GOOGLE INDIA (P) LTD. vs. JOINT DIRECTOR OF INCOME TAX
(INTERNATIONAL TAXATION)*
ITAT, BANGALORE ‘C’ BENCH
Member(s) : Sunil Kumar Yadav, J.M. & Inturi Rama Rao, A.M.
Income deemed to accrue or arise in India—Royalty—Payment for purchase of advertisement space for resale to advertisers in India—Pursuant to the Google Adwords Program Distribution agreement between the assessee and the lreland based group company GIL, assessee has been appointed as a non-exclusive authorized distributor of adwords program to the advertisers in India—It has also entered into a service agreement with GIL to render IT enabled services—Under the service agreement the intellectual property is owned by GIL and assessee acknowledges and agrees that all such confidential information, intellectual property, software technology and documentation shall remain the exclusive property of GIL—Similar is the position with regard to derivative works and software embodiment—During the course of performance of the agreement, GIL will disclose certain confidential information to the assessee solely to permit it to perform its obligation under this agreement—Except as otherwise provided in this agreement, assessee agrees that such confidential information shall be kept secret by it during the term of agreement and it shall not disclose or facilitate disclosure of such confidential information to any person without the prior consent of GIL—Upon termination of the agreement, the assessee shall discontinue all use of confidential information, derivative works and software embodiment, intellectual property and other software technology and shall have no further rights in respect thereto—It shall immediately return to GIL or destroy all copies of confidential information, derivative works and software embodiment—This means that the assessee has an access to the intellectual properties, confidential information, derivative works and software embodiment and the software technologies of the GIL—Under the distribution agreement the assessee has to conduct its business for its own account, in its own name, and not as an agent, employee, partner or franchisee of Google i.e., GIL—It has been clarified that GIL owns all right, title and interest in and to all information and data, including the user data collected by it relating to advertisers in connection with the provisions of the Adword program—Advertiser is having access to Google Analytics Program through the assessee—Whenever one particular keyword is searched, the targeted ad will be shown to the consumer and by clicking on the ad, the consumer will be landed on a webpage—Based on the initial keywords the advertiser enters, the tools shows various keywords suggestion automatically grouped into different adgroups—This is only possible if the assessee is permitted to use information, data and key planner to the advertiser which is patent and protected software of the Google—tBased on the initial keywords the advertiser enters, the tools shows various keywords suggestion automatically grouped into different ad groups. This is only possible if the appellant is permitted to use information, data and keyplanner to the advertiser which is patent and protected software of the Google—Thus, it is not merely an agreement to provide advertisement space but it is an agreement for facilitating the display and publishing of an advertisement to the targeted customers—Obligation cast upon the assessee under the Google Adword distribution agreement can only be discharged with the help of the ITES division—Therefore, Google Adword distributor agreement and the service agreement are to be read together as they are interconnected—Without resorting to the service agreement the terms and conditions under the Google Adword Distribution Agreement cannot be complied with—Assessee obtains the advertisement space under the Adword Distribution Agreement and resells it to different advertisers along with on sale and after-sale services—With the aid of ITES division, the assessee is required to execute the programs and also provide all technical support to the advertisers and GIL—While discharging its obligation under the Google Adword Programs and Service Agreement the assessee has an access to the trade marks, IPRs, derivative works, brand features and the confidential information of GIL—Therefore, it cannot be called that whatever payments were made by the assessee to GIL was simpliciter a payment towards the purchase of Adword space from the GIL for its resale to advertisers which may be treated as business profit in the hands of the recipient but it is a payment of royalty to GIL in the light of definition of royalty given under the Act and the DTAA—In the return filed by GIL for the asst. yr. 2009-10 it has shown its method of accounting as mercantile system of accounting—Once GIL has itself declared the method of accounting as mercantile system it cannot claim that for the purpose of royalty, system of accounting should be on cash/receipt basis—Assessee could not demonstrate that the royalty was not paid to or received by GIL and it was simply credited to its accounts in the books of accounts of the assessee—Thus, there is no merit in the contention of the assessee that royalty cannot be taxed in the impugned assessment year as it was not received by GIL and therefore, is not chargeable to tax in India as a deemed income accrued—Since the payment made under the distribution agreement to GIL by the assessee is held to be the payment of royalty, it is required to deduct the TDS on such payment—Equalization levy is to be charged only on consideration for specified services and not others where there is use of IPR, copyright and other intangibles—Under Ad word Distribution and Service Agreement, the assessee has acquired licence to use IPRs, copyright and other intangibles to provide better services either to GIL or to advertisers—Therefore, the introduction of equalization levy would not convert the nature of payment made by the assessee to GIL—Facts taht the impugned payment were royalty and that it was liable to deduct TDS were known to the assessee since the execution of both the agreements—Therefore, it cannot be said that the assessee was under the bonafide belief for non-deduction of TDS—Since the assessee has not deducted tax at source as per provisions of s. 195, it was rightly held to be in default under s. 201(1)—Consequent to the failure by the assessee-company to do so, dis allowance under s. 40(a)(ia) is automatically attracted
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