Whether payment to non-resident towards purchase of advertisement space for resale to advertisers in India is liable for TDS?

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Whether payment to non-resident towards purchase of advertisement space for resale to advertisers in India is liable for TDS?

Payment to non-resident towards purchase of advertisement space for resale to advertisers in India constituted ‘Royalty’ under section 9(1)(vi) and assessee was under an obligation to withhold tax under section 195.

Assessee in terms of Google Adwords distributors agreement made payment to Google Ireland towards purchase of advertisement space for resale to advertisers in India. AO treated consideration paid by assessee in terms of said agreement as royalty and disallowed the same under section 40(a)(ia) on account of non-withholding of tax under section 195. Assessee’s case was that payments made by it to Google Ireland was in the nature of distribution fee.

Held: In terms of Google Adwords distribution agreement, assessee was licensed to use trademarks, brand features and other intangibles owned by Google Ireland though same not stood transferred to the assessee. Therefore, payments made by the assessee-company to Google Ireland for use of all the intangibles constituted ‘Royalty’ under section 9(1)(vi) and assessee was under an obligation to withhold tax under section 195. Therefore, disallowance made by AO was justified.

Decision: Against the assessee.

IN THE ITAT, BANGALORE ‘C’ BENCH

SUNIL KUMAR YADAV, J.M. & INTURI RAMA RAO, A.M.

Google India (P.) Ltd. v. Jt. DIT

IT Appeal Nos. 1190 of 2014, 949, 950 & 2845 (Bang.) of 2017 & Others

A.Y. 2013-14

11 May, 2018

Appellant by: Percy Pardiwala, Sr. Counsel, Anmol Anand, Narendra Jain, Advocates Vinay Mangla and Padamchand Kincha CA’s

Respondent by: K.V. Arvind, Sr. Counsel and C.H. Sundar Rao

ORDER


 

Per Bench:

These appeals are preferred by the assessees as well as the Revenue against the respective orders of the Commissioner (Appeals) pertaining to assessment years 2007-08 to 2015-16. Since the issues involved in these appeals are interconnected and interrelated, these were heard together and are being adjudicated through this single consolidated order for the sake of convenience. We, however, prefer to adjudicate them one after the other as under:

  1. 2IT(IT)A Nos. 1190/Bang/2014, 949 & 950/Bang/2017

Though grounds raised in these appeals are almost similar, but for the sake of reference we extract the grounds raised in ITA No. 1190/Bang/2014 as under :–

Based on the facts and in the circumstances of the case, the learned Commissioner (Appeals) and the learned assessing officer have :–

  1. Erred in holding the payment made by the Appellant to Google Ireland Limited in relation to purchase of advertisement space for resale to the advertisers in India under the Google Ad Words Reseller Agreement (‘the Agreement’) to be in the nature of ‘Royalty’ under the Act and the India-Ireland Double Taxation Avoidance Agreement (‘India-Ireland Treaty’) stating that the issue is covered under the appeals for earlier years.
  2. Erred in holding that the amount payable towards purchase of advertisement space to be in the nature of ‘Royalty’ under the Act, even after acknowledging that the Appellant is distributing/reselling the advertisement space to the advertisers in India.
  3. Erred in holding the amount payable by the Appellant to Google Ireland Limited as Royalty by attributing the same towards right to use of Trademark, even after concluding that the assessee company was permitted to use the trademarks of Google for the purpose of marketing and distribution of AdWords program.
  4. Erred in holding that the AdWords program is complex computer software, the right to use has been granted to the Appellant without appreciating the fact that AdWords program is a standard advertisement service through which the advertiser is able to advertise its products or services on the Google website.
  5. Erred in holding that Google Ireland Limited has granted the Appellant the right to use of the AdWords program, which is a complex computer program without parting with the copyright, thus granting licence to use the software without appreciating the fact that the Appellant is only involved in marketing and distribution/resale of the advertisement space to the advertisers in India.
  6. Erred in holding that the training provided in relation to the advertisement program, its functionality, tools available etc. to the distribution team of the appellant who markets and distributes the same to advertisers in India tantamount to rendering of services to the Appellant even after concluding that such training is restricted to use of the AdWords program and not how to develop the AdWords program.
  7. Erred in confirming that the distribution rights granted under the distribution/reseller agreement are itself “IP rights” covered by “similar property” used in section 9(1)(vi) of the Act, after holding that as per the distribution/reseller agreement Google Ireland Limited has agreed to provide advertisement space to the Appellant through AdWords program for distribution to the Indian Advertisers.
  8. Erred in confirming that Distribution Agreement/Reseller Agreement cannot be read without the service agreement (ITES agreement) between the Appellant and Google Ireland Limited and the Appellant has been granted right to use intellectual property owned by Google Ireland Limited without appreciating the fact that ITES service agreement is a separate agreement under which the Appellant performs an independent global outsourcing function for Google Ireland Limited for which it receives arm’s length consideration and is not linked in any manner to the function of sale of advertisement space to the Indian advertisers being performed by the Appellant.
  9. Without appreciating the facts of the case, erred in holding that the amount payable by the Appellant to Google Ireland Limited towards purchase of advertisement space to be in the nature of ‘Royalty’ under section 9(1)(vi) of the Act.
  10. Erred in upholding the order of the learned JDIT that the amount payable by the Appellant to Google Ireland Limited is towards right to use of trademark and copyrighted computer program and process. Hence is in the nature of ‘Royalty’ as per the article 12 of the India Ireland Double Taxation Avoidance Agreement.
  11. Erred in not following the principle laid down by Hon’ble Mumbai Tribunal in the case of Yahoo India (P.) Ltd. v. Dy. CIT (2011) 140 TTJ 195 (Mumbai)and Pinstorm Technologies (P.) Ltd. v. ITO (2013) 154 TTJ 173 (Mumbai)on similar facts by stating that the facts and issues are completely different and at no stage the Mumbai Tribunal consider what exactly is the AdWords Program, nor did it have occasion to examine the right to use trademark or other IP rights.
  12. Erred in not following the decision of the Calcutta Tribunal in the case of ITO v. Right Florists (P.) Ltd. (2013) 154 TTJ 142 (Kol-Trib)on similar facts.

