TMI Blog2018 (5) TMI 896X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA. Since the assessee has not deducted the tax at source as per provisions of section 195 of the Act, assessee was rightly held to be in default under section 201(1) of the Act. We therefore confirm the order of the CIT(A) upholding the ordert of the AO passed under section 201(1) and 201(1A) of the Act in this regard. Beneficial owner of the royalty received - whether GIL is the beneficial owner of the payment received in the form of royalty? - Held that:- From a reading of this agreement, it is not clear as to how much revenue is shared by different holdings. In the absence of the relevant evidence either in the form of agreement executed between the various holding companies or otherwise, it is not clear as to whether the GIL has full control over the receipt received under Google AdWord Program or the GIL was acting as a conduit of its parent holdings. We therefore are of the view that this aspect requires a fresh look by the AO in the light of all the relevant evidences. We accordingly restore the matter to the AO after setting aside the order of the CIT(A) in this regard in all these appeals to readjudicate the issue of beneficial ownership in the light of the license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment - assessee contented reopening on no forming a belief that income chargeable to tax has escaped the assessment and notice under section 143(2) was not issued within the prescribed period - Held that:- Notice under section 143(2) was issued in time. Moreover, we do not find any procedure either in the Act or in Income Tax Rules wherein it has been laid down that after issuance of notice under section 148, the returns are to be filed and thereafter assessee has to seek the reasons recorded for reopening of the assessment and thereafter file the objection thereto. After disposal of the objections the AO can only issue the notice under section 143(2) of the Act. For completing the assessment under section 147 the procedure laid down under section 143 is to be followed. Nowhere it has been mentioned either under section 143 or under section 147 that the notice under section 143(2) cannot be issued before disposing of the objections filed by the assessee against the reasons recorded for reopening the assessment. No merit in the contention of the assessee that the notice under section 143(2) is bad in law. Revenue has assessed the appellant on business profit received by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated are owned and used by the assessee-company itself or transferred to any other entity and whether the assessee-company is properly compensated for transferring such intangibles. The findings of the TPO shall be based on the actual conduct of the parties and evidence produced by the assessee-company. The comparability of all these independent transactions shall be judged with reference to uncontrolled similar transaction by adopting most appropriate method and comparability factors. In respect of transactions aggregated with AdWords business transaction, the TPO shall bench-mark the transaction by adopting Profit Split Method as most appropriate method, as the transaction of business of AdWords programme requires deployment of assets and functions of different entities located in different geographical locations in order to ultimately deliver services as the combined effort generate revenues. It is also settled proposition of law that Profit Slip Method (PSM) can be adopted as most appropriate method in cases involving multiple interrelated international transactions which cannot be evaluated separately.us, all the grounds of appeal relating to TP adjustment are set aside t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TANT MEMBER IT(TP)A No.466/Bang/2013, IT(TP)A No. 191/Bang/2014, IT(TP)A No.205/Bang/2015, ITA No.1299/Bang/2015 And IT(TP)A No.881/Bang/2016 For The Assessee : Shri Percy Pardiwala, Sr. Counsel, Shri. Anmol Anand, Advocate, Shri. Vinay Mangla, CA Shri. Padamchand Kincha, CA Shri. Narendra Jain, Advocate For The Revenue : Shri. C. H. Sundar Rao, CIT I, Shri. K. V. Arvind, Sr. Standing Counsel for Department ORDER PerBench These appealsare preferred by the assessees as well as the Revenue against the respective orders of the CIT(A) pertaining to assessment years 2007-2008 to 2015-2016. Since the issues involved in these appeals are interconnected and interrelated, these were heard together and are being adjudicated through this single consolidated order for the sake of convenience. We, however, prefer to adjudicate them one after the other as under: 2. IT(IT)A Nos. 1190/Bang/2014, 949 950/Bang/2017 Though grounds raised in these appeals are almost similar, but for the sake of reference we extract the grounds raised in ITA No.1190/Bang/2014 as under: Based on the facts and in the circumstances of the case, the Ld CIT(A) and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as per the distribution/reseller agreement Google Ireland Limited has agreed to provide advertisement space to the Appellant through AdWords program for distribution to the Indian Advertisers. 8. Erred in confirming that Distribution Agreement/Reseller Agreement cannot be read without the service agreement (ITES agreement) between the Appellant and Google Ireland Limited and the Appellant has been granted right to use intellectual property owned by Google Ireland Limited without appreciating the fact that ITES service agreement is a separate agreement under which the Appellant performs an independent global outsourcing function for Google Ireland Limited for which it receives arm's length consideration and is not linked in any manner to the function of sale of advertisement space to the Indian advertisers being performed by the Appellant. 