Income Tax Appellate Tribunal affirms the applicability of Google Tax in Google’s own case
Recently the Hon’ble Income Tax Appellate Tribunal (“ITAT”) in 3Google India P. Ltd. vs DCIT, [IT(TP) Appeals No. 1513– 1516 /Bang / 2013], reversed its earlier view, and has now, held that the payments made by Google India to Google Ireland are not in the nature of royalty as defined under section 9(1)(vi) of the Income-tax Act, 1961 (“ITA”) as well as Article 12(3)(a) of the India – Ireland Double Taxation Avoidance Agreement (“DTAA”). The controversy before the ITAT revolved around the very innovative online advertisement services offered on the Google AdWords Program, that allows businesses around the world to carry out targeted advertising on the internet. By means of online advertisement, for instance, on Google Search Engine, businesses can have the link to their website displayed within or at the top of the search results, in response to a search query, which is most relevant for their business. Payment for online advertising by the advertiser to Google, in such a case, is triggered whenever the end user of Google Search Engine, clicks on the link of the advertiser within the search results.
In the case of Google, this dispute arose for the first time in the hands of the Indian group company which acted as the distributor of online advertisement space to Indian Advertisers. Google India, in its capacity as a distributor, collected payments from Indian Advertisers, retained its margin and remitted the remaining balance to the Google Ireland, being the principal operator of Google AdWords Program. It is on this remittance to Google Ireland that the Indian Tax Authorities, invoked the royalty provision under the ITA as well as the DTAA and sought to apply tax rate of 10% on gross. In view of the Tax Authorities, this payment was for use or right to use software, trademark, process, equipment etc. On the other hand, the stand taken by Google was that these payments were business profits, which could not be taxed under the ITA or the DTAA, in the absence of a permanent establishment (“PE”) of Google Ireland in India.
The ITAT, in the second round of litigation before it, took into consideration recent decision of the Supreme Court in Engineering Analysis (2021 SCC OnLine SC 159) as well as the commentary on the Model Convention issued by the Organisation for Economic Co-operation and Development, while holding that the payments in question were in fact commercial payments and not for the use of any intellectual property. Due regard was also paid to the Report of the Technical Advisory Group, which in 2001 had stated that payments for online advertisement should be business profits and not royalty. Given that it was nobody’s case that Google Ireland had a PE in India, the ITAT held the payments to be not taxable in India as royalty. This has resulted in the reinforcement of the much-needed certainty for the e-commerce industry. In fact, this decision is now in line with the provisions of the equalisation levy law (“Google Tax”), which were introduced primarily for taxing online advertising revenues earned by non-residents (subject to certain exceptions).
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