The Appellant craves, to consider each of the above grounds of appeal without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.

  1. In IT(IT)A Nos. 949 & 950/Bang/2017, the appellant has also assailed the order of the Commissioner (Appeals) denying the benefit of beneficial ownership by raising following common grounds :–

Beneficial ownership of payments under the DTAA

Not adhering to the rule of consistency by not following the learned Commissioner (Appeals)’s decision for assessment year 2013-14 in the Appellant’s very own case and taking contradictory views without considering :–

— Certificates issued by the Irish Revenue Authorities stating that GIL is a tax resident of Ireland and its world-wide income is taxed in Ireland.

— Fact that there was neither any change in facts of the Appellant vis-a-vis the previous year nor was any new material fact brought on record by the learned assessing officer.

— Not providing an opportunity of being heard to the Appellant and thereby violating principles of natural justice.

— Rule of consistency requires that when contradictory views are taken vis-a-vis the previous years, reasons for such contradictory views would need to be specified.

  1. During the course of pendency of the appeal, assessee has also moved an application for the admission of the following additional grounds :–

Withholding liability on Royalty to arise only on payment basis under the India-Ireland Double Taxation Avoidance Agreement (‘DTAA’)

  1. Without prejudice to the argument that the payments made by the Appellant to Google Ireland are not in the nature of Royalty as per Article 12 of India-Ireland DTAA, the learned Assessing Officer/Learned Commissioner of Income Tax (Appeals) erred in holding that the Appellant is liable to withhold tax on amounts payable to Google Ireland disregarding that ‘Royalty’ income for a non-resident is taxable only on receipt basis under the India-Ireland DTAA.

The Appellant craves, to consider the above ground of appeal without prejudice to other grounds of appeal and craves leave to add, alter, delete or modify the above ground of appeal.”

  1. Though various grounds are raised but they all relate to the characterization of the payment made by the appellant to M/s. Google Ireland Ltd., with regard to purchase of advertisement space for resale to the advertisers in India under the Google AdWords program distribution agreement. The facts in all these years are almost similar subject to variation in quantum. Therefore, we record the facts for the assessment year 2013-14 in IT(IT)A No. 1190/Bang/2014. The facts in brief borne out from the record in this regard are that the assessee company, i.e., Google India Pvt. Ltd., (hereinafter called as “GIPL”), having its registered office at Bangalore was incorporated on 16-12-2003, as a wholly owned subsidiary of Google International LLC, US. The GIPL is engaged in the business of providing Information Technology (IT) and Information Technology enabled Services (ITES) to its group companies. It also acts as a distributor for AdWord programs in India. The assessee company’s activities was classified by the Commissioner (Appeals) in its order in 3 segments which are as under :–

— IT services: GIPL has entered into a service agreement with Google Inc. to render software development services. Google India’s research and development units at Bangalore, Hyderabad and Gurgaon provide IT services including application development, maintenance and testing services. For these services, GIPL, is remunerated at cost plus 17.5%

— IT enabled services: GIPL has entered into a service agreement with Google Ireland Limited (Google Ireland) to render IT enabled services. Its service centre at Hyderabad and Gurgaon provide IT enabled services relating to the administration of advertisements in accordance with the guidelines provided by Google Ireland and provide customer support services. For these services, GIPL is remunerated at cost plus 15.5%.

— Marketing and distribution services for the AdWords program: Under the Google AdWords Program Distribution Agreement dated 12-12-2005 (Agreement) entered into between GIPL and Google Ireland, Google India is appointed as a non-exclusive authorised distributor of AdWords program to the advertisers in India.

