TMI Blog2017 (10) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a major conversation and campaign, which results 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. 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 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 result as and when the customer selects the key words relatable to the advertisement. The module as suggested does not merely work by providing the space in the Google search engine, but it works only with the help of various patented tools and software. As we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 space to the advertisers in India, we are not in agreement with the same. Under the advertisement distribution agreement, it is the prime responsibility of the Appellant to give post and prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee i.e Resident or non-resident, Law abhor vacuum and uncertainty. There is no classification given under section 201. 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. Withholding of tax - sec 195 applicability - Held that:- 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 to the AO, there would not be any occasion for him to determine the chargeability of payment of royalty to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying 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 function of sale of advertisement space to the Indian advertisers being performed by the Appellant. Ground, 5: Erred in confirming that .the distribution rights granted are itself IP rights covered by similar property used in See 9(1)(vi) of the Act after holding that as per the distribution agreement GIL has agreed to provide advertisement space to the Appellant through Adwords program for distribution to the Indian Advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational 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 Adword Program to various advertisers in India. It is the case of the assessee that the Google India entered into an agreement with Google Ireland Limited ( herein after called GIL) for resale of online advertising space under the advertisers program to advertisers in India. For the purpose of sales and marketing the space work wise flow of activities of the assessee and advertiser were as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 advertising spend incurred by the advertiser on clicks through the users. 09. In a nutshell, it was the contention of the assessee that it is merely a reseller of advertisement space. The assessee only performs market related activities to promote the sales of advertisement space. No right or intellectual properties were transferred by Google to the assessee or to the adverti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 caused to the Revenue if this ground is permitted to be raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 for four days and also filed detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not in the nature of 'Royalty' 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty. From the definitions of intellectual property, it may be inferred that the term 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other brand features being referred to in the Distribution Agreement are mere incidental to enable the Appellant to distribute the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO observed that Google Ireland is obliged to train Google India for marketing and distribution of Ad Words Program. Further, the AO also draws unwarranted reference to the ITES division 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 def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive use which excludes multiple users. In the instant case, the amount payable by the Appellant to Google Ireland is not for the use or for right to use any scientific equipment. Hence, based on the following facts, the same is 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued as Google India failed to comply with provisions of Section 195 of the Act. In para-3, page 5 of the order, the AO has recorded that the distribution Adword program involves three parties viz, the licensor, the reseller and the advertiser. The licensor is Google 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o distribution agreement. The obligations under the distribution agreement and the service agreement would make it clear that both the documents cannot be separated from each other. For the purpose of marketing and distribution activities Google India is granted the right 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se trademarks and brand features. The grant of right to use trademarks and brand features is for the purpose of selling the advertisement space and the license to use the IP being tool of the trade for the Google India, right to use Google trademarks and other brand features without 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Ltd (ITAT Bangalore bench) and ABB FZ-LCC (2017) 83 Taxman.com 86 (Bangalore -ITAT), the amount paid towards license to use IPR is the nature of royalty and chargeable under the Act under section 195 of the Act. 29. On the basis of the above, it was summarized learned Advocate for the Revenue that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ireland cannot be regarded as royalty, the payments made by the distributor for the same ad space cannot be characterised as royalty. 