of cooperation by producing the agreement executed between the various parent holdings of the GIL. Thus the matter is restored to the file of the AO to readjudicate the issue of beneficial ownership in terms indicated above. Accordingly appeal No. 1190/Bang/2014 is dismissed and appeal Nos. 949 & 950/Bang/2017 are partly allowed for statistical purposes and appeal No. 1295/Bang/2014 is allowed for statistical purposes.

173. IT(TP)A Nos. 374 and 466/Bang/2013 

These are cross appeals preferred by the assessee as well as the Revenue against the order of the CIT(A) pertaining to the assessment year 2008-09. Certain grounds are common in both these appeals, therefore we adjudicate them together. However for the sake of reference, we extract the grounds of appeal raised in both the appeals as under:

Grounds of appeal in IT(TP)A No. 374/Bang/2013

“Based on the facts and circumstances of the case, Google India Private Limited (hereinafter referred to as the ‘Appellant’) respectfully submits that the order of the Commissioner of Income-tax (Appeals)- I, Bangalore (‘Ld CIT(A)’), is not correct as it is based on incorrect interpretation of fact and law and therefore is bad in law and hence, needs to be cancelled. The Appellant also submits that each of the grounds hereinafter are independent and without prejudice to one another.

1. The Ld CIT(A) erred in not deliberating upon the validity of the order passed by the Learned Assessing Officer (‘Ld AO’) without appreciating the fact that the Ld AO had passed a contingent order.

Rejection of Books of accounts:

2. The Ld CIT(A) has erred in upholding that the accounts of the Appellant were not consistent with the provisions of section 145 of the Act-and-That-theLd.AO was justified in rejecting the same.

3. The Ld CIT(A) has erred in upholding that the Appellant was required to credit Rs.167,32,01,616 to its Profit and Loss account.

4. The Ld CIT(A) having held that 40% of the operations with respect to the AdWords program were attributable to operations in India erred in holding that the Appellant was required to credit the whole of Rs.167,32,01,616 to its Profit and Loss account.

Disallowance of payments to wards distribution right invoking provisions of section 40 (a) (i) of the Act

5. The Ld CIT(A) has erred in upholding that the amount Rs.119,82,61,994 remittable by the Appellant to Google Ireland under the

6. The Ld CIT(A) has erred in upholding that the Appellant, in relation to distribution of AdWords Program, was a Dependent Agent Permanent Establishment of Google Ireland Ltd under Article 5 of the India-Ireland Double Taxation Avoidance Agreement.

7. The Ld CIT(A) has erred in holding that the Appellant was not remunerated at arm’s length.

8. The Ld CIT(A) has erred in upholding that the Appellant was required to deduct tax at source from Rs.119,82,61,994 remittable by the Appellant to Google Ireland and in view of its failure to deduct tax, the amount of Rs.119,82,61,994 was required to be disallowed u/s 40(a)(i) of the Act.

9. The Ld CIT(A) having held that the Appellant was an agent of Google Ireland Ltd. erred in holding that Appellant ‘was a person responsible for paying’ any amount to Google Ireland Ltd. within the meaning of section 195 of the Act.

Re-computation of profits from distribution of AdWords program in India

10. The Ld CIT(A) has erred in upholding that the profits of Google Ireland Ltd. from the AdWords program, to the extent they were attributable to activities carried on in India, could be taxed in the hands of the Appellant.

11. The Ld CIT(A) has erred in holding that 40% of re-computed profits on the Rs.167,32,01,616, being the revenues collected in India under the AdWords program, are attributable to activities carried on in India.

12. The Ld CIT(A) has erred in holding that the profit from revenues collected in India under the AdWords program is 30.535%.

13. The Ld CIT(A) has erred in rejecting cost-plus method basis of remuneration of the Appellant for the distribution of the AdWords program, disregarding the fact that the same has been concluded by the transfer pricing officer to be at arm’s length under the Transactional Net Margin Method.

14. The Ld CIT(A) has erred in subjecting the Appellant to tax on 40% of the re-computed profits from revenues collected in India under the AdWords program.

Miscellaneous

15. The Ld CIT(A) has erred in surmising that Google Ireland Ltd. would, insofar as the revenues collected in India under the AdWords program is concerned, contend that “the amounts are liable for taxation in India only in the hands of” the Appellant.

16. The Ld CIT(A) has erred in surmising that the Appellant and Google Ireland would engage in self-serving pleas with the intent “to evade being taxed in India”.

17. The Ld CIT(A) has erred in upholding the levy of interest u/s 234B of the Act.

18. The Ld CIT(A) has erred in upholding the validity of the initiation of the penalty proceedings  initiated u/s 271(1)(c) of the Act disregarding the fact the Ld AO has passed a penalty order levying a penalty u/s 271(1)(c) of the Act.

The Appellant craves, to consider each of the above grounds of appeal independently without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

174. IT(TP)A No.466/Bang/2013

1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.

2. The CIT(A) erred in directing the AO to recompute the deduction allowable u/s 10A of the I.T.Act after reducing the telecommunication expenses amounting to Rs. 10,02,44,744/- from the total turnover also.

3. The Ld. CIT(A) erred in not appreciating that there is no provision in section 10A which requires the concerned expenses, which are required to be reduced from ‘the export turnover as per clause (iv) of the Explanation to Section 10A to be reduced from the total turnover also.
4. The Ld. CIT(A) erred in not appreciating the fact that the jurisdictional High Court decision in the case of M/s Tata Elxsi Ltd. relied upon by him has not been accepted by the department ,and a SLP has been filed before the Hon’ble Supreme Court which is pending.

5. The CIT(A) erred in directing the AO to adopt 40% of the additional profit arrived at by the AO as correct profit without any scientific basis which is further reduced by the amount already offered i.e. Rs. 6,37,36,487/-, thereby restricting the additional profit to Rs. 14,06,28,358/- as against the addition of Rs. 44,71,75,626 made.

6. The CIT(A) erred in not appreciating the fact the since M/s Google Ireland Ltd. has neither filed return of income nor was willing to admit any taxability in India, the additional profit of Rs. 44,71,75,626/- has been taxed rightly in the hands of the assessee.

7. The CIT(A) erred in not appreciating the fact the additional profit of Rs. 44,71,75,626 represents the profits evaded from being charged to income tax in India of the service, Google Adwords run through the medium of Google website in India

8. The CIT(A) erred in not appreciating the fact as per the contract the assessee is neither a captive service provider nor a cost centre to M/s Google Ireland Ltd but the assessee claims to have be an independent distributor acting on its own account.

9. The CIT(A) erred, in not appreciating that in the facts and circumstances of the case the assessee should have declared incomes with respect to its revenues and not with respect to its cost as the whole agreement with Ms/ Google Ireland Ltd and the subsequent accounting treatment of adiftitting income only on 15.5% of the cost incurred in India to earn advertisement revenues is a ploy to evade payment of axes in India.

10. The CIT(A) erred, in not appreciating that it has been brought out in great detail in the assessment order that the entire advertising business ( Adwords) is treated as one enterprise in India and that there is only one profit earned out of the said enterprise.

11 The CIT(A) erred, in not appreciating the fact that, in the lack of a better alternative, the profit has been worked out at the rate of 30.565% of the total revenues i.e. Rs. 167,32,01,616/- in line with global profit of M/s Google Inc. USA and the said profit of Rs. 51,09,12,113/- represents the entire profit of the enterprise to be charged to tax in India in the hands of M/s Google India Pvt. Ltd. as well as M/s Google Ireland Ltd.

12. The CIT(A) erred, in not appreciating the fact that, out of the said amount only a profit of Rs. 6,37,36,487/- is admitted in the hands of M/s Google India Pvt. Ltd and the differential amount of Rs. 44,71,75,626/- has been held to be the escaped profit of the enterprise in India, considering the fact that Google Ireland Ltd. has neither filed its return if income nor is willing to admit any taxability in India.

14.For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.

15.The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.

175. The brief facts on the impugned issues are that the AO has rejected the books of accounts as per the provisions of section 145 of the Act and calculated the disallowance of certain payments made to GIL by the appellant on account of business profit under section 40(a)(ia) of the Act on non-deduction of TDS. The assessee has challenged the rejection of books of accounts and also the disallowance made under section 40(a)(ia) of the Act before the CIT(A) but did not find favour with him. Now the assessee is before us and his leanred Counsel Mr. Percy Pardiwala has invited our attention to provisions of section 145 r.w.s. 144 of the Act with the submission that once the books of accounts are rejected, the AO has to estimate the assessee’s income and no disallowance can be made under different heads. The assessee had prepared its financial statements for the year in accordance with law and the prescribed accounting standards issued by ICAI and complete and consistent disclosures including the notes to accounts have been made in the financial statements. There had been no change in the financial policy followed by the assessee during the year under consideration from the earlier years and the financial statements of the assessee had been duly audited by an independent statutory auditor. The AO has rejected the books of accounts having observed that the form of reporting of the advertisement revenues in the profit and loss account is not proper. There has been no finding of the AO that books of accounts were unreliable or that entire revenue was not credited in the books of accounts and it was not possible to compute the actual profit on the basis of the books of accounts. The learned Counsel for the assessee further invited our attention that after rejecting the books of accounts, the AO recasted the profit and loss account without making any change in the revenue.

The learned Standing Counsel for the Revenue has placed a reliance upon the order of the CIT(A).

176. Having carefully examined the orders of lower authorities on this issue, we find that AO has not pointed out the specific defect in maintenance of books of accounts. Moreover, after recasting the profit and loss account, there was no change in the profit originally reported by the assessee in its financial statements. It is also noticed that assessee has been following the same method of accounting in earlier years but it was never rejected by the AO. We also find force in the contention of the learned Counsel for the assessee that the lower authorities have not identified the accounting standards that has to be followed by the assessees. In the light of these facts, we are of the considered opinion that rejection of the books of accounts by the AO is not proper. We therefore set aside his order and direct the AO to accept the books of accounts prepared by the assessee.

177. So far as the disallowance on payments made by the assessee to GIL on account of business profit under section 40(a)(ia) on non-deduction of TDS is concerned, we find that during the impugned assessment year i.e., 2008-09, the Tribunal has adjudicated the issue of the characterization of payments made by the appellant and held it to be payment of royalty. Though the Hon’ble High Court directed the Tribunal to adjudicate the issue of characterization of the payments made by GIPL the appellant, to GIL, in other appeals of different assessement years, but in the impugned assessment year i.e., 2008-09 the Tribunal has taken a particular view with regard to characterization of payment under the AdWord Distribution Agreement, we cannot ignore these facts. Moreover, in foregoing appeals, we have re-examined the issue of characterization of such payment to GIL and held it to be royalty. The claim of bonafide for non-deduction of TDS on such pyment has already been examined by us in the foregoing paras while adjudicating an issue as to wheather the asseessee is to be held in default on non deduction of TDS and we did not find any merit in the contention of the appellant that under a bonafide belief it did not deduct the TDS on such payment. Therefore, we do not find any justification to readjudicate the same issue again in this appeal. Hence, we do not any infirmity in the order of the CIT(A) and we accordingly confirm the same. Accordingly ground Nos. 5 to 16 in the assessee’s appeal and ground Nos. 5 to 13 in the Revenue’s appeal are disposed off.

178. So far as the ground Nos. 10 to 12 in IT(TP)A No. 374/Bang/2013 and ground Nos. 5 to 7 and 12 in IT(TP)A No. 466/Bang/2013 relating to disallowance under section 40(a)(ia) with regard to additional profit computed by the AO on the basis of transfer pricing adjustment are concerned, we are of the view that since in the transfer pricing appeals the issue of computation of arm’s length price of payment made under Google AdWord Program by GIPL to GIL has been restored back to the AO / TPO for recomputation of arm’s length price in terms of directions issued by Tribunal, the disallowance of additional profit calculated on the basis of transfer pricing adjustment, cannot be made under section 40(a)(ia) of the Act. We therefore set aside the order of CIT(A) and delete the disallowance made in this regard.

Ground No. 18 of assesse’s appeal relating to initiation of penalty proceedings under section 271(1)(c) is premature and we dismiss the same.

179. During the course of hearing of the appeal, the Revenue has also moved an application for the admission of additional grounds with the submission that assessee has accepted in the written submissions filled before the Tribunal that it is providing services through ITES division in connection with the distribution of the advertisement by way of Ad- review in compliance of the local laws. The additional grounds raised are extracted as under:

1. The assessee is appointed as non-exclusive authorised distributor of adword program to the advertisers in India by Google Ireland. Under the Google Adword Program Distribution Agreement dated 12/12/2005, the assessee has been granted marketing and distribution rights of adword program to the advertisers in India. Clause 3.4 of the distribution agreement provides for minimum level of service as specified in Exhibit – C. Exhibit -C to the adword agreement refers to service level agreement and imposes responsibility for providing services to the customers (advertisers). All advertisers are instructed to contact the assessee directly for support. In view of the specific obligation to provide presale and Post sale support by the assessee to the advertisers, the assessee is providing the same as per service agreement dated 1/4/2004.

2. The above aspect has been admitted by the assessee in its written submissions filed in IT(TP)A.No.1511 to 1516/B/2013 arising out of, proceedings under section 201 of the Act.

1. The assessee in the written submissions has accepted that it is providing services through ITES division in connection with the distribution of advertisement by way of review with respect to the compliance of the local laws. It is further admitted that the assessee performs ad review services under ITES agreement with Google Ireland for which assessee is separately compensated. It is the specific contention of the revenue that this amount received by the assessee from Google Ireland for rendering services the in India to the advertisers is claimed as export under section 10A of the Act.

2. The above aspect is a question of law which can be considered by this Hon’ble tribunal at this stage. Further the above activities were not disclosed by the assessee in the course of any proceedings except before this Hon’ble tribunal by way of written submissions in the appeal involving applicability of section 195 of the Act.

3. As held by the Apex Court, additional ground which is question of law can be raised and entertained at any stage. The application of section 10A of the Act without there being any export of article or thing or computer software is question of law.

180. In support of request for admission of the additional grounds, the learned Standing Counsel further contended that it was admitted by the assessee that it performs ad review services under ITES division with Google Ireland for which the assessee was separately compensated. Therefore in the light of specific contentions that the amount received by the assessee from Google Ireland for rendering services in India to the advertisers cannot be claimed as exemption under section 10A of the Act. Since this aspect was not examined by the AO, the additional grounds now may be admitted and matter be restored to the AO for its adjudication in accordance with law. The learned Counsel for the assessee strongly objected the application for the admission of the additional grounds with the submissions that this ground was never raised either before the CIT(A) or before the Tribunal at the time of filing of the appeal. Moreover, this ground was also not raised before the Tribunal at the time of hearing of the appeal by different bench. Now this ground has been raised at the advanced stage of the hearing of the appeal. The learned Counsel Mr. Percy Pardiwala further contended that AO has not raised the dispute in this regard during the course of assessment proceedings. Therefore, these grounds cannot be raised at this stage. He further placed reliance upon the judgments in the case of Hukumchand Mills Ltd., Vs. CIT 63 ITR 232 (SC) and M Corp Global Pvt. Ltd., Vs. CIT 178 taxmann.com 347 (SC), Instrade Corporation Ltd., Vs. ACIT 62 taxmann.com 239 (Karnataka High Court) in support of his contention that Tribunal has no power to enhance the income of the assessee. If the additional grounds are admitted and matter is restored to the AO, the AO will recompute the deduction under section 10A resulting into enhancement of the Income. Therefore, the additional grounds cannot be admitted.

181. Having carefully examined the order of authorities below in this regard, we find that AO has accepted the claim of deduction under section 10A of the Act and he has not raised any dispute with regard to amount received by the assessee from Google Ireland for rendering services in India to the advertisers which was claimed as export proceeds under section 10A of the Act. It is also a settled position of law that at the second appellate stage, the Revenue cannot improve upon the case made out by the AO. There are various provisions under the Income Tax Act where the Revenue can rectify its mistakes but before the Tribunal no additional grounds can be raised which was not a subject matter of appeal or dispute before the lower authorities. The Tribunal, being a second appellate authority, is supposed to adjudicate those issues which were raised before it and also was of subject matter of dispute before the lower authorities. The Revenue cannot improve upon its case. Therefore, we are of the view that additional grounds raised by the Revenue are not admissible and we accordingly reject the same.

182. Ground Nos. 2 to 4 in the Revenue’s appeal relate to the computation of deduction under section 10A and in this regard, the learned Counsel for the assessee has contended that this ground is covered by the judgment of jurisdictional High Court in the case of
Tata Elxsi 349 ITR 98 and the view taken by jurisdictional High Court has also been confirmed by the Hon’ble Apex Court. Therefore, no interference in the order of the CIT(A) is called for.

The learned Standing Counsel placed reliance upon the order of the AO.

183. Having carefully examined the order of authorities below, we find that CIT(A) has adjudicated the issue in the light of judgment of jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd., (supra) and the judgment of Tata Elxsi has been approved by the Hon’ble Apex Court. Since the CIT(A) has adjudicated the issue in the light of judgment of jurisdictional High Court, we find no infirmity in his order and accordingly we confirm the same in this regard. Accordingly, the appeal of the assessee is partly allowed and that of the Revenue is dimissed.

184. IT(IT)A No. 2845/Bang/2017

This appeal is filed by the assessee against the order of the CIT(A) on following grounds:

1. On the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer (Id. AO’) u/s 143(3)/ 147/ 144 C(5) of the Income-tax Act, 1961 (‘the Act), wherein income of Rs. 93,66.27,879 has been assessed as being in the nature of ‘Royalty’ is bad in law as the same has been passed by completely misconstruing the facts of the case and is based on an incorrect interpretation of the provisions of the Act read with Double taxation Avoidance Agreement between India and Ireland (`DTAA’). Therefore, the said order as well as the consequent demand is liable to be quashed.

2. On the facts and in the circumstances of the case and in law, the impugned order is bad in law in-as-much-as the initiation of re-assessment proceedings on the purported ‘Reasons to believe are based on incorrect inference drawn by the Ld. AO from the information available with him.

3. On the facts and in the circumstances of the case and in law, the impugned order is bad in law as the reassessment proceedings that were initiated based on ‘Reasons to believe’ only considered the provisions of the Act and failed to consider that the Appellant, being a tax resident of Ireland was entitled to claim relief under the DTAA, to the extent beneficial vis-a-vis the provisions of the Act.

4. On the facts and in the circumstances of the case and in law. the Ld. AO/ Hon’ble DRP has erred in relying on the orders passed under section 201 of the Act in the case of Google India Pvt Ltd (‘Google India’) and not appreciating that it is a trite law that primary assessment has to be made in the hands of the non-resident payee of taxability of income. if any. and that orders u/s 201 in the hands of the payer is consequential.

5. On the facts and in the circumstances of the case and in law. the order passed by the Assessing Officer (`A0′) u/s 143(3)/ 147/ 144 C(5) of the Income-tax Act, 1961 (‘the Act’). wherein income of Rs. 93,66,27,879 has been assessed as being in the nature of ‘Royalty’ is bad in law as the same suffers from jurisdictional errors and is barred by limitation.. Therefore, the said order as well as the consequent demand is liable to be quashed.

6. On the facts and in the circumstances of the case and in law, the impugned order is bad in law. as the statutory notice for assessment u/s 143(2) of the Act was served on the Appellant on 16 February 2016, beyond the statutory time limit for service of such notice, thereby, the entire proceedings conducted by the Ld. AO and the order pursuant thereto are null and void. being barred by limitation.

7. On the facts and in the circumstances of the case and in law, the Hon’ble DRP has erred in rejecting the objection of the Appellant on non-‘`service” of notice u/s 143(2) of the Act that was purportedly “issued” by the AO on 28 August. 2014. but was not “served” on the Appellant, failing which, the entire proceedings for re-assessment and the consequential order/ demand is void and is liable to be quashed.

8. On the facts and in the circumstances of the case and in law, the re-assessment proceedings are bad in law since the notice u/s 143(2) of the Act was not even issued before the timeline for receipt of the said notice by the Appellant. as per provision of the Act.

9. Without prejudice to the grounds above, the conduct of re-assessment proceedings based on the notice under section 143(2) of the Act purportedly issued on 28 August 2014 even before furnishing of ‘Reasons to believe’ to the Appellant is bad in law. being against the established law and procedure of conduct of reassessment proceedings as laid down by the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd v ITO (2003) (259 ITR 19) (SC).

10. On the facts and in the circumstances of the case and in law, the reassessment proceedings are bad in law as the ‘Reasons to believe’ were furnished to the Appellant beyond reasonable time from the date of filing of letter by the Appellant requesting for furnishing of reasons pursuant to which the re-assessment proceedings were initiated by the Ld. AO.

11. On the facts and in the circumstances of the case and in law. the reassessment proceedings are bad in law as the notice under section 148 of the Act does not mention the approval obtained by the Ld. AO from the prescribed authority as required under section 151 of the Act and also held by the Hon’ble Mumbai Tribunal in the case of GTL Ltd. Vs. ACIT (59 taxmann.com 362).

