9911796707
TMI Blog2017 (10) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... eland Limited, Ireland 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 license to use the software without appreciating the fact that the Appellant is only involved in marketing and distribution of advertisement space to the Indian advertisers and that it is GIL which uses the back end process/ program for processing and displaying the advertisement. Ground 3: 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 advertisement space to the advertisers in India. Ground 4: Erred in confirming that Distribution Agreement cannot be read without the service agreement (ITES agreement) between the Appellant and GIL and the Appellant has been granted right to use intellectual property owned by GIL without appreciating the fact that ITES service agreement is a separate agreement under which the Appellant performs an independent global outsourcing function for GIL for which it receives consideration and is not linked in any manner to the functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9: 12. Erred in upholding validity of initiation of proceedings undre section 201(1) of the Income-tax Act, 1961 for the subject assessment year after the expiry of four years from the end of the relevant financial year. Brief facts 04. The assessee Google India Private Limited (Google India) company registered under the provisions of the Companies Act and wholly subsidiary of Google International LLC, US. Google India is appointed as a non-exclusive authorized distributor of Adword programs to the advertisers in India by Google Ireland. Google is specialized in Internet search engines and related advertising services. Google maintains an index of websites and other online content which is made available through its search engine to anyone with an Internet connection. 05. Under the Google Adword Program Distribution agreement dated 12/12/2005, Google India was granted the marketing and distribution rights of Adword program to the advertisers in India. 06. As per assessee it is engaged in information technology (IT) and IT enabled service (ITES) to its overseas group companies and is also engaged as an non exclusive distributor of the online advertising space under Google Adw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ploitation over the underlying I.P. or software which is entirely owned by Google incorporation and its subsidies. 08. It was submitted by the assessee that the advertisers gets its advertisement uploaded into Adword program, and thereafter it directly logged on the Adword program website owned by Google and follows the various steps to create the Adword account for itself. It is also the assessee's case that the advertisers select the key words, content and presentation related to its ads and places a bid on the online system for the price it is willing to pay overtime its user clicks on its advertisement. One of the steps is the selection of the payment in INR and once the terms and conditions displayed are accepted an assigning contract is entered between the advertiser and Google India (assessee) for sale of ad space. It was further submitted that once the advertisers creates the accounts and upload and advertisement the same automatically gets stored on Adword platform owned by Google on the servers outside the India and the ads are displayed in the manner determined by the programs running on automated platform. The assessee periodically raises the bill on advertisers for ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder passed by The AO, appeals were preferred before the CIT (A). However the CIT (A) vide impugned order had decided the issues against the appellant by treating the amounts payable to GIL as royalty under the Act and under the DTAA. Hence the present appeals were filed by the assessee before us on various grounds mentioned herein above. 10.5 It may be appropriate to mention here that the assessee, had raised the common ground no.1 to 11 in all the six appeals and the ground no.12 was only restricted to two assessment years for 2007-08 and 2008-09. During the course of argument it was pointed out that the assessee had not raised the ground no.11 raised before CIT (A) pertaining to royalty income, if any, is taxable on receipt basis. Therefore, the assessee, in all the appeals had filed the additional ground bearing no.13, before us. We have heard the argument on admissibility of additional ground at this stage from both the sides. In our view the assessee had raised this ground before the CIT (A) as ground no.11 which is clear from the record and the CIT (A) had also recorded the finding on this issue. Moreover this issue is legal in nature and therefore no prejudice would be cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a has access to the processes running on the data centers, based on the distribution rights granted to it by Google Ireland N. Appellant is granted the use or the right to use the process in the Adwords platform for the purpose of marketing and distribution. (Page 49 of the order u/s 201) O. Grant of distribution right also involves use of Industrial, commercial and scientific equipment P. Adwords program, in one way, is also commercial cum scientific equipment and without having access to servers running the Ad Words platform, Google India cannot perform its functions as per the Distribution Agreement. 12. The appellant had challenged the order passed by the AO however the CIT(A) had decided the issues against the assessee and confirmed the withholding tax liability in the hands of the Appellant on the basis that the amount payable by the Appellant to Google Ireland is in the nature royalty under the provisions of the Act as well as under the India-Ireland DTAA. 13. Feeling aggrieved by the order of CIT(A) the assessee challenged the order of lower authorities on the above said grounds. 14. The LD AR for the assessee had made elaborate arguments before us which continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omer situated in the Europe. There is no professional interaction between the distribution team and ITES team since these are separate functions performed independent of each other. (c) The process of review of advertisements is largely automated and run outside India, and the Appellant is involved in reviewing only those Ads which cannot be completely reviewed by the automated system. (d) The function of providing ad policy administration services can be outsourced to another third party company or another company outside of India. That is, this outsourcing function does not need to be located in India. It is mere coincidence that the Appellant has undertaken to perform ITES outsourcing services as a part of its business. Thus, based on the above, we wish to submit that the roles of ITES and the distribution team are different in nature and are not inter related or interdependent. Use of Intellectual Property through ITES agreement The AO has assumed that the right to use the intellectual property granted under ITES agreement was used by the Appellant for the purposes of distribution of ad space. Basis this presumption, the AO has adjudged that the payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In terms of Explanation 2 to section 9(1)(vi), the term 'royalty' means consideration for transfer of all or any rights (including the granting of a license) in respect of use of a patent, invention, model, design, secret formula, process, trademark, similar intellectual property or in relation to imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. In the instant case, as per the 'Google Ad Words Program Distribution Agreement' between the Appellant and Google Ireland: * the Appellant is appointed as a mere non-exclusive distributor of advertisement space to the advertisers in India; * the amount payable to Google Ireland is for purchase of advertisement space under the Ad Words program and is not in relation to any 'transfer of any right' or any 'right to use' any copyright, patent, invention etc.; * the Agreement does not involve any use of patents, invention, model, design, secret formula or process or trademark or similar property by the Appellant Further, all the rights title, and interest in and to all information and data, including user data (i.e., data provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Intellectual Property' refers to property which is the essentially the product of human intellect. The present non-exclusive right to distribute the advertisement space is a commercial right and not an intellectual property rights. In any event it is submitted that no payment is made by the Appellant to Google Ireland for grant of such right. Further the definition of the tax royalty in Article 12(5) of the India Ireland DTAA is narrower in scope than the definition in Explanation 2 as inter alia the