  1. The main issue raised in this appeal is with regard to the non-deduction of TDS on payments made by the appellant to M/s. Google Ireland Ltd., as the assessing officer characterized the payment made by the appellant to M/s. Google Ireland Ltd., as royalty. Under the Adword Program distribution agreement, the agreement was entered into between GIPL and Google Ireland Ltd., (hereinafter called as “GIL). The GIPL was granted the marketing and distribution rights of Adwords Program to advertisers in India and the GIPL is remunerated on cost plus market basis for the distribution services under Adword Programs.
  2. On verification of the financial statements for the assessment year 2012-13, the assessing officer noticed that GIPL had credited a sum of Rs. 111,491,99,289 to the account of M/s. Google Ireland Ltd., (GIL) without deduction of tax at source. The GIL had also not obtained the Nil deduction certificate on the sums payable to it from the department. Reliance upon the provisions of section 195 of the Income Tax Act (hereinafter called as an “Act”) was placed according to which any person responsible for paying to nonresident, not being a company, or to a foreign company, any interest or any other sum chargeable under provisions of the Act (not being income chargeable under the head salaries) shall at the time of credit of such income to the account of the payee or at the time of payment there-of in cash or by the issue of cheque or draft by any other mode whichever is earlier, deduct income tax thereon at the rates in force, and the assessing officer issued a show cause notice to the appellant (GIPL) as to why he should not be treated as assessee in default in respect of tax not deducted at source on sums payable to GIL under section 201(1) of the Act. The GIPL was asked to furnish details of sums paid or payable for the financial year 2012-13, relevant to the impugned assessment year and the deduction of tax at source thereon. In response thereto, the assessee has filed the submissions where from it was noticed by the assessing officer that during the impugned assessment year, GIPL had credited a sum of Rs. 111,491,99,289 to the account of GIL towards marketing and distribution rights of Adword Program without deduction of tax at source. A sum of Rs. 795,28,87,731 had been remitted during the financial year 2012-13 and the balance of Rs. 319,63,11,558 was outstanding.
  3. The assessing officer has further observed that assessee company is an Indian company and the payee is foreign company based in Ireland, with their residential status being that of nonresident and as per section 5(2) of the Act, the total income of any previous year of any person who is a non-resident includes all incomes from whatever source derived which is (a) is received or is deemed to have been received in India in such year or by or on behalf of such person or (b) accrued or arised or is deemed to have been accrued or arised to him in India during such year.
  4. The assessing officer further observed that section 9 of the Act deals with the income deemed to accrue or arise in India and as per section 9(1)(vi) of the Act, inter alia, any income by way of royalty payable by a person who is a resident, shall be deemed to accrue or arise in India to the recipient except where the royalty is payable in respect of any right, property or information used or services utilised for the purpose of business or profession, carried on by such person outside India or for the purpose of making or earning any income from any source outside India.
  5. The assessing officer accordingly issued a show cause to the assessee to explain as to why the sum payable to GIL towards marketing and distribution rights of Adword Programme should not be treated as royalty as per provisions of section 9(1)(vi) of the Act. Assessee was also show caused to explain as to why provision of section 201(1) should not be invoked in this case and it be treated as assessee in default in respect of the tax not deducted at source. In response to show cause notice, the appellant filed the submissions on various dates where from it was observed by the assessing officer that under the distribution agreement, the GIPL has acquired marketing and distribution rights over Adword Programmes for the territory of India from GIL. The distribution of Adword Programme involves 3 parties, i.e., Licensor, the reseller or distributor and the advertiser. In this case, the licensor is GIL, the distributor or reseller is GIPL and the end users are the advertisers. The assessee has taken a stand that the amount payable to the GIL is not in the nature of royalty either under the Act or the India-Ireland Double Taxation Avoidance Agreement (hereinafter called as “DTAA”). The gist of submissions made by the GIPL are extracted by the assessing officer in his order and for the sake of reference, we extract the same as under :–

— As per Agreement between the assessee-company and Google Ireland, GIPL is appointed as a mere non-exclusive Distributor/Reseller of AdWords program to the advertisers in India;

— Distribution fee is payable to Google Ireland on distribution of AdWords in India and is not in relation to any ‘transfer of any right’ or any ‘right to use’ any patent/invention etc.;

— The Agreement does not involve any use of patents, invention, model, design, secret formula or process or trade-mark or similar property. Further, all the rights, title and interest in and to all information and data including the user data (i.e. data provided by users) are owned by Google Ireland;

— Further, the distribution fee payable under the Agreement is not in relation to any knowledge concerning a patent or invention and is neither concerned with use or right to use of any scientific equipment.

— Reliance was placed on decisions of the Hon’ble Mumbai ITAT in the case of Pinstorm Technologies (P) Ltd. v. ITO (ITA No. 4332/Mum/2009) and Yahoo India (P.) Ltd. v. Dy. CIT (2011) 140 TTJ 195 (Mumbai).

— Therefore the sums paid/payable are not taxable under the Income Tax Act, 1961 (“Act”) and India-Ireland DTAA.

