Google India Private Ltd. Vs ACIT (ITAT Bangalore)
ITAT Bangalore held that distribution fees paid by Google India Private Ltd. (Google India) cannot be treated as DAPE (Dependent Agent Permanent Establishment) of Google Ireland Ltd (Google Ireland). Accordingly, distribution fees paid by Google India to Google Ireland doesn’t attract TDS u/s. 195.
Facts- The case was selected for scrutiny and notice u/s. 143(2) was duly served on the assessee. TPO accepted the international transaction of the assessee with its AE to be at arm’s length. AO made the additions with respect to deduction of telecommunication charges from export turnover for computing deduction u/s. 10A of the Act; allowability of deduction of the amount payable by the assessee towards distribution right of AdWord program; and claim of TDS credit deducted by the Indian advertisers on advertising payment made to the assessee.
Aggrieved, the assessee preferred appeal before the CIT(A). CIT(A) partially allowed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- In our considered view when the assessee has presented the results of the impugned transactions that reflects the substance of the transaction we see no reason for the AO not to be satisfied with the correctness or completeness of the books of accounts of the assessee.
Held that that there is no adverse finding with regard to the books of accounts, in our view the action of the AO by rejecting the books to recast the P&L with an intention to disallow distribution fee paid by the Assessee to GIL is not tenable.
Held with respect to the clauses in the Distribution agreement between the assessee and GIL, the invoices raised on advertisers and the relevant Articles of DTAA between India and Ireland, we hold that the Assessee cannot be treated as DAPE of Accordingly the distribution fees paid by the assessee to GIL is not liable for TDS u/s. 195 of the Act and therefore no disallowance u/s.40(a)(i) is warranted.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals are against the orders of CIT(Appeals)- 1, Bangalore dated 28.01.2013 & 27.02.2013 for the assessment year 2008-09 which the assessee contended against the order of the AO passed u/s.143(3) r.w.s. 144C and u/s.271(1)(c) respectively.
2. The assessee is engaged in the business of providing information technology and Information Technology enabled Services (ITeS) to its group company. Further, the assessee also acts as distributors for AdWords program in India. The assessee has service centre and offices located at Bangalore, Gurgaon, Hyderabad and Mumbai in India. For the AY 2008-09, the assessee filed return of income on 30.9.2008 declaring at total income of Rs.7,35,16,505. The case was selected for scrutiny and notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions with its AE, the case was referred to TPO for determination of ALP of the international transaction. The TPO accepted the international transaction of the assessee with its AE to be at arm’s length vide order dated 31.10.2011. The AO made the additions with respect to the following during the course of assessment proceedings and also initiated penalty proceedings u/s.271(1)(c):-
(1) Deduction of telecommunication charges from export turnover for computing deduction u/s. 10A of the Act.
(2) Allowability of deduction of the amount payable by the assessee towards distribution right of AdWord program
(3) Claim of TDS credit deducted by the Indian advertisers on advertising payment made to the assessee.
3. Aggrieved, the assessee preferred appeal before the CIT(A).
4. Before the CIT(A), the assessee contended that the following issues besides the reduction of telecommunication charges from export turnover:-
(i) Rejection of books of accounts in respect of income relating to distribution of AdWord program.
(ii) Disallowance of payments made towards distribution rights invoking provisions of section 40(a)(i) of the Act.
(iii) Recomputation of profits from distribution of Adwords program in India.
(iv) Credit for TDS deducted on the revenue from distribution rights of Adword programs.
5. The CIT(A) partially allowed the appeal whereby the CIT(A) directed the AO to recompute the deduction u/s. 10A by relying on the decision of the jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd., (2013) 247 CTR 334. With regard to rejection of books and the disallowances made towards AdWord program, the CIT(A) upheld the order of the AO. With regard to the appeal filed against the order u/s.271(1)(c) gave marginal relief by reducing the percentage of penalty levied by the AO. Aggrieved, these orders of the CIT(A) assessee is in appeal before the Tribunal.
ITA No.374/Bang/2013
6. In this appeal the assessee raised the following grounds:-
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 Assessee were not consistent with the provisions of section 145 of the Act and that the Ld.AO was justified in rejecting the same.
3. The Ld CIT(A) has erred in upholding that the Assessee was required to credit Rs.167,32,01,616 to its Profit and Loss
4. The Ld CIT(A) having held that 40% of the operations with respect to the Ad Words program were attributable to operations in India erred in holding that the Assessee was required to credit the whole of Rs.167,32,01,616 to its Profit and Loss account.
Disallowance of payments towards distribution rights invoking provisions of section 40(a)(i) of the Act
5. The Ld CIT(A) has erred in upholding that the amount 119,82,61,994 remittable by the Assessee to Google Ireland under the Ad Words Program was taxable in India.
6. The Ld CIT(A) has erred in upholding that the Assessee, 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 Assessee was not remunerated at arm’s length.
8. The Ld CIT(A) has erred in upholding that the Assessee was required to deduct tax at source from Rs.119,82,61,994 remittable by the Assessee to Google Ireland and in view of its failure to deduct tax, the amount of Rs.1 19,82,6 1,994 was required to be disallowed u/s 40(a)(i) of the Act.
9. The Ld CIT(A) having held that the Assessee was an agent of Google Ireland Ltd. erred in holding that Assessee ‘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 Assessee.
11. The Ld CIT(A) has erred in holding that 40% of recomputed 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 535%.
13. The Ld CIT(A) has erred in rejecting cost-plus method basis of remuneration of the Assessee 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 Assessee 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 Assessee.
16. The Ld CIT(A) has erred in surmising that the Assessee 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 Assessee 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.
Brief facts relating to the issue under consideration
7. The assessee acts as the Distributor for the Adwords program whereby the advertisements which appear on the Google website are sold in India for Indian business establishment. The assessee and its AE Google Ireland Ltd. [GIL] have entered into an agreement for marketing and distribution of the AdWord programs. The Google AdWords program is an option based advertising program that lets advertisers purchase and deliver relevant ads targeted to search queries or web contents across Google sites and through the website of Google Network.
8. During the course of hearing, the AO noticed that the assessee has claimed TDS credit of Rs.3,55,23,891 against the amount of 47,49,39,634 shown as advertisement revenue in the Profit & Loss account (net of amount remitted to GIL account). The AO called on the assessee to furnish the details pertaining to the advertisement revenue as shown in the P&L account. The assessee in response filed a reply stating that an amount of Rs.167,32,01,616 is received from the advertisers on which the TDS of Rs.3,55,23,891 is deducted at source. Of this amount, an amount of Rs.119,82,6 1,984 is the distribution fee payable to GIL and the assessee in the P&L account has netted these two figures and has reflected the net amount to the credit of the P&L account. The AO did not accept the submissions of the assessee and rejected the books of accounts and recasted the profit & loss account of the assessee by holding as under:-
“16. 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 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 it 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 non-existent Indian ‘GAAP’ accounting norms. By claiming to show the revenue on a net basis, the assessee company has tried to avoid
a) 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.
17. This non-inclusion of gross revenue by the assessee in its return cannot be accepted on account of the reasons as above. The assessee shall show its full income based on a gross basis and claim any expenses thereon. This is mandatory as per the accounting standards of ICAI applicable to all the companies in India. The assessee cannot be an exception. For this limited purpose, the accounts shown by the assessee from its Ad revenue are rejected u/s. 145 of the Income Tax Act and income is computed as per section 144 of the Income Tax Act by recasting the profit and Loss account from its ‘Adwords Programme as below:
Segmental `Adwords’ Programme P & L Account as per
accounting standards of ICAI for AY 08-09
