Google India Private Limited Vs DCIT (International Taxation) (ITAT Bangalore)
ITAT Bangalore held that unless the non-resident, who is engaged in sale of online advertisement space, has a PE in India, no portion of receipts earned by it from sale of online advertisement space in India can be brought to tax in India as Act read with the relevant DTAA.
Facts- The assessee, Google India Private Limited, had entered into Google AdWords Program Distribution Agreement dated 12.12.2005 with Google Ireland Limited (GIL). As per the agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to the advertisers in India. The distribution fees paid by the assessee to Google Ireland as per the agreement for the relevant assessment years.
AO initiated proceedings u/s 201(1) and 201(1A) of the I.T.Act in respect of the above payments made by the assessee to Google Ireland Limited, since, no tax was deducted at source u/s 195 of the I.T.Act.
Show cause notice was issued proposing to treat the said payment as Royalty under the Act and the DTAA. The same was confirmed by AO.
Assessee preferred and appeal before CIT(A) which was rejected. Being aggrieved, the assessee preferred the present appeal.
Conclusion- Held that the stand of the lower authorities that the impugned payments are in the nature of Royalty cannot be upheld especially under Article 12 of the India – Ireland DTAA merely because the marketing, distribution and ITES activities are carried out in India and revenues are generated from India or from Indian Advertisers.
The Delhi High Court in DIT v Sheraton International Inc [2009] 313 ITR 267 held that when the use of trade mark, trade name etc are incidental to the main service of advertisement, publicity and sales promotion and further when there is no consideration payable for such use of trade mark, trade name etc, the consideration cannot be characterised as royalty. Applying the said principle, in the present case, use of Google Brand Features etc are de hors any consideration payable to Google Ireland and further they are incidental and ancillary for achieving the main purpose of marketing and distributing the Google Adwords Program. Hence, the lower authorities were not right in treating the payments as Royalty.
Therefore, in terms of the international guidance as stated herein, the position regarding taxability of receipts from sale of online advertisement space is clear. Unless the non-resident, who is engaged in sale of online advertisement space, has a PE in India, no portion of receipts earned by it from sale of online advertisement space in India can be brought to tax in India as Act read with the relevant DTAA.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals at the instance of the assessee were originally disposed by the ITAT vide its common order dated 23.10.2017. On further appeal at the instance of the assessee, the Hon’ble High Court vide judgment dated 17.04.2021 in ITA No.883/2017, 897/2017 to 899/2017, restored the matter to the ITAT for de novo consideration. The relevant finding of the Hon’ble High Court reads as follows:-
“12. This Court by an order dated 15.11.2017 has admitted the present appeal on the following substantial questions of law;
III(1) Whether the Tribunal erred on facts and in law in coming to the conclusion that the payments made by the Appellate under the “Distribution Agreement” dated 12.12.2005 to GIL constituted “Royalty” under the provisions of Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Double Taxation Avoidance Agreement between India and Ireland?
III(2) Whether the impugned order of the Tribunal is perverse in as much as the conclusions of the Tribunal are based on assumptions, conjectures and surmises and not on the basis of facts available on record and as such liable to bet set aside?
III(3) Whether the Tribunal grossly erred in law in placing reliance on unverified material available in public domain to conclude that payments made by the Appellant to GIL constituted ‘royalty’ under the provisions of the Act and DTAA and more so since the Appellant was not confronted with such material, thereby violating the principles of natural justice?
III(4) Whether the Tribunal erred in ignoring that the initiation of proceedings under section 201 of the Act was barred by limitation?
III(5) Whether the Tribunal erred in law in applying the amended provisions relating to limitation in section 201 to the period under consideration given that the limitation for completion of such proceedings had already expired and could not be restored by subsequent amendments?
III(7) Whether the Tribunal erred in law in not appreciating that the amended provisions of section 201(3) as amended by Finance Act, 2012 (applicable with retrospective effect from 1.4.2010), which bestowed limitation in respect of resident payee’s was not applicable for the financial year under consideration and in the absence of any limitation prescribed, a period of 4 years was a reasonable period for initiation of proceedings under section 201 of the Act?