  1. The assessing officer has examined the explanations and the submissions explaining the functioning of the appellant but was not convinced with the contentions of the assessees and he concluded that the payments made by the assessee to GIL is the royalty payment for which assessee is under obligation to deduct tax at source as stipulated under section 195 of the Income Tax Act. Since the assessee failed to discharge its obligations, the assessee company/GIPL was held to be assessee in default in respect of tax not deducted at source on amounts credited to GIL. The assessing officer accordingly worked out the tax liability of the appellant under section 201(1) and 201(1A) for the impugned assessment year and issued a demand notice of Rs. 258,84,40,845.
  2. Besides, it was also held by the assessing officer that GIL is not the beneficial owner of the amounts received/receivable from the appellant in relation to sale of advertisement space under the agreement on the ground that Google Inc., owns the search engine and Adword Programme and other holdings are also involved in Adword program and are entitled to share the revenue generated under the Adword agreement.
  3. Aggrieved, assessee preferred an appeal before the Commissioner (Appeals) and the Commissioner (Appeals), on the point of characterization of the payment made by GIPL to GIL has held that it is a royalty payment, following its earlier order for the assessment year 2006-07 to 2012-13. Since there is no discussion in the order of the Commissioner (Appeals) while holding the nature of payment by GIPL to GIL as royalty, except the reference of its earlier order for assessment year 2006-07 to 2012-13,we are required to examine the findings given by the Commissioner (Appeals) in that order. The order of the Commissioner (Appeals) for 2006-07 to 2012-13 has already been confirmed by the Tribunal against which an appeal is pending before the Hon’ble High Court of Karnataka. The Hon’ble High Court of Karnataka has passed orders in ITA Nos. 879/2017 and 898/2017, dt. 15-11-2017 and 20-11-2017 respectively that the present appeals are to be disposed off independently without being influenced with the order of the Tribunal dated 23.10.2017 passed for the assessment years 2006-07 to 2012-13. Therefore, we cannot look to the order of the Tribunal for assessment years 2006-07 to 2012-13, confirming the order of the Commissioner (Appeals) in this regard but we are supposed to adjudicate the issues of nature of payment in the light of the finding of Commissioner (Appeals) for assessment years 2006-07 to 2012-13 independently as it was relied on by the Commissioner (Appeals) while adjudicating the impugned issue without being influenced by the order of the Tribunal. In appeal filed before the Commissioner (Appeals) against the assessment orders for assessment years 2006-07 to 2012-13, the assessee has disputed the findings of the assessing officer with regard to nature of payment made by GIPL to GIL.
  4. The Commissioner (Appeals) while adjudicating the characterization of nature of payment made by GIPL to GIL, has examined and analysed the agreement entered into by the assessee/appellant with GIL and Google AdWord Programs how it operates in the light of information available on internet and also in the light of various judicial pronouncements rendered by the Tribunal and held that nature of payment made by GIPL to GIL is royalty. The relevant observation of the Commissioner (Appeals) are extracted hereunder for the sake of reference :–

“Before I proceed to examine the issues raised before me, it is pertinent to give a proper finding with respect to the Adwords program. From the discussion reproduced in the body of this order, it is very clear that the Adword program is actually computer software by which the advertiser is able to publish an advertisement on the “Google Website”. And it is after utilizing a complex computer program, the clients gain access to the advertiser’s web-page. The contention of the assessee that AdWords is an automated, self-serve system through which advertisers independently develop a set of keywords that relate to their business and manage their own account online from the Goodie website and therefore, it has simply rented out space on the “Goodie Website” and charged the advertiser as newspapers are akin to doing, is a fallacy. It is evident that the Adwords program is a complex computer program developed and owned by Google Ireland. A computer programme is a process when it executes instructions lying in it in passive state. It is built upon and uses sophisticated computer technology as under :–

“The AdWords system was initially implemented on top of the MySQL database engine. After the system had been launched, management decided to use Oracle instead. The system became much slower, so eventually it was returned to MySQL. Eventually, Google developed a custom distributed Relational database management .system (RDBMS) known as Google Fl specifically for the needs of the Ad business, which requires strong consistency, high scalability across data centers and powerful SQL queries. The interface has also been revamped to offer better work flow with additional new features, such as Spreadsheet Editing, Search Query Reports, and better conversion metrics.”

10.2. Google Fl is a Relational Database Management System and it is undoubtedly a computer program within the meaning of the Act as is evident from the following illustration:

10.3. As per Wikipedia, a computer program, or just a program, is a sequence of instructions, written to perform a specified task with a computer. A computer requires programs to function, typically executing the program’s instructions in a central processor. The program has an executable form that the computer can use directly to execute the instructions. The same program in its human-readable source code form, from which executable programs are derived (e.g., compiled), enables a programmer to study and develop its algorithms. A collection of computer programs and related data is referred to as the software.

10.4. The definition of computer program in the copyright Act of 1957, is as under :–

“Section 2(ffc) “computer programme” means a set of instructions expressed in words, codes, schemes or in any other form, Including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.”

