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Fees Paid By Google India To Google Ireland For AdWords Program Distribution In India Are Not ‘Royalty’: ITAT

The Income Tax Appellate Tribunal (ITAT) Bangalore Bench has ruled that the distribution fees paid by Google India to Google Ireland under a Distribution Agreement, under which Google India was appointed as a distributor of the AdWords program to advertisers in India, do not constitute ‘Royalty’ under the India-Ireland DTAA.

The Bench of George George K (Judicial Member) and Padmavathy S (Accountant Member) held that unless a non-resident engaged in the sale of online advertisement space has a Permanent Establishment (PE) in India, no portion of the receipts earned from the sale of online advertisement space in India can be taxed in India under the Income Tax Act.

The assessee, Google India Private Limited, entered into a Service Agreement and a Google AdWords Program Distribution Agreement with Google Ireland Limited. Under the aforementioned program/Distribution Agreement, the assessee was designated as a non-exclusive distributor of the AdWords program to advertisers in India, i.e., a non-exclusive distributor of online advertisement space in India. As a result, the assessee paid a distribution fee to Google Ireland under the aforementioned scheme.

The Assessing Officer (AO) determined that the distribution fees paid by the assessee to Google Ireland constituted royalty on which no tax was deducted at source under Section 195 of the Income Tax Act, 1961. As a result, the AO issued an order against the assessee by Sections 201(1) and 201(1A) of the Income Tax Act.

In response, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) CIT (A). The CIT(A) maintained the AO’s determination that the distribution fees paid by the assessee were payment for the right to use or license to utilize a computer program/process, namely the AdWords program. As a result, CIT(A) determined that the sum submitted by the assessee was like royalty.

The assessee filed an appeal with the ITAT, disputing the CIT’s decision (A).

In the lack of a Permanent Establishment (PE) of the non-resident in India, the assessee Google India argued before the ITAT that the purchase of online advertisement space cannot be regarded as ‘Royalty,’ and so is not payable to tax in India. As a result, the assessee maintained that the aforementioned payments were like commercial earnings, which were taxable in Ireland but not in India.

The revenue department maintained that under the distribution agreement, the assessee was expected not only to submit the online advertisement but also to offer after-sales customer service, which included the use of IPRs given by Google.

The revenue agency claimed that under the service agreement, the assessee Google India obtained sensitive information from Google Ireland, which was then utilized by the assessee to carry out its responsibilities under the distribution agreement. As a result, it asserted that the assessee’s payment to Google Ireland under the distribution agreement amounted to royalty.

The “Google AdWords Program” is a computerized advertising program that shows adverts on Google’s search engine, according to the ITAT. Furthermore, outside of the United States, Google Ireland is the exclusive licensee and primary operator of the Google AdWords Program.

The Tribunal noted that, to accommodate Indian advertiser(s) who preferred to pay in Indian Rupees rather than foreign currency, Google Ireland entered into a Google AdWords Program Distribution Agreement with the assessee, under which the assessee Google India was appointed as a non-exclusive distributor of online advertisement space in India. Indian advertisers ready to pay in foreign currency, on the other hand, continued to trade directly with Google Ireland.

Taking into account that the Google AdWords Program and its features are the same whether the Indian advertiser purchases the online advertisement space from Google Ireland or its authorized distributor, Google India, the ITAT noted that no payment is made by the advertiser(s) unless the said Ad is clicked by an end-user.According to Section 90(2) of the Income Tax Act, the definition of “royalty” in Article 12(3) of the India-Ireland DTAA supersedes the definition of “royalty” in Explanation 2 to Section 9(1)(vi) of the Income Tax Act. As a result, because the meaning of the term “royalty” under the India-Ireland DTAA was more advantageous, it was used in the instance of the assessee.

According to Article 12(3)(a) of the India-Ireland DTAA, the word “Royalty” comprises the payment paid for the use of or the right to utilize any copyright of literary, artistic, or scientific work, including any cinematograph film(s) or cassettes for radio or television broadcasting. The Tribunal further stated that the computerized advertising program, i.e., “Google AdWords Program,” is fundamentally a computer program, i.e., computer software.

Referring to the Supreme Court’s decision in Engineering Analysis Centre of Excellence Private Limited versus CIT & Anr. (2021), the ITAT stated that the Apex Court ruled that Explanation 2(v) to Section 9(1)(vi) of the Income Tax Act, which 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.

Furthermore, the Supreme Court declared 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 30 of the Copyright Act, 1957, will not fulfill the definition of ‘Royalty’ under the Income Tax Act or the DTAA.

The Tribunal remarked, after reading the service agreement and distribution agreement between the assessee Google India and Google Ireland, that all intellectual property was to remain the exclusive property of Google Ireland. Furthermore, the confidential information given by Google Ireland was to be used by the assessee in the execution of its services under the agreement, but it was to remain the sole property of Google Ireland. As a result, the ITAT determined that the assessee’s payments to Google Ireland could not be considered royalty under the India-Ireland DTAA.

“Based on all of the aforesaid agreements and the circumstances on record, we conclude that Google Ireland has not transferred any of the rights under Section 14(a)/(b) and Section 30 of the Copyright Act, 1957 to the assessee in the current matter.” The Hon’ble Apex Court held in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. (supra) that 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 Computer Act does not constitute a transfer of underlying copyright in it. The Copyright Act of 1957 will not fulfill the Act’s / DTAA’s definition of royalty. Similarly, the use of private information, software technology, training papers, and others are all examples of “literary work” with copyrights owned by the foreign corporation, and there was no transfer or license of copyrights in favor of the assessee firm. As a result, the contested payments cannot be classified as ‘Royalty’ under the DTAA.”

The ITAT further concluded that the assessee’s use of Google Ireland’s trademark and other brand elements was not independent or in violation of the distribution agreement, but rather incidental and ancillary to the promotion and distribution of the AdWords program. The Tribunal cited the Delhi High Court’s decision in DIT versus Sheraton International Inc (2009), which held that if the use of a trademark or trade name is incidental to the main service of advertisement, publicity, or sales promotion, and no consideration is payable for use of the said trade mark or trade name, the payments made cannot be characterized as royalty.

As a result, it held that because the assessee’s use of Google Brand Features was incidental and ancillary to achieving its main purpose of marketing and distributing the Google AdWords Program, and because no consideration was paid to Google Ireland for use of such Google Brand Features, the distribution fee could not be described as ‘Royalty.’

Thus, based on a comprehensive examination of the circumstances at hand, we conclude that the disputed payments cannot be considered royalty under the India-Ireland DTAA. Indeed, the Google Adwords program was commercially and economically leveraged in India to earn money from Indian clients or marketers. This is the business or commercial component of the deal. However, the lower authorities’ contention that the disputed payments are like royalties cannot be upheld, particularly under Article 12 of the India-Ireland DTAA, simply because the marketing, distribution, and ITES activities are carried out in India and revenues are generated from India or Indian Advertisers.”

The ITAT said that unless the non-resident is involved in the selling of online advertisement space and has a PE in India, no share of the revenues made by it from the sale of online advertisement space in India may be taxed in India under the Income Tax Act read with the applicable DTAA. While ruling that online advertising is covered under the provisions of the Equalization Levy (EL), as inserted by the Finance Act, 2016, the ITAT stated that if the online advertisement was already covered under the definition of ‘royalty,’ it would not have been included under the scheme Equalisation Levy. Thus, in granting the assessee Google India’s appeal, the ITAT concluded that the payments made by it to Google Ireland cannot be regarded as royalty under the India-Ireland DTAA.

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