words "similar property" has not to be found. (ii) Grant of distribution rights in Adwords Program involves transfer of right in copyright The AO observed that Google Ireland has granted the Appellant the right to use of the Ad Words program, which is a computer software without parting with the copyright, thus granting a license to use the software. The AO and the CIT(A) have factually erred in stating that the Appellant gets the right to use the Ad Words program. Drawing reference to the description of the Ad Words Program and the role played by the Appellant during the sale of the ad space, it is submitted that the Appellant neither receives any right nor access to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ad space in India. There has been no specific transfer of any patent/ trademark to the Appellant in this regard. Any reseller or distributor to perform its obligations as a reseller needs to use the brand of the product being sold. For example, if Raymond appoints a person as its authorised distributor, such person may identify himself as an authorised reseller of Raymond products through signage board. This does not mean that payments by the reseller to Raymond for purchase of products is royalty. It is submitted that mere use of name of brand for procuring ad contracts would not amount to use of trademark and, hence, even assuming that a view is taken that a part of the price paid by the Appellant to Google Ireland can be characterized as a payment for the alleged use (which is denied) such income would not be liable to tax as royalty under the provisions of the Act. Reliance is placed on the judgements referred to in para 3.3.5 in Section II (in relation to submissions for AY 2008-09 i.e. ITA No 374 of 2013) wherein it has been held that incidental use of trademark should not over shadow the main purpose of entering into the agreement which was marketing and publicity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision in this regard. The AO has again disregarded the fact that review of advertisements as per the local law requirements and Google Editorial policies is undertaken by the ITES division and not by the Ad Words division. Further, the AO observed that the training is given to Google India for the purpose of imparting of information concerning technical, commercial or scientific knowledge, experience or skill as specified in clause (iv) of Explanation 2 to Section 9(l)(vi) of the Act. In this regard, it is pertinent to note that the term information' has not been defined under the Act. Used independently, the word 'information' may convey a very broad meaning. The term 'information' as used in clause (iv) would draw its meaning in the light of the meaning of the term as used in the main body of the section. The term 'information' for section 9(1)(vi) would allude to the concept of know-how. The various types of knowledge, experience or skill referred to in the definition would refer to know-how being made available in light of the original essence of the term royalty. Circular No. 202 dated 05 July 1976 issued by the CBDT which explains the amb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the nature of 'royalty' even under Explanation 2(iva) to section 9(l)(vi) of the Act. - No part of the server is devoted and earmarked for the Appellant; - "Use" or "right to use" equipment connotes that the Appellant has the possession and control over the equipment and the equipment is virtually at its disposal. The Appellant does not exercise any possessory rights in relation to the server. - The Appellant is not concerned with the infrastructure/ server installed by Google Ireland or the components embedded in it. The operation, control and maintenance of the server, solely rests with Google Ireland. - The Appellant does not have any right to modify or deal with the server which only vests with Google Ireland. Further, the CIT(A) has confirmed that the Appellant has not gained any right to use any scientific equipment as captured in clause (iv) and as submitted earlier the revenue has not filed any appeal in this regard. 2.3.3 Amount payable to Google Ireland is in the nature of business profits The Appellant places reliance on its submissions in Para 3.3.4 of Section II of this submission (i.e. Submission for AY 2008-09 in ITA No 374 of 2013) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gle Ireland, the distributor is Google India and the end-user is the advertiser. The Assessing Officer by considering the judgment of the Madras High Court in the case of Consim Inidia Pvt Ltd Vs Google India Pvt Ltd dated 30/9/2010 explained the concept of search engine and explained how search engine operate. The AO considering the provisions of section 9(1)(vi) r.w Explanation-2 of the Act read with DTAA concluded that the payment by Google India to Google Ireland is in the nature of royalty. A reference is invited to Google Adword program distribution agreement considered by the AO at page 15 of the order. 18. As per clause 2.6 of the Adword program distribution agreement, the distributor (Google India) will provide after sales services to advertisers in accordance with the broad instructions, training standards of Google. Clause 3.1 of the Adword agreement provides for Google Ireland to utilise the space through the Adword's program for distribution by Google India to advertisers as set forth. Clause 3.4 provides for minimum level of service as specified in Exhibit -C. Clause 7 of the Adword agreement provides for agreement to mutual nondisclosure agreement which is Exhib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use the valuable business asset of Google Ireland which includes intellectual property in the products and services offered by Google Ireland. 19. DR submitted that Intellectual Property Rights of Google resides in search engine technology, associated software and other features, hence right to use IPR for performing various activities like accepting advertisements and providing after sale services would clearly fall within the ambit of "Royalty". 20. As per the terms of the distribution agreement, Google India has been authorized to sell or offer for sale the Adword program to the advertisers which is nothing but granting of licence to Google India to sell or offer for sale to advertisers. By acquiring the distribution and marketing rights, Google India has been granted licence in respect of Adword's program, licensed to sell or offer for sale certain rights to the advertisers and such rights or the rights to use the Adword program. Therefore the license to use the Adword program by the copyright holder is licensed to market and sell the Adword program. The license to use the Adword program (search engine) which is copyrighted by Google would amount to right to use t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any ambiguity would amount to license to use IP and the consideration constitutes Royalty chargeable under section 195 of the Act. 25. Under the distribution agreement the assessee has been granted distribution rights involving transfer of rights in process. The entire search engine technology on which license has been granted to Google India for selling advertisement space to the advertisers is a "process". The search engine technology is an IP. Hence the license to use the "process" being IP and consequential payment is "royalty". 26. The distribution agreement was also entered for transfer of know-how in view of clause 3.1 of the distribution agreement wherein the Google India has been provided access to internal tool for the purpose of performing the obligations under the Adword agreement. The statements recorded from the persons concerned of the Google India reproduced at page 53 and 54 of the AO's order would make it clear that marketing,distribution and maintenance of Adword program is the responsibility of Google India involving knowledge of tools and training on its usage, knowledge of trademark policy, add content policy. Such knowledge has been imported through e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat exploitation of search engine which is an IPR and the said IPR being used by the Google India as tools of trade and therefore is royalty and therefore liable for tax under the Act as well as DTAA. 30. The learned Advocate sought to distinguish the judgment relied upon by the assessee in the matter of Right Florist limited is not applicable to the facts and circumstances of the present case. In the case relied on by the assessee, the advertiser has only placed advertisement in the search engine and no right in the IPR was conferred on the advertiser. In such circumstances it has been held that payment by the advertiser does not amount to royalty. Whereas in the present case the Google India has been provided access to the IPR and Google India has used IPR as tool of the trade for generation of