10.5. In a recent decision, the Delhi Bench of the Hon’ble Tribunal in Gracemac Corporation v. Asstt. DIT (2010) 42 SOT 550 (Delhi) had an occasion to examine the term “Computer Program” vis-a-vis the term “Process” used in the Act as well as the Indo-US Tax Treaty and observed “It is a golden rule of interpretation of statutes that the language of the statute should be read as it is. The intention of the Legislature is primarily to be gathered from the language used, which means that attention should be paid to what has been said as also to what has not been said. As a consequence a construction which requires for its support addition or substitution of words or which results in rejection of words as meaningless has to be avoided.

Director-General, Telecommunication & Anr. v. T.N. Peethambaram [Civil Appeal No. 3141 of 1986, dt. 19-9-1986] relied on. The use of punctuation marks cannot be said redundant.

The need for interpretation arises when words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the Legislature. Where the word is plain and unambiguous, it is not for judges to invent fancied ambiguities as an excuse for failing to give effect to its plain meaning because they themselves consider that the consequences of doing so would be inexpedient, or even unjust or immoral.

The words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning unless that leads to some absurdity or unless there is something in the context, or in the object of the statute to suggest the contrary. If the language of the statute is not clear and there is need to resort to aids of construction, such aids can be either internal or external.

In the definition of “royalty” in clause (v) of Explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961, the Legislature has used a comma after the word “copyright” indicating the legislative intent to treat “copyright” independently of the words “literary, artistic or scientific work”. Therefore, “copyright” cannot be read in conjunction with the words literary, artistic or scientific work by substituting the comma with the word “of’. The definition of “royalty” is inclusive. Deletion of the comma and addition of the word “of’ between words “copyright” and “literary” would limit the scope royalty only to copyright work relating to literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. The term “copyright” is wide enough to include other works such as dramatic or musical work, computer programme, cinematograph film and a sound recording as included in clauses (a), (b), (d) and (e) of section 14 of the Copyright Act, 1957. The language employed in clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act is plain, clear and unambiguous and is not capable of two meanings. Therefore, there is no need substitution of the comma by the word “of”.

The expression “copyrighted article” is not defined either in the 1961 Act or in the Double Taxation Avoidance Agreement between India and the U.S.A. (DTAA). Nor there a definition in the Copyright Act, 1957 of “copy-righted article” on the lines as in the Patents Act, 1970. The term “copy-righted article” is nowhere used in the Act or the Double Taxation Avoidance Agreement. The expression “copyrighted article” finds its origin in U.S. regulations and then in the OECD commentary. The OECD commentary or IRS Regulations of the U.S.A. would not be a safe or acceptable guide or aid for interpretation of provisions of the Income Tax Act, 1961 or the Double Taxation Avoidance Agreement between India and another country. The language used in Explanation 2 to section 9(1)(vi) of the Act or article 12(3) of the Double Taxation Avoidance Agreement defining the term “royalty” is not ambiguous. For the purposes of interpretation of the term “royalty” in respect of computer software reliance cannot be placed on the difference made in the OECD commentary or in the U. S. regulations between the expressions “the transfer of a copyright right” and “the transfer of a copyrighted article”. The question of royalty in respect of computer software has to be decided on the basis of provisions of the Act and the Double Taxation Avoidance Agreement. Hence for the purposes of income-tax a copyrighted article cannot be treated as product.

CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) applied.

A computer programme is a literary work under the Copyright Act, 1957 and the consideration received will be in the nature of royalty if it is in respect of the transfer of all or any rights (including the granting of a licence) in respect thereof under clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act. The definition of royalty in Explanation 2 to section 9(1)(vi) and article 12(3) of the Double Taxation Avoidance Agreement takes into its ambit both industrial as well as copyright royalties. It will not be appropriate to restrict the scope of the definition of royalty under the income-tax law only on the ground that since computer programme has been provided protection under the Copyright Act, the provisions of other intellectual property rights laws will not be applicable.

A computer programme is a process when it executes instructions lying in it in passive state. Therefore, any consideration made for the use of process would amount to royalty.

Explanation 2 has to be read as part and parcel of section 9(1)(vi) of the Act.

Keshavji Ravji and Co. v. CIT (1990) 183 ITR 1 (SC) applied.

The second proviso to section 9(1)(vi) carves out an exception from the main section exempting lump sum payment made by a resident for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Export, Software Development and Training, 1986 of the Government of India. It cannot stand on its own and hence cannot be held a substantive provision. Therefore, section 9(1)(vi) from the very inception included computer software for the purposes of royalty. If royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer programme was not taxable under section 9(1)(vi) of the Act, Parliament would not have prescribed a special rate of income-tax in respect of royalty income in respect of any computer software under section 115A(1A). The provisions of section 9(1)(vi) have to be considered in the light of the provisions of section 115A(1A) of the Act. The use of the expressions “in respect of copyright in any book to an Indian concern” or “in respect of any computer software to a person resident in India” in section 115A(1A) shows that for the purposes of income-tax copyright in “computer software” is different from copyright in any “book” though both are literary works under the Copyright Act, 1957.