12. On the facts and circumstances of the case. the Ld. AO has erred in making following incorrect assumptions/ factual incorrect statements:

a) That Google India has entered into a service agreement with the Appellant to render software development services.

b) That the agreement entered into by the Appellant with the advertisers is similar to the agreement entered into by the Appellant and Google India.

c) That as per the distribution agreement Google India is licensed to use the AdWords Program in India and has obtained the right to use the IP of Google.

d) That as per the distribution agreement Google India has obtained the license to sell right to use Adwords program to advertisers in India

e) That Advertisers are given the right to use the copyright in the software while using a Google service like AdVVors program

f) That Google India cannot distribute the advertising space to Indian customers under AdWords program without the use of or right to use the IP, know-how, trademark.

g) That without access to the back end portion of the AdWords program, Google India cannot perform its activities of marketing and distribution.

h) That by allowing Google India to market and distribute AdWords program, Appellant had decided to share the profits from the AdWords program over which it holds copyright.

i) That Appellant has permitted Google India to exploit and use the AdWords program and in return Google India has agreed to pay a share of the profit to Google Ireland which holds the license over the AdWords program.

j) Google India has to review the search results to ensure outcome of the desired results or to improve upon quality of the search results.

k) Under the ITES service agreement. Google India is given the rights to use the Intellectual Property related to internet search technology, advertising system, products and services

13. On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in holding that the amounts receivable by the Appellant from sale of online advertisement space under the AdWords Program from Google India is taxable as `Royalty’ income under the Act as well as under the DTAA.

14. On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in holding that the amounts receivable by the Appellant from Google India towards sale of online advertisement space under the Ad Words Program is taxable as ‘Royalty’ under various sub-clauses of Explanation 2 to section 9(1)(vi) of the Act.

15. On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP erred in holding that the income from other advertisers amounting to INR 510,874,532 in India towards sale of online ad space is chargeable to tax as ‘Royalty’ under the Act and the DTAA and without following the decisions by the Hon’ble Kolkata Tribunal in the case of ITO vs. Right Florists (P.) Ltd. (154 TTJ 142) and Hon’ble Mumbai Tribunal in the case of Pinstorm Technologies vs ITO (54 SOT 78) squarely applicable to the facts of the present case.

16. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in holding that the payment received from direct advertisers pertains to the use or right to use of Copyright in the computer programme and therefore, taxable as royalty in India.

17. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in relying on the decision of Delhi Tribunal in the case of Microsoft (134 TTJ 257) and holding that there is no distinction between the provisions of the Act and the DTAA with respect to the taxation of Royalty.

18. On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred at one side holding that the above mentioned decisions are not applicable to the facts of the Appellant by stating that in Appellant’s case the issue pertains to grant of rights by appellant to Google India and on other hand not following the Tribunal decisions in case of direct advertisers. The Ld. AO has further erred in distinguishing the decision of Mumbai Tribunal in the case of Yahoo India Pvt. Ltd. (140 TTJ 195) without appreciating that the similar facts are involved in the case of the Appellant.

19. On the facts and in the circumstances of the case and in law. the Ld. AO has erred in inter-alia holdingas under:

a) That the AdWords Program is a complex computer software and consideration paid by Google India to Appellant is for granting of license to use the copyright in the Ad Words program as specified in section 14(a)(iii) and 14(b)(ii), without appreciating that the said consideration was payable by Google India in the subject year and no licensing of copyright is involved in the case of Appellant and only a sale of online advertisement space under the said AdWords Program.

b) That the consideration paid by Google India to Appellant is for granting of license to use the copyright in the AdWords program without appreciating that that the said consideration was payable by Google India in the subject year and that Google India is only a distributor engaged in purchase and sale of an online Ad space and not engaged in exploitation of any copyright or other intangible property subsists in it, which would result in any royalty payment to the Appellant.

c) That non-exclusive right is also covered under the Copyright Act while the Act specifically provides that the Copyright means the exclusive rights to do or authorise the doing of any of the acts mentioned in section 14 of the Copyright Act.

d) That the Ld. AO in para 5.18 of the impugned order has mentioned that the very nature of software is that it, being a computer programme. cannot be sold without the transaction involving some transfer of copyright.

20. Without prejudice to the grounds above, the Ld. AO/ Hon’ble DRP has erred in not appreciating that the clauses of Explanation 2 to section 9(1)(vi) are mutually exclusive and same amount receivable by the Appellant from Google India towards sale of online advertisement space under the AdWords Program cannot be taxed under multiple clauses of the said Explanation.

21. On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in disregarding the judicial precedents squarely applicable to the facts of the Appellant and not considering the reliance placed by the Appellant on the High Powered Committee constituted by the Central Board of Direct Taxes vide Notification No. F No 500/ 122/ 99 dated December 16, 1999.

22. On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in placing reliance on the judicial precedents which are not applicable to the case of the Appellant.

23. On the facts and circumstances of the case and in law, the Ld. AO/ DRP erred in stating that the reliance placed by the Appellant on various case laws is distinguishable without pointing out the distinction, particularly in decided cases where the Appellant was the payee in respect of transaction of sale of online advertisement space online to the Indian advertisers under the AdWords Program.

24. On the facts and circumstances of the case and in law, the Ld. AO/ Hon’ble DRP has erred in misconstruing the distribution agreement between the Appellant and Google India dated 12 December 2005 by stating that the said agreement is for use of software and other IP of the Appellant, which tantamounts to re-writing of the agreement which is not permissible under the law as laid down by the Supreme Court in the case of CIT vs Motor & General Stores Pvt. Ltd. (66 ITR 692) (SC).

25. On the facts and circumstances of the case and in law, the Ld. AO has erred in holding that the distribution agreement are complemented by the IT Enabled Services agreement entered into by the Appellant with Google India dated 1.4.2004 CITES agreement’) and therefore, amounts receivable by the Appellant from sale of online advertisement space on AdWords Program was in the nature of Royalty.

26. On the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating that the ITES agreement has no connection whatsoever with the distribution agreement under which the Appellant distributes advertisement space to Google India and which has nothing to do with the ITES agreement. The linkage between the two agreements is erroneous given that the Google India started providing ITES agreement related services in the year 2004 and the distribution activity started only in the end of 2005.

27. On the facts and circumstances of the case and in law, the Ld. AO has erred in concluding that Appellant’s obligation under the Distribution Agreement was nterconnected with the obligation of the Appellant under the ITES segment.

28. Without prejudice to the above grounds and on the facts and circumstances of the case and in law, the Ld. AO erred in holding that by virtue of ITES agreement dated 01.04.2004 for rendering of Ad-review services by the ITES division results in use/ access to IP tools, confidential information, data etc. Ld. AO failed to appreciate that the Ad review process done by the ITES division comprises of approximately 6% of the total Ads that are reviewed and consequently 94% of the Ads which are reviewed automatically, without any involvement of the ITES division and therefore by no stretch of any imagination there could be any access to or use of IP tools, confidential information. data etc. for majority of the Ads.

29. On the facts and circumstances of the case and in law, the Ld. AO has erred in holding that grant of right to use Google brand features and trademark and Intellectual Property provided to Google India under the ITES agreement is independent of the distribution agreement.

30. On the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating that the right to use Google brand features and trademark provided to Google India under the Distribution agreement was not the main purpose of the Distribution agreement and was rather incidental to the main purpose of distribution of online advertisement space and marketing of AdWords Program in India.

31. On the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating that the right to use Google brand features and trademark was granted merely for identification of Google India as the distributor of online advertisement space and marketer of AdWords Program.

32. On the facts and in the circumstances of the case and in law. the Ld. AO has erred in contradicting with the order of Ld. Transfer Pricing Officer (TPO’) and construing that the Appellant has given Copyright/ Copyright rights for further exploitation to Google India while the TPO has accepted the said transaction in the nature of distribution and marketing of the AdWords Program for the purpose of computing the Arm’s Length Price.

33. Without prejudice to the principal ground that the amount receivable is not ‘Royalty’, the Ld. AO/ Hon’ble DRP has erred in not accepting that the amounts receivable by the Appellant from Google India will be taxable as *Royalty only in the year of receipt of actual amount i.e. in the Financial Year 2014-15 as per the beneficial provisions of DTAA. Further the Ld. AO has erred in not adjudicating on the said ground in the impugned order.

34. Without prejudice to the above grounds and on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest u/s 234B of the Act without appreciating that any taxes payable by the Appellant were deductible by the payers at source in India and therefore no such interest is leviable on the Appellant which is in consonance with the judicial precedents on this issue, including the decision of Hon’ble Special Bench of Delhi Tribunal in the case of Motorola Inc. (96 TTJ 1).

35. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A of the Act.

185. Though various grounds are raised by the assessee but they all relate to the validity of the reopening of the assessment, characterization of payment made by the GIPL to GIL under AdWord Program and chargeability of interest under section 234A and 234B of the Act.

186. With regard to validity of the reopening of the assessment, the learned Counsel for the assessee has contended that AO has initiated the proceedings for the assessment year 2007-08 under section 147 of the Income Tax Act (hereinafter called as an “Act”), and issued a notice under section 148 dated 29.03.2014. In compliance thereof, the appellant, Google Ireland Ltd., furnished the return of income and objected the reasons furnished by the AO. Although appellant was not served with the notice under section 143(2) of the Act, but the objection in this regard has been raised before the AO and thereafter transfer pricing proceedings was initiated by the TPO. The learned Counsel for the assessee has further submitted that the reassessment proceedings under section 147 was initiated by the AO without having any jurisdiction. The learned Counsel for the assesse further contended that as per judgment of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. ITO 259 ITR 19 the AO has to dispose off the objections filed against the reasons for reopening the assessment by passing a speaking order before proceeding with the assessment. It was further contended that before disposing of the objections filed by the assessee, the AO cannot proceed with the assessment. Therefore notice under section 143(2) cannot be issued before disposing of the objections against the reasons for reopening filed by the assessee. In the present case, notice under section 143(2) is stated to have been issued prior to providing the reasons for reassessment and for this reason alone the reassessment proceeding should be held invalid. The learned Counsel for the assessee further contended that notice under section 143(2) was issued on 16.02.2016 along with notice under section 142(1) of the Act. Thus the notice is time barred as it was issued beyond the prescribed period. Therefore, assessment framed consequent thereto deserves to be quashed. It was further contended that while exercising jurisdiction under section 147 of the Act, the AO should have reason to believe that income has escaped assessment and secondly appropriate sanction in terms of section 151of the Act must be obtained. It was further contended that the notice was issued by ACIT without having a proper approval from the JCIT. Therefore, the assumption of jurisdiction is not proper.

187. The learned Standing Counsel, on the other hand, has contended that the assessee, Google Ireland is a non-resident and has not filed any return of income in India. The AO on the basis of the assessment framed in the case of the payer i.e., GIPL, formed a belief that income chargeable to tax in the hands of the appellant has escaped assessment.The learned Standing Counsel further contended that AO is not required to wait for filing of the objections against the reasons recorded for reopening of the assessment, for issuing a notice under section 143(2) of the Act. Once the returns are filed in response to notice under section 148 of the Act, the AO is at liberty to issue a notice under section 143(2) of the Act within the prescribed period. The learned Standing Counsel further contended that due approval was obtained by the JCIT and the copy of the approval is also placed on record by the learned Standing Counsel. He has also invited our attention to the order sheets with the submission that assessee has filed the return of income on 20.08.2014 in response to notice under section 148 of the Act and on the same day the AO issued a notice under section 143(2) of the Act. In support of his contention he has filed the copy of the order sheets. The learned Standing Counsel for the Revenue further contended that order sheet recorded by the AO in the course of discharge of official duty is presumed to be correct unless contrary is proved. In the order sheet, it is clearly mentioned that notice under section 143(2) was issued on 28.08.2014, therefore contention of the assessee cannot be accepted that notice was not issued in time. The learned Standing Counsel has placed the reliance on the judgment of the Apex Court in the case of Rajesh Javeri Stock Broker 291 ITR 500 in support of his contention that the prima facie belief is required to be formed by the AO to reopen the assessment.

188. Having carefully examined the orders of authorities below, in the light of rival submission in this regard, we find that the assessee has disputed the reopening of the assessment mainly on two aspects, one is that the AO has reopened the assessment without forming a belief that income chargeable to tax has escaped the assessment and secondly the notice under section 143(2) was not issued within the prescribed period. Before proceeding to deal with the issues on merit, we want to record certain facts hereunder:

189. Notice under section 148 was issued on 16.04.2014 according to the assessee. The assessee has filed the return of income on 14.08.2014 in response to notice under section 148 of the Act. On 20.08.2014, the AO has taken a note that assessee has filed the return of income in response to notice under section 148 of the Act and the case was selected for scrutiny.He accordingly issued notice under section 143(2) of the Act. Thereafter the proceedings were commenced on 24.07.2015 and reasons for reopening the assessment was communicated to the assessee on 24.07.2015 and on 16.09.2015, assessee filed the objections. The objections filed by the assessee were disposed off by the AO and thereafter again a notice under section 143(2) was issued to the assessee along with questionnaire under section 142(1) of the Act. While issuing second time notice under section 143(2), the AO has categorically recorded in the order sheet that fresh notice under section 142 is issued to the assessee; meaning thereby that earlier notice was also issued on 28.08.2004. Nothing has been placed on record on behalf of the assessee to dispute the minutes of the proceedings recorded by the AO during the
course of assessment except the oral contentions. Copy of the proceedings recordedby the AO are placed on record. We, therefore, find no merit in the oral submissions with regard to the non-issuance of the notice under section 143(2) within the prescribed period as it is a settled position of law that the minutes or the order sheet recorded in discharge of official duty are correct unless and until contrary is proved in view of section 114 of the Indian Evidence Act, 1872. Therefore, we are of the view that notice under section 143(2) was issued in time. Moreover, we do not find any procedure either in the Act or in Income Tax Rules wherein it has been laid down that after issuance of notice under section 148, the returns are to be filed and thereafter assessee has to seek the reasons recorded for reopening of the assessment and thereafter file the objection thereto. After disposal of the objections the AO can only issue the notice under section 143(2) of the Act. For completing the assessment under section 147 of the Act, the procedure laid down under section 143 of the Act is to be followed. Nowhere it has been mentioned either under section 143 or under section 147 of the Act that the notice under section 143(2) cannot be issued before disposing of the objections filed by the assessee against the reasons recorded for reopening the assessment. Accordingly, we find no merit in the contention of the assessee that the notice under section 143(2) is bad in law.

With regard to other arguments of the asseessee that AO has not formed a proper belief that income chargeable to tax has escaped assessment, we find that the asseessee has not filed any return of income and in the hands of payer, the AO treated the payments made to the payee ie. the asseessee to be royality though the payer claimed it to be business profit in the hands of the asseessee. In view of the judgement of the Apex court in the case of Rajesh Javeri Stock Brokers(Pvt) Ltd (supra) the AO is required to form a prima facie belief that income chargeable to tax has escaped asseesseement and not to make out a full proof case. From a carefull reading of the reasons recorded for reopening the asseesseement we are of the view that the AO has formed a primafacie belief that income chargeable to tax has escaped asseesseement. and we therefore hold that reopening is valid.

190. So far as assessment on merit is concerned, we find that Revenue has assessed the appellant on business profit received by it after treating the GIPL as its Permanent Establishment in India. The issue of characterization of the payment made by the GIPL to GIL has already been adjudicated by us in the appeals filed by GIPL and we have taken a view that the payments made by GIPL to GIL under the Google AdWord Distribution Agreement is payment of royalty, therefore the receipts in the hands of GIL cannot be treated to be business profit in the hands of the GIL. The GIL and GIPL were dealing on principal to principal basis. Therefore, GIPL cannot be called to be the Permanent Establishment of the GIL. In the light of these facts, we are of the view that Revenue has wrongly assessed the GIL for business profit received by it under AdWord Distribution Agreement. Moreover, during the course of hearing, the learned Standing Counsel has candidly admitted that now the Revenue’s stand is very clear that the payment made by the GIPL to GIL is in the nature of royalty and not the business profit received by the GIL. Therefore, we are of the considered opinion that assessment of business profit in the hands of GIL after treating the GIPL as Permanent Establishment of the GIL is not proper. Even if the royalty is to be paid by the GIPL to GIL the tax is to deducted on its payment and benefit of the same will be given to GIL while completing the assessment in its hands. Therefore, we set aside the order of CIT(A) and restore the matter to the AO with a direction to reframe the assessment in the light of the observations of the Tribunal in the foregoing paras and also in accordance with law. Accordingly, this appeal is partly allowed for statistical purposes.

191. IT(TP)A Nos. 69/Bang/2014, 191/Bang/2014, 68/Bang/2014, 205/Bang/2015, 559/Bang/2016, 881/Bang/2016, 387/Bang/2017, ITA No.1299/Bang/2015

These are cross appeals filed by the assessee-company as well as the revenue directed against respective final assessment orders passed u/s.143(3) r.w.s.144C of the Act, for the assessment years 2009-10, 2010-11 and 2011-12,.

192. For the sake of clarity and convenience, facts relevant to the assessment year 2009-10 in IT(TP)A No.69/Bang/2014 (filed by the assessee) and IT(TP)A No.191/Bang/2014 (filed by the Revenue) are stated herein.

193. Briefly the facts of the case are as under. The assessee is a company duly incorporated under the provisions of Companies Act, 1956. It is a wholly owned subsidiary of Google International LLC, USA. It has STPI units at Hyderabad and Gurgaon. It is engaged in the business of providing IT services as well as IT enabled Services (ITes) and also Marketing and Distribution of AdWords programme to its group companies including Google Inc and Google Ireland and other group of companies. It filed return of income for the assessment year 2009-10 on 30.09.2009 and later revised declaring total income of Rs.16,57,21,800/- after claiming deduction of Rs.184,32,46,295/- u/s.10A of the Income-tax Act. The assessee-company also reported the following international transactions with its AE in form 3CEB :

Name and address of the associated enterprise with whom the international transaction has been entered into	Description of the property and nature of transaction	Nature of units of each property	Amount paid/payable		Method used for determining arm’s length price (see section 92C(1)
			As per books of account	As computed by assessee having regard to the arm’s length price
Clause 8C(a)	Clause 8C(b)	Clause 8C(c)	Clause 8C(d)(i)	Clause 8C(d)(ii)	Clause 8C(e)
Google Ireland Limited 1st& 2nd Floor, Gordon House Barrow Street, Dublin 4 Ireland	Purchase of fixed assets and equipment	Items are numerous in quantity and hence quantitative information cannot be given	150,322,120	150,322,120	Refer note below
Google Inc 1600 Amphitheatre Parkway, Mountain View CA 94043	Purchase of fixed assets and equipmen	Items are numerous in quantity and hence quantitative information cannot be given	12,294,215	12,294,215	Refer note below
Google IT China Co.Ltd. No.1 Zhongguancun East Road, Haidian District Beijing 1084	Purchase of fixed assets and equipment	Items are numerous in quantity and hence quantitative information cannot be given	124,188	124,188	Refer note below
Total			162,740,523	162,740,523
			The total amount paid/payable to associated enterprises for the purchase of the capital goods is Rs.162,740,523/- as per books of account
			Further the said amount of Rs.162,740,523/- has been determined/computed by the assessee having regard to the arm’s length price on application of the Comparable Uncontrolled Price method as prescribed under section 92C/92 of the Income Tax Act, 1961 and the laws and government orders (customs regulations) in force as prescribed in Rule 10B(2)(d) of the Income Tax Rules,1962

Particulars in respect of sale of other tangible property

Clause 8 C
INR

Name and address of the associated enterprise with whom the international transaction has been entered into	Description of the property and nature of transaction	Nature of units of each property	Amount paid/payable		Method used for determining arm’s length price (see section 92C(1)
			As per books of account	As computed by Assessee having regard to the arm’s length price
clause 8C(a))	Clause 8C(b)	Clause 8C(c)	Clause 8C(d)(i)	Clause 8C(d)(ii)	Clause 8C(e)
Google IT China Co.Ltd. Tsinghua Science Park Building 6, No.1 Zhongguancun East Road Haidian District Beijing 1084	Sale of fixed assets and equipment	Items are numerous in quantity and hence quantitative information cannot be given	278,468	278,468	Refer note below
Google Singapore Pte Ltd. #38-01/01A 8 Shenolon Way Singpore 068811	Sale of fixed assets and equipment	Items are numerous in quantity and hence quantitative information cannot be given	2,824,249	2,824,249	Refer note below
Total			3,102,717	3,102,717
			The total amount received/receivable from associated enterprises for the sale of the capital goods is Rs.3,102,717/- as per books of account
			Further the said amount of 3,102,717/- has also been determined/computed by the assessee having regard to the arm’s length price on application of the Comparable Uncontrolled Price method as prescribed under section 92C/92 of the Income Tax Act, 1961.

