Google India paid to Ireland unit not royalty, rules ITAT

The Bengaluru-bench of Income Tax Appellate Tribunal (ITAT) ruled that payments totalling ₹1,457 crore made by Google India to Google Ireland is not a royalty and therefore, it is not subject to withholding tax.

In relief to Google India, the ITAT has said the payments made by the company to Google Ireland between 2007-08 and 2012-13 is not a royalty and hence, it is not subject to withholding tax here.

The Bengaluru bench of ITAT gave this ruling after re-examining the matter on the orders of the Karnataka High Court. The case relates to whether payments totalling ₹ 1,457 crore made by Google India to Google Ireland is a royalty and tax is to be withheld in India.

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, it also acts as a distributor for Adwords Programme in India. Google AdWords Program Distribution Agreement dated December 12, 2005 with Google Ireland Limited (GIL). As per the agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to advertisers in India.

In 2013, the tax department issued a show-cause notice to Google proposing to treat the payments made by Google India to Google Ireland as royalty payments. Google India explained that the payments are not in the nature of 'royalty' under the Income Tax Act and India-Ireland Double Taxation Avoidance Agreement (DTAA) and is in the nature of advertisement fees.

However, the assessing officer rejected Google’s contention and held that the activities performed by the assessee under the distribution agreement are complemented by those performed under the service agreement and they cannot be divorced from each other.

As per AO, for the purpose of marketing and distribution activities, the assessee is granted the right to use the valuable business assets of Google Ireland which includes intellectual property in the products and services offered by Google Ireland. It was held by the AO that transfer of distribution rights are itself IP rights covered by 'similar property' as per definition of 'royalty' under Explanation 2 to Section 9(l)(vi) of the IT Act.

The ITAT, however, has ruled 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 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. “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,” ITAT ruled.

Pleased at ITAT ruling, a Google spokesperson said, “We are pleased that the Income Tax Appellate Tribunal through its detailed and reasoned order has confirmed the distinction between royalty and business profits. As such, we pay all of the applicable taxes due and comply with the tax laws in India and in every country where we operate around the world and will continue doing so.”

This follows another order by the Jaipur Bench of the ITAT which upheld that there will be no Equalisation Levy (EL) on Google Advertisement payment where advertisers and target audience are located abroad.