Google India Private Ltd. Vs. Addl. CIT (ITAT Bangalore)
TDS on royalty payments under section 195(2): Applicability of DTAA cannot be determined suo-moto by AO without there being any application
Section 195(2) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’), where the person responsible for paying any such sum chargeable under the Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer(AO) to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
Recently, in Google India Private Ltd. vs. Addl. CIT [IT(TP)A.1511 to 1518/Bang/2013 (A.Y.2007-08 to 2012-13), decided on 23.10.2017], briefly, the assessee-company Google India Private Limited (Google India) registered under the provisions of the Indian Companies Act and wholly subsidiary of Google International LLC, US. Google India, appointed as a non-exclusive authorized distributor of Adword programs to the advertisers in India by Google Ireland. Google was specialized in Internet search engines and related advertising services. Google maintained an index of websites and other online content which was made available through its search engine to anyone with an internet connection.
Under the Google Adword Program Distribution agreement dated 12/12/2005, Google India was granted the marketing and distribution rights of Adword program to the advertisers in India.
As per assessee, it was engaged in information technology (IT) and IT enabled service (ITES) to its overseas group companies and was also engaged as an non exclusive distributor of the online advertising space under Google Adword Program to various advertisers in India. It was the case of the assessee that the Google India entered into an agreement with Google Ireland Limited ( herein after called GIL) for resale of online advertising space under the advertisers program to advertisers in India. For the purpose of sales and marketing the space work wise flow of activities of the assessee and advertiser were as under:
i. Enter into resale agreement with GIL and resale on advertising space under the Adword program under the Indian advertisers.
ii. Perform marketing related activities in order to promote the sales of advertising space to Indian Advertisers. After training to its own sale flows above the features / tools available as part of Adword program to enable them to effectively market the same to advertisers.
iii. Enter into a contract with Indian advertisers in relation to sale of space under the Adword program.
iv. Provide assistance / training to Indian advertisers if needed in order to familiarize that with the features / tools available as part of our Adword product.
v. Resale invoice to the above advertisers.
vi. Collect payments from the aforesaid advertisers.
vii. Remit payment to GIL for purchase of advertising space from it under the resale agreement.
It was the case of the assessee that no rights in the intellectual property of the Google were transferred to the assessee from GIL. Assessee was mere reseller of advertising space made available under the Adword distribution program by GIL. Further as per appellant, the assessee is a distributor of advertising space and it do not have any access or control over the infrastructure or the process that are involved in running the Adword program, as program runs on software, Algorithm, data center which are owned by Google and its subsidies outside India. It was also the case of the assessee that the Adword platform is running on servers located outside India that belonged to or hired by Google. Assessee in India had no control over the server of Google.
Moreover, it was submitted that the Google does not sell any software but resells products and services which are developed by Google incorporation USA and its subsidiaries outside India. It was the case of the assessee that neither the assessee nor its advertisers get any right or right to use or exploitation over the underlying I.P. or software which is entirely owned by Google incorporation and its subsidies.
It was submitted by the assessee that the advertisers gets its advertisement uploaded into Adword program, and thereafter it directly logged on the Adword program website owned by Google and follows the various steps to create the Adword account for itself. It was also the assessee’s case that the advertisers select the key words, content and presentation related to its ads and places a bid on the online system for the price it was willing to pay overtime its user clicks on its advertisement. One of the steps was the selection of the payment in INR and once the terms and conditions displayed were accepted an assigning contract was entered between the advertiser and Google India (assessee) for sale of ad space. It was further submitted that once the advertisers creates the accounts and upload and advertisement the same automatically got stored on Adword platform owned by Google on the servers outside the India and the ads were displayed in the manner determined by the programs running on automated platform. The assessee periodically raised the bill on advertisers for advertising spend incurred by the advertiser on clicks through the users.
In the nutshell, it was the contention of the assessee that it is merely a reseller of advertisement space. The assessee only performed market related activities to promote the sales of advertisement space. No right or intellectual properties were transferred by Google to the assessee or to the advertiser. The assessee had no control or access to the software, Algorithm and data centre. The server on which the Adword program runs were located outside India over which it was not having control. The assessee or the advertisers had not any right of any use or exploitation or the underlying I.P. and software. The advertisers selected key works and placed a bid on the online auction. The assessee periodically raised invoice on advertisers for advertising spend incurred by the advertisers.
On verification of the financial for the FY 2007-08 relevant to AY 2008-09, it was noticed that assessee had credited a sum of Rs.119 crores to the account of GIL without deduction of tax at source. Further, GIL had also not obtained a nil deduction certificate on the sums payable to it from the Department. Similar were the facts for the other A.Y.s.
As the appellant had not complied with the provisions of section 195 of the Act, therefore the proceedings were initiated under section 201 of the Act by issuing the notice on 20.11.2011 calling upon the appellant why it should not be treated as assessee in default for not deducting the tax at source on the sum payable to GIL. The appellant had filed the detailed reply and submitted the detail of the distribution fees payable to Google Ireland on which the TDS was not deducted by it:
|Financial year||Distribution fee payable (In Rs.)|
Before the AO, the assessee filed the detailed reply for all the five years. However, the AO was not convinced with the reasoning and accordingly the tax liability of the appellant under sections 201 (1) and 201(1A) of the Act for the AY 2007-08 to 2012-13 were determined by considering the amounts payable to GIL as royalty under the Act and under the DTAA(Double Tax Avoidance Agreement).
Against the order passed by the AO, appeals were preferred before the CIT (A). However the CIT (A) decided the issues against the appellant by treating the amounts payable to GIL as royalty under the Act and under the DTAA. Hence, the appeals were filed by the assessee before ITAT as per grounds of appeal.
The learned Members of the ITAT, Bengaluru observed that the assessee had raised the common ground no.1 to 11 in all the six appeals and the ground no.12 was only restricted to two assessment years for 2007-08 and 2008-09. During the course of argument it was pointed out that the assessee had not raised the ground no.11 raised before CIT (A) pertaining to royalty income, if any, was taxable on receipt basis. Therefore, the assessee, in all the appeals had filed the additional ground bearing no.13, before ITAT. After hearing the arguments on admissibility of additional ground from both the sides, hon’ble Members of ITAT allowed admission of additional ground no.13 to be raised in the appeals.
The learned Members opined that the scope and ambit of section 195(2) of the Act is clear and unambiguous, which mandates the AO to decide whether any payment( Royalty ) paid by the appellant to GIL is chargeable to Tax on cash / receipt basis or not. However, to trigger 195(2) of the Act, the payer (assessee) was duty-bound to make an application with the AO. Unless an application is made to the AO, there would not be any occasion for him to determine the chargeability of payment of royalty to tax by referring to DTAA or under the Act. Therefore, the finding given by the Hon’ble Supreme Court in GE India Technology Centre P. Ltd vs. CIT(327 ITR 456 (SC)) does not come to the rescue of the assessee. The applicability of DTAA cannot be suo-moto be determined by AO without there being any application under section 195(2) of the Act for the purposes of deducting the tax at source.
Respectfully following the judgment of Hon’ble SC in the matter of Transmission Corporation of AP Ltd. vs. CIT  239 ITR 587, orders of the co-ordinate Benches in the matter of Vodafone South Ltd.  53 taxmann.com 441 (Bangalore – Trib.) and also for the reasons mentioned, ground 13 of the appeals was dismissed by ITAT, Bengaluru.