income without which, it would have been an infringement of the copyright owned/retained by the Google Ireland (licensor). Similarly for High-Power Committee report dated 16/12/1999 and Tax Treaty dated 1/2/2001, it was submitted that payment made by the advertiser directly to the owner of the search engine would not amount to royalty. Rebuttals against the arguments of DR 31. Ld AR in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Reseller agreement, the Appellant is required to provide aftersales support. In terms of Exhibit C, the advertisers are to contact the Appellant for support and the terms in the Exhibit only specify the minimum levels of service to be adhered to by the Appellant whilst communicating with the customers. The terms in the Exhibit cannot be read de hors the main agreement to conclude that Exhibit C is linked to the ITES agreement and neither does a reading of the Exhibit suggest that, even remotely. What is envisaged under the said Exhibit is only that the Appellant responds to all routine queries of customers without GIL having to do the same. Typically, sales and billing related questions are to be responded to the by the Appellant. In case of advertiser issues or technical issues, GIL would have to respond to the customer queries. Evidently, no right to use any IPs is granted to the Appellant. Further ld AR submitted that the reliance on clause 3 of the NDA by ld DR is also of no avail. Clauses containing protection of confidential information are generic to most agreements and this clause for protection per se cannot establish that there is a use of right to use any IPs. The Conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat when the said term or phrase is searched for by any user on the Google Search Engine, the Advertisement ("Ad") of the advertiser may also get displayed on the search results page in addition to the organic search results, though separately identified as 'Sponsored Links' or 'Ads'. A user thus gets an opportunity to make an informed decision as to which website he wants to explore. Businesses that use Adwords can create relevant ads using keywords or phrases matching with the terms or phrases ('search query') that people who search the Web using the Google search engine. Multiple advertisers can provide/register the same Keyword and Google does not "sell" these Keywords nor does it allow only one advertiser to exclusively use a specific Keyword and restrict others. These Keywords are merely textual characters or strings that are used to algorithmically trigger advertisements through the "fresh flower delivery" as one keyword in the Adwords campaign. When some user searches Google using the search query with phrase "fresh flower delivery" or a similar term, the advertiser's advertisement might appear next to Google organic search results. The main components of Ad Rank are bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and time zone along with the currency that the advertiser wishes to use (Please refer Page 213 of Paper book Volume. This part of the account set-up process is common for Advertisers across locations and not specific to India based customers. It is only after India is selected as the billing address and Indian Rupee as a billing currency is selected that Google India gets involved. c. Step 3 (Selection of Advertisement Campaign Settings) Pursuant to updating the above mentioned preferences, the Advertiser moves to the next step where details of the Advertising campaign would need to be keyed in by the Advertiser. The following information is sought from the Advertiser to create an Advertisement campaign * Locations to be targeted in the advertisement campaign * Language in which the advertisement should be published * Bidding and budget: The Advertiser has an option to submit a bid amount for a specific keyword that he wishes to use. The Advertiser also provides its budget rate/cost per click to display the advertisement and offer to pay to Google when the surfer/user click on the advertiser's website link. The advertiser can also fix the maximum amount of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ram terms & conditions and Google Ireland Limited is bound to place th advertisement Subject to ad review process, pursuant to the obligation cast on Google Ireland Limited under the Amended and Restated Google Adwords Program Distribution Agreement dated 12 December 2005 (referred to as 'Distribution Agreement'). When the Advertiser accepts the Advertising Program Terms, the said terms bind both the Advertiser as well as Google India Private Limited into a contract. Google Ireland would provide the relevant information contained in the Advertiser account to Google India, as specified in Clause 5.1 of the 'Distribution Agreement' to enable Google India to collate the necessary information for its purpose and to prepare and share the requisite monthly reports that may need to furnish under Clause 5.2 of the Distribution Agreement. 4. How are Ads uploaded on Google Adwords account? Process to upload Ads on Google Adwords account is as under: * Sign in to your Adwords account at https://Adwords. google.com click the Campaigns tab, and then click the name of the display campaign you want to work on. * On the "+ AD" menu", click Image ad. * In the "Choose how to create your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that appx 94% of the Ads are automatically reviewed by the automated system outside of India. Appx 6% of the Ads come for manual review performed. The role simply involves reviewing the Ads sent for manual review and specifying whether Ads uploaded by the Advertiser is in accordance with the Google policies/ guidelines. The Ad review outsourcing function is carried out for all global customers including India. Ad review teams are based in various jurisdictions like India, Dublin, China, Japan, US, Korea etc. Ad review team consists of Google employees and third party vendor employees who are graduates from various colleges. Google India performs outsourced ad review services under an ITES agreement with GIL for which Google India is separately compensated by GIL. These services mainly involve IT-enabled data processing work. The said data i.e. Ads is placed by the advertisers (originating from various countries) and routed to Google India through a workflow based on language and time zone from GIL. Process flow chart in relation to Ad review is enclosed as Exhibit 1. 6. How are Ads placed on Google website Ads are transmitted through internet from advertiser to data c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne experts who have been certified by Google to manage Adwords accounts. Companies who qualify for Partner status earn the Google Partner or Premier Google Partner badge. The badge shows that a company has demonstrated Adwords skill and expertise, met Adwords spend requirements, delivered agency and client revenue growth, and sustained and grown their client base. 38. Beside filling these written submissions, no other literature or books or documents were filed by the assessee or by the Revenue for the benefit of the Bench so that the Bench can appreciate the working of Google Adword and Google analytics, as the parties have failed to bring any tangible material except in the form of written note mentioned herein above, the Bench, had gone through the books available in public domain on Google Adword and Google analytics and also gone through the website of the Google and the Adword links therein. On the basis of the above, our understanding of how the Google Adword functions is as under: i. The Google Adword gives an opportunity to the advertiser to reach its target audience with the advertising messages. The text based ads are displayed on Google search results however the Goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant ads to the people (b) target to the select audience. (c) It causes minimum advertising expenses and (d) it is only payable when people are engaged. It gives the access to the advertiser the tools of the Adword program which can be accessed through the gateway of Google India / appellant. Through the use of patented technology with the help of appellant gate way, Adword platform gives the advertiser to choose the preferred time, season of the year when the ads are to be shown.. In fact after advertiser accept the terms, thereafter assessee gives the advertiser accesses to the various tools of Adwards program. The assessee in its written submissions had accepted this in the following manner : When contract is entered into by Google India Private Limited, advertiser is bound by all Adwords program terms & conditions and Google Ireland Limited is bound to place the advertisement Subject to ad review process, pursuant to the obligation cast on Google Ireland Limited under the Amended and Restated Google Adwords Program Distribution Agreement dated 12 December 2005 (referred to as 'Distribution Agreement'). When the Advertiser accepts the Advertising Program Terms, the said term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnology tool. It also suggests the traffic forecast of the list of key words, multiple key word placed to get new key word ideas. Thus, the key words or planner which will display a list of additional key word suggestion. Based on initial key words, the advertiser enters and the tools shows various key word suggestions automatically grouped into different ad groups. This is only possible as Appellant permits the use of information, data and key planner to the advertisers which is patent and protected software of the Google. The key word planner also suggests the suitability of the key words which are useful in the particular month of the year. The advertiser is able to plan its campaign for optimization or for the purpose of getting more impression and conversion based on keyword planner. Based on this impression and forecast, the advertiser is able to bid on the key words. 