35. Ld AR submitted that the minimum levels of service specified in Exhibit C cast obligations on GIL as a well as on the Appellant to render the services. In terms of Clause 2.6 of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvertiser to create, change and monitor the performance of sponsored links to set a budget for advertising and only pay when people click the ads. This, the advertiser can do by providing the text of the advertisement and by providing/registering a search term or phrase or a keyword which is relevant to the advertiser s website, so that 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertiser would be first required to create a website having details of their products / services. b. Step 2 (Setting up of Adwords Account basis Location, Time zone and Currency) Advertiser will then be required to set up Adwords account ('https://Adwords.google.com). Once the email address is provided, the advertiser is required to select his location 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, I agree to the above Terms and Conditions . Where the Advertiser selects Indian Rupee as the billing currency (basis the country selected in Step 2) the Adwords program will automatically direct the Advertiser to the Advertising Program Terms relevant to Google India Private Limited. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processed through the automated system is sent to service providers in different jurisdictions (ITES team) for review/ conformity with the Google Editorial Guidelines. The purpose of the ITES outsourcing service engagement is to review the Ads specified for manual review (originating from various countries) for conformance with Google s editorial policy/guidelines. These Ads are reviewed in accordance with Google policies/ guidelines. It is submitted 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uracy and relevance. 8. How can advertiser manage its Adwords account? Advertiser needs to manage Adwords account on its own or it can seek services of Google certified Partners/ marketing agencies. Google certified Partners/ marketing agencies help with a range of services, including managing advertisers Adwords account or developing website, help save time and maximize return on investment. Google Certified Partners are agencies, marketing professionals, and online 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on behavioral targeting of servers along with website surfers . Another mode of advertisement by the Google Adword program is a social advertising program where the advertisements pop up at Face book, Twitter and other social media with the help of keywords or user profile. In the case of the social advertisement, the advertisement campaign is targeted based on the geography, category of people, area of interest etc. 40. The Google Adword has various benefits namely it shows (a) relevant 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose, Appellant / Google has provided the optimization and technique to the advertiser. Google (appellant as service provider under the agreement) uses its expertise and the information within its domain and control, to suggest the key words based on the recent marketing material and need of the advertiser. The appellant also suggests periodical review of the website home page, product and services which can be bundled together. The key word planner is a part of the appellant / Google technology 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 optim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o buy the apartment, then the appellant can help him by putting negative words of rent in the key-word search. therefore the only person who is searching for service apartment would be landing on to the advertiser s web site and the person who is searching on rented service apartment would not be visiting the web site of advertiser i.e advertisement would not be displayed to him in the searched results . Thus with the help of this technique of not showing the particular key word there would be effective 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 Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. . Like for example, if a doctor is free during the noon time of every Friday, then the ad company can be strategized for showing his ability during the morning / noon time of Friday or on the evening time of Thursday. Assessee with the help of Google analytics gives the accurate impression of persons visiting the advertisement and also provide how many are converted. The Google analytics optimize the impression, based on the user behavior and this needs to be a major conversation and campaign, which results 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be required. Moreover in our view, the space on search engines / websites are readily available and therefore there was no occasion to market and sell it. Any person with the help of buying the static IP addresses can upload the data/ advertisement in the endless web world. Therefore, in our view, the agreement entered between the assessee and the Google India is not merely for providing the advertisement space but was in the nature of providing the services for displaying and promoting of the advertisement to the 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 launc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meet the queries of various clients of Google Ireland worldwide and for that purposes the access to IPRS, confidential information and NDAs are there. 58. However as per the agreement dt.12.12.2005, the primary responsibility is on the Appellant to provide after or before sale services, after having access to user data, IPRS, secret formula, process, software and confidential information of Google Ireland, in its own capacity under the agreement dt.12.12.2005 and not under the agreement dt.01.04.2004. The appellant, for the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of advertisement on a particular place / site. Even otherwise, if we consider that the appellant is selling advertisement space then, at which location/ web place, the said ad- space was sold by the appellant to the advertiser,. It is the case of the assessee that the ads are stored in the servers situated outside India. In our view, the appellant has not sold the storage space on the server outside India nor it has sold the identified / demarcated ad on the web site / search engine. Further if the ad-space is sold, then the Adword