ITAT’s Google verdict – Reigniting the Digital Taxation Debate


In a significant ruling, Bangalore ITAT has slapped a tax demand on everyone’s favourite search engine Google India for remitting Rs.1,457cr ad-revenues to Google Ireland (‘GIL’) during AYs 2007-08 to 2012-13, without withholding tax. ITAT held that  payment made by Google India to GIL for granting distribution right of ‘Adwords programme’ is taxable as ‘royalty’ under the domestic law (i.e. Section 9) as well as under the India-Ireland tax treaty. ITAT rejected Google India’s contention that it was mere reseller of advertising space and had no rights in the intellectual property (‘IP’) of the Google transferred to it.   

Interestingly, after taking a deep dive into Google’s technical functioning of the Adwords program, ITAT observed that Google India had access to all personal information and data pertaining to the user of the website in the form of age, gender, eating habits, wearing preferences etc., which it then used for focused targeted marketing. ITAT held that IP of Google vested in the search engine technology, associated software and other features, and hence use of these tools by Google India, clearly fell within the ambit of ‘Royalty’. ITAT ruled that since no tax was deducted by Google India while remitting funds to Google Ireland, it was a0 case of tax evasion. Further, ITAT rejected assessee’s reliance on GE India Technology Centre case and overturned its contention that   payment made to GIL was not the sum chargeable under the provisions of the Act and remarked that assessee should have approached the AO for TDS clarification u/s 195(2).  

Is the ITAT right in construing personal user information as ‘confidential data’ for the purposes of ‘royalty’ taxation? Is TDS non-deduction sufficient to uphold Google's motive of tax avoidance, despite having bonafide belief of ‘no sum chargeable to tax in India’?  What global implications will this ruling have on some of the other multinational companies having digital presence? What is the fate of MNCs chargeability in India, despite not having PE in India? Based on this ruling, will transactions with non-residents always face the rigour of  Sec. 195(2) application, whether or not the payment is chargeable to tax in India? Will this ruling still find relevance in present context where the payment is subject to equalization levy?  

Dinesh Kanabar
CEO, Dhruva Advisors LLP

Characterisation of payments for digital goods and services has always been a contentious issue, especially in the Indian context. We have had a handful of judgments on this so far, including in the cases of Right Florists, Pinstrorm Technologies and Yahoo India. However, the principles applied in these cases were not followed in the Google case, since the Tribunal felt that the facts relating to the working of the AdWords program stood on a different footing. This means that the law on this issue will continue to remain somewhat unsettled until resolved by the higher judiciary.  

The BEPS Report on the Digital Economy had observed that the digital economy was fast becoming the economy itself, and that differentiating between the two could prove difficult, if not impossible. In practice though, these are treated differently, and this often proves disadvantageous to ‘digital’ businesses.  

For example, income streams in technology driven businesses seem to be at a greater risk of being treated as royalties/FTS, even if the services performed are otherwise comparable to those provided in a non-digital context. In the Google case, the fact that technologically advanced tools were used to improve the range, targeting and pricing of advertisements was a crucial factor...

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Girish Vanvari
Partner & Head- Tax, KPMG in India

The Bangalore Tribunal held in favour of tax department and asked Google India to pay tax on remittances to Google Ireland for granting distribution rights of ‘Adwords Program’ which are treated as royalty in nature. The decision will impact the advertising distribution structure as it seems that the Tribunal has gone beyond the scope of the distribution agreement and emphasised on the substance of the transaction which was to facilitate the display and publish an advertisement to the targeted customer with the help of various patented tools and software.

In view of introduction of equalisation levy, one needs to examine the services provided by the foreign company with respect to online advertising, etc. vis-à-vis applicability of equalisation levy. After introduction of equalisation levy, with effect from Assessment Year 2017-18, such income will not be taxed as royalty or business income but it would be subject to equalisation levy.

The Tribunal observed that both the Associated Enterprises are trying to misuse the provision of tax treaty by structuring the transaction with the intention to avoid payment of taxes. In view of General Anti Avoidance Rules (GAAR) provision under the Income-tax Act and India’s commitment to implement Multilateral Instrument (MLI) under the Base Erosion...

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Ketan Dalal
Managing Partner, Katalyst Advisors LLP

Before discussing the technical aspects of the ruling, in my view, this ruling is a classic case of application of archaic tax laws to address modern day business situations, particularly in the context of the digital world. The current definition of Royalty (either under the Act or under the Treaty) does not seem to cover revenues earned for providing specialised services, albeit using complex automated/ robotic processes, but the current ruling in a sense tries to bring such payments within the tax net. 

The Honourable Tribunal has held that the payments made by Google India to Google Ireland in lieu of distribution rights for ad space (by running Google’s “Adwords” program) in the India territory is royalty under the Act as well as the Treaty. The Tribunal has held that the payment entails payment for use of copyrighted information, patented technology, secret process (of determining target audience based on various criteria) etc owned by Google Ireland and used in the Adwords Programme, though the process of placing the ad on the search engine by the advertiser seems to be a highly automated process. In this context, the roping in of such a payment within “patented technology”, “secret formula” etc seems a...

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K R Sekar
Partner & Head, Global Business Tax practice, Deloitte India

The Bangalore Income-tax Appellate Tribunal has ruled that payments made by Google India to Google Ireland are taxable in India. Simply put, Google India ought to have withheld tax on payments to Google Ireland as, according to the revenue authorities this constituted “royalty” income in the hands of Google Ireland. In an elaborate 134- page order, the Bangalore Tribunal has reasoned out its findings. 

Google India, was appointed as a non-exclusive authorized distributor of Adword Programme to the advertisers in India by Google Ireland. Google India also had a separate arm which provided certain support services to overseas entities. The key conclusion that a payment by a advertisement program distributor to the overseas entity will partake the character of royalty was made on the following basis:

-        While the taxpayer provided a detailed explanation as to how the program works, the Bench noted that the taxpayer has not brought any tangible material in the form of a written note.  Hence the Bench has reviewed data available in the public domain on this subject. Based on this, the Bench has made an observation that the advertiser has access to the tools and data which can be accessed through the gateway...

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P V Srinivasan
Corporate Advisor & Former Tax Head, Wipro

The Bangalore ITAT ruling in the case of Google India Limited that the payments made to Google Ireland Limited (GIL) under the Distribution Agreement between the parties brings a new understanding to the scope of “royalty”.   The earlier Kolkata ITAT decision in Right Florists Private Limited is distinguished on the basis that the scope of activities is wider than mere display or exhibiting of advertisements on the website.  Likewise, the earlier Mum ITAT decision in Yahoo India (P) Ltd is also distinguished.  From the ITAT order it appears that there were elements of business income and royalty but the payer did not make an application u/s 195(2) for separating the two streams for arriving at the chargeability.  Possibly, it ought to have been mentioned that the ITAT is not inhibited in splitting of the income chargeable totax in India on account of the payer not making an application u/s 195(2) and the ITAT is at liberty to issue directions in this regard.   The already thin line of difference between access to IPRs and use / right to use of IPRs has narrowed down further, which is expected when services are rendered using high-end technology.    Intricate aspects such as method...

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