44. The display of the advertisement based on the key words, is dependent upon the auction price paid by the advertiser. The key word bid at highest rate by the advertiser would be shown at the top of the search results and therefore, is likely to fetch more visibility and attention.. With the help of tools o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fective improvement in CTR (Click Through Rate) i.e. the website would be saved from unnecessary visit of the non-convertible or non-interested visitors. Similarly the same modus operandi can be used for negative phrase and negative exact match. 48. Likewise if the advertiser is selling in leather cover for iphone then the advertiser may not like that the person who is looking for leather cover for another brand may visit the website of the advertiser. Therefore, the negative words can be used to avoid to improve the CTR, with the help of these tools. By using these tools, Appellant had been giving various suggestions to the advertiser to include various key words. 49. The Google Adword program is also having Google analytics which is connected with the Google Adword programme and which is a potential patented tool to target the key words and the negative key words. This is the USP of the Google Adword program, which is maintaining thousands of different key words used by the people to search the website and based on this user behavior, the Google analytics suggests the appropriate key words to be used by the advertiser for encouraging the traffic on the website. Similarly the Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ults into return for investment. There are various other features of the Adword program which shows that the program is having embedded tools to display the advertisement of the advertiser to the targeted consumers. 52. On the basis of above, in our view the agreement between the assessee and the Google Ireland was not in the nature of providing the space for advertisement and display the advertisement to the consumers. As per our understanding if the agreement was merely for sale and marketing for providing the space for advertisement, then in that eventuality, it should be treated as an agreement akin to an agreement for advertisement in newspaper / television. 53. If we look into the advertisement module of Adword program stated herein above, then we will come to an irresistible conclusion that it is not merely an agreement to provide the advertisement space but is an agreement for facilitating the display and publishing of an advertisement to the targeted customer. If we look into the submission made by the learned AR, it is clear that the advertiser, selects some key words and on the basis of key words, the advertisement is displayed on the website or along with the search r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he targeted consumers. 54. As recorded herein above the Google is working on various platforms and the said platforms uses various customer data for targeted ads campaign. The files of these customer data are shared for running the campaign by the Appellant with the advertisers. The popular ad campaigns of Google is "like- alike ad", "customeraudience ads", etc where details of like-set of users are provided by the Appellant for running the targeted campaign. Similarly target marketing campaigns are done with the help of customer audience (where the client of advertiser is having its own data and wish to advertise to them). Like, if ice cream vendor wanted to go for launching of new ice cream product, it may approach Appellant /Google to share data with similar user profile or liking for ice-cream, the Appellant in possession of such data shares this data with the advertiser - ice-cream produce manufacturer. Based on this ice cream manufacturer formulates its marketing campaign with the help of Appellant and other channel partners . 55. In our view IP of Google vests in the search engine technology, associated software and other features, and hence use of these tools for performi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of managing its own affairs can afford to provide these services to the advertiser through the route of agreement dt.01.04.2004, but the rendition of services by the appellant to the advertisers in India are obligations under the agreement dt.12.12.2005 and not under the agreement dt.01.04.2004. The substance of the agreements is to be given precedence over the form of the agreements. Clause 6 of the service agreement dt.01/4/2004 provides for confidential information, access and use of confidential information and further provides not to disclose confidential information, ownership and return of confidential information and injunctive relief. 59. In our view without exercising its right under this agreement, (1.4.2004) the obligation of the Appellant under the agreement dated 12/12/2005 and under the appel lant-advertiser agreements cannot be discharged. Therefore the AO was right in relying on this agreement dated 1/4/2004 for the purposes of bringing the case under Royal ty, as per the provisions of section 9(1)(vi) of the Act read with DTAA. As per clause 8 of the agreement dt.12.12.2005 mentioned herein above, the distributor is under an obligation to maintain the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogram would be incapable of functioning as the advertisement would be shown to various locations, persons and targeted consumers. In our view, there is no sale of space, as concluded hereinabove rather it is a continuous targeted advertisement campaign to the targeted and focused consumer in a particular language to a particular region with the help of digital data and other information with respect to the person browsing the search engine or visiting the website. Further, the argument of selling the space is not available to the assessee and we are of the opinion that it is not merely selling the space but it is rendering the services by making available the technology permitted by the Google to the appellant and permitting the same to be used by advertiser. For purpose of targeted focused advertisement campaign by using the gateway of Google India / assessee. Thus the activities clearly fall within the ambit of 'Royalty' as mentioned in Income Tax Act and under DTAA. 61. In our view though Appellant claimed to be separately earning revenue from ITES segment, under a separate outsourcing service agreement with Google Ireland which is independent of the distribution of advertising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore in our view amount was being paid by the Assessee to Google Ireland for the use of patent invention, model, design, secret formula, process, etc . 66. It was further contended by the learned AR that there is no transfer of the trademark or copy right of Google to the assessee and therefore it will not fall within the purview of the royalty. It was submitted by the learned AR that there is no specific transfer of any patent trademark to the appellant and the use of Google trademark and other brand features referred in the distribution agreement are merely incidental to unable the appellant to distribute the ad space in India. 