9. Without appreciating the facts of the case, erred in holding that the amount payable by the Appellant to Google Ireland Limited towards purchase of advertisement space to be in the nature of 'Royalty' under Section 9(1)(vi) of the Act. 10. Erred in upholding the order of the Ld JDIT that the amount payable by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout prejudice to the argument that the payments made by the Appellant to Google Ireland are not in the nature of Royalty as per Article 12 of India-Ireland DTAA, the Learned Assessing Officer / Learned Commissioner of Income-Tax (Appeals) erred in holding that the Appellant is liable to withhold tax on amounts payable to Google Ireland disregarding that 'Royalty' income for a non-resident is taxable only on receipt basis under the India-Ireland DTAA. The Appellant craves, to consider the above ground of appeal without prejudice to other grounds of appeal and craves leave to add, alter, delete or modify the above ground of appeal. 5. Though various grounds are raised but they all relate to the characterization of the payment made by the appellant to M/s. Google Ireland Ltd., with regard to purchase of advertisement space for resale to the advertisers in India under the Google AdWords program distribution agreement. The facts in all these years are almost similar subject to variation in quantum. Therefore, we record the facts for the assessment year 2013-14 in IT(IT)A No. 1190/Bang/2014. The facts in brief borne out from the record in this regard are that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e account of M/s. Google Ireland Ltd., (GIL) without deduction of tax at source. The GIL had also not obtained the Nil deduction certificate on the sums payable to it from the department. Reliance upon the provisions of section 195 of the IT Act (hereinafter called as an Act ) was placed according to which any person responsible for paying to nonresident, not being a company, or to a foreign company, any interest or any other sum chargeable under provisions of the Act (not being income chargeable under the head salaries) shall at the time of credit of such income to the account of the payee or at the time of payment there-of in cash or by the issue of cheque or draft by any other mode whichever is earlier, deduct income tax thereon at the rates in force, and the AO issued a show cause notice to the appellant (GIPL) as to why he should not be treated as assessee in default in respect of tax not deducted at source on sums payable to GIL under section 201(1) of the Act. The GIPL was asked to furnish details of sums paid or payable for the financial year 2012-13, relevant to the impugned assessment year and the deduction of tax at source thereon. In response thereto, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case, the licensor is GIL, the distributor or reseller is GIPL and the end users are the advertisers. The assessee has taken a stand that the amount payable to the GIL is not in the nature of royalty either under the Act or the India-Ireland Double Taxation Avoidance Agreement (hereinafter called as DTAA ). The gist of submissions made by the GIPL are extracted by the AO in his order and for the sake of reference, we extract the same as under: * As per Agreement between the assessee company and Google Ireland, GIPL is appointed as a mere non-exclusive Distributor/Reseller of AdWords program to the advertisers in India; * Distribution fee is payable to Google Ireland on distribution of AdWords inIndia and is not in relation to any 'transfer of any right' or any 'right to use' any patent/ invention etc.; * The Agreement does not involve any use of patents, invention, model, design, secret formula or process or trade mark or similar property. Further, all the rights, title and interest in and to all information data including the user data (i.e. data provided by users) are owned by Google Ireland; * Further, the distribution fee payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.879/2017 and 898/2017 dated 15..2017 and 20.11.2017 respectively that the present appeals are to be disposed off independently without being influenced with the order of the Tribunal dated 23.10.2017 passed for the assessment years 2006-07 to 2012-13. Therefore, we cannot look to the order of the Tribunal for assessment years 2006-07 to 2012-13, confirming the order of the CIT(A) in this regard but we are supposed to adjudicate the issues of nature of payment in the light of the finding of CIT(A) for assessment year 2006-07 to 2012-13 independently as it was relied on by the CIT(A) while adjudicating the impugned issue without being influenced by the order of the Tribunal. In appeal filed before the CIT(A) against the assessment orders for assessment years 2006-07 to 2012-13, the assessee has disputed the findings of the AO with regard to nature of payment made by GIPL to GIL. 14. The CIT(A) while adjudicating the characterization of nature of payment made by GIPL to GIL, has examined and analysed the agreement entered into by the assessee/appellant with GIL and Google AdWord Programs how it operates in the light of information available on internet and also in the light of va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly executing the program's instructions in a central processor. The program has an executable form that the computer can use directly to execute the instructions. The same program in its human-readable source code form, from which executable programs are derived (e.g., compiled), enables a programmer to study and develop its algorithms. A collection of computer programs and related data is referred to as the software. 