program 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 availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rol of the Google, which is maintained by the appellant as well and the entire Adwords Programme works around customer data, users profile etc. It is inconceivable to run the Google / appellant marketing programme without having access to the customer data. Therefore the argument of the assessee that it was only using customer data, IPR etc., for rendering the services relating to ITES is incorrect. In our view, the conclusion of the authorities below that the use of the confidential clause and confidential data by the appellant was correct. Therefore 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76 taxmann.com 6 (Delhi HC): There is no doubt that the main object of the RPC and the relevant provisions of the ALA was not the permission to use the trademarks, but granting and designating Jaypee as the promoter of the event and laying out the rights of the parties, particularly FO WC as regards the event, the spaces to be made available to it exclusively, the sole and exclusive rights over all event related activities, the right to exploit them commercially, etc. The use of the mark on the tickets sold by Jaypee was only incidental. The AAR's findings that 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Adword programme, subject to the condition mentioned therein. If we look into the activities of the assessee, for the purpose marketing and distribution of Adword programme, then, it is not possible for the appellant to undertake these activities, without the use of the Google, trademark and other brand features. Further, for marketing and distribution of Google Adword programme, the use of the Google trademark is essential and pivotal for doing the business of the advertisement on the search engine and the websites. In the absence of the Google trademark, it is difficult to comprehend 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 agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adwords Programme cannot be equated to a secret process since information relating to the program is freely available to the public on Google's website along with explanatory videos regarding the same. Hence, Google Ad Words program cannot be considered a secret process and hence, it does not constitute process within the meaning of the term as defined in Clause (i). 74. On the other hand ld Counsel for revenue had submitted that content ion of the assessee is not correct as the appellant is using the secret formula/ process for marketing and advertising the advertising programme of the advertisers . 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e members of the Committee have agreed with the view taken, including members from the CBDT .Further it was submitted that coordinate bench in the matter of Right Florist (supra) has agreed with the views of the High Powered Committee and stated as under: 13.1n the light of the above discussions, even as per the High Power Committee, a website per Se, which is the only form of Google's presence in India - so far as test of primary meaning i.e. basic rule PE is concerned, cannot be a permanent establishment under the domestic law. We are I considered agreement with the views of the HPC on this issue 78. Further coordinate Mumbai bench of 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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant, therefore decision of coordinate bench in the case of Right Florist Private Limited is not applicable to the facts and circumstances of the present case. In the present case the Google India has been provided access to the IPR, Google Brand features, secret process embedded in Adwords Programme as tool of the trade for generation of income. Therefore the payment made by the appellant to Google Ireland is royalty and not the business profit and therefore chargeable to tax in India. 82. Ld. AR further relied upon para 21 of the decision of the coordinate bench in Right Florist Private Limited, (supra),Para 6 of Pinstorm Technologies P. Ltd (supra) and para 8 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisement of the Department of Tourism of India on its use by the assessee any industrial, commercial or scientific equipment and no such Isro Satellite Centre Dell International Services (India) (P.) Ltd. advertisement of the Department of Tourism of India on its portal was not in the nature of royalty but the same was in the nature of business profit and in the our opinion, the payment so made cannot be disallowed by invoking the provisions Similarly, in para 21 of the decision in Right Florist (supra), it was 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 entirely the responsibility of Yahoo Holdings (Hong Kong) Ltd. and assessee company was only required to provide t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India, etc shall be deemed to accrue or arise in India. However, as far as the impugned receipts are concerned, neither it is the case of the Assessing Officer nor has it been pointed out to us as to how these receipts have arise on account of any business connection in India. There is nothing on record do demonstrate or suggest that the online advertising revenues generated in India were supported by, serviced by or connected with any entity based in India. On these facts, Section 9(1)(i) cannot have any application in the matter. Section 9(1)(ii), (iii), (iv) and (v) deal with the incomes in the nature of salaries, dividend and interest etc, and therefore, these deeming fictions are not applicable on the facts 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r giving details of the proceedings which took place before the AO, in respect of ground NO.12 for assessment years 2007-08 and 2008-09, it was contended by the learned counsel for the assessee that 8/02/2013 The Revenue issued another show cause notice