Particulars in respect of transactions in intangible property

Clause 9
INR

Clause 9(a)	Clause 9(b)	Clause 9(c)(i)	Clause 9(c)(ii)	Clause 9(d)
Google Ireland Limited,Ireland. 1 st& 2nd Floor, Gordon House Barrow Street, Dubin 4 Ireland	Payment of fees for distribution right*	1,681,852,823	1,681,852,823	Refer note below
Total		1,681,852,823	1,681,852,823
**Excludes the amount of Rs.16,052,689 which is ccounted for in financial year 2008-09 but has been considered for tax purposes in financial year 2006-07 by revising the return of income for that year.		The total amount paid/payable to the associated enterprises is Rs.1,681,852,823/- as per books of account
		The said amount of Rs.1,681,852,823/- has been determined/computed by the assessee having regard to arm’s length price on application of the Transactional Net Margin Method as prescribed under section 92C/92 of the Income-tax Act,1961 and the laws and government orders in force (foreign exchange regulations) as mentioned in rule 10B(2)(d) of the Income-tax Rules, 1962

Particulars in respect of rendering of services

Clause 10
INR

Name and address of the associated enterprise with whom the international transaction has been entered into	Description of services provided	Amount received/receivable		Method used for determining arm’s length price (see section 92C(1)
		As per books of account	As computed by assessee having regard to the arm’s length price
Clause 10(a)	Clause 10(b)	Clause 10(c)(i)	Clause 10©(ii)	Clause 10(d)
Google Ireland Limited 1 st & 2nd Floor, Gordon House Barrow Street, Dublin 4 Ireland	Informati9on technology enabled services	2,892,019,907	2,892,019,907	Refer note below
Google Inc 1600 Amphitheatre Parkway, Mountain View CA 94043	Information technology enabled services	2,483,571,117	2,483,571,117	Refer note below
		The total amount received/receivable from the associated enterprises for rendering the services is Rs.5,375,591,024/- as per the books of account.
		The said amount of Rs.5,375,591,024/- has been determined/computed by the assessee having regard to arm’s length price on application of the Transactional Net M:argin Method as prescribed under section 92C/92 of the ;Income-tax Act,1961

Particulars in respect of reimbursement of expenses

Clause 13
INR

Name and address of the associated enterprise with whom the international transaction has been entered into	Description of the property and nature of transaction	Amount paid/payable		Method used for determining arm’s length price (see section 92C(1)
		As per books of account	As computed by assessee having regard to the arm’s length price
Clause 13(a)	Clause 13(b)	Clause 13(c)(i)	Clause 13C(c)(ii)	Clause 13(d)
Google Inc.USA 1600 Amphitheatre Parkway Mountain View CA 94043	Reimbursement of expenses	258,431,140	258,413,140	Refer note below
Google Ireland Ltd., Ireland 1st & 2nd Floor, Gordon House Barrow street, Dublin 4 Ireland	Reimbursement of expenses	914,271	914,271	Refer note below
Google UK Ltd. Bedgrave House 76 Buckingham Palace Road London SWIW91Q United Kingdom	Reimbursement of expenses	8,389,091	8,389,091	Refer note below
Google Switzerland Brandschenkestrase 110 8002 Zurich Switzerland	Reimbursement of expenses	4,326,324	4,326,324	Refer note below
Googlle Austria Pty.Ltd. Google Australia Pty.Ltd. Level 5, 48 Pitrama Road, Permount, NSW 2009 Australia	Reimbursement of expenses	2,259,127	2,259,127	Refer note below
Total		274,319,953	274,319,953
		The total amount paid/payable to the associated enterprises in respect of reimbursement of expenses is Rs.274,319,953/- as per the books of account..
		The statement has been submitted without prejudice to the contention that reimbursement of expenses is not an international transaction and in substance such reimbursement transactions are with third parties.
		The said transactions amounting to Rs. Rs.274,319,953/- have been determined /computed by the assessee having regard to arms length price on application of the Comparable Uncontrolled Price Method as prescribed under section 92C/92 of the Income-tax Act, 1961

Particulars in respect of recovery of expenses

Clause 13
INR

Name and address of the associated enterprise with whom the international transaction has been entered into	Description of the property and nature of transaction	Amount paid/payable		Method used for determining arm’s length price (see section 92C(1)
		As per books of account	As computed by assessee having regard to the arm’s length price
Clause 13(a)	Clause 13(b)	Clause 13(c)(i)	Clause 13C(c)(ii)	Clause 13(d)
Google inc USA 1600Amphitheatre Parkway’ Mountain View CA 94043	Recovery expenses	24,983,245	24,983,245	Refer note below
Google Singapore Pte.Ltd. #38-01/01A 8 Shelton Way Singapore 068811	Reimbursement of expenses	2,780,296	2,780,296	Refer note below
Google Payment Limited 1st & 2nd Floor, Gordon House Barrow Street, Dublim 4 Ireland	Reimbursement of expenses	5,856,036	5,856,036	Refer note below
Total		33,619,577	33,619,577
		The total amount received/receivable in respect of recovery of expenses from the associated enterprises is Rs.33,619,577/- as per the books of account..
		The statement has been submitted without prejudice to the contention that reimbursement of expenses is not an international transaction and in substance such reimbursement transactions are with third parties.
		The said transactions amounting to Rs. Rs.33,619,577/- have been determined /computed by the assessee having regard to arms length price on application of the Comparable Uncontrolled Price Method as prescribed under section 92C/92 of the Income-tax Act, 1961

194. The Assessing Officer (AO) referred the matter to the TPO with the approval of the learned CIT, Bengaluru-1 for the purpose of determining the ALP of the above international transactions. The TPO, vide order dt.29.01.2013, passed u/s 92CA(3) of the Act, suggested ALP adjustment of Rs.83,50,87,934/- in respect of international transactions with Google Ireland on aggregate basis and of Rs.44,84,24,329/- in respect of IT services to Google Inc, USA. While doing so, the TPO had analysed the TP study submitted by the assesse-company, in para 2.2 of his order as under:

“2.2 On perusal of group profile given on page 13 and 14 of the TP study it is observed that Google Inc. USA is the ultimate holding company of the group. Google Inc is a public and profitable company focused on search services. Google Inc is the legal owner of AdWords Software product, Brand Names, and all other related Intellectual Property Rights (IPRs). Google Inc. has given rights to use intangible assets to Google Ireland Holdings which is an Ireland based subsidiary of Google Inc. Google Ireland Holdings in turn has by license agreement given rights to use the same intangible assets to Google Netherlands Holdings BV; a Netherlands based subsidiary. Google Netherlands Holdings pays royalty to Google Ireland Holdings for the same. Google Netherlands Holdings again in turn by license agreement has given the rights to use these intangible assets to Google Ireland Limited; an Ireland based subsidiary. Google Ireland Limited pays royalty to Google Netherlands Holdings BV. Google Ireland Limited has entered into an agreement with Google India Limited on December 12, 2005 for distribution of AdWords program. In the TP Report the assessee has mentioned on page 13 that as per the agreement Google India has to market and distribute Ad Words Program to advertisers in the designated Territory, within the broad guidelines provided by Google Ireland Limited. It is mentioned on page 14 of the TP Report that Ad Words is an automated system under which advertisers purchase enhanced visibility in the Google website and manage their own accounts. Advertisers independently develop a set of Keywords that are related to their business and bid on a CPC basis. Advertisers submit bids for the dollar amount they are willing to pay to display their advertisement when those key words are queried by an internet user.”

195. The AO observed that in the TP study made by the assessee-company, an attempt has been made to show that it is only a low-end service provider and it had been suitably compensated by its AE. But the TPO had contradicted this characterisation and observed that the assessee should have furnished the FAR analysis of each service rendered to its AE, instead of FAR analysis of the whole group and observed as under:

“3.0 TPO’s finding: In depth study of transfer Pricing Study submitted by the assessee, salient features of which have been mentioned above, has convinced the undersigned that in the TP Study the attempt has been made to declare Google India as low end service provider and that it has been suitably compensated by the Associated Enterprises (AEs). But the facts brought on record in the TP study do not support this conclusion. Therefore, the conclusion that Google India is a low end service provider is in utter contradiction to what I have gathered on analysis of facts given in the TP Study. In this connection, please refer to the 3CEB Report dated 30th September 2009, which the assessee has filed in the Office of Additional Commissioner of Income Tax 30′ September2009. In the report, I find that in respect to each international transaction name and address of associated enterprise with whom the international transaction has been entered into has been mentioned. The assessee has rendered to or taken from specific associated enterprise the specific service. Accordingly, as mentioned in the 3CEB report, Information Technology Services have been rendered by the assessee to Google Inc USA and the assessee has determined arm’s length price (in short ALP) of the services at Rs 2,483,571,117. Likewise, Information Technology Services have been rendered by the assessee to Google Ireland Limited and ALP of the services has been determined at Rs 2,892,019,907. Payment of fees for distribution rights have been made by the assessee to Google Ireland Limited and the ALP has been determined by the assessee at Rs 1,681,852,823. This being the factual position in respect to services rendered or taken by the assessee, the assessee should have furnished for each service the FAR analysis of the assessee and the Associated Enterprise concerned to whom the services have been rendered. As against it, in the TP Study FAR analysis has been given of assessee on one hand and the ‘whole group’ on the other hand. FAR analysis furnished by the assessee in the TP study, therefore, is not considered proper. How can the functions performed, assets used and the risks incurred by the whole group can be taken in to consideration with the functions performed, assets used and the risks incurred by the assessee in respect to specific international transactions undertaken by the assessee with specific Associated Enterprise. To be precise Google India has under taken the international
transactions of rendering IT and ITES with Google Inc USA and Google Ireland Limited respectively, then the FAR analysis should be made of Google India and Google Inc for IT services, and Google India and Google Ireland Limited for ITES. Similarly in respect to distribution rights in AdWords product the FAR analysis should be between Google India and Google Ireland Limited. If in FAR analysis of Google India on one hand and the whole group on the other hand is made, Google India will always be found inferior in terms of functions performed, assets used and the risks incurred, as one enterprise or the other in the whole group would be performing one function or the other, using asset and incurring
different risks and thus in unison group companies as a whole would be presenting very impressive picture as compared to Google India. On page 48 of TP study in respect to Marketing & Distribution of AdWords Program while comparative study of functions, in respect to ‘Product Intangible’ it has been mentioned that functions related to Development of research Program, Conduct of research, Conduct of research for improving the existing products, testing of products, and development of product have been performed by AE and Google India has not performed these functions. It is wrong analysis. Ad Words product related rights have been given to Google India by Google Ireland Limited. Google Ireland is
not the legal owner of AdWords Software Product. All IP rights in it belong to Google Inc.USA. Google Ireland Limited, as discussed in para 2.2 through an arrangement which involves four layers of license agreements amongst group companies, has given distribution rights in the Ad Words Software related distribution rights to Google India. These four layers at the expense of repetition are shown below-

Therefore, in this relationship Google India and Google Ireland Limited are relevant and between the two Google India has performed functions related to intangible product. Rather, Google India has performed significant functions whereas Google Ireland Limited has not performed any function at all in this regard. I find that Google India has performed IT services to GoolgeInc USA almost every year. Position of IT services rendered by Google India to Google Inc USA in this year and in two preceding years is as follows-

Financial Year	IT services rendered by	IT services rendered to	Amount
2006-07	Google India	Google Inc	1,181,826,53
2007-08	Google India	Google Inc	1,981,054,354
2008-09	Google India	Google Inc	2,483,571,117

Likewise Business strategy and conceptualization function has not been performed by Google Ireland Limited. Some group company must have performed this function but in respect to relevant international transactions in this case Google India and Google Ireland Limited are relevant Companies and their functions should be performed. Therefore, it cannot be said that Google Ireland Limited has performed this function and Google India has not performed this function. Market Research activity Google India has performed but nothing can be said about Google Ireland Limited as in the study on page 48 comparisons has been made with the `Whole Group’ which vitiates the comparison and makes it unreliable. Likewise Development of Global Marketing Strategy cannot be considered on the basis of TP Study as the function of Google Ireland Limited as the study is not reliable due to comparison with the whole group and not with Google India Limited alone. In respect to assets, once again intangible assets on page 51 of TP study have been shown as belonging to AE. But in this connection I repeat that Intangibles are legally owned by Google Inc USA, whereas in respect to transactions related to distribution of AdWords Program only Goolge Ireland Limited is relevant and I find that these assets do not belong to Ireland Google Limited. Service level Quality risk mentioned on page 52 may be incurred by either the Google India which is providing services to the customers and who has direct interaction with the customers or by Google Inc USA which legally owns the intangible assets. As google Ireland Limited has taken the rights to distribute the software based services under licensed agreement from Google Netherlands HoldingsBV the risk is incurred by Google India and not by Google Ireland Limited because Google Ireland Limited will shift the risk to Google Netherlands Holdings BV. Likewise, ultimate deliverable quality risk lies with Google Inc USA and not with Google Ireland Limited. I also hold that Software Technology risk is not incurred by Google Ireland Limited as software product is legally owned by Google Inc; USA. On the basis of FAR analysis dissected by me, I find that characterization of Google India as a low risk service provider , who assumes very less risk, performs very limited functions and does not own any capital asset or valuable intangible assets as concluded on page 53 in TP study is wrong conclusion and cannot be relied upon. Rather when I compare Google India with Google Ireland Limited I find in terms of functions performed, assets used and risks assumed, Google India is a far more active participant compared to Google Ireland Limited and therefore cannot be called as low end and low risk service provider.”

196. The TPO, after perusal of the agreement of Google AdWords programme dt. 12.12.2005 entered into by the assessee-company and Google Ireland, had concluded that the assessee-company is not marketing/distribution agent for Google Ireland, but doing the business on its own account as it employed all the assets and assumed the risks associated with the business. The TPO further observed that Google Ireland is not a legal owner of AdWords Software programme and the same were acquired by it through an arrangement among the group companies and therefore in order to find out the economic substance of the transaction, the TPO also analysed the functions performed by different units of the assessee-company and finally concluded that the ITeS business is closely connected with the AdWords programme as they are not separable from each other. The relevant finding of the TPO as given in para 3.2 of TPO’s order is reproduced herein below:

“3.2 In para 2.1 above brief description has been made of the kind of work which has been done by different units of Google India. The description is based on the discussion given in the TP study submitted by the assessee. A part of it related to ITES Services and AdWords services are repeated here. STPI Units at Hyderabad and Gurgaon also perform (apart from IT Services) certain IT enabled services, which involve approving and administering of the advertisement. Hyderabad and Gurgaon Units are involved in performing back office functions for the Adwords Business such as approval of advertisements for the purpose of running the same on the google website. On page 13 it is mentioned that Google India has entered into an agreement with Google Ireland Ltd, Ireland for distribution of Adwords Program with its reasonable commercial expertise, own sales force and customer service infrastructure. The Delhi and Mumbai offices consist of direct sales teams (approximately 250 people in totality) which approach corporate and midsized advertisers in order to sell as apace for the Ad Words business. Therefore, ITES and AdWords business are not separable from each other. Further, in so far Intangibles are concerned it is not the use of AdWords Software Program that has contributed in earning of super normal profit but also it is assessee’s ITES efforts, dedicated sales team of 250 people in Delhi and Mumbai Offices, commercial expertise of employees of Google India, Customer service infrastructure established by Google India and the customer base which have committed to use Google Software to give their advertisements that has made equally salutary contribution in earning super profit. Google India’s STPI Units at Bangalore and Hyderabad act as R&D Centers wherein certain Information Technology Services are performed. In Bangalore contracted R&D services in the nature of Google’s Product development, product upgrades, product support, testing of products and product improvement are performed. In Bangalore Unit search results appearing on Google’s website are reviewed; it enables Google to improve the quality of search results for end users across the world. (Please refer to search quality evaluation on page 11&12). Hyderabad facility also performs certain software development tasks in relations development of web-based language translator. Evaluation of Google Services and tools for efficiency, bugs, performance, failure and other aspects is also done in Bangalore. The Software is tested by the Hyderabad unit of Google India before it is ready for release. (please refer to QA Engineering on page 12). These IT services rendered by Google India to Google Inc. USA have also its bearing on total revenue earned by Google India. These Services cannot be called as low end routine services. These services do contribute towards the success of AdWords Software Program, which is legally owned by Google Inc USA. Therefore, in AdWords Marketing and distribution business the contribution of Google India is not routine or low end. Google India has apart from rendering IT and ITES Services to Google Inc USA and Google Ireland Limited respectively has contributed Intangible assets in earning super profits in Adwords Business. Therefore, I find the Cost Plus Mark up method used to evaluate the IT, ITES and AdWords Business efforts of Google India is absolutely improper. It is not considered as acceptable. This method ignores the extraordinary contribution made by Google India in providing IT, ITES Services, doing Marketing and distribution business and contributing Intangible assets to earn super profit. Therefore, I propose to also determine the Arm’s Length Price of Intangible Assets contributed by Google India.”

197. Finally the TPO concluded that the entire transactions of the assessee-company with its AEs cannot be considered in isolation since the assessee also contributed towards the development of intangibles, namely, market intangibles to Google Ireland Ltd., and Technology intangibles to Google Inc and gives the possession of this valuable nonroutine intangibles. All the transactions are inter-related and inter-linked therefore, the TPO proposed to adopt residual profit split method as the most appropriate method.

198. In response to the show-cause notice issued by the TPO on the above lines, the assessee-company made submissions vide its letter dt. 04.12.2012. After considering the reply, another show-cause notice was issued by the TPO on 04.12.2012 proposing that the assessee had also rendered R & D services to Google Inc, USA and these services are high-end services and it cannot be treated as a low-end service provider. Another show-cause notice dt. 18.01.2013 was issued directing the assessee-company to furnish the FAR analysis of the company performed by the assessee in respect of international transactions disclosed in form 3 CEB report. On account of failure of the assessee-company to furnish the FAR analysis of the functions performed by the assessee-company in respect of international transactions with the AE, the TPO proposed to reject the TP study submitted by the assessee-company. The TPO also proposed to apply the residual profit split method, as the transactions between the Google India and Google Ireland cannot be considered in isolation because it deployed all routine valuable intangibles i.e. marketing intangibles by Google India and Technology Intangible by Google Ireland Ltd., In TPO’s view, because of presence of this valuable non-routine intangibles and transactions being inter-related and inter-linked, had proceeded to apply residual profit-split method after referring to the Guidelines of OECD on this method. Accordingly the TPO had proceeded to arrive at arm’s length price based on the residualprofit split method as under:

“6.2 Profit Split Method

6.2.1 the OECD Guidelines provide ,for two different profit .split methods to determine taxable income associated with intercompany transactions: the ‘comparable’ profit split method and the ‘residual’ profit split method.

Under the comparable profit split method the split used in comparable uncontrolled transaction is applied to the controlled transactions. The comparable profit split compares the division of operating profit among the controlled taxpayers to the division of operating profit among the uncontrolled taxpayers engaged in similar activities under similar circumstances. Because of the difficulty I obtaining the uncontrolled profit split information, including the iulbrmation needed for consisting accounting treatment, it as likely that the comparable profit split method will seldom be a viable approach.

The residual profit split method allocates operating profit or losses from controlled transactions in proportion to the relative contributions made by each party in creating the combined profits or losses. Relative contributions may be determined by functions peiforined, risks assumed, resources employed, costs incurred and value drivers contributed to the overall business.

According to paragraph 3.5 of the 1995 OECD report, ” the profit split method .first identifies the profit to be split for the associated enterprises from?, the controlled transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm’s length”

The Method is generally used where multiple entities, operating in an integrated manner, contribute to a large extent, to the creation of valuable business drivers that add to future growth prospects of the company as a whole. Applying the profit split would mean splitting any (residual) profit between the entities on all sides of transaction.

Paragraph 3.5 and 3.7 of the OECD guidelines mention that where transactions are very interrelated, it might be that they cannot be evaluated on a separate basis. Independent companies might under similar circumstances, decide to set up a partnership’ and agree to a form of profit split. The strength of the profit split method is that it is less likely that either party to the controlled transaction will be left with an extreme and improbable profit result since all the parties to the transaction are evaluated. This multi-sided approach may also be used to achieve a division of profits from economies of scale or other joint efficiencies that satisfied both the taxpayer and tax administration.

Paragraph 3.11 of the OECD guidelines stresses that if the profit split method were to be used by the associated enterprises to establish transfer pricing in controlled transactions, ten each associated enterprise would seek to achieve the division of prof that independently would have expected to realize in a joint relationship. Generally, conditions established in this manner would have to be based upon projected profits rather• than actual profits, because it is not possible for the taxpayer to know what the profits of the business activity would be at time the conditions are established.

6.2.2 in the instant case the international transactions between Google India and Google Ireland are the fees paid by Google India for import of distribution rights, Information Technology Enabled Services rendered by Google India to Google Ireland and Provision of sales and marketing services by Google India to Google Ireland. However, the above transactions cannot be considered in isolation since the parties viz Google India and Google Ireland deploy valuable intangibles viz the customer base of Google India and Technology IPR of Google Ireland. Due to presence of valuable non-routine intangibles and also as the transactions (routine transactions such as provision of contract 1TE Services and marketing services and the non-routine transactions involving intangibles) are all interrelated and inter-linked., the residual profit split (RPSM) is selected as the most appropriate method.