10.4. The definition of computer program in the copyright Act of 1957, is as under: Section 2(ffc) computer programme means a set of instructions expressed in words, codes, schemes or in any other form, Including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. 10.5. In a recent decision, the Delhi Bench of the Hon'ble Tribunal in Gracemac Corporation v. Assistant Director of Income-tax 008 ITR (Trib) 522 had an occasion to examine the term Computer Program vis-a-vis the term Process used in the Act as well as the Indo-US Tax Treaty and observed It is a golden rule of interpretation of statutes that the language of the statute should be read as it is. The intentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 14 of the Copyright Act, 1957. The language employed in clause (v) of Explanation 2 to section 9(1)(vi) of the 1961 Act is plain, clear and unambiguous and is not capable of two meanings. Therefore, there is no need substitution of the comma by the word of'. The expression copyrighted article is not defined either in the 1961 Act or in th,7-. Double Taxation Avoidance Agreement between India and the U.S.A. (DTAA). Nor there a definition in the Copyright Act, 1957 of copy-righted article on the lines as in the Patents Act, 1970. The term copy-righted article is nowhere used in the Act or the Double Taxation Avoidance Agreement. The expression copyrighted article finds its origin in U. S. regulations and then in the OECD commentary. The OECD commentary or IRS Regulations of the U. S. A. would not be a safe or acceptable guide or aid for interpretation of provisions of the Income-tax Act, 1961 or the Double Taxation Avoidance Agreement between India and another country. The language used in Explanation 2 to section 9(1)(vi) of the Act or article 12(3) of the Double Taxation Avoidance Agreement defining the term royalty is not ambiguous. For the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of royalty. If royalty income from the use or the right to use or transfer of all or any right (including the granting of the licence) in respect of copyright in computer programme was not taxable under section 9(1)(vi) of the Act, Parliament would not have prescribed a special rate of income-tax in respect of royalty income in respect of any computer software under section 115A(1A). The provisions of section 9(1)(vi) have to be considered in the light of the provisions of section 115A(1A) of the Act. The use of the expressions in respect of copyright in any book to an Indian concern or in respect of any computer software to a person resident in India in section 115A(1A) shows that for the purposes of income-tax copyright in computer software is different from copyright in any book though both are literary works under the Copyright Act, 1957. The Income-tax Act and the Copyright Act operate in different fields. The object of the Copyright Act is to provide protection to the copyrights in various works of the authors whereas the purpose of income-tax is levy and collect tax on various types of incomes. The provisions of the Incometax Act cannot be explained by reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (7)(a) royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. If the person paying royalty has a permanent establishment or a fixed base there in connection with which the liability to pay the royalties is incurred and the liability is borne by such establishment or base the royalty is deemed to arise in the State in which the permanent establishment or fixed base is situated. According to paragraph (7)(b) royalties related to the use of, or the right to use, the right or property, in one of the Contracting States, shall be deemed to arise in that Contracting State. No conflict exists between the Income-tax Act and the Double Taxation Avoidance Agreement. The language of article 12(7)(b) of the Double Taxation Avoidance Agreement between India and the United States of America is clear and unambiguous. The royalties or fees for included services shall be deemed to arise in that Contracting State in which the use of, or the right to use, the right or property, or the fees for included services is performed. The term right in article 12(7)(b) cannot be interpreted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he distribution rights granted are itself IP rights covered by similar property used in section 9(1)(vi) of the Act . Thereafter, he concluded since IP of Google resides in search engine technology, associated software and other features, logically the income received by it includes royalty for its IP from all its non-retail users viz., Advertisers and Intermediaries. Therefore, the assessee company being the intermediary has obtained the right to use the intellectualproperty, knowhow, trademark and other brand features owned by Google lreland. 