asking the assessee to furnish following information 15/2/2013 Assessee filed reply page 139 22/2/2013 The AO passed order u/s 201(1) and 201(1A) of the IT Act for assessment years 2006-07 to 2012-13. the notice issued for declaring assessee in default was barred by limitation as held by the Hon ble Delhi High Court in CIT vs. NHK Japan Broadcasting Corporation (305 ITR 137) wherein it was held that initiation of proceedings u/s 201 against the assessee in respect 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act provides for time for completion of assessments and reassessments. Sub-section (1) of the said Section provides for assessment to be completed within two years from the end of the assessment year and one year from the end of the financial year in which the return was filed. He relies on sub-section (2) of Section 153 which provides that no order of assessment, reassessment or recomputation shall be made under Section 147 after expiry of one year from the end of the financial year in which notice under Section 148 was served. According to him, Section 147 of the Act would apply for computing the reasonable period and not Section 153(1) of the Act, and since notice under Section 148 could be served up to six years from the end of the relevant assessment year (in cases where the amount involved is more than ₹ 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the period of deposit of tax by the Recipient. 87. Our attention was also drawn to the judgment of the Special Bench of Tribunal in the case of Mahindra Mahindra Ltd., vs. DCIT (30 SOT 374) Our attention was drawn to paras.14.1, 14.2, 17.1, 17.5, 17.10, 17.10 and 17.14. Further Our attention was also drawn to the judgment passed by the Hon ble AP High Court in the case of CIT vs. Electronic Instruments Ltd. (371 ITR 314). 88. On the basis of the judgments referred to above, it was submitted by the AR for the assessee that initiation of proceedings commenced from the issue of show cause notice dated 20/11/2012 for the assessment years 2007-08 and 2008-09. However, in light of law laid down by the aforesaid judgments, notice should have been issued by the AO 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as applicable on said date and therefore, the Special Bench has applied the limitation as provided u/s 143(2), 149, 153, 154 and 263 to the proceedings under section 201 of the Act. The special bench after detailed examination in para.14.2, in the case Mahindra Mahindra has came to the conclusion that, as there is no limitation provided under un-amended section 201, therefore, period of 4 years will be the reasonable period for initiation of proceedings. Further it was held that the period of completion of proceedings shall be one year form the end of the relevant financial year. 92. On the basis of above it was submitted by the learned Standing Counsel that the reasoning as given by the Special Bench, Hon ble jurisdictional High Court as well as by other High Courts is no more available for initiation 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 amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee that in the absence of any limitation, reasonable time limit has to be read into the section is to be accepted, applying the same analogy as held by the various courts relied upon by the assessee and considered by the Delhi High Court, the period of six years provided by the statute to the payments ma1e to resident in India under section 201(3) of the Act would be equally applicable to the payments made to the nonresident's. If any limitation other than six years is read into the section in respect of payments to non-resident, it would amount to discrimination among the payments to residents and the nonresident. 93. In rebuttal, learned counsel for the assessee submitted that prior to amendment, there was no statutory period for initiation of proceedings against the non-resident. Once the amendment came 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 at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to take action even after 30, 40 or 50 years. The canons of limitation are ordinarily provided expressly in the Act and in their absence, they are to be impliedly inferred by taking into consideration the scheme of the relevant provisions. The ld. DR has relied on some cases for suggesting that no time limit be laid down by the Tribunal for the purposes of passing order under section 201(1) or (1A). In our opinion before applying the ratio of any judgment, it is imperative to look into text and the context in which it is rendered. It is equally important to bear in mind the relevant provision in the background of which such judgment was rendered. It is not permissible to pick up a case from one enactment and insist for the application of the ratiodecidendi of that case to an altogether different legislation, which has no resemblance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay tax and as a last resort they have sought to exercise power under Section 201(1) and 201(1A) against Assessee. 