Google India Pvt. Ltd. v. CIT
In the Income Tax Appellate Tribunal
IT(IT)A 1190/Bang/2014
Before Mr Sunil Kumar Yadav, Judicial Member, and Mr Inturi Rama Rao, Accountant Member
Decided on May 11, 2018

Relevancy of the Case: Whether payments made for acquiring marketing and distribution rights for a computer programme to a foreign company constitute royalties under the Income Tax Act, 1961?

Statutes and Provisions Involved

• The Income Tax Act, 1961 (Section 4, 5, 9, 10A, 40, 41-52, 90, 115, 144-148, 151, 194C, 200, 201, 206AA, 271)
• The Copyright Act, 1957 (Section 2, 14, 52)
• India Ireland Double Taxation Avoidance Agreement (Article 12)

Relevant Facts of the Case

• The assessee company, Google India Private Limited (“GIPL”), provides IT and IT-enabled services and is a distributor for the AdWords programme in India.
• The Assessing Officer (AO) issued a show-cause notice to GIPL. This notice asked GIPL as to the reason for not deducting TDS on the sums payable to Google Ireland Limited (“GIL”) for the assessment year 2012-13. This notice also required GIPL to explain why the amount payable to GIL for marketing and distribution rights should not be treated as royalty under Section 9 of the Income Tax Act, 1961.
• In its response, GIPL responded that a distribution agreement is in place. This agreement gives them marketing and distribution rights for the territory of India. Hence, the amount payable to GIL is not royalty.
• However, AO did not find these submissions satisfactory. He held GIPL default in its tax liability. GIPL appeared before the Commissioner of Income Tax. In the first appeal, the CIT(A) held that payments made by GIPL to GIL are a form of royalty. Aggrieved by this, the assessee has filed a second appeal.

Prominent Arguments by the Advocates

• The appellant’s counsel argued that GIL is only a mere distributor and does not have access to the intellectual property of Google Inc. The tribunal should set aside the order due to inconsistent departmental views and unfounded merit. Further, Section 195 does not apply to the payments as no permanent establishment exists. Further, the assessee was under bona fide belief that it did not require to deduct tax deducted at source (TDS).
• The respondent’s counsel submitted that the license to use the AdWords programme results in the use of copyright from Google Inc. This means that GIL has the license to use intellectual property from Google Inc. in its services. Royalty payments are chargeable under Section 195.

Opinion of the Bench

• The assessee, GIPL, had access to parents, trademarks, copyrights, and other intellectual property available with GIL. Hence, the advertisement fee payments to GIPL are not a payment towards purchasing AdWords space. Instead, these payments constitute royalties.
• The assessee is under obligation to deduct tax at source (TAS). Its failure to do so attracted disallowance.
• Further, the assessee did not lay down any factual foundation to establish how they were under a bonafide belief.
• GIPL is not merely a re-seller of advertising space to Indian users but a licensee of GIL’s intellectual property.

Final Decision

• The tribunal dismissed the batch of appeals and cross-appeals. It ordered GIPL to pay taxes on the payments made to GIL for marketing and distribution rights of the AdWords programme in India between 2007-08 and 2015-16.

Anjali Agrawal, an undergraduate student at the NALSAR University of Law, Linet Christina Thomas, an undergraduate student at Lords Universal College of Law, Ojasvi Gupta, an undergraduate student at the Faculty of Law, Banaras Hindu University, and Parul Anand, an undergraduate student at the National Law University, Jodhpur, prepared this case summary during their internship with The Cyber Blog India in May/June 2022.