13. Learned Senior Counsel for the assessee while arguing the matter has fairly stated before this Court that question Nos.2 and 3 are required to be decided in the present case so far as his prayer in respect of remand is concerned and the other questions be left open.
14. Substantial questions of law III(2) and III(3) read as under;
III(2) Whether the impugned order of the Tribunal is perverse in as much as the conclusions of the Tribunal are based on assumptions, conjectures and surmises and not on the basis of facts available on record and as such liable to bet set aside?
III(3) Whether the Tribunal grossly erred in law in placing reliance on unverified material available in public domain to conclude that payments made by the Appellant to GIL constituted ‘royalty’ under the provisions of the Act and DTAA and more so since the Appellant was not confronted with such material, thereby violating the principles of natural justice?
15. Heard the learned counsel for the parties at length and perused the record.
16. The basic question before this Court is whether the Tribunal while passing the common order dated 23.10.2017 has violated the principles of natural justice and fair play as it has not afforded an opportunity to the appellant to rebut fresh evidence especially when the fresh evidence was based on Google study. The relevant paragraph of the order passed by the Tribunal i.e., paragraph 38 reads as under;
“38. Beside filling these written submissions, no other literature or books or documents were filed by the assessee or by the Revenue for the benefit of the Bench so that the Bench can appreciate the working of Google Adword and Google analytics, as the parties have failed to bring any tangible material except in the form of written note mentioned herein above, the Bench, had gone through the books available in public domain on Google Adword and Google analytics and also gone through the website of the Google and the Adword links therein. On the basis of the above, our understanding of how the Google Adword functions is as under:
i. The Google Adword gives an opportunity to the advertiser to reach its target audience with the advertising messages. The text based ads are displayed on Google search results Page – 45 IT(TP)A.1511 to 1516/Bang/2013 however the Google Adwords can also be used to message out in other forms including image, audio and videos. Another way of advertisement is displaying the advertisement as people browse and engaged with the content online.
ii. The online advertising is different from the traditional advertising like advertisement in magazine, newspaper and Television as the online advertising is measurable on cost per click basis (CPC) and also gives the advantage to the advertiser to target the particular class into age, sex, language, religion, region etc,.
iii. The online advertising (Adwords) is a patent tool used by the advertiser in conjecture with the various sophisticated tools and IPR’s of Google. Google gives the platform, techniques, data based, the IPR, I.P. address and also suggest potential user/client of the advertiser.
iv. The search advertising with the help of search engine, allows the advertiser to target the people as they search for key words. This technique is being used in the search engine, enable the advertisement pop up if the key words are searched by the people . Advertisement would be shown to the target consumer advertisement with the help of various tools, which include showing of advertisement with keywords, phrase, and broad words with generic or same meaning.
v. The Google search engine or search based campaign gives high conversion rate and better return of investment then display of advertisement on television rate, newspaper and magazine.
17. The Tribunal in the aforesaid paragraph has held that no literature or books or documents were filed by the assessee except some of the documents mentioned in the order of the Tribunal and as the parties have failed to bring any tangible material except in the form of written note, the Bench had gone through the books available in public domain at Google Adword or Google analytics and also gone through the website of the Google and the Adword links and based upon the above research carried out by the Tribunal, they have summarized the Google Adword functions. The material on which Google Adword functions were summarized does not find place in the order of the Tribunal nor the material was brought to the notice of the appellant, meaning thereby some material collected behind back of the appellant has been used by the Tribunal and the material brought on record through proper application has not been looked into.
18. The Madras High Court in similar circumstances, in the case of Ramco Industries Ltd., (supra) in paragraphs 5 to 10 has held as under;
“5. This Court paid its best attention to the rival submissions and also perused the materials placed before it.