72. The view taken by Delhi High Court that period of limitation of four years, as applicable for making Assessment under Section 147, should be made applicable for exercising power under Section 201(1) and 201(1A), we find it difficult to subscribe inasmuch as we do not impose a fixed time and prescribe a period of limitation, which has not been prescribed by Legislature in its wisdom. Such legislative action, by way of judicial precedent, in our view, would not be appropriate exercise of judicial review under Article 226 of Constitution. As we have already discussed above, even Supreme Court says that if time period is not prescribed for exercise of power, a reasonable time would depend upon the facts of each case and cannot be quantified 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 reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or initiation of proceedings on the analogy and principle mentioned in section 147, 148, 153 etc prior to amendment in law. However there are contrary judgments in favour of the revenue post amendment which does not provide any limitation for initiation of proceedings u/s.201 of the Act. 99. In view thereof, there is conflict of judgments of various courts. One set of judgment are in favour of the assessee and the other set of judgments are in favour of the Revenue. There is no direct judgment after the amendment of Section 201, by the jurisdictional High Court which deals with the issue of initiation of proceedings under the amended provision of 201. In the absence of any binding judgment by the Hon ble jurisdictional High Court, we are bound to adopt the same logic as upheld by the jurisdictional High Court, by treating the resident and the non-resident at par after relying upon the decision 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 reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Allahabad High Court judgments (supra), if the payee is non-resident then, it will amount to discrimination against the nonresident as the proceedings may be initiated against the resident within four years and there is no limitation for initiation of proceedings against the non-resident. Therefore, the arguments of both the assessee as well as the Revenue cannot be accepted. If we accept the argument of one it would tantamount to discriminating either the resident or the non-resident, which is not permissible in the eyes of law. 102. The assessee / payer in the eyes of law whether making payment to resident or non-resident under the provisions of section 201, constitutes one class only. Accordingly, the same period of limitation is required to be applied equally for payee i.e Resident or non-resident, Law abhor vacuum and uncertainty. 103. There is no classification given under section 201. 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it was submitted that assuming amount payable to Google Ireland is in the nature of 'royalty', then in terms of Article 12 of the India-Ireland DTAA, income in the nature of royalty is chargeable to tax in the hands of the nonresident only on receipt basis. 108. Our attention is drawn to Article 12 of the India-Ireland DTAA: 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State... 3. ( a) The term royalties as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes for radio or television 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 indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o placed on a recent decision of the Hon'ble Bombay High Court ruling in the case of Siemens Aktiengesellschaft ITA No. 124 of 2010. The Hon'ble High Court was dealing with Article 12 of India Germany DTAA and held that the assessment of Royalty or fees for technical services should be made in the year in which the amounts are received and not otherwise. 115. The Ld. AR submits in the case of Booz. Allen Hamilton (India) Ltd (ITA No. 4505/Mum/2003) is also relevant in the present context. The Hon'ble ITAT, relying on the case of Siemens Aktiengesellschaft (supra) ,and keeping in view the language employed in DTAA, held that the amounts receivable by the nonresident from its agent in India could not be brought to tax in India during the year of credit since the same had not been paid by the agent to the said entities. 116. The Ld. AR further relies upon Johnson Johnson (ITA No. 7865/Mum/2010) and CSC Technology Singapore Pte Ltd (supra). 117. The Ld. AR submitted that 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 followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force (Emphasis, by underling supplied by us). When income embedded in a payment is not taxable under the Income Tax Act, 1961, the tax withholding liability does not get triggered at all. 10. We may also a deal yet another argument in favour of the stand of the revenue to the effect that if tax liability of the non-resident is to computed on the basis of domestic law anyway, which permits taxation of royalties at the point of accrual, the tax withholding should have taken place at the point of time when royalties accrued i.e. when the account of the non-resident was credited. However, we are unable to see any legal merits in this plea because what is material is the tax liability of income embedded in the related payment as at the point of time when event triggering tax withholding liability takes place, i.e. crediting the amount or paying the amount. When the income embedded in the payment is not liable to be 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that amount is chargeable in the hands of the Google Ireland on receipt basis is misplaced. 121.2 If the language of definition of royalty under the DTAA is read Article 12(3)(a) with Ireland, the wordings the term royalties as used in this article means payment of any kind received as consideration for the use------- would clearly and unambiguously makes it clear that payment received as consideration for use would alone be considered as royalty. The words payments of any kind received as a consideration for the use of' has to be read together and it would only mean the classification of the income and not the method of accounting. Hence the contention of the assessee is misplaced. 121.3 It is submitted that the assessee is providing IT services and IT enabled services to Google Ireland in addition to marketing and distribution services for the adverts program. The assessee will be receiving amounts from IT services and IT enabled services from Google Ireland. The assessee will pay Go o gl e I r e l and in v i ew o f ma r k e t in g an d distribution services for Adword program. It is undisputed fact that the assessee is wholly-owned subs idiary of Goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contemplated under the DTAA. In the absence of any material or enquiry by the assessee, the assessee cannot jump to the conc lus ion tha t the amount i s not chargeable under the DTAA. 121.8 The contention of the assessee that receipt in the hands of Google Ireland is liable to be taxed on cash basis is completely baseless for the reason that the Google Ireland itself has filed return of income for the Assessment Year 2007-08 and 2008-09 and has admitted the Mercantile system of accounting being followed. Copies enclosed for ready reference and consideration. 