11.2. The AO after examining Clause-1.5 Clause-6 of the distribution agreement concluded that the assessee company was permitted to use the trademarks of Google for the purposes of marketing and distribution of Adwords program. Afterexamining Clause-3 of the agreement, he opined that Google Ireland is obliged toprovide advertising space through itsdistributor i.e. the assessee company and is also obliged to train the distributor, so that it can market and distribute the Adwords program. The Adwords platform runs on servers located outside India and the assessee company cannot perform its activities of marketing and distribution with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncludes any such programme or any customized electronic data; Explanation 4 .- For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium throuct which such right is transferred. Explanation 5 .- For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- ( a) the possession or control of such right, property or information is with thepayer; ( b)such right, property or information is used directly by the payer; ( c) the location of such right, property or information is in India. 11.4. Intellectual property and trademark can be defined as under :- Intellectual property (p) is a legal concept which refers to creations of the mind for which exclusive rights are recognized. [1] Under intellectual property law, owners are granted certain exclusive rights to a variety of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable is for granting of a licence in respect of a copy right in the Adwords program :- These two issues are taken together as they are interrelated. I have studied he Adwords program in detail and it is very clear to my mind that the Adwords program owned and developed by Google Ireland is a Computer Program within the meaning of Explanations - 3, 4 5 to section 9(1)(vi) of the Act. As per the Delhi Bench of the Hon'ble Tribunal (supra) the following principles emerge:- A computer programme is a process when it executes instructions I in it in passive state. Therefore, any consideration made for the use of process would amount to royalty. The term copyright is wide enough to include other works such as dramatic or musical work, computer programme, The question of royalty in respect of computer software has to he decided on the basis of provisions of the Act and the Double Taxation Avoidance Agreement. Hence for the purposes of income-tax a copyrighted article cannot be treated as product. CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC) applied. A computer programme is a literary work under the Copyright Act, 1957 and the consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm royalty vis- -vis computer software . The Hon ble Court observed:- In view of the abovesaid definition of royalty , it is clear that the necessary ingredient to be satisfied to find out as to whether the payment would amount to royalty is as follows - payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work. It has been universally accepted that a literary work is entitled to copyright and wherefore, a literary work is entitled to be registered as copyright. In India, the provisions of section 2(o) of the Copyright Act, 1957, defines literary work as under: 'literary work' includes computer programmes, tables and compilations including computer databases Therefore, computer software has been recognized as copyright work is also. Having regard to the above said definition of royalty , we have to consider the contents of software licence agreement entered into by the nonresident with Samsung Electronics and also the respondents Page 25 of 331 in the case represented by Sri Ganesh, learned senior counsel and Sri Aravind Dattar, wherein it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (by whomever produced), of the software or documentation and ownership of all patent copyright, trade mark, trade secret and other intellectual property rights pertaining thereto, shall be and remain the sole property of Actuate. The distributor shall not be an owner of any copies of, or any interest in, the software, but rather is licenced pursuant to the agreement to use and distribute such copies. Actuate represents that it has the right to enter into the agreement and grant the licences provided therein and confidentiality is protected. Therefore, on reading the contents of the respective agreement entered into by the respondents with the non-resident, it is clear that under the agreement, what is transferred is only a licence to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement, as referred to above, and the nonresident supplier continues to be the owner of the copyright and all other intellectual property rights. It is well settled that copyright is a negative right. It is an umbrella of many rights and licence is granted for making use of the copyright in respect of shrink wrapped software/off-the-shelf software under the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( vi) to make any adaptation of the work ; ( vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi) ; ( b) in the case of a computer programme, (i) to do any of the acts specified in clause (a); ( ii) to sell or give on commercial rental oil offer for sale or for commercial rental any copy of the computer programme : .. Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. ( c) in the case of an artistic work, (0 to reproduce the work in any material form including depiction in three dimensions of a two-dimensional work or in two dimensions of a threedimensional work ; ( ii) to communicate the work to the public ; ( iii) to issue copies of the work to the public not being copies already in circulation ; ( iv) to include the work in any cinematograph film; ( v) to make any adaptation of the work ; ( vi) to do in relation to an adaptation of the work any of the acts specified in relation *to the work in sub-clauses ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infringement of copyright and wherefore, but for the licence granted in these cases to the respondent to make copy of the software contained in shrinkwrapped/ off-the-shelf software into the hard disk of the designated computer and to take a copy for back-up purposes, the end user has no other right and the said taking back-up would have constituted an infringement, but for the licence. Therefore, licence is granted for taking copy of the software and to store it in the hard disk and to take a back-up copy and right to make a copy itself is a part of the copyright. Therefore, when licence to make use of the software by making copy of the same and to store it in the hard disk of the designated computer and to take back-up copy of the software, it is clear. that what is transferred is right to use the software, an exclusive right, which the owner of the copyright, i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement. The decision of the Delhi High Court in CIT v. Dynamic Vertical Software India P. Ltd. [2011] 332 ITR 222 (Delhi) relied upon by Sri Aravind Dattar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d user to copy and download the software, the dumb C. D. containing the software would not in any way be helpful to the end user as software would become operative only if it is downloaded to the hardware of the designated computer as per the terms and conditions of the agreement and that makes the difference between the computer software and copyright in respect of books or prerecorded music software as book and prerecorded music C D. can be used once they are purchased, but so far as software stored in dumb C D. is concerned, the transfer of dumb C D. by itself would not confer any right upon the end user and the purpose of the C. D. is only to enable the end user to take a copy of the software and to store it in the hard disk of the designated computer if licence is granted in that behalf and in the absence of licence, the same would amount to infringement of copyright, which is exclusively owned by nonresident suppliers, who would continue to be the proprietor of copyright. Therefore, there is no similarity between the transaction of purchase of the book or prerecorded music C. D. or the C. D. containing software and in view of the same, the Legislature in its wisdom, has treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ram and defined the terms - Computer software means a computer programme recorded on any disc, etc., and includes any such programme which was transmitted from India to a place outside India by any means ... ....... ............. But once the scope of the words computer programme was not explained in section 801111E, the global meaning of the word is to be taken into account. The doctrine of pari materia was relevant for this purpose. According to that doctrine, the meaning of a particular word could be imported if the same was not contrary to the provisions of the Act to which it is being imported. Therefore, in the absence of a specific definition of the word programme in the Income-tax Act, the expression computer programme should be understood as defined in the Copyright Act and should be interpreted broadly, liberally and consistently with other legislations of Government to include export of data processing software as well ......... The words computer programme has not been defined in the Income-tax Act but it has been defined in the Copyright Act, 1957, as amended in 1994. According to the definition, it means a set of instructions expresse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under the agreement ; whether the applicant was not taxable under the Double Taxation Avoidance Agreement between India and Sri Lanka (DTAA) ; whether the applicant providing maintenance service to ICEL could not be treated as having a permanent establishment in India ; whether, if the applicant was not taxable in India for the fees paid by 10EL, it would later be required to withhold tax under section 195 of the Act on the fees, and if ICEL had deducted withholding tax, the applicant would be entitled to get refund ; and assuming that the applicant had no other taxable income in India, whether the applicant would be absolved from filing a tax return in India under the provisions of the Act with respect to the fees. The Authority on the stated facts ruled : ( i) That the fees paid by ICE'', to the applicant were taxable as royalty under clause (v) of Explanation 2 to section 9(1)6,0 of the Act. ( ii) That since the fees payable by ICEL to the applicant arose in India, they were taxable under article 12(2) of the DTAA in India. ( iii) That the applicant did not have a permanent establishment in terms of article 5 of the DTAA. ( iv) That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot the applicant had a permanent establishment in India under article 5 of the DTAA. ( iv)Therefore since without the agreement being in place, any usage of the computer programme by the customers would have amounted to copyright infringement, the payment made under the agreement was for Obtaining the right to use the'copyright lit the software and was taxable as royalty under the DTAA and the 1961 Act. Per P. K. Balasubramanyan (Chairman).