The assessee in the present case has used the information, patented technology, etc., from Google Ireland Limited (GIL) which in the opinion of the bench, is royalty and therefore, as per the mandate of Article 12(2), the royalty is to be taxed in the contracting state (India) in accordance with the laws of India. Clause (2) of Article 12 of DTAA clearly provides as under :
12(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….
Further the laws of India provide taxability of royalty on the basis of the accrual (mercantile method) and not on receipt (cash basis). Therefore, once field is occupied by clause 2 of Article 12, the royalty paid by the assessee to GIL is taxable as per Indian law.
In our view, the assessee has used the information, patented technology, etc., from GIL which in the opinion of the bench, is royalty and therefore, as per the mandate of Article 12(2), the royalty is to be taxed in the contracting state (India) in accordance with the laws of India. Further the laws of India provide taxability of royalty on the basis of the accrual (mercantile method) and not on receipt (cash basis). In our view once the field is occupied by clause 2 of Article 12, then the same is required to be applied and enforced.
The reliance placed by the Ld. AR on paragraphs 7 and 8 of the decision of the coordinate bench in the matter of Pizza Hut International LLC (supra) is to support its case, is out of place and is therefore required to be rejected. For arriving at the conclusion that the royalty is taxable on cash basis, the coordinate bench neither gone into the method of account nor considered Article 12(2) of DTAA which provides that the royalty is taxable in accordance with the laws of India (contracting state/ source country )
As admitted by the assessee during the course of argument as well as in the written submissions that the assessee had applied for RBI permission only in November, 2011. The following written submissions were made in this regard.
The distribution fee payable by the Appellant to Google Ireland for the period December 2006 to June 2009 remained unpaid until FY 2011-12. The Appellant had approached the Reserve Bank of India through the Authorized Dealer bank in November 2011 requesting for approval to remit the amounts to Google Ireland. Pursuant to the approval from the RBI on 12 May 2014, the Appellant has remitted the distribution fee pertaining to aforementioned period in May 2014.
If we examine the conduct of the assessee it is clear that the assessee has not sought the permission for the distribution fees to be paid to its AE (GIL) for AY 2006-2009, upto Nov 2011.
Thus the intention of the assessee as well as of the GIL is clear and conspicuous that they wanted to avoid the payment of taxes in India. That is why, despite the duty of the assessee to deduct the tax at the time of payment to GIL, no tax was deducted nor any permission was sought for paying the amount. If the permission for paying the amount is taken immediately after entering into agreement, then this argument of not making the payment as late as May, 2014 would not have been available to the assessee. This is a clear design to skip the liability by both the assessee as well as GIL by having mutual understanding.
Therefore in our view the Ld. DR was right in his submission that the assessee deliberately not sought permission for making the payment to GIL and is taking chance to avoid taxes within the four corners of IT Act.
Full Text of the ITAT Order is as follows:-
These are in all six appeals are by the assessee against the order of the CIT(A) –IV, Bengaluru, date 20.09.2013, for the assessment years 2007-08 to 2012-13.