121.9 The coordinate bench of this Hon'ble Tribunal in the case of Vodafone South Ltd at para-36, 37 has examined the scope of applicability of the DTAA and has been held that applicability of the DTAA is not automatic. It is further held by this Hon'ble Tribunal that the only onus upon the assessee is to determine that the payments made by it did do not involve the element of income chargeable under the Act and the provisions of DTAA would not automatically attract in defence of the payer. 121.10. In view of the decision of this Hon ble Tribunal in the case of Vodafone South Ltd, and the law laid down by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned assessing officer. In the absence of any such exercise on behalf of the non-resident, the contention of the assessee is baseless and liable to be rejected. 121. 1 3 . If the terms of the payment as agreed between the parties is examined it is clear that on periodic intervals the amounts are liable to be paid. In view of the above, the contention contrary that amount is taxable in the hands of the nonresident on receipt basis is baseless. 121.14. The ld Counsel for revenue relid upon following judgments a Transmission corporation of AX Ltd ANR v Commissioner of Income-tax (239 ITR 587(SC)): b. GE India Technology Centre (P) LTD. vs Commissioner of Income-tax ANR (327 ITR 0456 (SC)) c. Commissioner of Income-tax v Eli Lilly Co. (India) (P.) Ltd 223 CTR (SC) 20 . d. d. Vodafone South Ltd. v. Deputy Director of Income-tax (International Taxation) (44 ITR(T) 330 (Bang ITAT) e. Palam Gas Service v. CIT: Rebuttal against the submissions of the DR 122. Ld AR that Section 4(1) is a charging provision and it lays down that the total income of the assessee should be taxed in the relevant assessment at the rates in force. The term 'total income& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of GE India Technologies (P) Ltd (supra). Further Ld AR submitted that decision of the Supreme Court in Palam Gas is in a completely different context and cannot be relied on to submit that 'received' should be interpreted as 'receivable'. 122.5. Ld AR submitted that the AO proposed to apply the India Ireland DTAA to determine the rate of withholding and has not disputed on the applicability of the treaty on this issue. Discussion and Finding : 123 . As per service agreement dated dt.01.04.2014, payment is required to be made by the GIL with 90 days after it receipt the invoice from the Assessee : Payment : 4.1 As sale compensation for the performance of the services, Google Ireland, or any of the affiliates, on behalf of Google Ireland, will pay Google India an amount calculated as specified in Exhibit A hereto ( Service Fees ). Google India will invoice Google Ireland on a periodic basis for the services Fee due with respect to services performed. Each invoice shall be accompanied by a report providing an accounting of all services provided by Google India during the payment period; such all information reasonably necessary for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Google an amount equal to the excess of : ( A) Revenue earned by Distributor and recognized in accordance with accounting standard in the books of account of Distributor pursuant to this Agreement. ( B) (i) Expenses incurred under and recorded on the books of account of Distributor in pursuant to this Agreement; and ( ii) The Specified Percentage of Expenses. XXXX 6. Payment of fees : 6.1 Distributor shall make payments at mutually agreed intervals during the year and make the final trued-up payment on the basis of duly audited accounts to Google. 6.2 Payments by Distributor to Google shall be in the currency specified by Google. 6.3 Documentation: Google shall provide such documentation as may be required by distributor to evidence the fees for its records, compliances and audit. 6.4. All fees and payments may be subject to Indian tax laws or tax rules defined under various tax laws or under specific DTAAs (Double Taxation Avoidance Agreements) as may be applicable. 123.3. From the conjoint reading of the above two provisions it is abundantly clear that the distribution fees (Royalty) is payable during the year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer. Moreover, the assessee cannot claim that the royalty is chargeable to tax in the hands of the non-resident on receipt basis as the assessee has no access to the accounting method followed by GIL. 123.7 The Ld. Standing Counsel for the Revenue had filed the copy of the return of income for AY 2008-09 where the GIL had mentioned against the column Method of accounting employed in the previous year Merc (Mercantile). For the ready reference we are herewith reproducing the first page and sixth page of ITR 6 of AY 2008-09. 127.8 Thus it is clear that GIL was following the mercantile method of accounting and not the cash method of accounting. As per the mercantile method of accounting, the GIL should have shown the distribution fees (royalty) on accrual basis and not on receipt basis. Therefore the argument of chargeability of royalty in the hands of non-resident (GIL), on receipt basis is required to be rejected. 123.10 There are only two methods of accounting prevalent in the world, i.e., mercantile method and cash method. In mercantile method, the taxability is done on accrual basis, whereas in cash method, the taxability is done on receipt basis. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r service is utilized by the recipient. In the present case, the distribution fees was credited as accrued by the assessee after utilizing the benefit under the distribution agreement to the account of GIL, Therefore, the same is chargeable to tax when it was credited to the account of GIL and the appellant is duty-bound to deduct TDS at the time of crediting it to the account of GIL. The appellant will not suffer any loss on this account if the payment is made to the GIL after deducting the tax. In any case if the GIL proves that the amount is not required to be taxed in India then the GIL can claim refund in the assessment proceedings. 123.14. The assessee in the present case 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. Clause (2) of Article 12 of DTAA clearly provides as under : 12(2) : However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State . Further the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is why, despite the duty of the assessee to deduct the tax at the time of payment to GIL, no tax was deducted nor any permission was sought for paying the amount. If the permission for paying the amount is taken immediately after entering into agreement, then this argument of not making the payment as late as May, 2014 would not have been available to the assessee. This is a clear design to skip the liability by both the assessee as well as GIL by having mutual understanding. 123.20 Therefore in our view the Ld. DR was right in his submission that the assessee deliberately not sought permission for making the payment to GIL and is taking chance to avoid taxes within the four corners of IT Act. The judgment referred by the assessee in the case of Pizza Hut International LLC (supra) and CSC Technology (supra), mentioned about the misuse and deliberate attempt to delay the payment of taxes when the transaction is between the AE. In the case on hand conduct of the two parties, which are associated enterprises (AEs) clearly show that both are trying to misuse the provision of DTAA by structuring the transaction with the intention to avoid payment of taxes. The same is not permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Ld. AR that the judgment passed by the Hon ble Apex Court in the case of Transmission Corporation of AP (Supra) is applicable to the facts is not correct. In fact, Section 195 deals with a situation where any person is making the payment or part of the payment, to a non-resident which is chargeable to tax under the provision of the Act. In case any person responsible for making the payment is having any doubt about chargeability to tax under the provisions of the Act, then an application is to be made u/s.195(2) of the Act. There was no occasion for the Hon ble Supreme Court to deal with the argument that the sum paid to non-resident is not chargeable to tax in India. In our view, once the Hon ble Supreme Court has dealt and decided the issue of payment by any person to a non-resident for a sum chargeable to tax in India, the negative also stood automatically adjudicated by the Hon ble court. As held hereinabove, the question of chargeability of the sum paid by the assessee to the GIL would appropriately be decided in the proceedings of GIL and the assessee cannot shirk from its duty to deduct the tax at the time of making the payment. If Appellant was having any doubt abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payee is there to demonstrate that he is not chargeable under the DTAA either by himself or through a payer. The payee never comes u/s 195 (3) of the I.T. Act. It is not available on the record that payee had ever informed the payer about the holding of their tax residency certificate and also whether they want the benefit of DTAA. According to the learned Counsel for the Revenue the tax residency certificate given by the sovereign of the State or State(s) would satisfy that payee is a taxable entity in that state and it is entitled for the benefit of DTAA, if the provisions are more beneficial than the domestic law. Contrary to this contentions, it was pointed out by the learned Counsel for the assessee that the assessee has complied with the procedural requirement contemplated under Rule 37BB of the ITR 1962. It had submitted the details of the payee relevant clauses of the DTAA. According to him the entire literatures, commentaries and judicial decisions run counter to the arguments of the Revenue. The judgment of the Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holdings (supra), was brought to our notice during the course of hearing. The Hon'ble Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xation avoidance treaty rules merely alter the legal consequences derived from the tax laws of the contracting states, either by excluding application of provisions of the domestic tax law where these apply or by obliging one or both of the concerned States to allow a credit against their domestic tax for taxes paid in the other State. Klaus Wogel (Supra) explains that rules or double taxation are thus not conflict rules, similar to that in private international law but are rules of limitation of law, comparable to those of international administrative law'. 37. According to the learned Counsel for the Revenue, the treaty is not to be applied automatically. Section 90(2) of the Income Tax Act mandates application of treaty and it is applicable in relation to an assessee upon whom such agreements are applicable. In the present case it is applicable in the case of payee, if at all is applicable, he has highlighted that Article-1 in all the treaties specifies the type of person to whom treaty would be applicable. The treaty would be applicable to a person who is resident of State (R) or source of income in a State(s). It does not mean that it is applicable according to the domi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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