67. It was submitted by Assessee that mere use of name of brand for procuring ad contracts would not amount to use of trademark and, hence, even assuming that a part of the price paid by the Appellant to Google Ireland can be characterized as a payment for the alleged use for trade mark such income would not be liable to tax as royalty under the provisions of the Act . For this purposes the Appellant relied upon financial and submitted that no part of the said sum of Rs. 119.82 crores was the payment for use of trademark, as the Appellant was only hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the use of the mark and intellectual property rights benefitted Jaypee, which paid for them, is entirely erroneous. Jaypee permitted use, as it were, was for a limited duration and of an extremely restricted manner; this is contained in the definition of emitted use' in the ALA.As event promoter and host Jaypee had to publicize the F] Grand Prix Championship. Therefore, it was bound to use the F] marks, logos and devices; however, it was not authorized to use the marks on any merchandise or service offered by it. This condition, in the opinion of the court, places the matter beyond the pale of controversy; the use of the trademarks were purely incidental. The conclusion of the AAR is therefore, incorrect. The answer to the question is that the amounts paid to FOWC by Jaypee were not 'royalty' within the meaning of article 13 of the DTAA, as they were business income and could not be brought to tax under the head of 'royalty.' 68. On the other hand ld Counsel for revenue had submitted that content ion of the assessee is not correct, as the use of trade mark is not incidental and hence amount to royalty. The assessee has acquired a right under the distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end that Assessee would attract lot of advertisers for its advertisement space on search engine and web site . Appellant was getting lot of engagement and clientage only on account of Google trademark . It may not be possible to have this kind of business inflow of advertisements without using the trade mark of Google . The distribution agreement had not made any provision for making the payment for the Google brand features and had only made provision for making the lumpsum payment under the agreement. As per Exhibit- A. Therefore in our view, the payments made by the assessee under the agreement was not only for marking and promoting the Adword programmes but was also for the use of Google brand features.. Needless to add that the said Google brand features were used by the appellant as marketing tool for promoting and advertising the advertisement space, which is main activity of Assessee and is not incidental activities .The use of trademark for advertising marketing and booking in the case of Hotel Shereton (Supra) as well as in the case of Formula 1 were incidental activities of the assessee therein as the main activities in the cases were providing Hotel Rooms and organizing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75. In this regard it will suffice to say that we had already concluded in the foregoing paragraphs that though Adwords Programme along with associated videos are available in public domain but how this programme functions, for targeted marketing campaign, promoting advertisements are only possible with the use of secret formula, confidential customer data only . This secret process of targeting the customers, is not in public domain therefore in our view also the assessing officer was right when it concluded that the appellant was using the secret process for marketing promoting displaying of the advertisement. 76. It was submitted by ld AR that revenue earned from advertisement is not liable to be taxed as royalty or fees for technical services and is required to be taxed as business profit and in absence of any PE, remittance made by GI to assessee cannot be taxed in India. In this regard it was submitted OECD had set up a Technical Advisory Group ('TAG') to examine the issues arising in characterization of ecommerce payments. The TAG has categorized e-commerce transactions into 28 types including internet Advertising. The TAG has concluded that the payments arising fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ITAT in the case of eBay International AG (140 ITD 20) has upheld the reliance placed on the aforesaid reports while holding that the income received by the assessee in the said case towards operation of its website is business income. Relevant extracts are reproduced below for your reference: "13. The ld. CIT(A) has also referred to High Powered Committee (HPC) on "Electronic Commerce Taxation" constituted by the Central Board of Direct Taxes, which has stated in its report that such amount would be in the nature of payment for business activities. He also referred to The Technical Advisory Group (TAG) formed by OECD, which, vide its report on Tax Treaty Characterized Issues Arising From E-Commerce issued in February, 2001, has also opined that revenue earned by operating online facility are in the nature of business profits falling under Article 7 of the Treaty. These findings recorded by the id. CIT(A) have remained uncontroverted by the id. DR. 14. In view of the above discussion, there remains no doubt whatsoever that the fee received by the assessee can't be described as 'Fee for technical services', but is in the nature of 'Business profits'. In ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Yahoo India P. Ltd, (supra) to prove that the issue of online advertisement had been considered in all the decisions and it was held that the payment made by the advertiser to the website owner was business profit and in the absence of any business connection and PE in India and not the Royalty. Therefore, the said payment made to the service provider were not chargeable in India. 82.1 Per contra, the Ld. DR sought to distinguish the facts of the present case and of the decisions referred in the preceding paragraph. 82.2 We have gone through the above said decisions. In para 8 of Yahoo India (supra), coordinate bench held as under : "8. As already noted by us, the payment made by assessee in the present case to Yahoo Holdings (Hong Kong) Ltd., was for services rendered for uploading and display of the banner advertisement of the Department of Tourism of India on its portal. The banner advertisement hosting services did not involve use or right to use by the assessee any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo Holdings (Hong Kong) Ltd., to assessee company. Uploading and display of banner advertisement on its portal was ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the banner advertisement of the Department of Tourism of India on its portal. The banner advertisement hosting services did not involve use or right to use by the assessee any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo Holdings (Hong Kong) Ltd. to assessee company. Uploading and display of banner advertisement on its portal was entirely the responsibility of Yahoo Holdings (Hong Kong) Ltd. and assessee company was only required to provide the banner Ad to Yahoo Holdings (Hong Kong) Ltd. for uploading the same on its portal. Assessee thus had no right to access the portal of Yahoo Holdings (Hong Kong) Ltd. and there is nothing to show any positive act of utilization or employment of the portal of Yahoo Holdings (Hong Kong) Ltd. by the assessee company. Having regard to all these facts of the case and keeping in view the decision of the Authority of Advance Rulings in the case of Isro Satellite Centre 307 ITR 59 and Dell International Services (India) (P.) Ltd. 305 ITR 37, we are of the view that the payment made by assessee to Yahoo Holdings (Hong Kong) Ltd. for the services rendered for uploading and display of the banner advertisem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the case before us. As far as applicability of Section 9(1)(vi) is concerned, coordinate benches, in the cases of Pinstorm Technologies (P.) Ltd. (supra) and Yahoo India (P.) Ltd. (supra), have dealt with the same and, for the detailed reasons set out in these erudite orders - extracts from which have been reproduced earlier in this order, concluded that the provisions of Section 9(1)(vi) cannot be invoked. We are in considered and respectful agreement with the views so expressed by our distinguished colleagues. .................................... (emphasis supplied by us ) 82.3. After going through all the above cited decisions of the coordinate bench, we are unable to persuade ourselves to agree with the reasoning for treating the payment made by the advertisers as a business profit and not as a royalty. As in our opinion, the detailed working of the Adword programme of the appellant and GIL clearly shows that the appellant is having the right to access not only to the patented technology but also to the customer data, information (like telephone number, user behaviors, region, gender , language, colour, photographs, place of visit, mobile device used, time spent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment year 1990-91 was barred by limitation having been initiated beyond reasonable period of 4 years. In paras.18, 19, 20 of the judgment, it has been held as under: "18. Insofar as the Income-tax Act is concerned, our attention has been drawn to section 153(1)(a) thereof which prescribes the time-limit for completing the assessment, which is two years from the end