The Income Tax Act and the Copyright Act operate in different fields. The object of the Copyright Act is to provide protection to the copyrights in various works of the authors whereas the purpose of income-tax is levy and collect tax on various types of incomes. The provisions of the Income Tax Act cannot be explained by resorting to various provisions of the Copyright Act, 1957. However, a limited reference to understand the meaning of term “copyright” can be made to the Copyright Act, 1957 as this term has not been defined under the 1961 Act.

Under the Explanation inserted in section 9(1)(vi) of the 1961 Act with effect from 1-6-1976 by the Finance Act, 2007 and again substituted by the Finance Act, 2010 the income of a nonresident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) irrespective of whether the non-resident has a residence or a place of business or business connection in India or the non-resident has rendered services in India. Therefore, once the consideration is received by a non-resident for the transfer or all or any rights including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or similar property or any copy-right literary, artistic or scientific work, the consideration received shall be deemed to accrue or arise in India and will be taxable in India. Hence, by virtue of the amended Explanation to section 9(1)(vi) royalty income will be taxable in India whether or not the non- resident has a residence or place of business or business connection in India. The effect of an Agreement made pursuant to section 90 of the 1961 Act is that if no tax liability is imposed under this Act, the question of resorting to the Agreement would not arise. No provision of the Agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by this Act, the Agreement may be resorted to for negativing or reducing it. In case of difference between the provisions of the Act and of an Agreement under section 90, the provisions of the Agreement shall prevail over the provisions of the Act and can be enforced by an appellate authority or the court. However, as provided by sub-section (2) the provisions of this Act will apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income Tax Act which will govern the taxation of income.

The definitions of term “royalty” in Explanation 2 to section 9(1)(vi) of the 1961 Act and paragraph (3) of article 12 of the Double Taxation Avoidance Agreement are identical. According to paragraph (7)(a) royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. If the person paying royalty has a permanent establishment or a fixed base there in connection with which the liability to pay the royalties is incurred and the liability is borne by such establishment or base the royalty is deemed to arise in the State in which the permanent establishment or fixed base is situated. According to paragraph (7)(b) royalties related to the use of, or the right to use, the right or property, in one of the Contracting States, shall be deemed to arise in that Contracting State. No conflict exists between the Income Tax Act and the Double Taxation Avoidance Agreement.

The language of article 12(7)(b) of the Double Taxation Avoidance Agreement between India and the United States of America is clear and unambiguous. The royalties or fees for included services shall be deemed to arise in that Contracting State in which the use of, or the right to use, the right or property, or the fees for included services is performed. The term “right” in article 12(7)(b) cannot be interpreted to mean “copyright” as used in the article 12(3)(a).

The Double Taxation Avoidance Agreement with the United States of America was entered on 20-12-1990. By an amendment to section 9(1) by insertion of Explanation with effect from 1-6-1976 the royalties will be deemed to accrue or arise in India whether or not the non-resident has a residence or place of business or business connection in India. Therefore, by this amendment the income by way of royalty will be deemed to accrue or arise irrespective of a contrary provision in the Double Taxation Avoidance Agreement.

  1. In this backdrop, the issues raised are considered individually:

Distribution fee payable under the agreement is a relation to use or right to use Intellectual property, know-how, trademark & other brand features:

11.1. As is evident from the extracts reproduced from the assessment order earlier, the assessing officer on examination of agreements came to the conclusion that the Google Ireland holds the intellectual property, know-how, trademark and other brand features with respect to products and services offered by the Adwords_program. And vide the distribution agreement, the assessee company has been granted rights to market and distribute Adwords program in India In this process, Google Ireland has permitted the assessee company to access all intellectual property and confidential information which is utilized by the 1TES division of the assessee. He also observed that the job of the assessee does not end with marking and distribution of Adword program but also has to support existing customers by providing customer services to the advertisers in consonance with standards maintained by Google. It is also required to process customer queries related to advertisement issues and escalate the same to Google Ireland. The assessing officer has also noted that before the advertiser ca-run his campaign, the same has to be cleared as per editorial and trademark guidelines, hence the assessee had to monitor advertiser activity and gather other information about advertisers as specified. The distribution agreement cannot be read without the service agreement and on combined reading, it is clear that the assessee company has been granted the right to use valuable business assets of Google Ireland which includes intellectual property in the products and services offered by Google Ireland. Therefore, the distribution rights granted are itself IP rights covered by “similar property used in section 9(1)(vi) of the Act”. Thereafter, he concluded since IP of Google resides in search engine technology, associated software and other features, logically the income received by it includes royalty for its IP from all its non-retail users viz., Advertisers and Intermediaries. Therefore, the assessee company being the intermediary has obtained the right to use the intellectual property, know-how, trademark and other brand features owned by Google Ireland.