-(0 In terms of the InCome-tax Act, 1961 royalty means consideration for the transfer of all or any right, including the granting of a licence, in respect of any copyright or literary work. What the applicant had granted to ICIEL, was a licence to use the computer programme developed by it and owned by it and over which it had a copyright. This was done fora- consideration. This was a licence recognized by the Copyright Act and was 'a known mode of exploitation of a copyright. The applicant had not parted with its title over the copyright in the software. It had conveyed to another a right to use the software over which it had a copyright. The right of user of software, thus given, involved the right to use the copyright. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embedded in the software. The software is a literary work and the copyright of the creator over the software is an important and commercially valuable right. So, whenever a software is assigned or licenced for use, there is involved an assignment of the right to use the embedded copyright in the software or a licence to use the embedded copyright, the intellectual property right in the software. It is not possible to divorce the software from the intellectual property right of the creator of the software embedded therein. Even the right to sell or give on rental, would amount to a copyright and would be a right to be dealt with as a copyright. The definition of royalty in the Income-tax Act, 1961 is, consideration for transfer of all or any rights (including the granting of a licence) in respect of a pater: innovation, model, design, secret formula or process or trade mark or similar property. Consideration for grant of the use of any of the above is also royalty. It also takes in the consideration for the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work Licence is not confined to an exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... described or computed, as consideration for the use of, or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right . The definition is wider than that contained in the Act. It also ropes in payment of consideration for the use of a copyright in addition to the consideration paid for the right to use a copyright, covered by the definition in the Act. Consideration paid for use of a copyrighted software is also payment for use of the copyright embedded in the software. There cannot be a use of software, over which exists a copyright, without a use of the copyright therein. The payment for such use can only be royalty. The sale or licensing for use of a copyrighted software amounts to the grant of a right to use a copyright. P. No. 30 of 1999, In re 11999) 238 JTR 296 (AAR) relied on.A ruling by the Authority is based on the facts involved in the application leading to that ruling. The doctrine of precedent cannot be applied to a ruling under section 245R(4) of the Act. The Act has itself made it clear that the ruling is binding on the applicant in the application and the Revenue, in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm in Explanation 2 to clause (vii) of section 9(1) of the Act, whether the payment received by the applicant from the distributor for the Citrix subscription advantage programme, was in the nature of royalty within the meaning of the term in article 12 of the DTAA and in the light of the declaration provided by.the applicant that it did not have a permanent establishment in India in terms of article 5 of the DTAA, whether the payment received by the applicant was chargeable to tax in India and would the receipts by the applicant from the distributor suffer withholding tax under section 195 of the Income-tax Act, 1961, and at what rate. The Authority on the stated facts, ruled : ( i) That the payments received by the applicant from the distributor for sales of the software products were in the nature of royalty within the meaning of section 9(1)(vi) of the Incometax Act, 1961. ( ii) That the payments concerned would be royalty as defined in article 12 of the DTAA between India and Australia. ( iii) That the payment received by way of subscription for the updates would also be payment received for grant of a right to use the copyright embedded in the subscript ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in terms of clause (iv) of Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961. The subscription received was royalty liable to be taxed as such under the Act.Under the Double Taxation Avoidance Agreement between India and Singapore (DMA), it would qualify as royalty since it was the grant of the use for consideration or right to use for consideration, the process Or information concerning industrial, commercial or scientific experience and under the D1 AA the subscription received from the Indian subscriber would be taxable as royalty and taxable in India in view of paragraph (2) of article 12 of the DTAA, subject to the bene-fit conferred therein on the applicant on fulfilling the condition imposed by that paragraph. Tax was required to be deducted in terms of section 195 of the Act from the payment made to it by the subscribers who were resident in India. 