of the assessment year in which the income was first assessable. It is well-known that the assessment year follows the previous year and, therefore, the timelimit would be three years from the end of the financial year. This seems to be a reasonable period as accepted under section 153 of the Act, though for completion of assessment proceedings. The provisions of re-assessment are under sections 147 and 148 of the Act and they are on a completely different footing and, therefore, do not merit consideration for the purposes of this case. 19. Even though the period of three years would be a reasonable period as prescribed by section 153 of the Act for completion of proceedings, we have been told that the Income-tax Appellate Tribunal has, in a series of decisions, some of which have been mentioned in the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year (in cases where the amount involved is more than Rs. 1 lakh) coupled with Section 153(2) of the Act providing one year time for passing the order of assessment, reassessement or recomputation in which the notice under Section 148 was served, the same would amount to seven years from the end of the financial year and he thus contends that reasonable period of limitation under Section 201 of the Act should also be seven years from the end of the relevant financial year. 26. Sri K V Aravind, learned counsel for the Revenue has submitted that sub-section (1A) of Section 201 of the Act provides for payment of interest. The subsection, as it stood at the relevant time, prior to 1.7.2010, reads as under: "(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that subsection does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at 'one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within 4 years from the end of the financial year i.e. for the assessment year 2007-08, notice should have been issued by the AO on or before 31/03/2011 and for the assessment year 2008-09 by 31/03/2012. As the notices were not issued by the AO before the said date and were admittedly issued on 20/11/2012, initiation of proceedings by the AO was beyond the period of limitation and therefore, the notice was barred by limitation and therefore, proceedings initiated on the basis of the above said notices were require to be dropped. 89. Per contra, learned Standing Counsel has drawn our attention to the provisions of section 201 as on the date of issuance of notice i.e. 20/11/2012. It was submitted that section 201(3) was available on the statute book as on 20/11/2012 to the following effect: "201(3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of- (i) two years from the end of the financial year in which the statement is filed in a case where the statement referred to in section 200 has been filed; (ii) six years fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itiation of proceedings against non-resident for period of 4 years, in view of the fact that same logic and reasoning is required to be followed by the Tribunal by laying down the reasonable period of limitation for initiation of proceedings against non-resident entity. In the written submissions it was submitted by the DR as under: "1. Section 201(3) of the Act has been amended by providing Limitation only in respect of payments made to the resident in India. In the Circular Explaining the Finance Act, it has been specifically referred that the payments made to the nonresidents, no limitation is applicable. In view of the specific provision providing Limitation only to the payments made to the resident in India and not providing any limitation to the payments made to the non- r es ident , no l imi tat ion can be prescribed or read into the section. 2) Without prejudice to the above contention if the contention of the assessee is to be accepted that in the absence of any limitation being provided under the Act, reasonable time limit has to be read into the section as held by various high courts in the case of NHK Japan, Bharath Hotels, the limitation provided for payments to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into force for resident only, it should not implicitly apply to non-resident as it was only restricted to resident. It was submitted that principle of literal interpretation is required to be invoked for the purpose of interpreting this kind of provisions and this tribunal cannot supply the word which is not intended to be supplied by the legislature. Lastly, our attention was drawn to the judgment passed by the Hon'ble Delhi High Court in the case of Bharti Airtel vs. Union of India (76 taxman.com.256) and special attention was drawn to paras.11,12, 13, 14 & 17. 94. We heard rival submissions and perused material on record available. In our view, before we deal with issue of limitation, it would be relevant to reproduce the reasoning given by the Special Bench in the case of Mahindra & Mahindra (supra) which is as under: 14.2 After considering the rival submissions in the light of the material placed before us and the precedents relied upon it is obvious that sub-sections (1) and (1A) of section 201 do not prescribe any time limit for the initiation of the proceedings or the passing of the order. We find that for the most of the actions under the Act, the particular time limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the former. The Hon'ble Rajasthan High Court in Arihant Tiles & Marbles (P.) Ltd. v. ITO [2007] 295 ITR 148/166 Taxman 274 has held that the interpretation of any expression used in the context of one statute is not be automatically imported while interpreting similar expression in another statute. Similar view has been earlier expressed by the Hon'ble Supreme Court in CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174/103 Taxman 503. 95. In para.14.2 (supra in Mahindra and Mahindra) it has been held by the Special Bench that in sub-section (1) and (1A) of section 201, no limit for initiation of proceeding or passing of the order is prescribed. Thereafter, the Special Bench noticed the period of limitation provided for issuance of notice u/s 143(2), 149, 153, 154, 263 and thereafter it was held that certainty in taxing provision is hallmark of any proceeding and it was noticed that "it is beyond our apprehension that how in absence of time limit provided in the section, action can be taken in indefinite period. It is impermissible to argue that no time limit be granted to revenue." 96. Thus it is clear from reading of the abovementioned paragraph that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antified or prescribed like a period of limitation. 73. In Uttam Namdeo Mahale (supra), the judgment delivered by Three Judge Bench, Court has said as under: "Mr. Bhasme, learned counsel for the appellant, contends that in the absence of fixation of the rule of limitation, the power can be exercised within a reasonable time and in the absence of such prescription of limitation, the power to enforce the order is vitiated by error of law. He places reliance on the decisions in State of Gujarat v. Patil Raghav Natha; Ram Chand v. Union of India and Mohd. Kavi Mohamad Amin v. Fatmabai Ibrahim. We find no force in the contention. It is seen that the order of rejectment against the applicant has become final. Section 21 of the Mamlatdar's Court Act does not prescribe any limitation within which the order needs to be executed. In the absence of any specific limitation provided there under, necessary implication is that the general law of limitation provided in the Limitation Act (Act 2 of 1963) stands excluded. The Division Bench, therefore, has rightly held that no limitation has been prescribed and it can be executed at any time, especially when the law of limitation for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Special Bench in the matter of Mahindra and Mahindra (supra), in case relating to pre amendment assessment year. In our opinion, after the amendment of law same logic and limitation is required to be applied for non-resident well as resident thus treating non-resident at par with resident. In other words, period of imitation for initiation of proceedings for resident as well as non-resident u/s 201 should be 6 years from the end of the financial year. Further the payer is required to maintain books of account and deduct TDS for both resident as well as non-resident. No Separate treatment had been envisaged under the Act, for the payer paying to a non-resident. 