11.2. The assessing officer after examining Clause 1.5 & Clause 6 of the distribution agreement concluded that the assessee company was permitted to use the trademarks of Google for the purposes of marketing and distribution of Adwords program. After examining Clause-3 of the agreement, he opined that Google Ireland is obliged to provide advertising space through its distributor, i.e., the assessee company and is also obliged to train the distributor, so that it can market and distribute the Adwords program. The Adwords platform runs on servers located outside India and the assessee company cannot perform its activities of marketing and distribution without training which amounts to transfer of know-how. The training relates to internal tools and is provided to the staff of the assessee company only. Thus, he was of the view that technical know-how was imparted to the assessee company for the purpose of marketing, sale of the Adword program as also maintenance of Adword accounts, after sales, service, billing, etc. Hence, the sums remitted to Royalty within the meaning of the Act. I have examined the facts and circumstances of the case.

11.3. The relevant provisions of the Act to be examined are as under :–

“In section 9(1)(vi) of the Income Tax Act, 1961, the term ‘royalty’ has been defined under Explanation 2 to mean “consideration (including lump-sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘capital gains) for —

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44B;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).

Explanation 3.–For the purposes of this clause, “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data;

Explanation 4.–For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium throat which such right is transferred.

Explanation 5.–For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not —

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

11.4. Intellectual property and trademark can be defined as under :–

“Intellectual property (p) is a legal concept which refers to creations of the mind for which exclusive rights are recognized. [1] Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; discoveries and inventions; and words, phrases, symbols, and designs. Common types of intellectual property rights include copyright, trademarks, patents, industrial design rights, trade dress, and in some jurisdictions trade secrets.

A trademark, trade mark, or trade-mark[1] is a recognizable sign, design or expression which identifies products or services of a particular source from those of others. [2] [3] [4] [5] The trademark owner can be an individual, business organization, or any legal entity. A trademark may be located on a package, a label, a voucher or on the product itself. For the sake of corporate identity trademarks are also being displayed on company buildings.”

11.5. As per the service agreement Google Ireland shares the Confidential information which is defined to be :–

“Confidential Information” shall mean all data and information of a confidential, Mature, including know-holy and trade secrets, relating to the business, the affairs, the products, the development projects or other products or services of Google Ireland or its suppliers or its affiliate, including but not limited to intellectual Property.

11.6. Google Ireland as per the service agreement shares Confidential information in the following manner :–

Confidential Information.

Access and Use of Confidential Information.–During the course of performance of this Agreement; Google Ireland will disclose certain Confidential Information to Google India solely to permit Google India to perform its obligations under this Agreement. Except as otherwise provided in this Agreement, Google India agrees that such Confidential Information shall be kept secret by Google India during the term of this Agreement and after the expiration hereof Google India shall retrain from using or exploiting any and all Confidential Information for any purposes or activities other than those contemplated in this Agreement.

11.7. After considering the express terms in the service agreement, the finding of the assessing officer with regard to right to use intellectual property as well as trademark is confirmed. The issue with respect to transfer of technical know-how will be dealt later under the head “imparting of information”.

Use or right to use the process in Adwords program was granted by Google Ireland and that the fee payable is for granting of a licence in respect of a copy right in the Adwords program:

These two issues are taken together as they are interrelated. I have studied he Adwords program in detail and it is very clear to my mind that the Adwords program owned and developed by Google Ireland is a Computer Program within the meaning of Explanations 3, 4 & 5 to section 9(1)(vi) of the Act. As per the Delhi Bench of the Hon’ble Tribunal (supra) the following principles emerge :–

A computer programme is a process when it executes instructions I in it in passive state. Therefore, any consideration made for the use of process would amount to royalty.

The term “copyright” is wide enough to include other works such as dramatic or musical work, computer programme,

The question of royalty in respect of computer software has to he decided on the basis of provisions of the Act and the Double Taxation Avoidance Agreement. Hence for the purposes of income-tax a copyrighted article cannot be treated as product. CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) applied.

A computer programme is a literary work under the Copyright Act, 1957 and the consideration received will be in the nature of royalty if it is in respect of the transfer of all or any rights (including the granting of a licence) in respect thereof under clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act. The definition of royalty in Explanation 2 to section 9(1)(vi) and article 12(3) of the Double Taxation Avoidance Agreement takes into its ambit both industrial as well as copyright royalties. It will not be appropriate to restrict the scope of the definition, of royalty under the income-tax law only on the ground that since computer programme has been provided protection under the Copyright Act, the provisions of other intellectual property rights laws will not be applicable.

Therefore, section 9(1)(vi) from the very inception included computer software for the purposes of royalty. If royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer programme was not taxable under section 9(1)(vi) of the Act, Parliament would not have prescribed a special rate of income-tax in respect of royalty income in respect of any computer software under section 115A(1A). The provisions of section 9(1)(vi) have to be considered in the light of the provisions of section 115A(1A) of the Act. The use of the expressions “in respect of copyright in any book to an Indian concern” or “in respect of any computer software to a person resident in India” in section 115A(1A) shows that for the purposes of income-tax copyright “computer software” is different from copyright in any “book” though both are literary works under the Copyright Act, 1957.