The residual profit split method provides a routine return for routine services and also accommodates a compensation for non-routine services and investment in non-routine assets; hence it is considered to be the most reliable method to evaluate the license fees received for Ad-words by Google Ireland, and it also provides the best level of conformity to the OECD Guidelines.

Step 1	Identification of total cost for the different activities performed by Google India
Step 2	Assignment of a routine return for the contract IT Enabled Services performed by Google India for Google Ireland
Step 3	Ascertaining the residual profit by carving out the routine return profits from the total relevant profits earned by Google India relating to sale of Ad-words.
Step 4	Splitting the residual profit between Google India and Google Ireland as the return for their respective nonroutine intangibles viz. marketing intangibles and technology intangibles respectively.
Step 5	Identifying the amount of revenue to be transferred by Google India to Google Ireland and vice versa

6.2.3 The following broad steps have been followed for the purpose of arriving at an arm’s length allocation as per RPSM:

6.2.3.1

Step 1

Identification of total cost for the different activities performed by Google India

For this purpose total cost, inclusive of allocated overheads for the ITES and Sales and Marketing activity performed by Google India hill be identified.

Google India has the following streams of revenue all of which relate to Ad-words software-

• Sale of Adwords advertisement space and marketing of Adwords program.
• IT Enabled Service to Google India

Google India’s expenditure with respect to Google Ireland can be categorized into following cost centers.

• Direct and Indirect costs relating to sale and marketing of Ad-words space.
• Direct and Indirect Costs relating to Information Technology Enabled Services.

6.2.3.2.

Step 2

Assignment of a routine return for the contract IT Enabled Services performed by Google India for Google Ireland

The following table reflects the allocation of overhead to direct cost centers-

Direct Cost Centre	Direct Cost	Allocated Costs	Total
ITES	1,193,264,930	1,237,386,661	2,430,651,096
Sales Marketing Service	582,661,083	50,023,615	632,684,698
Total	1,775,926,013	1,287,409,781	3,063,335,794

Note: Costs allocated by the Assessee as per reply dated 3.12.2012

6.2.3.3 :

Step 3

Ascertaining the residual profit by carving out the routine return profits from the total relevant profits earned by Google India relating to sale of Ad-words.

The calculation of residual return attributable to the non-routine intangibles is as below:

Particulars	Amount
Total revenue earned by Google India in connection with Ad-words during the relevant period	2,433,217,266
Less: cost of sales and marketing service	632,684,698
Total profit earned by Google India during the relevant period	2,369,532,568
Less return on contract ITES @ 25.04% on cost Rs.2,430,651,096 (Para 7.0)	608,635,034
Residual return for attributable to the non-routine intangibles of technology and marketing relating to Adwords	1,760,897,534

6.2.3.4

Step 4

Splitting the residual profit between Google India and Google Ireland as the return for their respective non-routine intangibles viz. marketing intangibles and technology intangibles respectively.

The residual profit is split between the holder of non-routine technology intangibles (Google Ireland) and the holder of non-routine marketing intangibles (Google India) in an arm’s length manner. For this reliance is placed on the economics of bargaining and game them. Set out in Appendix B; which suggests that splitting the residual profit in a 50:50 manner between Google India and Google Ireland would be most representative of an arm’s length outcome in a bargaining situation.

Accordingly following table provides the split of residual profit between Google India and Google Ireland

Particulars	Percentage	Amount
	Attributable	(in Rupees)
Return Attributable to Non-routine Marketing	50%	880,448,767
Return attributable to Non- routine Technology Intangible	50%	880,448,767

6.2.3.5

Step 5

Identifying the amount of revenue to be transferred by Google India to Google Ireland and vice versa

The revenue attributable to Google India as the holder of Marketing intangible is determined considering the following-

• Google Ireland will pay Google India for the ITES Cost plus markup thereon.
• Google India will retain its share of residual profit due to its application of marketing intangible in Adword business.

Accordingly in respect to international transactions entered into between Google Ireland and Google India calculation is made as follows-

PARTICULARS	Amount Calculated by TPO (in Rupees)	Amount Calculated by the Assessee (in Rupees)	Balance receivable by the Assessee
Cost incurred by Google India on ITES	2,430,651,096	2,430,651,096	00.00
Markup calculated using TNMM on ITES	608,635,034	461,368,811	147,266,223
Return Attributable to Non-routine Marketing Intangible	880,448,767	00.00	880,448,767
Less mark up on marketing service allowed by Google Ireland	00.00	102,627,056	102,627,056
Total	3,919,734,897	3,084,646,963	835,087,934

6.2.3.6 Therefore, Google India has computed the arm ‘s length price of international transactions short by Rs.937,714,990. Adjustment in respect to international transactions with Google Ireland therefore is proposed for Rs 937,714,990.”

7.0 The Assessee Company has considered its markup in respect to ITES at arm’s length on the basis of comparison of its profit margin (operating profit/operating cost) with the profit margin of uncontrolled comparables computed using TNMM as the most appropriate method. TPO finds that the identification of uncontrolled comparables’ profit margin is not proper. Therefore, the TPO rejects the ALP computed by the Assessee U/s 92 C (3) (c) of the Income Tax Act 1961 and proceeds to compute the PLI of Uncontrolled Comparables identified by me (TPO). The detailed discussion thereon is given in annexure ‘A’ to this show cause. It is computed at 25.04 percent. Accordingly, markup on ITES is computed by applying the mark up percentage of 25.04 percent on cost-base computed by the Assessee at Rs 2,430,651,096

8.0 theAssessee Company has also entered into international transaction of IT Services. This international transaction has been entered by the Assessee with Google Inc USA. The Assessee has considered the markup of 21.25 % on cost base of Rs 2,048,315,417 as at arm’s length by comparing the same with PLI of Uncontrolled Comparables using TNMM as the most appropriate method.

8.1 In this connection on careful reading of TP Study it emerges that Google India’s STPI Units at Bangalore and Hyderabad act as R&D Centers wherein certain Information Technology Services are performed. In Bangalore contracted R&D services in the nature of Google ‘s Product development, product upgrades, product support, testing of products and product improvement are performed. In Bangalore Unit search results appearing on Google ‘S website are reviewed; it enables Google to improve the quality of search results for end users across the world. (Please refer to search quality evaluation on page 11&12). Hyderabad facility also performs certain software development task in relations development of web-based language translator. Evaluation of Google Services and tools for efficiency, bugs, performance, failure and other aspects is also done in Bangalore. The Software is tested by the Hyderabad unit of Google India before it is ready for release. (please refer to QA Engineering on page 12). Therefore, TPO considers the IT services rendered by Google India to Google Inc. USA are R&D services.

8.2 in this connection it is relevant to state that India’s IT industry can be divided into five main  components, viz. Software Products, IT services, Engineering and R&D services, ITES/BPO (ITenabled services/Business Process Outsourcing) and Hardware. Export revenues primarily on project based IT Services continue to drive growth with IT Services accounting for 59% of total revenues followed by BPO and Engineering services at 22% and Software Products at 19%.

Increasing competition, pressure on billing rates and increasing commoditization of lowerend ADM services are among the key reasons forcing the Indian software industry to make afast move up the software value chain by providing higher value-added services like consulting, product development, R&D, mobile, cloud computing and end-to-end turnkey solutions. Thus R&D ishigher value added service. It cannot be considered as low end service. It is considered as comparable to companies which are engaged in Knowledge Process Outsourcing Services. Therefore, the TPO considers that the data used to determine the ALP of IT Services is incorrect and not reliable. Therefore, it is rejected U/s 92 C (3)(c) of the Act and substituted by the study conducted by the TPO of KPOs. Please see Annexure ‘C’ to this show cause. Accordingly the Arm’s Length Margin of the KPO ‘s 43.68 % per annexure is applied to the cost base of the Assessee to determine the Arm.’s length price of International Transactions, which the Assessee has entered into with Google Inc USA.Accordingly, the Arms length price of the international transaction is as follows-

Particulars	IT Services to Google Inc(as per TPO	IT Services to Google(as per Assessee)
Cost Base (A)	2,048,315,417	2,048,315,417
Markup percentage	43.63%	21.25%
Amount of Markup (B)	883,680,016	435,255,700
Amount of Markup (A+B)	2,931,995,433	2,483,571,117

8.3 Therefore, the difference between the ALP as per theTPO and the Assessee Company computed at Rs 448,424,3’9 is proposed as an adjustment in respect to this transaction.

9.0 in this case based on the discussion made above following amounts are proposedfor adjustment-

Amount ofAdjustment	AMOUNT (in Rupees
In respect to international transactions entered into by Google India with Google Ireland on aggregated basis	835,087,934
In respect to IT Services to Google Inc USA	448,424,329
Total	1,28,512,263

9.0 Calculation of arms length price and adjustment has been done on the basis of transaction details given in 3CEB Report and the TP Study filed by the Assessee Company. But I find that in the Annual Report of the Assessee-Company for FY 2008-09 in Schedule K Domestic Advertising Revenues, net of fees Rs 751,364,443 for distribution services, are shown at Rs 3,282,075,060. In other words, it may be said that gross revenues, before the fees is paidforRs751,364,443, is Rs 4,033,439,503/. This is not the same figure which is given in TP Study and the 3CEB Report. Please certify the correct amount of Domestic Advertising Revenue, failing which amount Rs 3,282,075,060 will be taken into consideration.”

In response to above show-cause notice, the assessee-company submitted a reply on 28.01.2013 on three parts and the TPO’s observations are as under :

“3.3 Assessee in reply dated 28th January also reiterated in most part of it that Assessee has performed all value added services, assumed significant risks and used intangible assets in respect to all the international transactions and Google India has only performed routine services for which it has been suitably remunerated by Google India and Google Inc. I have already discussed this aspect in detail in my both the show Cause reproduced in this order. I have put up my stand on it. I have already discussed in the show cause that in FAR analysis the contribution of Google India cannot be undermined by calling it a routine service. Google India has in respect to all the international transactions rendered more valuable services as well as contributed intangible assets than Google Ireland and Google Inc. In a third part scenario the payments which Google India deserve will be equal to what I have proposed in the show cause notice dated 18.01.2013. I continue to reiterate that the Assessee has made efforts to show itself inferior by giving in the FAR analysis the functions risks and the assets of Google India on one hand and comparing it corresponding functions risks and the assets of any other group entity belonging to Google group and therefore the analysis was between Google India on one hand and Go ogle Group on the other and therefore, Google India wasought to look inferior. However, in one to one comparison for FAR analysis with that AE which entered into international transaction with Google India then one will find that the contribution of Google India is far more superior as compared to what Google India has been pained to be.

3.4 Assessee has submitted that Google India has entered into several agreements with its AEs for rendering services and Google India has performed those services as per the agreements and accordingly remunerated also. Assessee has therefore submits that agreements cannot be disregarded and due consideration should be given to such commercial transactions.

I have taken the agreements into consideration. On the basis of services performed by theAssessee as described in the TP Study, which is also the document prepared by the Assessee and given to the TPO to understand the role played by related parties in respect to each international transaction and then decide the ALP of these transactions, I have concluded that being a related party transaction the Assessee is not being remunerated suitably and therefore, in view of mandate conferred on the TPO by the Income Tax Act 1961 I have proposed to reject the price determined by the Assessee and to substitute the same with a price I have determined. Therefore, it cannot be described by the Assessee as non-consideration of Agreements by the TPO.

3.5 The Assessee has once again in reply dated 28.01.2013 given details of what the Assesseeand its AEs have done. In this connections it will be relevant to state that the TPO has already made detailed study of functions risks and assets of three enterprises given in the TP Study and subsequent replies filed by the Assessee. I find that the Assessee has given vivid description of everything Google Inc and Google Ireland have done. But in this regards I have already discussed in the show cause that in respect to international transactions at hand only we have to see as what is the contribution of Google India, Google Ireland and Google Inc. Painting a detailed picture of standalone entities is of not much avail. As against it I have made relevant study in terms of FAR of Google India, Google Ireland and Google Inc focusing on international transactions involved.

3.6 I have discussed at length the contribution of Google India in show case notices and established that it will be wrong to call Google India a routine service provider. Assessee is ready todeclare as wrong what it has been stated in the TP study. TPO has on careful study mentioned in the show cause that Delhi and Mumbai offices consist of direct sales team (approximately 250 people in totality) which approach corporate and mid-sized advertisers in order to sell ad space for the Ad Words business. Assessee has submitted in reply dated 28.01.2013 in para 34 that Assessee hasalready submitted in foregoing paragraphs that size of the employees in Delhi and Mumbai office consists of direct sales team of 25 employees (as against 250 employees which is advertently mentioned in your self’s notice. It shows that Assessee is not ready to accept even those facts which have been furnished by the Assessee in the TP Study. One can refer to page 13 of the TP study filed by the Assessee. Assessee has very clearly given this fact that there are 250 employees in Delhi and Mumbai sales team. Then why wrong statement by the Assessee in reply dated 28.01.2013? I therefore continue to abide with each and every statement I have made in two show reproduce above. Perhaps, Assessee is required to read its own TP study carefully as TPO did. On careful study of FAR given by the Assessee I found that ITeS and Sales and Marketing activities performed by Google India cannot be viewed separately. They can be evaluated only on aggregate basis. My conclusion is based on proper analysis of TP Study. Assessee is finding its own submissions in TP Study as inconvenient and therefore making wrong statement in an effort to declare that ITeS and Ad Words Business are two independent streams and there is no confluence of them at any point.That is why Assessee is supply new meaning to certain other terms as Assessee has done in respect to ‘non-exclusive’ in para 37 of reply dated 28.01.2013.1 continue to hold that the Assessee has carried on the business of Ad Words as full-fledged business enterprise and not on behalf of Google Ireland. I have already made detailed discussion in the show-cause on it and I donot consider it necessary to repeat the same here.

3.7 The Assessee has raised certain objections on use of profit split method also. One such objection is that ITes and AdWords are two separate transactions. But I have already explained in the show- cause that they are intermixed and one is incomplete without the other. They can only be evaluated on an aggregate basis. Relevant portion of discussion in TP Study of the Assesseeis reproduced below:

STPI Units at Hyderabad and Gurgaon also perform certain IT enabled services which involve approving and administering of the advertisement. Hyderabad and Gurgaon Units are involved in performing back office functions for the Adwords Business such as approval of advertisements for the purpose of running the same on the google website. On page 13 it is mentioned that Google India has entered into anagreement with Google Ireland Lid, Ireland for distribution ofAdwordsProgram with its reasonable commercial expertise, own sales force and customer service infrastructure. The Delhi and Mumbal offices consist of direct sales teams (approximately 250 people in totality) which approach corporate and midsized advertisers in order to sell apace for the Ad Words business.

This is the conclusion of the TPO based on facts that ITeS and Ad Words are intermixed and intertwined and the OECD guidelines are not averse to such conclusion. The Assessee has also raised the objection that for profit split global profit is an important prerequisite. In my view it is not necessary. Only requirement for this purpose is total profit of contributing AEs and in this case they are Google Ireland and Google India. That is why TPO has been able to apply profit split method in this case. Assessee has not pointed out any mistake in the same. And therefore, I do not consider it necessary to make change in the method as well as the financial figures taken into consideration.

3.8 Assessee is not ready to accept that there is any contribution of Google India in Ad Word Business other than routine service. Assessee is not ready to accept that Google India has contributed any marketing intangibles. Assessee has also mentioned in para 53 that Finance Bill 2012 has clarified the term intangible property used in the definition of International Transactions. Assessee has reproduced Claue (ii) of Explanation to Section 92 B. I have already explained in the show cause that Assessee has contributed intangible assets of ‘Customer base of Google India’, ‘Well trained marketing ream of Google India’, ‘ Promotion of Google brand name my performing the functions efficiently’ etc. If Assessee wants to know where Google India’s contribution in terms of intangible fits in, I would point out that it fits in human capital related intangible assets such as trained and organized work force. Employment agreements, union contracts. It also includes customer related intangible assets such as customer list, customer contracts, customer relationship, open purchase orders. It also includes Goodwill related intangible assets such as institutional goodwill, professional practice goodwill, personal goodwill of professional celebrity goodwill, general business going concern value. What other description Assessee requires for this purpose. If technology is vital then equally vital is human skill. Why Google Ireland requires trained man power in India if Technology is the only driver for profit earning. The very fact Google India is incorporated and rendering significant services is a proof that technology alone cannot run the business. It needs both technology and human skill. One is incomplete without other.

3.9 Google India and Google Ireland are equal partners in earning profit from AdWordBusiness and no one is entitled for profit more compared to other. 50:50 bargain theory is accepted worldwide it use to arrive at share in profit cannot be ignored. I have used Profit split method asmost appropriate method, which is one of the recognized method prescribed in Section 92 C (1) of the Act 1961 and to arrive at ALP other methods used world over is permissible. In this connection it is relevant to cite relevant paragraph form the landmark decision of Hon. ITAT “C” Bench Chennai in the case of Ascendas (hdia) Private Limited Vs Dy CIT Circle 1(1) Chennal (ITANo 1736/ Mds/ 201 1 AY 2007-08).

“It thus appears that following one of the methods mentioned in (a) to (/) above are mandatory. However, in our opinion the purpose of enactment of chapter x, is to benchmark an international transaction with the Fair Market Value of such transaction, so as to ensure that there are no profit transfer- between parties in different jurisdiction effectually circumventing taxes. Thus, purpose of transfer pricing rules, is to verify whether the prices at which an international transactions has been carried out is comparable with the market value of the underlying asset or commodity or service. It may be true that difficulties might arise in ascertaining the fair market value but such difficulties should not be a reason for not adapting the rules and methods prescribed in t h is regard. This might require some szihte adjustment in the methodology prescribed for evaluation of an international transaction. A water tight attituted of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime. The interpretation of the word ‘shall’ need not always be mandatory and could also be read as ‘may’, is a rule laid down by the on. Gujarat High Court in the case of CIT V Gujarat Oil & Allied Industires (201 JTR 325). This is more or less the same view taken by the Hon Apex Court in the case of Director of Inspection of Income Tax (Investigation) V Pooran mal & Sons (96 ITR 390) and in the case of Sainik Motors VS State of Rajasthan (air 1961 SC 1480). Hence, while finding the most appropriate method it is not that n’aodern valuation methods fitting the type of underlyingservice or commodities have to be ignored. Fixing enterprise value based on discounted value of future profits or cash is a method used worldwide. Endeavor is only to arrive at a value whichwould give a comparable uncontrolled price for shares sold. If viewed from this angle, we cannot say that the discounted cash flow method adopted by the TPO was not in accordance with Sec 92 C (1).

3. Thereforeallthe objections raised by the Assessee Company have been attended to.There is nothing which TPO which may have a compelling force to change the approach adopted by the TPO and therefore, I proceed to take action in accordance to the proposal contained in this regard in the show cause dated 18.01.2013. In short it is to apply Residual profit split method taking ITeS and AdWord related international transactions on aggregate basis.

4. The Assessee has objected TPO’s proposal to treat IT services it has rendered to Google Inc as KPO and not- software development services. The Assessee in Part C of the reply dated 28.01.2013 is on this aspect of the second show-cause. Before making any more discussion on this aspect I consider it necessary that at the expense of repetition I reproduce relevant paragraphs from first show cause. Accordingly it is reproduced below-

2.1 In para 2.2.2 on page 11 of the Transfer Pricing Study Report for Financial Year 2009-10 filed on 7.03.2012 (hereinafter referred to as the ‘TP Study) business activities of Google IndiaPrivate Limited (hereinafter referred to as the Google India, or the assessee) have been described. It is discussed in this para that Google India has three registered Units with STPI. Google India’s STN Units at Bangalore and Hyderabad act as R&D Centers wherein certain InformationTechnology Services are performed. In Bangalore contracted R&D services in the nature of Google’s Product development, product upgrades, product support, testing of products and product improvement are performed. In Bangalore Unit search results appearing on Google ‘swebsite are reviewed; it enables Google to improve the quality of search results for end users across the world. (Please refer to search quality evaluation on page 1 1&12). Hyderabad development tasks in relation to development of web-based language translator. Evaluation of Google Services and tools for efficiency bugs, performance, facility also performs certain software failure and other aspects is also done in Bangalore. The Software is tested by the Hyderabad unit of Google India before it is ready for release. (please refer to QA Engineering on page 12).