100. Further, the non-resident payee cannot be worse off than resident payee under the Income Tax Act and under the provisions of DTAA. Law provides non-discrimination of non- resident with resident and requires equal treatment of non-resident with resident under the provisions of DTAA. It cannot be said that a non resident would be given special and beneficial treatment in comparison to the resident or treated unequally by providing unlimited time to initiate proceedings under section 201 of the Act. In our opinion, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Section 201(1) only talks about person who is required to deduct any sum for the payment made. Therefore, borrowing the same reasoning of the special bench, whereby it held that the same period of limitation should be applied to resident as well as non-resident, we are of the considered view that limitation for initiation of proceedings for nonresident payee should be 6 years instead of no-limitation.as is the limitation for resident-payee. In view of the above ground No.12 in assessment year 2007-08 deserves to be dismissed and accordingly we dismiss the same. Ground no -13 -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 ("AO") / 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 in the hands of non-resident is taxable only on receipt basis under the said Article 12 of India-Ireland DTAA. 104. In this regard AO held that under Section 9(1)(vi) of the Act, royalty is charged on accrual basis and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broadcasting any patent, trade mark, design or model plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft or for information concerning industrial, commercial or scientific experience." 109. Accordingly it was submitted so far as taxability of Royalty is concerned, twin conditions of "arising in India" as also the "payment" are to be satisfied. The Ld. AR relies upon the order passed by the Mumbai ITAT in National Organic Chemical Industries Lid (96 TTJ 765). 110. Further, it was also submitted the term 'royalty' in Article 12(3a) of the India-Ireland DTAA is defined to mean payment of any kind received as a consideration for the use or right to use copyright, patent, trademark, etc. A plain reading of the above phrase means that an amount can be characterized as royalty under the DTAA only on payment and not merely on accrual. In other words, until the amount is paid, the amount accrued or due cannot partake the character of royalty. 111. If Article 12(1) is read in juxtaposition with Article 12(3)(a) which defines royalty, in the context of India as source country, provision woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Liability to withhold taxes in the hands of the payer on payment basis and not on accrual basis. For that purposes our attention was drawn to Section 195(1) to the following effect : "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest under referred to in section 194LB or section 194LC) or section 194LD or any sum chargeable under the provisions of this 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 thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate in force:" 118. It is submitted that for the purpose of determining whether an amount is chargeable to tax in the hands of a non-resident, the provisions of the relevant DTAA would also need to be factored. It is submitted that the charge under the DTAA on royalty is triggered only when the amount is paid and not when the amount is accrued or even due. Accordingly, royalty receivable by Google Ireland would be chargeable to tax under the India - Ireland ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed at the point of time when account of the non-resident was credited, in view of the fact that, under the related DTAA, tax liability can only arise at the point of a subsequent event i.e. payment. When income embedded in the payment is not taxable at that point of time of crediting the amount, there cannot be any occasion for deduction of withholding the tax on such income. It is only at the point of time when payment takes place, that the income embedded in payment becomes taxable under the DTAA as also under the domestic law, but then rate of tax prescribed in domestic law being lower, vis-à-vis the rate prescribed in the domestic law, the assessee has the option of adopting the lower rate under the domestic law." 119. Therefore, it was submitted withholding liability in the hands of the Appellant would arise only on payments made and not on the amounts payable to Google Ireland. Therefore, as section 195 of the Act casts an obligation on the payer to withhold tax, only when the same is chargeable to tax in India, withholding of tax, if any, would be required only at the time of actual remittance and not on the credit in the books of accounts. Hence in the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in g an d distribution services for Adword program. It is undisputed fact that the assessee is wholly-owned subs idiary of Google. In view of the clos e connection between the Google India and the Google Ireland, the payments to be received by the assessee provides IT servics and IT enabled services can be adjusted towards payment towards marketing and distribution services for Adword program. The fact that the assessee has not reflected the amounts paid to Google Ireland in the P&L account would further justify the above aspect. 121.4 In the above context if the language employed in article 12 (3) (a) of the DTAA specifically with the words "means payment of any kind received" would mean the receipt of amount by virtue of adjustments/set off in the books of accounts of the as s es s ee. Fur ther "payment of any kind received" has to be read as any mode of payment ei ther by book adjustment / credit or actual payment. Any other meaning would read the language redundant in view of the provisions of section 4, 5, 9, 90 and 195 of the Act. 121.5 It is further submitted that the DTAA does not determine the method of accounting and the year of taxability in respect of parties to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the decision of this Hon'ble Tribunal in the case of Vodafone South Ltd, and the law laid down by the Supreme Court in the case of GE India explaining the scope of section 195(1) and applicability of other charging provisions like section 4, 5, 9 and 90 (2) of the Act, what is to be considered at the time of payment by the assessee is only regarding the chargeability under the Act and the assessee can not be permitted to take shelter under the DTAA as the benefit of DTAA is conferred only on the nonresident recipient. 121.11. The various judgements relied on by the assessee in the case of Siemens, Booz Allen and Saira Asia are not applicable to the present case. Further the scope of section 90(2) of the Act and the effect of charging provisions under section 4, 5 and 9 have not been examined. Further the above judgements have not deal with the entitlement of the payer to claim protection under section 90(2) of the Act. Particularly and as admitted by the non-resident, the non- resident assessee is following Mercantile system of accounting and hence the word "received" in the DTAA cannot be read to mean the method of accounting. In contrary, the same has to read as classifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be taxed in the relevant assessment at the rates in force. The term 'total income' is defined in Section 5 to include all income which accrues or arises or deemed to accrue or arise or is received or deemed to be received. However, application of this provision is subject to other provisions of this Act including Section 90(2) of the Act. Section 90(2) provides that the provisions of the Act may be applied to the extent beneficial to the Assessee. Accordingly, for the purpose of applying Section 195(1), the 'sum chargeable' under section 4 would need to be determined having regard to the provisions of the relevant DTAA. 122.1 It was submitted by Ld AR that DR reliance on the decisions of the Hon'ble Supreme Court in the cases of Transmission Corporation of A.P Ltd (supra) and GE India Technologies (P) Ltd (supra) while submitting that the provisions of DTAA cannot be applied by the payer while determining the amounts chargeable to tax in India is incorrect. Ld AR submitted that applicability Section 195 of the Act may be evaluated in three different cases as illustrated below: (i) Where the total of the sum paid to non-resident is chargeable to tax in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation reasonably necessary for computation and / or confirmation of the payments due to Google India for such period. Google Ireland will pay each such invoice no later than ninety (90) days after its receipt. All payments due under this Agreement shall be paid in accordance with policies established by Google Ireland from time to time. 123.1. Similarly as per agreement date 12.12.2005. As per clause (4), payments received and taxes are required to be made in the following manner: 4. Billing, Payment, Receipt and Taxes. The payment terms contained in the Exhibit A shall govern the payment in connection with this Agreement Parties will provide an invoice for all payments due under this Agreement. Distributor shall be responsible for complying with all foreign exchange