6. Sub-section [6] of Section 255 of the Income Tax Act, 1961, in turn, refers to Section 131 of the Act and under Sub-section [1] of Section 131 of the Act, the authorities have the same powers that are vested in a Court under the Code of Civil Procedure, 1908 – the details of which, have been enumerated in the earlier paragraphs.
7. Rule 29 of the Income Tax [Appellate Tribunal] Rules, 1963 also speaks about the production of additional evidence and Rule 30 speaks about the mode of taking additional evidence and it is relevant to extract the same:-
Rule 29:-Production of additional evidence before the Tribunal:-The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.
Rule 30-Mode of taking additional evidence:-
Such document may be produced or such witness examined or such evidence adduced either before the Tribunal or before such income-tax authority as the Tribunal may direct.
8. A perusal and consideration of paragraph No.7 of the impugned common order passed by ITAT would disclose that the Tribunal, for reaching the conclusion to confirm the order of the Assessing Officer, has also done its part by doing some research on Google Study. Admittedly, the research done by ITAT in the form of Google study was not put either to the appellant/assessee Company or to the said Revenue. As already pointed out by this Court in the earlier paragraphs, in the absence of any specific rule including the applicability of the natural justice, it is a well settled position of law that adherence to the principles of natural justice, is implied in any legislation.
9. As rightly pointed out by the learned counsel for the appellant/assessee with regard to the study or research done by ITAT, the appellant/assessee was not put on notice. Hence, on this sole ground, the impugned common order warrants interference.
10. The Substantial Questions of Law Nos.1 and 2 are answered in affirmative and in favour of the appellant/assessee company.”
19. In the considered opinion of this Court, keeping in view Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and also keeping in view the fact that the material on the basis of which the order has been passed was not furnished to the appellant at any point time, the order passed by the Tribunal is certainly violative of principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut fresh evidence especially when such evidence was based on Google study. \
20. Another important aspect of the case is that details of the material has also not been reflected in the order passed by the Tribunal and therefore, this Court is of the opinion that as there is a violation of principles of natural justice and fair play, the matter deserves to be remanded back to the Tribunal for hearing it afresh in accordance with law.
21. In light of the aforesaid, the questions are answered in favour of the assessee and against the revenue and the other questions are left open. Accordingly, the appeal in ITA.No.879/2017 is allowed. The order passed by the Tribunal is set aside. The matter is remanded back to the Tribunal for fresh adjudication in accordance with law.
22. The parties will appear before the Tribunal on 3.5.2021 and within a period of 15 days the appellant shall be free to file the documents/additional documents in support of his contentions and the revenue shall also be free to file documents/additional submissions in support of their contentions. In case any other material is being relied upon by the Tribunal, the same shall also be made available to the assessee/appellant as well as to the counsel for revenue before passing a final order. The Tribunal is requested to make all possible endeavour to decide the matter at an earlier date.
23. In light of the order passed in ITA.No.879/2017, the connected appeals i.e., ITA.Nos.882/2017, 883/2017, 897/2017, 898/2017 and 899/2017 are also allowed and the order passed by the Tribunal is set aside and all the matters are remanded back to the Tribunal to decide the appeals afresh in accordance with law.”
2. Pursuant to the Hon’ble High Court’s judgment, the cases was finally heard on 13.09.2022. The brief facts of the case are recapitulated hereunder.
3. The assessee (Google India Private Limited) (GIPL) is a company engaged in the business of providing Information Technology (IT) and Information Technology Enabled Services (ITES) to its group companies. Further, the assessee also acts as a distributor for Adwords Programme in India. The companies activities are classified into the following segments:-
“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 services. For these services, GIPL, is remunerated at cost plus 17.5%.
IT enables 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 authorized distributor of AdWords program to the advertisers in India.”
4. The assessee had entered into Google AdWords Program Distribution Agreement dated 12.12.2005 with Google Ireland Limited (GIL). As per the agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to the advertisers in India. The distribution fees paid by the assessee to Google Ireland as per the agreement for the relevant assessment years are as under:-