I find that Google India has performed IT services to GoolgeInc USA almost every year. Position of IT services rendered by Google India to Google Inc USA in this year and in two preceding years is as follows-

199. In response to above show-cause notice, the assessee-company submitted a reply on 28.01.2013 on three parts and the TPO’s observations are as under :

200. Finally the TPO vide order dt.29.01.2013 suggested TP adjustment of Rs.128,35,12,263/- as under :

Amount ofAdjustment	AMOUNT (in Rupees
In respect to international transactions entered into by Google India with Google Ireland on aggregated basis	835,087,934
In respect to IT Services to Google Inc USA	448,424,329
Total	1,28,512,263

201. The AO passed draft assessment order dt.04.03.2013 u/s.143(3) r.w.s.144C of the Act corporating the TP adjustments suggested by the TPO of Rs.128,35,12,263/- and reducing the telecommunication charges incurred in respect of software segment of the business of Rs.10,99,83,459/- only from the export turnover without reducing the same from the total turnover, thereby restricting the deduction u/s.10A to Rs.181,61,83,592/-. Further the AO also disallowed a sum of Rs.328,20,75,060/- invoking the provisions of Section 40(a)(ia) of the Act, on the ground that the assesseecompany had failed to deduct tax on the amount of distribution fees on AdWords distribution programme payable to Google Ireland. Further the TPO also made additionon account of additional profits attributable to AdWords programme of Rs.117,37,50,871/-.

202. After receipt of the draft assessment order, the assessee-company had filed objections before the Hon’ble DRP contending that the TPO is not justified in rejecting TP study submitted by the assessee-company and re-characterising the company as highend KPO-company and also aggregating the activities of distribution of AdWords and ITeS segment. The assessee-company also objected for the use of single year’s data and contested the selection of comparables by the TPO on the ground that the comparables are functionally different. The assessee-company also objected restriction of disallowance u/s 10A. The assessee-company also objected to restriction of 10A deduction and addition u/s 40(a)(i) of the Act.

203. Hon’ble DRP, after considering the submissions made on behalf of the assesseecompany upheld the characterisation of IT services as high-end KPO services. However, directed the TPO to exclude M/s Coral Hub (formerly known as M/s Vishal Technologies), as comparable in respect of IT segment. However, Hon’ble DRP held that the activities of ITeS and AdWords distribution programme segment should be benchmarked separately. However, upheld appropriateness of various filters applied by the TPO in the selection of comparables in ITeS segment and also upheld the comparables selected by the TPO.

204. AdWords Segment:

Hon’ble DRP held that profit split method should be adopted as most appropriate method. However, for the purpose of arriving at over-all profits earned by the group, expenses incurred by Google Ireland should be factored. Hon’ble DRP granted relief in respect of 10A deduction by directing the AO to reduce telecommunication expenses incurred in foreign currency both from export turnover as well as total turnover.

205. In respect of disallowance u/s 40(a)(ia) of the Act, Hon’ble DRP directed AO/TPO to restrict disallowance by reducing the amount of TP adjustment. Hon’ble DRP also granted relief in respect of addition made on account of accretion of additional income to AdWords programme by holding that the transactions in relation to distribution of AdWord programme is also bench marked.

206. After receipt of the Hon’ble DRP’s order, final assessment order was passed vide order dated 31/01/2014 u/s 143(3) r.w.s. 144C of the Act. After giving effect to the directions of the Hon’ble DRP, the TP adjustment was reduced to Rs.82,51,71,946/- and the disallowance u/s 40(a)(ia) was reduced to Rs.1,41,80,57,831/-.

207. Being aggrieved, the assessee-company is in appeal in IT(TP)A No.69/Bang/2014 against that part of the order of the assessment order which is against it and the revenue is in appeal in IT(TP)A No.191/Bang/2014 against that part of the order of the assessment order which is against the revenue.

208. Now, we shall take up the appeal filed by the assessee-company. The assessee raised the following grounds of appeal:

“Based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon’ble DRP have:

A. Transfer Pricing Issues

Erred in rejecting the transfer pricing documentation maintained by the Appellant and making adjustments in respect of the following international transactions with its AEs:

♦ Provision of software services- Rs. 41,02,20,628;
♦ Provision of Information Technology enables Services (ITeS)- Rs. 14,72,66,223; and
♦ Purchase of advertisement space for distribution to the advertisers in India Rs. 26,76,85,095.

2. Erred in using single year data of companies to determine the arm’s length price of the international transactions without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant’s claim for use of multiple year data for computing the arm’s length price.

3. Erred in selecting certain companies which are earning super normal profits ascomparable to the Appellant in determining the ALP for the services.

4. Erred in considering provision for bad debts as non-operating cost in computing the net margins under Transactional Net Margin Method

5. Erred in not appreciating the fact that the Appellant operates as a risk mitigated service provider and all the key risks associated with the functions performed are borne by the Associated Enterprise (AE) and not by the Appellant.

6. Erred in not adjusting the net margins of the comparable companies selected taking into account the functional and risk differences between the international transaction of the Appellant and the comparable transactions in accordance with the provisions of Rule 10B(1)(e) of the Income-tax Rules, 1962.

7. Erred in not making adjustment for the difference in working capital of the Appellantvisà-vis the comparables selected.

8. (a) Erred in not allowing the option under the proviso to section 920(2) of the Act in
limiting the adjustment at a variation of 5 percent to the arm’s length price.

(b) Erred in not appreciating the fact that the amendment to section 92C(2) of the Act is
not applicable for the relevant AY under consideration.

Grounds specific to TP adjustments to provision of software services

9. Erred in rejecting the FAR analysis and re-characterizing the activities performed by the Appellant as Knowledge Process Outsourcing (`KPO’) services instead of software services.

10. Erred in adopting an approach different from its predecessors in assessment years up to assessment year 2008-09, without any change in facts or circumstances of the case from earlier years.

11. Erred in not undertaking an objective search and selecting of the following companies as comparables on an ad-hoc basis:

a) Acropetal Technologies;

b) Eclerx Services Ltd; and

c) Genesys International Corporation.

Grounds specific to TP adjustments to provision of ITES

12. Erred in rejecting the contemporaneous data (i.e., data existing before the due date of filing of return of income) and in undertaking a fresh comparable search during the course of assessment proceedings, using information/data which was not available to the Appellant at the time of satisfying the mandatory documentation requirements.

13. Erred in inter-alia using of the following additional filters in undertaking the comparative analysis for rejecting comparable companies having:

a) Diminishing revenue; and

b) Different year end.

14. Erred in not undertaking an objective comparative analysis and inter-alia selectingthe following companies as comparable to the ITES services of the Appellant:

a) Accentia Technologies Ltd;

b) Eclerx Services Ltd;

c) Infosys BPO Ltd; and

d) Informed Technologies India Ltd.

15. Erred in not undertaking an objective comparative analysis and inter-alia rejecting thefollowing comparable companies:

e) Lee & Nee Software Ltd; and

f) Microland Ltd (Call Centre segment).

Grounds specific to TP adjustments relating to payment for purchase of advertisement space under the AdWords program.

16. Erred in not undertaking an objective Functions Assets and Risks (‘FAR’) analysisand concluding that the Appellant owns marketing intangibles.

17. Erred in not appreciating the fact that the Appellant performs a limited role in theprovision of web based advertisement and that the AEs undertake all the economically significant functions.

18. Erred in adopting an approach different from its predecessors in assessment yearsup to assessment year 2008-09 in selection of most appropriate method, without any change in facts or circumstances of the case from earlier year.

19. Erred in rejecting Transaction Net Margin Method (‘TNMM’) and determining the ALP by applying Profit Split Method (‘PSM’) as the most appropriate method.

20. Erred in not applying PSM in accordance with the provisions of Rule 10B of theIncome Tax Rules, 1962 and following an erroneous methodology.

21. Erred in applying PSM, not determining the correct contribution made by the AE inearning the revenue in accordance with the FAR analysis of the transactions.

22. Erred in not providing requisite adjustment for the contribution made by the AE in theform of credit granted for the amount payable by the Appellant to the AE towards purchase of the advertisement space.

23. Erred in not following a consistent approach in considering the nature of provision forbad debts in determination of the ALP

B. Corporate Tax Issues

Rejection of Books of accounts

24. Erred in holding that the duly audited books of account of the Appellant are incomplete and incorrect based on conjectures and surmises without appreciating the complete disclosures made in the books of accounts maintained by the Appellant.

Disallowance of payments made to Google Ireland Limited invoking provisions of section 40(a)(ia) of the Act

25. Erred in holding that the amounts payable by the Appellant to Google Ireland Limited for purchase of advertisement space under the AdWords Program were chargeable to tax in India.

26. Erred in holding that the Appellant, in relation to distribution of advertisement space under the AdWords program, create a Dependent Agent Permanent Establishment of Google Ireland Ltd under Article 5 of the India-Ireland Double Taxation Avoidance Agreement and the receipts are taxable as business profits in India.

27. Having held that the Appellant was an agent of Google Ireland Ltd. erred in holding that Appellant ‘was a person responsible for paying’ any amount to Google Ireland Ltd. within the meaning of section 195 of the Act and that the Appellant gas failed to deduct tax at source on the amounts payable to Google Ireland Limited.

28. Having held that the Appellant creates a Dependent Agent Permanent Establishment of Google Ireland Limited in India, erred in attributing business profits, ignoring the fact that the Ld TPO has determined the arm’s length remuneration for the Appellant andhence there was no additional income chargeable to tax in India in the hands of Google Ireland Ltd requiring any deduction of tax at source under Section 195 of the Act and hence no disallowance under section 40(a)(i) of the Act is warranted.

29. Having held that the Appellant was an agent of Google Ireland Ltd. erred in holding that Appellant ‘was a person responsible for paying’ any amount to Google Ireland Ltd. within the meaning of section 195 of the Act.

30. Erred in alternatively holding the amount payable towards purchase of advertisement space under the Agreement as either Royalties or Fees for Technical Services under Article 12 of the India-Ireland Double Taxation Avoidance Agreement.

31. Erred in upholding that the Appellant was required to deduct tax at source from the amount payable by the Appellant to Google Ireland and in view of its failure to deduct tax, the amount of Rs 1,41,80,57,831 was required to be disallowed u/s 40(a)(i) of the Act.

32. Without prejudice to the above, assuming without admitting that the amount paid/payable by the Company to Google Ireland Limited is not chargeable to tax in India warranting any deduction u/s 195 of the Act, the Ld AO have erred in disallowing the amount paid/ payable to Google Ireland Limited u/s 40(a)(i) disregarding the fact that the demand raised by the Learned Deputy Director of Income-tax (International Taxation), Circle 1(1), Bangalore u/s 201(1) of the Act for the relevant AY has been remitted by the Appellant.

C. Miscellaneous

33. Have erred in imposing the levy of interest u/s 234B of the Act.

34. Have erred in initiating the penalty proceedings initiated u/s 271(1)(c) of the Act. The Appellant craves, to consider each of the above grounds of appeal independently without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

209. Ground Nos.1 to 8 are general in nature relating to TP adjustment and were not pressed during the course of hearing, hence dismissed as such.

210. Ground No.9 challenges FAR analysis and functions of the assessee-company undertaken by the TPO and re-characterising activities of the assessee-company as only Knowledge Process Outsourcing (KPO) instead of ITeS. It is submitted that the assessee-company had entered into service agreement with Google Ireland on 01.01.2006 whereby the assessee-company had agreed to provide IT services to Google Inc. USA. Copy of the agreement is placed at pages 1 to 14 of the paper book.

211. It is submitted that the units at Bangalore and Hyderabad act as R&D centre for Google Ireland from where certain IT services are provided. It was further submitted that this service involved evaluation of Google services and tools for efficiency, bugs, performance, failure and other aspects. The software is tested by the Hyderabad unit of GIPL before it is ready for release. The results of evaluation are reported to the development team abroad in the form of reports, mails, oral/non documented forms and other modes of technical communication. In consideration for the said services, assessee-company is compensated on a cost plus 17.50% mark-up basis.

212. With regard to the above international transaction, the assessee-company has carried out detailed functional analysis covering functions performed, assets utilized and the risks assumed by assessee-company and its AE i.e. Google Inc. and the same has been submitted to the TPO as part of TP documentation.

213. Based on the FAR analysis, TNMM was selected as the most appropriate method for the international transaction relating to rendering of IT services. The economic analysis was conducted by the assessee-company to identify external comparable companies engaged in similar services. Based on the comparability analysis, a set of 16 comparable companies was identified. The three year’s average OP/TC of the comparable companies was computed at 16.46% as compared to OP/TC of 21.25% earned by the assessee-company. Hence, the assessee-company concluded that the international transaction in IT services segment was at arm’s length.

214. The TPO had rejected the FAR analysis conducted by the assessee-company in the TP study and re-characterised the activities/functions and performance of the assessee-company as KPO service instead of IT services. The TPO observed that Bengaluru and Hyderabad STP units of the assessee-company act as R&D centres, which are in the nature of product development, product upgrades, product support, testing of products and product improvement. This approach of the TPO was confirmed by the Hon’ble DRP.

215. Now before us, it is contended that the assessee-company provides IT services which involve evaluation of Google products and tools for efficiency, bugs, performance, failures and other aspects, software development tasks in relation to development of web based language translator, etc. The TPO failed to understand that the assessee-company performs IT services in the role of a contract developer wherein the assessee-company is not exposed to any market risk or commercial risk for the product and accordingly, remunerated as assured return on a cost plus mark-up basis.

216. It was further submitted that the functions of KPO fall under category of ITeS. It is further submitted that the modules worked upon by the assessee-company form very insignificant part of Google products and major significant functions are done by Google Ireland, USA for development of end product and there was no-end product developed in India and Google patent search engine was developed much before setting up of the assessee-company in India. It was further submitted that in the earlier years i.e. assessment years 2005-06 to 2008-09, these activities have been characterised by the Tribunal as IT services and the same was confirmed by this Tribunal and there was no change in the functional profile of the assessee-company during the previous year relevant to assessment year under consideration from earlier assessment year. Thus it was contended that the TPO was not justified in re-characterising the functions of the  assessee-company as KPO services. Further, learned AR of the assessee-company also drawn our attention to the definition of the term ‘KPO’ and ‘software development’ as defined under rule 10T(a)(g) of the Safe Harbour Rules.

217. On the issue of selection of comparable by the TPO, it was submitted that the company M/s.Acropetal Ltd. cannot be compared with that of the assessee-company as it is into the health-care software and allied products and services and also into development of products. The company has got very high intangibles and no segmental information is available. Therefore, this company cannot be compared with that of the assessee-company.

218. As regards M/s.Coral Hub Ltd., it is submitted that this company is into services like sale of books, preparation of financial statement, liquidity monitoring etc., which cannot be compared with that of the assessee-company and it was also submitted that this company outsources segmental portion of its work to outside people. Therefore, this company cannot be compared with that of the assessee-company.

219. Similarly, as regards M/s.Eclerx Services Ltd. this company was into business of consultancy and advisory services and provide analytic services and no segmental information is available. This company also cannot be compared. Therefore, this company cannot be compared with that of the assessee-company.

220. Regarding ITeS Services, learned AR of the assessee-company submitted that the services rendered in terms of agreement entered into by the assessee-company with Google Ireland on 01.04.2004 and in consideration of such services, the assessee-company was remunerated at cost + mark up of 15.5%. The nature of ITeS was submitted as under:

Information Technology Services and Information Technology Enabled Services:

Google India has registered 3 units (Bangalore, Hyderabad and Gurgaon) with the Software Technology Parks of India (‘STPI’) and from these units, the company provides Information Technology services and IT enabled services. Google India has entered into agreements with Google Ireland Limited and Google Inc to provide IT and ITeS services.

Google India’s STPI units at Bangalore and Hyderabad act as R&D centers for Google group wherein certain Information Technology services are performed. The Bangalore facility started with low-level routine software development tasks related to various Google products like Google Maps, Google Earth, Scheduler, which extended tçnxiaçd R&D services in the nature of Google’s product development, product upgrades, product support, testing of products and product improvements. The services are:

Search quality evaluation :

This service involves the review of search results appearing on Google’s website, which enables Google to make decisions that are designed to improve the quality of search results for end users across the world.

QA engineering

This service involves the evaluation of Google services and tools for efficiency, bugs, performance, failure and other aspects. The software is tested by the Hyderabad unit of Google India before it is ready for release. The results of evaluation are reported to the development team abroad in the form of reports, mails, oral/non-documented forms and other modes of technical communication.

The STPI units at Hyderabad and Gurgaon also perform certain IT enabled services, primarily relate to performance of all such activities which involve approving and administering of the Advertisements in line with certain editorial and other relevant guidelines.

These units are involved in performing back office functions for the AdWords business, as described below:

Approvals for advertisements for the purpose of running the same on the Google website

These services mainly involve IT-enabled data processing work. The data comes from the customer and is routed to the Hyderabad unit through a workflow based on language and tier. On receiving the data, the AdWords team reviews the advertisement according to company policy. The resulting advertisement approval means that a customer’s advertisement can now be viewed on the web sites of Google and or its partners located outside India.

Further, the Hyderabad facility also performs certain software development tasks in relation to development of a web-based language translator. This is a project that is spearheaded by Google US and Google Ireland. Google India performs the role of a contract developer. All risks relating to software development are borne by the AEs and rights in the software also vest with the AEs.

Distributor for AdWords Program:

Google India has entered into an agreement on 12 December 2005 with Google Ireland Ltd., Ireland for distribution of Ad Words Program. As per the agreement, Google India has to market and distribute AdWords Program to advertisers in the designated Territory, within the broad guidelines provided by Google Ireland, with its reasonable commercial expertise and own sales force and customer service infrastructure.

The Delhi and Mumbai offices consist of direct sales teams (approximately 250 people in totality) which approach corporate and mid-sized advertisers in order to sell ad space for the AdWords business.

Online Sales :

The Hyderabad unit has an online sales and marketing team, which functions as a customer service support center and helpdesk for the AdWords business.

221. It was further submitted that the assessee-company had three units at Bangalore, Hyderabad and Gurgoan, which are registered as STP units. These units perform ITeS Services which involve approving and administering advertisements in conformity with certain editorial and other relevant guidelines. The assessee-company also submitted the TP study with FAR analysis of functions performed by the assessee-company and TNMM was selected as the most appropriate method for the purpose of bench marking ITeS functions. A set of 8 comparables were identified using comparable company’s three previous year’s data. The operating profit of the comparable selected was computed at 18.89% as against operating profit of the assessee-company at 10.24%. Hence, it was claimed that the transactions of the assessee-company with its AE in respect of ITeS are at arm’s length. The TP study was rejected by the TP on the following grounds:

• does not satisfy all filters applied by the TPO.
• has declining sales for the last three years.
• has year ending other than March.
• service income to sales is 44.04%
• functions of the company are not clear and no segmental information
• Financial year data is not available.

222. The TPO proceeded to carry out a fresh search using the current year’s data and finally selected the following eight comparables :

i. Infosys BPO Ltd.

ii. Aditya Birla Minac Worldwide Ltd.

iii. MicrolandLdt (both segments)

iv. AllsecTechnogies Ltd.

v. Accentia Technologies Ltd.

vi. Informed Technologies Ltd.

vii. Cosmis Global Ltd.

viii. Eclerx Services Ltd

223. The average profit of the above comparables was computed at 25.04% and ALP adjustment was suggested at Rs.14,72,56,223/- Based on the above, the TPO suggested an upward adjustment in respect of ITES segment. Hon’ble DRP also confirmed the approach applied by the TPO.

224. Before us it is contended that the details of activities carried out by the assesseecompany in ITES segment are as under:

Section	Particulars		Page No
I	ITES activities carried out by Google India
	A)	Background	1
	B)	Details of ITES activities provided by Google India
		i) Details of Global outsoured Ad revies services	2-4
		ii) Details of Global outsourced Advertisers Help Desk	4-6
		iii) Details of Global outsourced Advertisers support	6-7
II		Difference between Distribution agreement and ITES ageement
	A)	Details of Distribution agreeement entered into by Google India with GIL and activities performed by Google India	7-8
	B)	Summary of activities performed in India and outside India with respect to advertising service provided via the Goa AdWords Program to advertisers in India
			8-10
	C)	Details of how Distribution agreeement and ITES agreement are completely independent of each other
			11-12
III		EXHIBITS
		Exhibit “1” sample invoices raised by Google India on GIL for
		exert of ITES services	13-26
		Exhibit “2” Global outsourced Ad review services chart	27
		Exhibit “3” Global outsourced Advertisers Help Chart	28
		Exhibit “4” Global outsourced Advertiser support chart	29
		Exhibit “5” sworn statement of ITES head of Global India explaining details of ITES activities carried out by Google India	30-35
		Exhibit “6” Financial statements of Google India for the year	36-48
		ended 31st March 2005
		Exhibit “7” Affidavit of Mr. Hari Raju, Director of Appellant	49-58
		Company i.e. Google India Private Ltd.

225. On the selection of comparables, it is contended that the comparable entity M/s.EclerxServices Ltd, was selected for both IT and ITES segment by the TPO. It is further submitted that the comparables selected by the TPO needs to be excluded on functional differences.

226. It is submitted that the company, M/s.EclerxServices Ltd, is high end diversified ITES service provider, providing data analytics and data process solutions to some of the largest brands in the world and therefore, the company is functionally different.