procedures, including tax clearance, as necessary for Distributor to pay Google lawfully the payments under this Agreement. "Distributor shall take the necessary steps to obtain the necessary tax exemptions lawfully for its payments to Google. Payments to Google shall be subject to applicable taxes, distributor Shall advise Google immediately of any actual or proposed change in local law or regulation that would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al trued-up on the basis of the duly audited accounts of Google. Even as per clause 4 of the Service agreement, the Google Ireland will pay the invoices raised by Google India (assessee) within 90 days of receipt of invoice. On the basis of the above, there is no doubt that the payment is due and payable by the assessee to GIL within the year it became due. The same principle is applicable for distribution fees (royalty) as well as for services rendered by the assessee to GIL. The assessee, in its books of account has debited the amount of Rs. 1198261982/- for AY 2008-09 towards the fees for distribution services to GIL. 123.4. As per section 195, there is an obligation on the part of the payer to deduct the TDS, in case the assessee is making payment to a non-resident. The argument that the payment made by the assessee to GIL is not being the sum chargeable under the provisions of the Act, is not available for the payer to be raised in the present proceedings. The necessary safe-guards are provided by the Act in the form of Section 195(2) which clearly provides that in case the assessee is having any doubt about the chargeability to tax of the payment, then the assessee may make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern of the assessee as to which method is being following by the GIL yet, GIL as mentioned herein above, is following the mercantile method of accounting, therefore, the chargeability of tax would be in the year when it is accrued and not in the year when it was received. 123.11. The argument of chargeability to tax in the hands of nonresident on receipt basis, is also required to be rejected as the scope and ambit of DTAA (Double Taxation Avoidance Agreement) as per section 90 of the Act is to grant relief from double taxation, to promote mutual economic relations, trade and investment, for exchange of information for prevention of evasion or avoidance of income-tax chargeable under this Act or in other country, or for recovery of income-tax under this Act or under corresponding laws. In the opinion of Bench, the DTAA can only provide the characterization of the income, the country where it is to be paid and at what rate the said income is to be taxed. However, it is not within the scope of the DTAA to provide when (i.e year of accrual or receipt), the income is required to be charged. 123.12 In our view the literal rule of interpretation is not required to be followed and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of the accrual (mercantile method) and not on receipt (cash basis). Therefore, once field is occupied by clause 2 of Article 12, the royalty paid by the assessee to GIL is taxable as per Indian law. 123.15. In our view, the assessee has used the information, patented technology, etc., from GIL which in the opinion of the bench, is royalty and therefore, as per the mandate of Article 12(2), the royalty is to be taxed in the contracting state (India) in accordance with the laws of India. Further the laws of India provide taxability of royalty on the basis of the accrual (mercantile method) and not on receipt (cash basis). In our view once the field is occupied by clause 2 of Article 12, then the same is required to be applied and enforced. 123.16. The reliance placed by the Ld. AR on paragraphs 7 and 8 of the decision of the coordinate bench in the matter of Pizza Hut International LLC (supra) is to support its case, is out of place and is therefore required to be rejected. For arriving at the conclusion that the royalty is taxable on cash basis, the coordinate bench neither gone into the method of account nor considered Article 12(2) of DTAA which provides that the royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax for any length of time by mutual understanding of the parties, particularly when both the parties are under an obligation to pay and receive the payment for the services rendered and for distribution fees (royalty). Therefore, we have no hesitation to hold that the judgment relied upon by the assessee is not applicable to the facts and circumstances of the case, rather it supports the case of the Revenue.. 123.21 Ld AR had submitted that for the purpose of determining whether an amount is chargeable to tax in the hands of a non-resident, the provisions of the relevant DTAA would also need to be factored and royalty would triggered only when the amount is paid and not when the amount is accrued or even due accordingly, the liability to withhold under section 195 would arise only when the sum becomes chargeable in the hands of Google Ireland i.e. when the amount is paid. In support the ld AR relied upon the order of coordinate bench in the matter of Saira Asia Interiors Pvt Ltd (ITA No.673/Ahd/2014) Referred herein above. 123.22 In our view the finding recorded by the coordinate bench was on the facts before it, however said order is not applicable to the present set of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2).Once the Hon'ble Supreme Court has held that the person responsible to deduct the tax at source on the payment to a nonresident, which is chargeable to tax in India, then there is no scope for further interference. 124 The Ld. AR contradicted the submissions of theLd. DR whereby it was submitted by him that section 195 the provisions of 4, 5, 9 and 90 (2) and not with the provisions of the DTAA by referring to following paragraph in the matter of GE India Technology Centre P. Ltd (supra). "While deciding the scope of s. 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of s. 195. Hence, apart from s. 9(1), ss.4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying TDS provisions" 125 In our opinion, the scope and ambit of Section 195(2) is clear and unambiguous, which mandates the AO to decide whether any payment( Royalty ) paid by the appellant to GIL is chargeable to Tax on cash / receipt basis or not. However, to trigger 195(2), the payer (assessee) was duty-bound to make an application with the AO. Unless an application is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the treaties and domestic law co-exists for administering the taxation of any assessee. The findings of the Hon'ble Court explaining the scope and role of the DTAA is worth to note here, it read as under: "Double tax treaties are international agreements, their creation and consequences determined according to the rules contained in the Vienna Convention on the Law of Treaties, 1969 (VCLT). The conclusion of a treaty/convention is preceded by negotiations. States intending to conclude a treaty are represented by the appropriate level of executive, political or diplomatic expertise according to individual practices and judgment of the participant states. There are several steps in the negotiations phase eventually leading to conclusion of the treaty. Treaties or conventions are thus instruments signaling sovereign political choices negotiated between States. The efficacy of a treaty over domestic law turns upon either State - specific conventions operating to govern the sovereign practices, or where there is a written constitution provisions of that charter. 'Double taxation treaty rules do not "authorize" or "allocate" jurisdiction to tax to the contracting State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Article-4. He also pointed that DTAA is not a parallel Code and not a complete Code. It only allocates taxing rights. The Hon'ble Andhra Pradesh High Court has specifically observed that treaty rules do not force or "allocate jurisdiction" to tax to the contracting state, nor attribute the "right to tax". According to the Hon'ble Court it is recognized by public international law and constitutional law, states have the original jurisdiction to tax as an attribute of sovereignty, the rule of double taxation treaties is to establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are accepted. The learned Counsel for the Revenue has not raked up any new controversy in his submissions. He has just highlighted the procedural limitations of the inquiry required to be conducted u/s 195 r.w.s 201. To our mind onus is upon the assessee to determine that payments made by it do not involve the element of income. The role of the Assessing Officer while conducting the inquiry u/s 201 would be to demolish the formation of this opinion at the end of the assessee. The Assessing Officer has to indicate that the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
