Nov 29, 2022

AZB’s Tax Contribution in LIR’s first edition (November 2022)

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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Google AdWords Program, Google Tax and Royalty

Cotecna Inspection SA v. ITO, W.P. (C) NO. 14602 OF 2021 (Delhi HC)

The Hon’ble Delhi High Court in a path breaking ruling allowed the remittance of dividend at a lower rate of 5% as sought by the Assessee whilst holding that by virtue of the Most Favoured Nation (“MFN”) clause in the India-Switzerland Double Taxation Avoidance Agreement (“DTAA”), the beneficial rate of 5% prescribed for dividend in India-Slovenia, India-Columbia and India-Lithuania DTAA will be substituted for the 10% rate prescribed in the India-Switzerland DTAA. Further, the Court also observed that Income-tax Department cannot refuse to follow binding jurisdictional decision merely on the basis that the Income-tax Department proposes to file an appeal before the Supreme Court of India.  The legal issue is pending before the Hon’ble Supreme Court of India.


Jones Lang Lasalle Property Consultants (India) (P.) Ltd. v. DCIT, [2022] 447 ITR 40 (Delhi HC)

In a much-needed relief to the taxpayers, the Hon’ble Delhi High Court held that the Income-tax Authority cannot reject an application seeking withholding certificate at a low tax rate on the ground that there exists huge outstanding demand on their internal portal, without factoring that a rectification application of the taxpayer is pending and once that is decided, the tax demand against the taxpayer is likely to be reduced or become NIL.


PCIT v. Giesecks & Devrient (India) (P.) Ltd., ITA No. 141-2020 (Delhi HC)

On the aspect of ‘levy of penalty’ under section 271(1)(c) of the Income Tax Act, 1961 (“ITA”) in pursuance to transfer pricing adjustment made in the final assessment order, the Hon’ble Delhi High Court observed that mere making of a claim which is not sustainable in law, by itself, will not tantamount to furnishing inaccurate particulars regarding income of an Assessee. Further, the Court also observed that merely because, the Assessee had claimed an expenditure, which claim was not accepted or was not acceptable to the Income-tax Department, that by itself would not attract the levy of penalty.


Heidelberg Cement AG v. ACIT, ITA No. 531 (Delhi) Of 2022 (ITAT – Delhi)

In a first of its type ruling, the Delhi Bench of Income-tax Appellate Tribunal (“ITAT”) clarified the law on taxability of ‘interest’ earned on rupee denominated non-convertible debentures (‘RD NCDs’) of an Indian Company under in section 194LD read with section 115A(1)(a)(iiab) of the Income-tax Act, 1961 (“ITA”).  The ITAT held that interest earned on RD NCDs shall be treated at par with interest earned on ‘rupee denominated bonds’ of an Indian company or a Government Security and a concessional rate of 5% as mentioned in section 194LD of the ITA shall be applicable.    






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