227. It is submitted that M/s.Accentia Technologies Ltd is also functionally different as it is engaged into Healthcare Receivables Cycle Management (HRCM) services and Software Products for Business Process Outsourcing (BPO). Further segmental data is not available. This company earns revenues from medical transcription, billing and collection and income from coding. Therefore, this company is functionally different.

228. It is submitted that M/s.Infysos BPO Ltd. is also functionally different as it provides diversified BPO services and it possesses high brand value and intangibles and extra-ordinary activities.

229. It was also submitted that the company M/s.Lee& Nee Software Ltd., requires to be included in the list of comparables as it is functionally comparable since it is into ITES services.

230. It was also submitted that in respect of comparable company M/s.Microland Ltd., only ITeS Segment should be considered for ALP computation and IT infrastructure should be excluded for margin computation.

231. As regards ground Nos.16 to 23 raised by the assessee-company, it challenges the residual profit split method applied by the TPO by rejecting the TNMM selected by the assessee company. It was further contended that even the profit split method was not applied in accordance with the provisions of 10-B(1)(d) of the IT Rules 1962, as the TPO had failed to apply the correct contribution made by the AE in earning the revenue, in accordance with the FAR analysis of the transaction.

232. It is submitted that the whole basis applying residual profit split method is the allegation that the assessee-company has human intangibles and customer-base. While making such allegation, the lower authorities had completely ignored the fact that the technology plays a vital role and a value-driver and the technology is owned by Google Inc and licensed to Google Ireland Ltd. Learned AR further submitted that without prejudice to the argument that the assessee-company had not created any marketing intangibles, it is argued that marketing intangibles are not relevant or material in the business of AdWords distribution. It was further contended that, the mandatory conditions for application of profit split method, are not satisfied in the present case as there is no transfer of unique intangibles is involved, and multiple international transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction.

233. On the other hand the learned CIT(DR) argued on IT services that from the TP study submitted by the assessee-company, the TPO observed that the two STPI units at Bengaluru and Hyderabad operate as R & D Centres rendering R & D services in the domain of Google product development, project updates, testing of products and product improvement. From the very description of these services, it is clear that these services contribute high value addition to the products of the assessee-company i.e., M/s.Google India Ltd. Therefore, the TPO was justified in characterising these activities as KPO services. It was further submitted that the assessee company had submitted the ‘note’ on the nature of activities carried out by the assessee-company in IT segment under the search quality evaluation and QA engineering. It is further pointed out that search quality evaluation involves review of search results appearing on Google website and based on that review, Google Inc, the assessee company ultimately takes the decision to improve the quality of search results. This review work cannot, by itself, be termed as software development services. It is more of an activity of data analytics which fall within the category of KPO services. As regards the activities under the category of QA engineering, the learned CIT(DR) submitted that it involves evaluation of Google tools for efficient bug removal, performance, evaluation and other aspects. The evaluation results are reported to development wing abroad in the form of reports, e-mails etc.

234. It was further submitted that these services and tools cannot be described as software development services and it is argued that the services performed under the IT segment are purely in the nature of KPO services and therefore the TPO was justified in characterising as a KPO services company. As regards the characterisation done in the earlier years, it was submitted that, in the earlier assessment years, there was no detailed discussion by the TPOs in respect of the nature of services rendered by the assesseecompany in this segment. Therefore, in the absence of these discussions one cannot come to a conclusion on the characterisation of the functions undertaken by the assesseecompany and the principle of res-judicata has no application to the facts of the case as each year is separate and distinct.

235. ITeS :

The learned CIT(DR) submitted that the services rendered in ITeS were concerned with AdWords Distribution Programme and therefore the activities of ITeS services and AdWords Distribution Programme are inter-linked, inter-related and in-separable. Therefore, it was argued that the Hon’ble DRP was not justified in directing the AO/TPO to bench mark the activities under the ITeS segment and AdWords Distribution Programme. It was further submitted that there was inconsistency in the approach of Hon’ble DRP while directing the TPO to aggregate the international transactions relating to the distribution of AdWords programme and ITeS. However, the Hon’ble DRP took a contrary stand by holding that ITeS and AdWords segment are to be bench marked separately. In this connection, learned CIT(DR) had invited our attention to clauses 2.3, 2.5, 2.6 and 3.4 of the Agreement entered into by the assessee-company with Google Ireland in respect of AdWords Distribution Programme, dt.12.12.2005 to demonstrate that the activities of ITES are closely inter-linked with the activity of AdWords Distribution Programme. It is submitted that the assessee-company set up STP units at Gurgaon and Hyderabad which involved services like administration, advertisement and other back-office functions such as after sales support for AdWords business. The ITeS performed at STPI units at Bengaluru and Hyderabad added value addition to Google Inc. Through its operations the assessee company had contributed intangible assets of customer base, marketing team to Google Inc and Google Ireland. Google Ireland has only contributed to AdWords business is not correct. It has generated intangibles i.e., AdWords programme, which was in fact, not owned by it, but was only a sub-licensee. Based on this analysis of functions performed by the assessee-company the TPO had arrived at the conclusion that the assessee-company was not compensated adequately for its contribution to marketing intangibles. Whereas the AE i.e., Google Ireland was paid distribution fee of more than what would have otherwise been paid in the uncontrolled situation. Thus it was submitted that the TPO was justified in adopting residual profit split method, wherein the profits from the routine activities like ITeS was reduced from the net revenue earned by the assessee-company on AdWords Distribution Programme and thereafter divide the profit between the assessee company and Google Ireland in the ratio of 50 : 50.

236. It was further submitted by the learned CIT(DR) that the Hon’ble DRP also has confirmed this method. However, the Hon’ble DRP directed the TPO to apply the profit split method of residual profit split method. He argued that having regard to the FAR analysis all the functions performed by the assessee, it is clear that the assessee company also contributed towards the advertisement of marketing intangibles which, in turn, contributed to the development of AdWords business profits and the methodology adopted to compensate the assessee company on cost-plus basis, is not proper. In such circumstances, profit split method is the most appropriate method for determining the ALP of the distribution fees. He further submitted that the profit split method is one of the recognised methods for determination of ALP where the assessee generates revenue out of the operations that are highly integrated and where there is a transfer of technology intangibles. Reliance was also placed on the judgment of the Hon’ble Delhi High Court in the case of Global One India P. Ltd v. ACIT (44 taxmann.com 100). He also disputed the submission made by the Ld. AR that only twenty persons were employed for marketing the AdWords Distribution Programme.

237. We heard rival submissions and perused material on record. As regards TP adjustment, the TPO had rejected the TP study report submitted by the assessee-company on the ground that there was no separate FAR analysis of each function performed with AEs. The TP study contains FAR analysis of the functions performed. Needless to say the TP analysis should be ideally made on a transaction by transaction basis except in cases where transactions are so closely inter-related or continuous that application of arm’s length principle on a transaction by transaction basis would be unreliable or cumbersome. Only in those cases the transactions are aggregated. Therefore, the TPO was justified in rejecting the TP study submitted by the assessee-company. However, from perusal of TPO order it is clear that the TPO made TP analysis without referring to any evidence or actual conduct of the parties. Thus, in our considered opinion neither the assessee-company nor the TPO had approached the issue in proper perspective and therefore in the absence of proper TP analysis in proper perspective, the comparability of international transaction cannot be judged. Therefore, in fitness of things, we remand the entire TP issues to the file of the TPO/AO for undertaking the exercise of TP analysis afresh after affording opportunity to the assessee-company to furnish TP study report covering the entire functions performed, assets employed and risks undertaken transaction-wise in respect of international transaction with AE.

238. After the TP analysis on the above lines, the TPO shall aggregate the functions which has a direct nexus with core business activity i.e. AdWords distribution programme. We had already held in the appeal against order passed u/s 201(1) that the activities under ITeS services are integral part of AdWords distribution programme. Further the TPO shall examine whether the functions of the assessee-company resulted in creation of intangibles i.e. marketing intangibles or technological intangibles. Whether these intangibles so created are owned and used by the assessee-company itself or transferred to any other entity and whether the assessee-company is properly compensated for transferring such intangibles. The findings of the TPO shall be based on the actual conduct of the parties and evidence produced by the assessee-company. The characterisation of functions cannot be based on not merely terms of contract or
description of the services given by the assessee-company. It has to be determined having regard to the actual conduct of the parties. It is pertinent to state that the AO/TPO shall have regard to the guidelines issued by the CBDT vide circular No.6 of 2013 dated 29th June 2013 in deciding the functional profile of the assessee-company. In respect of transactions independent of AdWords distribution programme, the characterisation of the functions performed shall be based on the actual conduct of the parties and actual activities performed. The comparability of all these independent transactions shall be judged with reference to uncontrolled similar transaction by adopting most appropriate method and comparability factors. In respect of transactions aggregated with AdWords business transaction, the TPO shall bench-mark the transaction by adopting Profit Split Method as most appropriate method, as the transaction of business of AdWords programme requires deployment of assets and functions of different entities located in different geographical locations in order to ultimately deliver services as the combined effort generate revenues. It is also settled proposition of law that Profit Slip Method (PSM) can be adopted as most appropriate method in cases involving multiple interrelated international transactions which cannot be evaluated separately. Reliance in this regard can be placed on the decision of the co-ordinate bench in the case of Orange Business Services India Networks (P) Ltd. Vs. Dy.CIT (2015) 63 taxmann.com 304 (Delhi-Trib), Global One India (P.) Ltd. Vs. Asst. CIT (2014) 44 taxmann.com 100(Delhi-Trib). Thus, all the grounds of appeal relating to TP adjustment are set aside
to the file of the AO/TPO for de novo assessment after affording due opportunity of being heard. These grounds of appeal are partly allowed for statistical purposes.

239. We consider it not necessary to deal with the selection of comparables, as we restored to the file of the AO/TPO to decide the issue of characterisation of the functional profile of the assessee-company in respective segments.

240. In ground No.24, the assessee-company challenges rejection of book results. The AO had noticed that the assessee-company had not credited the gross receipts on account of AdWords business to its P & L account, but credited only the share of advertisement revenue. Considering this, show-cause notice dt.01.01.2013, was issued to the assesseecompany, calling upon to explain why all the receipts from AdWords business were not accounted on gross basis in the P & L account filed and also explain as to why the P & L account should not be recast in accordance with the Accounting Standards and further explain as to why the books should not be rejected as it has failed to follow the standard accounting practices.

241. The assessee-company filed explanation to the show- cause notice, vide letter dt.15.02.2013, stating that its books of account were duly audited by the chartered accountants who had opined that the books of account have been prepared in conformity with the standard auditing practices and the income has been disclosed on net basis and the assessee-company has offered entire income from distribution service to tax. Therefore, it was contended that there was no need for recasting the P & L account or re-working the profits of the company. It was further contended that there was no need for rejecting the books u/s.145, as the conditions for invoking section 145 were not satisfied in the present case. It was further contended that the books of account are correct and complete and the correct method of accounting has been followed by the assessee. The assessee-company had complied with the accounting standards notified
by the Central Government and the same method of account has been regularly followed from year to year. However, the AO rejecting the above contentions, held that the books are liable for rejection, vide para.17 of the assessment order which reads as under and
recast the P & L account :

“17. The submissions made by the assessee company are considered. It is seen that as per this contract dated 12-12-2005 with M/s. Google Ireland Ltd, the assessee company was required to conduct the Adwords marketing on its own account and as an independent distributor of the said programme. The contract mentions in as many words that the Adwords programme is sold by the assessee for its own account, in its own name, and not as an agent, employee, partner or franchisee of Google”. The various other clauses of the said agreement also make if clear that the assessee company was required to run the businesses on its own account. Moreover the assessee company was expected to pay “fees for distribution right’ to M/s. Google and all this fees and payments were made subject to DTAA and Indian Tax Laws, The assessee is an Indian company incorporated under the Companies Act with the Registrar of companies. The Indian companies Act makes the accounting standards given by Institute of Chartered Accountants of India (ICA) mandatory for all the Indian companies. The revenue generated from the said activity must be declared in its entirety on a gross basis as per the accounting principles. The assessee company has failed to do so and has claimed that the revenue shown as per Profit and Loss account filed is as per a nonexistent Indian ‘GAAP’ accounting norms. By claiming to show the revenue on a net basis, the assessee company has tried to avoid

a) The TDS provisions applicable u/s. 195 of the Income Tax Act, specifically with respect to fees paid to Google Ireland ltd.

b) Working out and showing correct income based on the gross revenue received by the assessee year on year.

c) Showing correct revenue for the purpose of Transfer Pricing adjustment which is on a markup basis and correct Transfer Pricing evaluation method.

d) Correct and proper method of arriving at ALP adjustment by the TPO of the department.”

The findings of the AO have been affirmed by the Hon’ble DRP.

242. Being aggrieved the assessee-company is in appeal before us with the present appeal.

243. The learned AR for the assessee vehemently contended that the relationship between Google Ireland and assessee-company is of principal to principal basis. He further contended that the AO was not justified in rejecting the book results without discharging the onus lying upon it to prove that the books of account maintained by the assessee were not correct and complete. It was further argued that the assessee company made a complete disclosure in the financial statements prepared in accordance with the prescribed accounting standard issued by the Institute of Chartered Accountants of India and there was no change in the accounting policy followed by the assessee from the earlier years and the financial statements have been duly audited by the statutory auditor who, after due verification of the books of account opined that the financial statements of the assessee are prepared in conformity with the accounting principles generally accepted. The AO was not justified in rejecting the books of account without bringing any evidence on record to demonstrate that the conditions specified in sub-section (3) of Section 145 are met. Further the Ld. Counsel submitted that the profit computed by the AO even after recasting the accounts is the same as computed by the assessee company. Thus, it was contended that the AO was not justified in invoking the provisions of Section 145 of the Act.

244. On the other hand, the Ld. Sr. Counsel for the Revenue vehemently contended that the AO was justified in rejecting the books of account inasmuch as the financial statements prepared by the assessee company do not reflect the complete picture of the business operations of the assessee.

245. We heard the rival submissions and perused the material on record. From the mere perusal of the assessment order, it is clear that the AO though mentioned that the provisions of Section 145 were invoked for the purpose of recasting the profit and loss account to show the gross receipts of the assessee-company from the AdWords business operations, this, in effect has no material impact or change on the profits disclosed by the assessee company. The difference in the method adopted by the AO and the assessee company is only in the matter of presentation of the financial statements. It has no impact on the profit or loss disclosed by the assessee company. The issue becomes only academic in nature and hence we hold that the rejection of books of account is not proper.

246. In ground Nos.25 to 32, the assessee-company challenges the disallowance made by the AO u/s.40(a)(ia) of the Act. The AO also disallowed the payment made to Google Ireland by the assessee company on account of distribution fees paid to it on the ground that no tax was deducted at source. The same was confirmed by the Hon’ble DRP.

247. Being aggrieved, assessee-company is in appeal in the present appeal.

248. The learned Senior Counsel for assessee vehemently argued that when the AO had invoked the provisions of Section 145, no further disallowance invoking the provisions of Section 40(a)(ia) can be made. In this regard, reliance was placed on the following decisions:

• Teja Constructions v. ACIT [(2010) 29 TTJ 57 (Hyd – Trib)]
• Indwell Constructions v. CIT [(1999) 151 CTR (AP HC)

249. It was further argued that the AO had not brought any evidence on record to justify that payments made by the assessee-company to Google Ireland in the form of distribution fee is in the nature of Royalty. It is further contended that the evidence brought on record by the assessee-company, the agreement between the assessee and Google Ireland and the agreement between the assessee and the Indian advertiser clearly establish that assessee-company acquired right to market and distribute Google AdWords programme. The assessee-company had acted on its own and not on behalf of Google Ireland. It is further submitted that if the contention of the Revenue is to be accepted that the assessee-company is only a dependent agent PE of Google Ireland Ltd, the question of disallowance u/s.40(a)(ia) does not arise. Reliance in support of this proposition was placed on the following decisions :

• CIT v. Heros Publicity Services [(2001) 248 ITR 256 (Bom)]
• SET Satellite (Singapore) P. Ltd [307 ITR 205]
• CIT v. Century Building Industries P. Ltd [(2007) 293 ITR 80 (Kar)]
• CIT v. Cargo Linkers [(2008) 218 CTR (Del) 695]

250. Without prejudice to the above, it was further contended that the reasoning given by the TDS officer in the orders passed u/s. 201(1), cannot be upheld in the light of the affidavit dt.14.03.2018 filed by the director of the assessee company, submissions made on the factual aspect of the issue before the bench on 19.03.2018 and the legal submissions made dt.20.03.2018 in the assessee’s appeals against the 201(1) order. The assessee also placed reliance on the following decisions of the coordinate benches :

• Pinstorm Technologies P. Ltd v. ITO [(2012) 54 SOT 78 (Mumbai)]
• ITO v. Right Florists (P) Ltd [(2013) 25 ITR (T) 639 (Kol)]
• Yahoo India P. Ltd v. DCIT [(2011 46 SOT 105 (Mum)

251. Further the learned Senior Counsel for assessee submitted that when the assessee company is under bona fide belief that it was not under obligation to deduct tax at source on the impugned payments, no disallowance u/s.40(a)(ia) of the Act is not called for. In support of this submission he relied on the Hon’ble Bombay High Court decision in the case of CIT vs. Kotak Securities Ltd. (340 ITR 333)

252. On the other hand, the Learned Senior Standing Counsel vehemently contended that the payment made by the assessee- company to Google Ireland in terms of the AdWords Agreement entered into is in the nature of licence fee paid to its various AEs and therefore the payment constitutes royalty which is liable for deduction of tax u/s.195 of the Act. Since the assessee had failed to deduct tax at source the assessee-company has been rightly treated as an assessee in default u/s.201(1) of the Act. He reiterated the same submissions made in the appeals against the orders u/s.201(1) of the Act, to say that the payments made by the assessee company to Google Ireland constitute ‘Royalty’.

253. We heard the rival submissions and perused the material on record. In the appeals, filed by the assessee-company in ITA Nos.1190/Bang/2014, 949 & 950/Bang/2017 against the orders passed u/s.201(1) of the Act, after considering the relevant facts and material on record, it was held by us that the payments made by the assessee-company to Google Ireland in terms of AdWords Distribution Programme constitutes ‘Royalty’ and therefore the assessee-company is under an obligation to deduct tax at source u/s.195 of the Act. Consequent to the failure by the assessee-company to do so, disallowance u/s.40(a)(ia) of the Act is automatically attracted. The plea of the assessee-company that when it is under bona fide belief that there was no obligation to deduct tax at source u/s.195, cannot be accepted as no factual foundation was laid before us or lower authorities as to how the assessee-company entertained bona fide belief that it was not under obligation to deduct tax at source on such payments. The ratio of the decision of the Hon’ble Bombay High Court in the case of Kotak Securities Ltd. (supra) cannot be applied to the facts of the present case as the Hon’ble Bombay High Court in the said case granted relief to the assessee considering the fact that payee has already paid the tax and nearly for a period of decade both revenue and the assessee proceeded on a footing that provisions of section 194J was not applicable to the payment of transaction charges. It is also pertinent to note that the provisions of section 40(a)(ia) starts with non obstante clause. A non- obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the mentioned in such non-obstante clause. In case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over teh other clause [see CIT vs. Navabharat Enterprises (P) Ltd. (No.2)(1988) 170 ITR 332)(AP)] Therefore, the plea of bona fide belief has no place in the non-obstante provisions of the Act.

254. We accordingly confirm the order of the DRP in this regard

255. The miscellaneous ground of appeal raised by the assessee-company relates to challenge of levy of interest u/s.234B and initiation of penalty proceedings u/s.271(1)(c) of the Act. These are all consequential in nature, which do not require any adjudication,
hence, dismissed as such.

256. In the result, the appeals filed by the assessee-company is partly allowed for statistical purposes.

257. IT(TP)A No.191/Bang/2014 [Revenue’s appeal for assessment year 2009-10]:

The revenue raised the following grounds of appeal:

1. “The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case.

2. The DRP erred in not accepting the application of the residual profit method wherein the joint profit of the assessee and M/s Google Ireland Ltd. has been computed by the TPO.

3. The DRIP erred in concluding that the action of the TPO in merging the two segments and then giving a rebate from the ITES profits from the residual profits of the two parties as not proper without appreciating that the had calculated profit on ITES activities which was not being deducted from the residual profit.

4. The DRP erred in holding that the assessee has rendered ITES to a wider client base without appreciating that as per records the assessee has rendered ITES to M/s Google Ireland Ltd. only and that as per the 3CEB report also ITES has been rendered by the assessee to M/s Google Ireland Ltd. only.

5. The DRP erred in holding that for implementing residual profit split method the normal profit of M/s Google Ireland Ltd. also needs to computed and reduced without appreciating that there is no routine profit of M/s Google Ireland Ltd. as no other functions have been performed by M/s Google Ireland Ltd. apart from contributing only the tangibles which is a non-routine function and for which the TPO had already attributed 50% of residual profit.

