Distribution Fees Paid By Google India To Google Ireland, For Distribution Of AdWords Programme In India, Not 'Royalty' : ITAT

The Bench of George George K (Judicial Member) and Padmavathy S (Accountant Member) held that unless the non-resident, who is engaged in the sale of online advertisement space, has a Permanent Establishment (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 under the Income Tax Act, 1961 read with the relevant DTAA.

The assessee - Google India Private Limited entered into a Service Agreement and a Google AdWords Program Distribution Agreement with Google Ireland Limited. Under the said programme/ Distribution Agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to advertisers in India, i.e., a non-exclusive distributor of online advertisement space in India. Accordingly, distribution fee was paid by the assessee to Google Ireland under the said programme.

The Assessing Officer (AO) held that the distribution fees paid by the assessee to Google Ireland was in the nature of royalty on which no tax was deducted at source under Section 195 of the Income Tax Act, 1961. Thus, the AO passed an order under Section 201(1) and 201(1A) of the Income Tax Act against the assessee.

Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) CIT(A). The CIT(A) upheld the finding of the AO that the distribution fees paid by the assessee was a consideration for the right to use or the license to use a computer program/process i.e., AdWords program. Thus, the CIT(A) ruled that the amount remitted by the assessee was in the nature royalty.

The assessee filed an appeal before the ITAT challenging the order of the CIT(A).

The assessee Google India submitted before the ITAT that purchase of online advertisement space cannot be characterized as 'Royalty' and hence, the same is not chargeable to tax in India, in the absence of a Permanent Establishment (PE) of the non-resident in India. Therefore, the assessee contended that the said payments were in the nature of business profits, which were chargeable to tax in Ireland and not in India.

The revenue department contended that under the distribution agreement, the assessee was not only required to upload the online advertisement but that it was also obligated to provide after sales customer support, involving the use of IPR's, which was provided by Google Ireland under the service agreement.

The revenue department argued that the assessee Google India received confidential information from Google Ireland under the service agreement, which was in turn used by the assessee for carrying out its obligations under the distribution agreement. Therefore, it contended that the payment made by the assessee to Google Ireland under the distribution agreement tantamounted to royalty.

The ITAT noted that the "Google AdWords Program" is a computerised advertising program that displays advertisements on Google's search engine. Further, Google Ireland is the exclusive licensee and principal operator of the Google AdWords Program for the whole world outside the USA.

The Tribunal observed that in order to accommodate Indian advertiser(s) desirous to pay in Indian Rupees instead of foreign currency, Google Ireland entered into the Google AdWords Program Distribution Agreement with the assessee, whereunder the assessee Google India was appointed as a non-exclusive distributor of online advertisement space in India. However, Indian advertisers who were willing to pay in foreign currency, continued to transact directly with Google Ireland.

Noting that the Google AdWords Program and its features remain the same whether the Indian advertiser purchases the online advertisement space from Google Ireland or its authorised distributor i.e., Google India, the ITAT took into account that no payment is made by the advertiser(s), unless the said Ad is clicked by an end-user.

The ITAT held that, in view of Section 90(2) of the Income Tax Act, the definition of the term "royalty" in Article 12(3) of the India - Ireland DTAA overrides the definition of "royalty", as provided in Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Therefore, since the definition of the term "royalty" under the India - Ireland DTAA was more beneficial, it was attracted in the case of the assessee.

The ITAT observed that under Article 12(3)(a) of the India - Ireland DTAA, the term 'Royalty' includes the consideration received for use of or the right to use any copyright of literary, artistic or scientific work, including any cinematograph film(s) or tapes for radio or television broadcasting. The Tribunal added that the computerised advertising program i.e., "Google AdWords Program" is essentially a computer program i.e., a computer software.

Referring to the decision of the Supreme Court in Engineering Analysis Centre of Excellence Private Limited versus CIT & Anr. (2021), the ITAT noted that the Apex Court has ruled that the Explanation 2(v) to Section 9(1)(vi) of the Income Tax Act, when it speaks of "all of any rights ... in respect of copyright", is more expansive than the DTAA provision, which speaks of the "use of, or the right to use" any copyright.

Additionally, the Apex Court had ruled that mere use of or right to use a computer program without any transfer of underlying copyright in it as per Section 14(a), 14 (b) or Section 30 of the Copyright Act, 1957, will not satisfy the definition of 'Royalty' under the Income Tax Act or the DTAA.

Perusing the service agreement and the distribution agreement between the assessee Google India and Google Ireland, the Tribunal observed that as per the said agreements, all intellectual property was to remain the exclusive property of Google Ireland. Also, the confidential information provided by Google Ireland was to be employed by the assessee in performance of its services under the agreement, however, they were to remain the sole property of Google Ireland. Hence, the ITAT held that the payments made by the assessee to Google Ireland cannot be characterized as royalty under the India-Ireland DTAA.

"On a consideration of all the above agreements and the facts on record, we find that none of the rights as per section 14(a)/(b) and section 30 of the Copyright Act, 1957 have been transferred by Google Ireland to the assessee in the present case. As held by the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. (supra), mere use of or right to use a computer program without any transfer of underlying copyright in it as per section 14(a)/(b) or section 30 of the Copyright Act, 1957 will not be satisfying the definition of Royalty under the Act / DTAA. Similarly, use of confidential information, software technology, training documents and others are all 'literary work' with copyrights in it owned by the foreign entity and there was no transfer or license of copyrights in favour of the assessee company. Hence, the impugned payments cannot be characterised as 'Royalty' under the DTAA."

The ITAT further ruled that the trademark and other brand features of Google Ireland were not used by the assessee independently or de hors the distribution agreement, but they were incidental and ancillary for the purpose of carrying out the marketing and distribution of the AdWords program.

The Tribunal referred to the decision of the Delhi High Court in DIT versus Sheraton International Inc (2009), where the High Court had ruled that if the use of a trade mark or trade name is incidental to the main service of advertisement, publicity or sales promotion, and if no consideration is payable for use of the said trade mark or trade name, the payments made cannot be characterised as royalty.

Therefore, it held that since the use of Google Brand Features by the assessee was incidental and ancillary for achieving its main purpose of marketing and distributing the Google AdWords Program, and since no consideration was payable to Google Ireland for use of such Google Brand Features, the distribution fee cannot be characterised as 'Royalty'.

"Thus on an overall analysis of the entire facts on record, we hold that the impugned payments cannot be regarded as royalty under the India - Ireland DTAA. It is true that the Google Adword program was commercially and profitably exploited in a commercial sense and profitable manner in India to generate revenues from Indian customers or advertisers. This is the business or commercial aspect of the transaction. However, 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 ITAT laid down 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 under the Income Tax Act read with the relevant DTAA.

While ruling that online advertisement is covered under the provisions of Equalisation Levy (EL), as inserted by the Finance Act, 2016, the ITAT held that if online advertisement was already covered under the definition of 'royalty', then it would not have been included under the scheme of Equalisation Levy.

Thus, allowing the appeal of the assessee Google India, the ITAT ruled that the payments made by it to Google Ireland cannot be characterized as royalty under the India-Ireland DTAA.

Case Title: M/s. Google India Private Limited versus The Deputy Commissioner of Income Tax (International Taxation)

Dated: 19.10.2022 (ITAT Bangalore)

Representative for the Appellant/Assessee: Mr. Percy Pardiwala, Sr. Advocate, Mr. Anmol Anand, Advocate, Miss Priya Tandon, Advocate and Mr. Vinay Mangla, CA

Representative for the Respondent/Revenue Department: Mr. K.V. Aravind, Standing Counsel

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