Therefore, once the consideration is received by a non-resident for the transfer or all or any rights including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or similar property or any copy-right literary, artistic or scientific work, the consideration received shall be deemed to accrue or arise in India and will be taxable in India. Hence, by virtue of the amended Explanation to section 9(1)(vi) royalty income will be taxable in India whether or not the non-resident has a residence or place of business or business connection in India.

11.9. The Jurisdictional High Court in CIT v. Samsung Electronics Co. Ltd. & Ors. (2012) 345 ITR 494 (Karn) had occasion to examine the term “royalty” vis-a-vis “computer software”. The Hon’ble Court observed :–

“In view of the abovesaid definition of “royalty”, it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to “royalty” is as follows – payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work.

It has been universally accepted that a literary work is entitled to copyright and wherefore, a literary work is entitled to be registered as copyright. In India, the provisions of section 2(o) of the Copyright Act, 1957, defines “literary work” as under :–

” ‘literary work’ includes computer programmes, tables and compilations including computer databases.”

Therefore, “computer software” has been recognized as copyright work is also.

Having regard to the above said definition of “royalty”, we have to consider the contents of software licence agreement entered into by the nonresident with Samsung Electronics and also the respondents Page 25 of 331 in the case represented by Sri Ganesh, learned senior counsel and Sri Aravind Dattar, wherein it is a case of purchase, sale or distribution or otherwise of the off-the-shelf software. It is described as a “software licence agreement”, wherein it is averred that customer accepts an individual, nontransferable and non-exclusive licence to use the licenced software program(s) on the terms and conditions enumerated in the agreement. It is further averred that the customer-Samsung Electronicsshall protect confidential information and shall not remove any copyright, confidentiality or other proprietary rights provided by the nonresident. However, what is granted under the said licence is only a licence to use the software for internal business without having any right for making any alteration or reverse engineering or creating sub-licences. What is transferred under the said licence is the licence to use the software and the copyright continue to be with the non-resident as per the agreement. Even as per the agreement entered into with the other distributors as also the end-user licence agreement, it is clear that the distributor would get exclusive non-transferable licence within the territory for which he is appointed and he has got right to distribute via resellers the software, upon payment of the licences set forth in exhibit A to the agreement only to end users pursuant to a valid Actuate shrink wrap or other actuate licence agreement and except as expressly set forth in the said agreement, distributor may not rent, lease, loan, sell or otherwise distribute the software the documentation or any derivative works based upon the software or documentation in whole or in part. Distributor shall not reverse engineer, de-compile, or otherwise attempt to derive or modem the source code for the software. The distributor shall have no rights to the software other than the rights expressly set forth in the agreement. The distributor shall not mode or copy any part of the software or documentation. The distributor may not use sub-distributors for further distribution of the software and documentation without the prior consent of Actuate. What is charged is the licence fee to be paid by the distributor of the software as enumerated in exhibit A to the agreement. Further, clause 6.01 of the agreement dealing with title states that the distributor acknowledges that actuate and its suppliers retain all right, title and interest in and to the original, and any copies (by whomever produced), of the software or documentation and ownership of all patent copyright, trade mark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. The distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the respondents with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement, as referred to above, and the nonresident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the respective agreement, which authorizes the end user, i.e., the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business as per the terms and conditions of the agreement. Therefore, the contention of the learned senior counsel appearing for the respondents that there is no transfer of copyright or any part thereof under the agreements entered into by the respondent with the nonresident supplier of software cannot be accepted …………

It is well settled that in the absence of any definition of “copyright” in the Income Tax Act or the DTAA with the respective countries, in view of article 3 of the DTAA, reference is to be made to the respective law regarding the definition of “copyright”, namely, Copyright Act, 1957, in India, wherein it is clearly stated that “literary work” includes computer programmes, tables and compilations including computer (databases). Section 16 of the Copyright Act, 1957, states that no personshall be entitled to copyright or any similar right in any work, whether published or unpublished, otherwise than under and in accordance with the provisions of the said Act or of any other law for the time being in force, but nothing in this section shall be construed as abrogating any right or jurisdiction to restrain a breach of trust or confidence. Section 14 of the said Act dealing with the, meaning of “copyright” reads as follows:–

14. Meaning of copyright.–For the purposes of this Act, ‘copyright’ means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely :–

(a) in the case of a literary, dramatic or musical work not being a computer programme, —

(i) to reproduce the work in any material form including the storing of it in any medium by electronic means;

(ii) to issue copies of the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public;

(iv) to make any cinematograph film or sound recording in respect of the work;

(v) to make any translation of the work;

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b) in the case of a computer programme, —

(i) to do any of the acts specified in clause (a);

(ii) to sell or give on commercial rental oil offer for sale or for commercial rental any copy of the computer programme:

……..Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.

(c) in the case of an artistic work,

(i) to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a three dimensional work;

(ii) to communicate the work to the public;

(iii) to issue copies of the work to the public not being copies already in circulation;

(iv) to include the work in any cinematograph film;

(v) to make any adaptation of the work;

(vi) to do in relation to an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (iv);

(d) in the case of a cinematograph film, —

 

 

 

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