6. The DRP erred in holding that for the purposes of bench marking, ITES and Adwords distribution segments are to be treated separately, without appreciating that the international transactions relating to ITES and Adwords are connected to each other and cannot be analyzed and evaluated separately for determination of ALP.

7. The DRP erred in directing to adopt profit split method for Adwords distribution segment instead of profit split method without appreciating the fact that the TPO had demonstrated the necessary evidences for the various functions the assessee has performed such as rendering ITES to M/s Google Ireland Ltd., providing marketing services and contribution of marketing tangibles while M/s Google Ireland Ltd. has only contributed the technology related intangibles.

8. The Hon’ble DRP erred in directing the AO to follow the ratio laid down by the Hon’ble Court in the case Tata Elxsi Limited 349 ITR 98 and exclude telecommunication expenses of Rs. 10,99,83,459/- from export turnover also while computing the deduction u/s 1OA of the I.T.Act without appreciating the fact that there is no provision in section 10A that such expenses should be the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover.

9. The DRP erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon’ble Supreme Court.

10. The DRP erred in directing to exclude Coral Hubs on the ground of functional incomparability without appreciating the fact that TNMM was applied as the most appropriate method and while applying TNMM the functions of the comparable need not be identical but a broad comparison is sufficient as many of the differences are evened out at the net margin level.

11. The DRP erred in directing that unallocated expenditure be taken into consideration in the case of Acropetal Technologies without appreciating that the comparable company itself has not taken the unallocated expenditure as operating expenditure while publishing the segmental results.

12. The DRP erred in not appreciating the fact that since M/s Google Ireland Ltd. has neither filed its return of income nor was willing to admit any tax liability in India. Hence, the additional profit of Rs. 30,65,47,268/- has been taxed rightly in the hands of the assessee.

13. The DRP erred in not appreciating the fact the additional profit of Rs. 30,65,47,268/- represents the profits evaded from being charged to income tax in India of the service, Google Adwords run through the medium of Google website in India.

14. The DRP erred in not appreciating the fact as per the contract the assessee is neither a captive service provider nor a cost centre to M/s Google Ireland Ltd but the assessee claims to have been an independent distributor acting on its own account.

15. The DRP, on the facts and in the circumstance of the case erred in not appreciating the fact that the assessee should have declared incomes with respect to its revenues and not with respect to its cost as the whole agreement with Ms/ Google Ireland Ltd is a ploy to evade payment of taxes in India.

16. The DRP erred in not appreciating the fact that it has been brought out in great detail in the assessment order that the entire advertising business (Adwords) is treated as one enterprise in India and that there is only one profit earned out of the said enterprise.

17. The DRP erred in not appreciating the fact that for the lack of a better alternative the total Adwords revenue from the advertisers during the year was considered at Rs. 403,34,38,319/- rather than consider the actual Adwords revenue of Rs. 241,71,64,576/- in line with the global profits of Google Inc USA and the profit represents the entire profit of the enterprise to be
charged to tax in India in the hands of M/S Google India Pvt. Ltd. as well as M/s Google Ireland Ltd.

18. The DRP erred in not appreciating the fact that Rs. 117.37 cores being the difference between the total turnover and the cost has been held to be the escaped profit of the enterprise in India considering the fact that Google Ireland Ltd. has neither filed its return if income nor is willing to admit any tax liability in India.

19. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored.

20. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

258. Ground Nos.1, 19 and 20 are general in nature and do not require any adjudication.

259. Ground Nos.2 to 7 challenges computation of ALP in respect of international transactions entered into by the assessee-company with its AE. In the assessee’s appeal for same assessment year 2009-10 in IT(TP)A No.69/Bang./2014, the issue of determination of ALP in respect of Information Technology (IT), ITeS and AdWords distribution programme is remanded to the file of the AO/TPO for the purpose of undertaking fresh exercise of TP analysis . In these circumstances, the grounds of appeal are also set aside to the file of the AO/TPO as these grounds of appeal are consequential to the grounds of appeal filed by the assessee-company. Thus, the grounds of appeal are partly allowed for statistical purposes.

260. Ground Nos.8 & 9challenges the finding of the Hon’ble DRP to reduce the telecommunication expenditure incurred in foreign currency from both export turnover and total turnover following the law laid down by the Hon’ble jurisdictional High Court in CIT vs. Tata Elxsi (349 ITR 98).

261. The issue in these grounds of appeal is no longer res integra as the Hon’ble Apex Court in the case of CIT vs. HCLTechnologies Ltd.[(2018)(93 taxmann.com 33)(SC)] confirmed the ratio of the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Tata Elxsi (349 ITR 98). The relevant paragraphs are reproduced hereunder:

“17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.

18. Accordingly, the formula for computation of the deduction under Section 10A of the Act would be as follows:

19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.

20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.

21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.”

In the light of the decision of the Hon’ble Apex Court in the case of HCL Technologies Ltd.(supra), the grounds of appeal filed by revenue are dismissed.

262. Grounds No.10 and 11 challenge the selection of comparables. Since in the assessee’s appeal, the very issue of TP analysis of entire functions undertaken by the assessee-company in respect of international transactions is remanded back to the file of the AO, the question of adjudication on selection of comparable does not arise. Hence, the grounds of appeal filed by the revenue are also partly allowed for statistical purposes.

263. Ground Nos.12 to 18 challenges the direction of the Hon’ble DRP to delete addition made on account of attribution of profits to Google Ireland Ltd. The AO, vide para.27 of his order, opined that the profits arising out of AdWords programme attributable to Google Ireland are not offered to tax. Therefore, he proceeded to compute the amount of profits attributable to Google Ireland as follows:

	Year Ended December 31 in
	thousands except per share amount)
Consolidated statements of Income Data	2007	2008	2009
Revenues	$ 1,65,93,986	$ 2,17,95,550	2,36,50,563
Costs and expenses
Cost of revenues	66,49,085	86,21,506	88,44,115
Resarch and Development	21,19,985	27,93,1192	28,43,027
Sales and marketing	14,61,266	19,56,244	19,83,941
General and administrative	12,79,250	18,02,639	16,67,294
Contribution to Google Foundation	0	0
Non-recurring portion oif settlement of disputes	0	0
with Yahoo
Total cost and expenses	1,15,09,586	1,51,63,581	1,53,38,377
Income from operations	50,84,400	66,31,969	83,12,186
Profit percentage	30.64%	30.43%	35.15%
Impairement of equity investments	0	(10,94,757)
Interest income and other.net	5,89,580	3,16,384	69,003
Income before income taxes	56,73,980	58,53,596	83,81,189
Provision for income taxes	14,70,260	16,26,738	18,60,741
Net Income	$ 42,03,720	$ 42,26,858	$65,20,448

264. Thus an amount of Rs.117,37,50,817/- was brought to tax as additional income attributable to Google Ireland purportedly to be in the capacity of agent of Google Ireland Ltd. The addition was deleted by the Hon’ble DRP on the ground that the required adjustment was already made under the provisions of section 92CA and no further adjustment was required.

265. Before us, the revenue contended that the Hon’ble DRP is not justified in directing deletion of this addition on the ground that this transaction is already subject to ALP adjustment u/s 92CA of the Act. Learned CIT(D)R submitted that provisions of section 92CA and section 9 operate in different fields.

266. On the other hand, learned Senior Counsel for assessee vehemently contended that when the transaction between assessee and AE is subjected to arm’s length pricing, there can be no further attribution of profits to PE and reliance in this regard was placed on the decision of the Hon’ble Apex Court in the case of Asst.DIT vs. E-funds IT Solution Inc .(399 ITR 34)(SC).

267. We heard rival submissions and perused material on record. It is undisputed fact that the transaction of AdWords programme between the assessee-company and Google Ireland is subjected to bench marking. Recently, the Hon’ble Supreme Court in the case of E-funds IT Solution Inc (supra) reiterating the ratio laid down in the case of Director of Income-tax (International Taxation) v. Morgan Stanley &Co.(292 ITR 416) held that once the TP analysis undertaken, there is no further need to attribute profit to PE. However, the said judgment in the case of Morgan Stanley & Co. (supra) added a rider that a situation would be different if TP analysis does not adequately reflect the functions performed and risks assumed by the enterprise. In such a situation there would be a need to attribute profit to PE for those functions and risks that have not been considered. Therefore, in the assessee’s appeal, since we have restored TP analysis afresh to the file of AO/TPO, this issue also is set aside to the file of the AO to make de novo assessment in light of principle laid down by the Hon’ble Supreme Court in the case of Morgan Stanley & Co. and E-funds IT Solution Inc. (supra). Thus, these grounds of appeal are also partly allowed.

268. In the result, the appeal filed by the revenue is partly allowed for statistical purposes.

269. IT(TP)A No.68/Bang/2014 [Assessee’s appeal for assessment year 2010-11]

The assessee-company raised the following grounds of appeal:

“Based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon’ble DRP have:

TRANSFER PRICING (TP) MATTERS

Rejection of transfer pricing documentation and making adjustments

1 Erred in rejecting the contemporaneous transfer pricing documentation (i.e., using data available before the due date of filing of return of income) maintained by the Appellant and making adjustments in respect of the following international transactions with Associated Enterprises (AEs):

a) Provision of software development services = Rs. 91,95,38,461;

b) Provision of Information Technology Enabled Services (‘ITES’) = Rs. 25,67,89,031; and

c) Purchase of online advertisement space for distribution to the advertisers in India = Rs. 32,53,45,159.

Further, the Ld. TPO erred in adopting an approach different from the predecessors in assessments up to assessment year 2008-09, without any change in facts or circumstances of the transactions.

Rejection of use of multiple year data

2. Erred in rejecting the use of multiple year data and using single year data of the comparable companies to determine the arm’s length price of the international transactions without appreciating the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.

Selection of companies earning super normal profits as comparables

3. Erred in selecting certain companies which are earning super normal profits as comparable to the Appellant.

Non-provision of adjustment for risk differences

4a) Erred in not appreciating the fact that the Appellant operates as a risk free service provider and all the key risks associated with the functions performed are borne by the foreign AEs.

b) Erred in not providing adjustments taking into account the functional and risk differences between the international transaction of the Appellant and the comparable transactions in accordance with the provisions of Rule I013(1)(e) of the Income-tax Rules, 1962.

Grounds specific to comparability analysis of software services transaction

5. Erred in rejecting the Function Asset and Risk (‘FAR’) analysis of the international transaction relating to provision of software services and re-characterizing the same as Knowledge Process Outsourcing (‘KPO’) services.

6. Erred in not undertaking an objective search and selecting the following companies as comparables on an ad-hoc basis:

a) Eclerx Services Ltd; and

b) Genesys International Corporation

Grounds specific to comparability analysis of ITES transactions

7. Erred in not undertaking an objective comparative analysis and inter-alia selecting the following companies as comparable to the ITES of the Appellant:

a) Accentia Technologies Ltd;

b) Infosys BPO Ltd; and

8. Erred in not undertaking an objective comparative analysis and inter-alia rejecting the following comparable companies:

a) AUsec Technologies Ltd;

b) Axis lT&T Ltd;

c) Caliber Point Business Solutions Ltd (Segment)

d) CG-VakSofware& Exports Ltd (Segment);

e) e4e Healthcare business services Pvt Ltd (Segment);

f) Jindal IntellicomPvt Ltd;

g) Microgenetics Systems Ltd;

h) Microland Ltd (Segment)

i) R Systems International Ltd (Segment); `

Grounds specific to TP adjustments relating to payment for Ad Words

9. a) Erred in not undertaking an objective Functions Assets and Risks (‘FAR’) analysis of the international transactions relating to distribution of online advertisement space and concluding that the Appellant owns marketing intangibles.

b) Erred in not appreciating the fact that the Appellant performs a limited role in the provision of online advertisement space and that the AEs undertake the key economically significant functions.

10. Erred in rejecting Transaction Net Margin Method (‘TNMM’) and determining the ALP by applying Profit Split Method (‘PSM’) as the most appropriate method.

11. Erred in not applying PSM in accordance with the provisions of Rule lOB of the Income Tax Rules, 1962.

12. Erred in applying PSM, not determining correctly the relative contribution made by the AEs in earning the revenue on the basis of the FAR analysis of the transactions and how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances.

13. Erred in not determining the combined net profit of the international transactions to be split amongst the enterprises in proportion of their relative contribution.

14. Erred in not evaluating and providing for the relative contribution made by the AEs in the form of extended credit period to the Appellant

CORPORATE TAX MATTERS

Rejection of Books of accounts

15. Erred in holding that the duly audited books of account of the Appellant are incomplete and incorrect based on conjectures and surmises without appreciating the complete disclosures made in the books of accounts maintained by the Appellant.

Re-computation of deduction u/s IOA of the Act

16 Erred in concluding that the communication expenses incurred by the Appellant are attributable to delivery of computer software outside India and thereby, reducing the same from export turnover for computing the deduction u/s 1 OA of the Act.

17. Without prejudice to Ground 16, erred in considering the whole of communication expenses (comprising telephone charges and internet expenses) incurred by the Appellant as attributable to the delivery of computer software outside India for computing the deduction u/s 10 of the Act.

Disallowance of payments made to Google Ireland Limited invoking provisions of section 40(a)(i) of the Act

18. Erred in holding that the amounts payable by the Appellant to Google Ireland Limited for purchase of online advertisement space under the AdWords Program were chargeable to tax in India.

19. Erred in holding that the Appellant, in relation to distribution of advertisement space under the Ad Words program, create a Dependent Agent Permanent Establishment of Google Ireland Limited under Article 5 of the India-Ireland Double Taxation Avoidance Agreement.

20. Having held that the Appellant was an agent of Google Ireland Limited erred in holding that Appellant ‘was a person responsible for paying’ any amount to Google Ireland Limited. within the meaning of section 195 of the Act and that the Appellant has failed to deduct tax at source on the amounts payable to Google Ireland Limited.

21. Having held that the Appellant creates a Dependent Agent Permanent Establishment of Google Ireland Limited in India, erred in attributing business profits, ignoring the fact that the Ld TPO has determined the arm’s length remuneration for the Appellant and hence there was no additional income chargeable to tax in India in the hands of Google Ireland Limited requiring any deduction of tax at source under Section 195 of the Act and hence no disallowance under section 40(a)(i) of the Act is warranted.

22. Erred in alternatively holding the amount payable towards purchase of advertisement space under the Agreement as either Royalties or Fees for Technical Services under Article 12 of the India-Ireland Double Taxation Avoidance Agreement.

23. Erred in upholding that the Appellant was required to deduct tax at source from the amount payable by the Appellant to Google Ireland Limited and in view of its failure to deduct tax, the amount payable by the Appellant to Google Ireland Limited was required to be disallowed u/s 40(a)(i) of the Act.

OTHERS

24. Erred in considering the eligible MAT credit u/s 11 5JAA of the Act at Rs 565,306 as against the eligible brought forward MAT credit of Rs 8,81,87,191.

25. Erred in considering the refund already issued to the Company u/s 143(1) at Rs 9,37,80,480 instead of the actual amount of refund of Rs 6,58,06,480 received by the Appellant thereby increasing the total tax demand.

25. Having erred in considering the refund amount of Rs 9,37,80,480, erred in levying the interest u/s 234D of the Act on refund amount of Rs 9,37,80,480 as against the actualrefund received of Rs 6,58,06,480.

26. Erred in imposing the levy of interest u/s 234B of the Act.

27. Erred in initiating the penalty proceedings initiated u/s 271(1)(c) of the Act.

The Appellant craves, to consider each of the above grounds of appeal independently without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

270. Ground Nos.1 to 14 relates to TP analysis and selection of comparable etc. In the identical facts, in assessee’s own case for AY 2009-10, the issues raised in these grounds of appeal were restored to the file of AO/TPO for the purpose of undertaking fresh TP analysis etc. For parity of reasons given therein, these grounds of appeal are restored to the file of the AO with similar directions.

271. Ground No.15 challenges rejection of book results. As stated by us in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang)/2014, though the AO has stated that book results are rejected, in effect there is no rejection of book results as the profit even after recasting the P&L Account remained the same. Thus, this ground of appeal becomes academic in nature and is dismissed as such.

272. Ground Nos.16 & 17 challenges finding of lower authorities in reducing communication expenditure only from export turnover. The issue in these grounds of appeal is no longer res integra as the issue is decided in favour of the assessee-company in the case of HCLTechnologies Ltd.HCL Technology (supra). Thus these grounds of appeal are allowed.

273. Ground Nos.18 to 23 challenges the addition u/s 40(a)(ia) of the Act on the ground that the assessee-company had not deducted TDS on payments of royalty made to Google Ireland Ltd. For the detailed reasons given by us in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 we confirm the addition made u/s 40(a)(ia) of the Act. Accordingly, these grounds of appeal are dismissed.

274. The other grounds of appeal are consequential in nature and do not require adjudication.

275. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

276. IT(TP)A No.205/Bang/2015 [Revenue’s appeal for assessment year 2010-11]

The revenue raised the following grounds of appeal:

1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case.

2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub- clause (4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this Section.

3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon’ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has riot become final since the same has not been accepted by the Department and SLPs are pending before the Hon’ble Supreme Court.

4. On the facts and in the circumstances of the case the Dispute Resolution Panel ought to have appreciated the fact that since MIs Google Ireland Ltd. has neither filed return of income nor willing to admit any taxability in India, the additional profit of Rs 79,21,20,928 has been taxed rightly in the hands of the assessee concern only by the AO. This amount represents the profits evaded to have been taxed in India from Adwordsenterprise run through the medium of Google website in India.

5. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in holding that for the purpose of bench marking ITES and Adword distribution segment to be treated separately without appreciating the fact that international transactions related to lTES and Adword are connected to each other and they cannot be analyzed and evaluated for ALP separately.

6. On the facts and in the circumstances of the case, the Dispute Resolution Pane erred in directing the TPO/AO to adopt profit split method pertaining to Adword distribution segment instead of applying the residual profit method without appreciating the fact that the TPO has already demonstrated with necessary evidence on record that the assessee has performed varied functions such as rendering ITES to Google Ireland, providing marketing services and contributing Technology related intangibles.

7. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing to exclude M/s Acropetal technologies Ltd a comparable without appreciating the fact that when TNMM is applied as Most. Appropriate Method, the functions of the comparable need not be identical and a broad comparison of rendering IT related services is sufficient becaus many of the differences are evened out at net margin level.

8. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relat€ to the above grounds may be reversed.

9. The appellant craves leave to add, alter, amend and I or delete any of the grounds mentioned above.

277. Grounds No.1, 8 and 9 are general in nature and do not require adjudication.

278. Ground Nos.2 and 3 challenges the direction of the Hon’ble DRP to direct AO to exclude reimbursement of expenditure incurred in foreign currency both from export turnover as well as total turnover. The issue in these grounds of appeal is no longer res integra as the issue is decided in favour of the assessee-company in the case of HCL Technologies Ltd. (supra). Thus these grounds of appeal are dismissed.

279. Ground No.4 challenges the direction of the Hon’ble DRP to the AO to delete addition on account of attribution of profits to PE of Google Ireland Ltd. In the earlier year i.e. 2009-10, this issue was remanded to the file of the AO for de novo assessment in the light of the principles laid down by the Hon’ble Apex Court in the case of Morgan Stanley & Co. (supra). This ground of appeal is remitted back to the file of the AO for denovo assessment.

280. Grounds No.5 to 7 challenges the direction of the Hon’ble DRP to bench mark the transaction under ITeS and AdWords distribution separately and apply the profit split method in respect of AdWords distribution programme and selection of comparable in IT related services. For the reasons stated in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 , we remit these grounds of appeal back to the file of the AO/TPO for the purpose of undertaking fresh TP analysis on the lines indicated therein, Thus these grounds of appeal are partly allowed for statistical purposes.

281. In the result, the appeal filed by the revenue is partly allowed for statistical purposes.

282. ITA No.1299/Bang/2015 (Revenue’s appeal for assessment year 2010-11):

This is an appeal filed by the Revenue directed against the order passed by the AO giving effect to the directions of the Hon’ble DRP passed u/s 154 dated 29/6/2015. Hon’ble DRP had directed the AO to verify and apply the profit margin of Google Ireland based on statements available for determination of profit by applying profit split method.

283. The revenue raised the following grounds of appeal:

1. “The directions of the Dispute Resolution Panel are opposed to law and facts of the case.

2. On the facts and in the circumstances of the case, the Hon’ble Dispute Resolution Panel erred in directing the TPO to verify the available financial statement of Google Ireland for verification of the profit margin,

3. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed.

4. The appellant craves leave to add, alter, amend and /or delete any of the grounds mentioned above.”

284. In the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2009, since we restored the entire issue of TP adjustment to the file of the AO/TPO, the appeal becomes infructuous

285. In the result, the appeal filed by the revenue in IT(TP)A No.1299/Bang/2015 is allowed for statistical purposes.

286. IT(TPA) No.559/Bang/2016 [Assessee’s appeal for assessment year 2011-12]:

The assessee-company raised the following grounds of appeal:

“Based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon’ble DRP have:

TRANSFER PRICING (TP) MATTERS

Rejection of transfer pricing documentation and making adjustments

1. Erred in rejecting the contemporaneous transfer pricing documentation (i.e., using data available before the due date of filing of return of income) maintained by the Appellant and making adjustments in respect of the international transaction with Associated Enterprises (AEs)

Rejection of use of multiple year data

2. Erred in rejecting the use of multiple year data and using single year data of the comparable companies which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements, to determine the arm’s length price of the international transactions.

3. Non-provision of adjustment for risk differences

a) Erred in not appreciating the fact that the Appellant operates as a risk free service provider and all the key risks associated with the functions performed are based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon’ble DRP  have:

b) Erred in not providing adjustments taking into account the functional and risk differences between the international transaction of the appellant and the comparable transactions in accordance with the provisions of Rule 10B(1)(e) of the Income-tax Rules,1962

Incorrect margin computation of certain companies

4 a) Erred in computing segmental margin of ICRA Online Ltd. (Outsourced services segment) at 34.21% vis-à-vis the correct margin at 25.15%

b) Erred in not allocating the unallocated income and expenditure while computing the segmental margin of ICRA Online Ltd. (Outsourced services segment)

Grounds specific to comparability analysis of software services transaction

5. Erred in rejecting the Function Asset and Risk (‘FAR’) analysis of the international transaction relating to provision of software services and re-characterizing the same as Knowledge Process Outsourcing (‘KPO’) services and inter-alia selecting Accentia technologies Limited as comparable to the IT services transactions.

6. Without prejudice, erred in not undertaking an objective comparative analysis to select all KPO companies as comparables.

Grounds specific to comparability analysis of ITES transactions

7 Erred in not undertaking an objective comparative analysis and inter-alia selecting the following company as comparable to the ITES of the Appellant:

a) Accentia Technologies Ltd

8. Erred in not undertaking an objective comparative analysis and inter-alia rejecting the following comparable companies:

a) Caliber Point Business Solutions Ltd (BPO segment);

b) R Systems International Ltd (BPO segment);

c) Datamatics Financial Services Ltd.

d) Informed Technologies India Ltd., and

e) Microland Limited (call centre segment)

Grounds specific to TP adjustments on payments for web-based advertisement procured for distribution to advertisers in India

9. a) Erred in not undertaking an objective Functions Assets and Risks (‘FAR’) analysis of the international transactions relating to distribution of internet advertisements and concluding that the Appellant owns marketing intangibles.

b)Erred in not appreciating the fact that the Appellant performs a limited role in the provision of internet advertisement and that the AEs undertake the key economically significant functions.

10. a) Erred in rejecting Transaction Net Margin Method (‘TNMM’) and determining the ALP by applying Profit Split Method (‘PSM’) as the most appropriate method.

b) Erred in not applying PSM in accordance with the provisions of Rule 10B of the Income Tax Rules, 1962 and following an erroneous methodology.

c) Erred in not determining the correct contribution made by all the AEs in relation to the advertisement business.

11. Erred in not providing requisite adjustment for the contribution made by the AE in the form of credit granted for the amount payable by the Appellant to the AE towards purchase of online advertisement space.

CORPORATE TAX MATTERS

Rejection of Books of accounts

12. Erred in holding that the duly audited books of account of the Appellant are incomplete and incorrect based on conjectures and surmises without appreciating the complete disclosures made in the books of accounts maintained by the Appellant.

Re-computation of deduction u/s 10A of the Act

13. Erred in concluding that the communication expenses incurred by the Appellant are attributable to delivery of computer software outside India and thereby, reducing the same from export turnover for computing the deduction u/s 10A of the Act.

14. Erred in considering the whole of communication expenses (even related to telephone charges and internet expenses) incurred by the Appellant as attributable to the delivery of computer software outside India for and reducing it from export turnover for the purpose of computing the deduction u/s 1 OA of the Act.

15. Not reducing the amount of communication expenses from the amount of total turnover for the purpose of computing deduction u/s 10A of the Act.

Disallowance of payments made to Google Ireland Limited invoking provisions of section 40(a)(i) of the Act

16. Erred in holding that the amounts payable by the Appellant to Google Ireland Limited for purchase of online advertisement space under the AdWords Program were chargeable to tax in India.

17. Erred in holding that the Appellant, in relation to distribution of online advertisement space under the AdWords program, create a Dependent Agent Permanent Establishment of Google Ireland Limited under Article 5 of the India-Ireland Double Taxation Avoidance Agreement and the receipts are taxable as business profits in India.

18. Having held that the Appellant was an agent of Google Ireland Limited erred in holding that Appellant ‘was a person responsible for paying’ any amount to Google Ireland Limited within the meaning of section 195 of the Act and that the Appellant has failed to deduct tax at source on the amounts payable to Google Ireland Limited.

19. Having held that the Appellant creates a Dependent Agent Permanent Establishment of Google Ireland Limited in India, ignoring the fact that the Ld TPO has already determined the arm’s length remuneration for the Appellant and that there was no additional income chargeable to tax in India, erred in attributing income chargeable to tax in India requiring deduction of tax at source under Section 195 of the Act. On this premise making a disallowance u/s 40(a)(i) of the Act, which is not warranted.

20. Erred in alternatively holding the amount payable towards purchase of online advertisement space under the Agreement as either Royalties or Fees for Technical Services under Article 12 of the India-Ireland Double Taxation Avoidance Agreement.

21. Erred in upholding that the amount payable by the Appellant to Google Ireland Ltd for purchase of online advertisement space was chargeable to tax in India and Appellant was required to deduct tax at source from the amount payable and in view of its failure to deduct tax, the amount payable by the Appellant to Google Ireland Limited was required to be disallowed u/s 40(a)(i) of the Act.

OTHERS

22. Erred in considering the eligible TDS at Rs 16,01,49,685 as against the TDS credit of Rs 16,68,09,760 available to the Company.

23. Erred in imposing the levy of interest u/s 234B of the Act.

24. Erred in initiating the penalty proceedings initiated u/s 271(1)(c) of the Act.

The Appellant craves, to consider each of the above grounds of appeal independently without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

287. Ground Nos.1 to 11 relates to TP analysis and selection of comparable etc. In the identical facts, in assessee’s own case for assessment year 2009-10 in IT(TP)A No.69/Bang/2014, the issues raised in these grounds of appeal were restored to the file of AO/TPO for the purpose of undertaking fresh TP analysis etc. For parity of reasons given therein, these grounds of appeal are restored to the file of the AO with similar directions.

288. Ground No.12 challenges rejection of book results. As stated by us in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang)/2014, though the AO has stated that book results are rejected, in effect there is no rejection of book results as the profit even after recasting the P&L Account remained the same. Thus, this ground of appeal becomes academic in nature and is dismissed as such.

289. Ground Nos.13 to 15 challenges finding of lower authorities in reducing communication expenditure only from export turnover. The issue in these grounds of appeal is no longer res integra as the issue is decided in favour of the assessee-company in the case of HCLTechnologies Ltd. (supra). Thus these grounds of appeal are allowed.

290. Ground Nos.16 to 21 challenges the addition u/s 40(a)(ia) of the Act on the ground that the assessee-company had not deducted TDS on payments of royalty made to Google Ireland Ltd. For the detailed reasons given by us in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 we confirm the addition made u/s 40(a)(ia) of the Act. Accordingly, these grounds of appeal are dismissed.

291. The other grounds of appeal viz. 22 to 24 are consequential in nature and do not require adjudication.

292. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

293. IT(TP)A No.881/Bang/2015 [Revenue’s appeal for assessment year 2011-12]

The revenue raised the following grounds of appeal:

i. “The directions of the DRP are opposed to law and facts of the case.

ii. In the facts and circumstances of the case, Whether the Hon’ble DRP is correct in holding that the M/s Acropetal Technologies Ltd cannot be taken as comparable, when it satisfies all the qualitative and quantitative filters adopted by the TPO.

iii. Whether the Hon’ble DRP is right in applying “onsite revenue filter” without appreciating the fact that the function carried out is “Software Development” irrespective of whether onsite or offshore.

iv. Whether the Hon’ble DRP in correct in excluding M/s Acropetal Technologies on the ground that it has significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins.

v. Whether the Hon’ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.

vi. Whether the Hon’ble DRP erred in facts and law in excluding the company as a comparable, on the ground of failing the service income filter, when only the segmental results have been considered for comparability

vii. Whether the Hon’ble DRIP ought to have appreciated the fact that when segmental results are available and considered for comparability, the application of service income to total income filter does not arise

viii. Whether the Hon’ble DRPerred in fact and law in rejecting the comparable on the ground that segmental information is not available, when the company had classified itself to be operating in one segment i.e. provision of ITES

ix. Whether the order of the Hon’ble DRP in rejecting comparable cases by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under income Tax Act?

x. Whether Hon’ble DRP is justified in holding that for purpose of bench marking ITES and Adword distribution segment to be treated separately in the light of the fact that international transactions related to ITES and Adword are connected to each other andthey cannot be analysed and evaluated for ALP separately.

xi. Whether the Hon’ble DRP is justified in directing to adopt profit split method pertaining to Adword distribution segment instead of applying the residual profit method in the light of the fact that the TPO has already demonstrated with necessary evidence on record that the Assessee has performed varied functions such as rendering ITES to Google Ireland, providing marketing services and contribution of Marketing tangibles whereas the Google Ireland has performed the function of contributing Technology related intangibles.

xii. Whether while seeking the exact comparability as mentioned above the DRP was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin.

xiii. Whether the Hon’ble DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprise

xiv. On the facts and circumstances of the case the DRP ought to have appreciated the fact that Since M/s Google Ireland Ltd., has neither filed return of income nor willing to admit any tax liability in India, the additional profit of Rs.1,43,44,10,156- has been rightly taxed in the hands of the assessee concern by the AO. This amount represents the profits evaded that should have been taxed in Insdia from Adwords enterprise run through the medium of Google Website in India.

The DRP has erred in holding that the expenses reduced from the ETO has to be reduced from the ITO also. As total turnover has not been defined u/s 10A which provides for exclusion of such expenses from Total turnover also.

The DRP failed to appreciate the fact that the decision of the High Court of Karnataka has not been accepted by the Department in the case of CIT Vs Tata Elxsi Ltd., and an SLID has been filed against the decision before the Apex Court which has not been adjudicated upon.

294. Grounds No.1 to 13 challenge the direction of the Hon’ble DRP to bench mark the transaction under ITeS and AdWords distribution separately and apply the profit split method in respect of AdWords distribution programme and selection of comparable in IT related services. For the reasons stated in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 , we remit these grounds of appeal back to the file of the AO/TPO for the purpose of undertaking fresh TP analysis on the lines indicated therein, Thus these grounds of appeal are partly allowed for statistical purposes.

295. Ground No.14 challenges the direction of the Hon’ble DRP to the AO to delete addition on account of attribution of profits to PE of Google Ireland Ltd. In the earlier year i.e. 2009-10, this issue was remanded to the file of the AO for de novo assessment in the light of the principles laid down by the Hon’ble Apex Court in the case of Morgan Stanley. This ground of appeal is remitted back to the file of the AO for de novo assessment.

296. In the result, the appeal filed by the revenue is partly allowed for statistical purposes.

297. IT(TP)A No.387/Bang/2017 [Assessee’s appeal for assessment year 2012-13]

298. The assesse-company raised the following grounds of appeal:

“Based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon’ble DRP have:

TRANSFER PRICING (TP) MATTERS

Rejection of transfer pricing documentation and making adjustments

1. Erred in rejecting the contemporaneous transfer pricing documentation (i.e., using data available before the due date of filing of return of income) maintained by the Appellant, and making adjustments in respect of the international transactions with Associated Enterprises (AEs)

Rejection of use of multiple year data

2. Erred in rejecting the use of multiple year data, and instead used single year data pertaining to FY 2011-12 of alleged companies without considering the fact that such data was not available to the Appellant at the time of complying with the transfer pricing documentation requirements to determine the arm’s length price of the international transactions.

Non-provision of adjustment for risk differences

3. a) Erred in not appreciating the fact that the Appellant operates as a risk freeservice provider and all the key risks associated with the functions performed and assets employed are borne by the foreign AEs.

b) Erred in not providing appropriate adjustment to take into account the difference in risks profile of the Appellant vis-à-vis the alleged comparable companies in accordance with the provisions of Rule 10B(1) (e) of the Income-tax Rules, 1962.

Application of additional filters

4. Erred in application of the following arbitrary filter for undertaking the comparabilityanalysis under TNMM:

a) Rejection of companies having financial year end other than 31 March 2012; and

b) Rejecting companies having export revenue are more than 76 percent of revenue.

Grounds specific to comparability analysis of software services transaction

5. Erred in rejecting the analysis of Functions performed, Assets employed and Risks assumed (FAR analysis’) for the international transaction relating to provision of software services and re-characterizing the same as Knowledge Process Outsourcing (KPO’) services.

6. Erred in not undertaking an objective comparative analysis and inter-alia rejecting the following KPO companies as comparable to the software services of the Appellant

a) Acropetal Technologies Limited;

b) Informed Technologies Limited;

c) Sundaram Business Services Limited; and

d) Tata Elxsi Limited

7. Erred in not undertaking an objective comparative analysis and inter-alia rejecting the following KPO company additionally proposed by the Appellant where international transaction relating to provision of software services is being re-characterized as KPO:

a) Cheers Interactive (India) Private Limited

Grounds specific to comparability analysis of lIES transactions

8. Erred in rejecting the analysis of Functions performed, Assets employed and Risks assumed (‘FAR analysis’) for the international transaction relating to provision of ITES and inter-alia considering high-end service providers as comparable to the Appellant.

9. Erred in not undertaking an objective comparative analysis and inter-alia selecting the following functionally different companies as comparable to the ITES services of the Appellant:

a) Accentia Technologies Limited;

b) BNR Udyog Limited (Medical Transcription segment);

c) lnfosys BPO Limited; and

d) TCS E Serve Limited

10. Erred in not undertaking an objective comparative analysis and inter-alia rejecting the following comparable companies:

a) Datamatics Financial Services Ltd

b) Sundaram Business Services Ltd;

c) Microland Limited (Segmental);

d) ACE BPO Services Private Limited; and

e) Cheers Interactive (India) Private Limited.

11. Erred in rejecting certain comparable companies and adding certain companies to the final set of comparable companies for the impugned transaction on an adhoc basis, thereby resorting to cherry picking of comparable companies to determine arm’s length price for the ITES transaction.

12. Erred in vitiating the principles of natural justice by rejecting ‘Jindal Intellicom Limited’ in its Directions without giving the Appellant an opportunity of being heard.

Grounds specific to TP adjustments on payments for web-based advertisement space procured for distribution to advertisers in India

13. a) Erred in not undertaking an objective analysis of Functions performed, Assets employed and Risks assumed (FAR analysis’) for the international transaction relating to distribution of internet based advertisements space and concluding that the Appellant owns marketing intangibles.

b) Erred in not appreciating the fact that the Appellant performs limited role being reseller of online ad space and that the AEs undertake the key economically significant functions in this regard.

14. a) Erred in rejecting Transaction Net Margin Method (‘TNMM’) and determining the ALP by applying Profit Split Method (PSM’) as the most appropriate method.

b) Erred in not applying PSM in accordance with the provisions of Rule 1013(1)(d) of the Income Tax Rules, 1962 and thereby resorting to an erroneous methodology.

c) Erred in not considering the contribution made by all the AEs of the Appellant in relation to the advertisement business in India.

d) Erred in not considering the third party costs incurred by the Appellant towards provision of ITES services which have been alleged by the the LdAO/Ld TPO and the Hon’ble DRIP to be intrinsically linked to the advertisement segment.

15. Erred in not providing requisite adjustment for the contribution made by the AE in the form of credit granted for the amount payable by the Appellant to the AE towards purchase of advertisement space.

CORPORATE TAX MATTERS

Rejection of Books of accounts
16. Erred in holding that the duly audited books of account of the Appellant are incomplete and incorrect based on conjectures and surmises without appreciating the complete disclosures made in the books of accounts maintained by the Appellant.

Disallowance of payments made to Google Ireland Limited (GIL) invoking provisions of section 40(a)(i) of the Act

17. Erred in holding that the amounts payable by the Appellant to GIL for purchase of online advertisement space under the AdWords Program were chargeable to tax in India.

18. Erred in holding that the Appellant, in relation to distribution of online advertisement space under the Ad Words program, create a Dependent Agent Permanent Establishment (‘DAPE’) of GIL under Article 5 of the India-Ireland Double Taxation Avoidance Agreement and the receipts are taxable as business profits in India.

19. Having held that the Appellant creates a DAPE of GIL in India, ignoring the fact that the Ld TPO has already determined the arm’s length remuneration for the Appellant and that there was no additional income chargeable to tax in India, erred in attributing income chargeable to tax in India requiring deduction of tax at source under Section 195 of the Act

20. Having held that the Appellant was an agent of GIL erred in holding that Appellant ‘was a person responsible for paying’ any amount to GIL within the meaning of section 195 of the Act and that the Appellant has failed to deduct tax at source on the amounts payable to GIL

21. Erred in alternatively holding the amount payable towards purchase of online advertisement space under the Agreement as either Royalties or Fees for Technical Services under Article 12 of the India-Ireland Double Taxation Avoidance Agreement.

22. Erred in holding that the Appellant was required to deduct tax at source from the amount payable to GIL and in view of its failure to deduct tax, the amount payable by the Appellant to GIL was required to be disallowed u/s 40(a)(i) of the Act.

Additional Attribution of profits to Google India

23. The Ld AO has erred in re-computing the profits of the Assessee from distribution of advertisement space under the AdWords program in India, by attributing the profit percentage of Google Inc, USA.

24. The Ld AO has erred in attributing an additional amount of Rs. 232,65,45,142 over and above the amount payable by the Company to GIL which to that extent amounts p multiple additions of the same amount.

25. The Ld AO has erred in passing a contingent order, depending on the view that may be taken by the appellate authority, thereby refraining from determining the exact tax liability of the Assessee.

Miscellaneous

26. Erred in considering the eligible TDS at Rs.30,22,71 ,081 as against the TDS credit of Rs.30,61 ,44,745 available to the Company.

27. Erred in disallowing the MAT credit amounting to Rs.31,19,71,193 eligible to the Company for the AY 2012-13.

28. Erred in imposing the levy of interest u/s 234B of the Act.

29. Erred in imposing the levy of interest u/s 234D of the Act.

30. Erred in initiating the penalty proceedings initiated u/s 271 (1)(c) of the Act:

The Appellant craves, to consider each of the above grounds of appeal independently without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

299. Grounds No.1 to 4 are not pressed and accordingly dismissed as such.

300. Ground Nos.5 to 15 relates to TP analysis and selection of comparable etc. In the identical facts, in assessee’s own case for AY 2009-10, the issues raised in these grounds of appeal were restored to the file of AO/TPO for the purpose of undertaking fresh TP analysis etc. For parity of reasons given therein, these grounds of appeal are restored to the file of the AO with similar directions.

301. Ground No.16 challenges rejection of book results. As stated by us in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang)/2014, though the AO has stated that book results are rejected, in effect there is no rejection of book results as the profit even after recasting the P&L Account remained the same. Thus, this ground of appeal becomes academic in nature and is dismissed as such.

302. Ground Nos.17 to 22 challenges the addition u/s 40(a)(ia) of the Act on the ground that the assessee-company had not deducted TDS on payments of royalty made to Google Ireland Ltd. For the detailed reasons given by us in the assessee’s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 we confirm the addition made u/s 40(a)(ia) of the Act. Accordingly, these grounds of appeal are dismissed.

303. Ground Nos.23 to 25 challenges the direction of the Hon’ble DRP to the AO to delete addition on account of attribution of profits to PE of Google Ireland Ltd. In the earlier year i.e. 2009-10, this issue was remanded to the file of the AO for de novo assessment in the light of the principles laid down by the Honb’le Apex Court in the case of Morgan Stanley & Co. (supra). This ground of appeal is remitted back to the file of the AO for denovo assessment.

304. The other grounds of appeal are consequential in nature and do not require adjudication. Accordingly this appeal is partly allowed for statistical purposes.

305. In the result, assessee’s appeals IT(IT)A No.1190/Bang/2014 is dismissed and IT(IT)A No. 2845, 949, 950/Bang/2017, IT(TP)A Nos. 374/Bang/2013, 68/Bang/2015, 69/Bang/2014, 387/Bang/2017, 559/Bang/2016 are partly allowed for statistical purposes, and Revenue’s appeals IT(IT)A No. 1295/Bang/2014 is allowed for statistical purposes and IT(TP)A No.466/Bang/2013 is dismissed. In Revenue’s appeal, IT(TP)A No. 191/Bang/2014, No.205/Bang/2015, 881/Bang/2016 are partly allowed for statistical purposes and ITA No.1299/Bang/2015 is allowed for statistical purposes.

Pronounced in the open court on 11th May, 2018.