11.14. After considering these views, the facts of the instant case are that Google Ireland has granted the assessee company the right to use the Adwords program which is a complex computer program, without parting with the copyright, thus granting the licence to use the software in the garb of marketing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Yahoo India Pvt. Ltd. Vs. DCIT (140 TTJ 195). I have carefully gone through both the orders. The former blindly follows its decision in Yahoo India case. The facts of this case are that the Department of the Tourism, Government of India, hired the services of the assessee company to approach the foreign principal to provide uploading and display services for hosting the banner advertisement at Yahoo Hongkong portal. The assessee company hired the services of the principal for the same and made a payment without deducting tax at source. The Bench observed that banner advertisement hosting services did not involve use or right to use any industrial, commercial or scientific equipment and no such use was actually granted by the principal to the assessee company. Therefore, such payments did not amount Royalty. The facts and the issues in the case are completely different from the instant case. At no stage did the Mumbai Bench consider what exactly is the Adword program, nor did it have occasion to examine the right to use trade mark and other intellectual property rights. Hence, the decision rendered in that case is peculiar to the facts of its own and is not applicable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e term Server in context of Information Technology has been described by VVikipedia as, a system (software and suitable computer hardware) that responds to requests across a computer network to provide, or help to provide, a network service. Therefore, a server is nothing but computer software backed by necessary hardware. Thus, it cannot be said that the assessee gained right to use any scientific equipment. Since, Google Ireland has not parted with the copyright it holds, in the Adwords program, it cannot be said that any kind of technical knowhow has been transferred to the assessee company. Hence, without prejudice to my view in holding that the remitted amount is Royalty on different grounds, I am not in an agreement with the AO on these issues. The Google Ireland rendered services to enable the assessee company to market and distribute the Adwords program : 11.21. The AO after examining the agreement opined that training is an inherent part of grant of distribution rights of the Adwords program. The training is given to the staff of the assessee company at all stages of marketing and distribution of Adwords program. The relevant extracts from the AO's orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the GIPL, having relied upon the certificate of the Revenue authorities of Ireland. The relevant observations are extracted hereunder for the sake of reference: 9. In the instant case, the following facts are quite clear :- ( i) The Google AdWords Programme distribution agreement is between GIL GIBL. ( ii) The assessee Distributor has made payments for acquisition of distribution rights to GIL alone. ( iii) The assessee has filed a notarized certificate of incorporation of GIL from the Irish Authorities to establish that the entity is incorporated in the Company Acts of Ireland. Thereafter, the Revenue Authorities of Ireland have certified that GIL files its corporation tax return in Ireland and is a resident of Ireland for tax purposes and duly is liable to Irish corporation tax on its worldwide income including that from India. ( iv) Although Circular No. 789 deals with the Indo Mauritius Treaty, the same was applied by the Mumbai Bench to the lndo Netherland Treaty. 9.1. Now, in this light, it will be relevant to analyze the AO's attempt to distinguish the judgement of the Hon'ble High Court of Mumbai read w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not so skilful, advisers, on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last, but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers'. In the instant case, the AO has failed to demonstrate whether the transaction constituted a colourable device so as to avoid tax. Hence, I cannot concur with him on this point at all. * Secondly, the certificate of beneficial ownership furnished by the taxpayer is the interpretation arrived at by the Netherlands authorities. Indian Courts may not necessarily agree with the interpretatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dated 12.12.2005 with GIL pursuant to which the appellant company was appointed as a non-exclusive, authorized distributor of online advertisement space to advertisers in India under Google AdWords Program. 18. Subsequently, the appellant company entered into a Google Reseller Agreement on 01.07.2012 with GIL, pursuant to which the earlier agreement dated 12.12.2005 was terminated and the appellant company was appointed as non-exclusive, authorized reseller of online advertising space to advertisers in India under the Google AdWords Program. 19. The learned Counsel for the assessee further contended that the entire case of the Revenue is that the payment made by the appellant company to GIL amounts of consideration for the right to use copyright/trade mark/process/software. The case of the Revenue is also that the payment made by the Appellant Company to GIL amounts to consideration for the grant of distribution rights of Google AdWords Program and since the same is covered within the meaning of similar property , payments thereof is Royalty . It was further contended that the assumption on which the AO has proceeded on to conclude that the payments made by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w by ITES teams based globally out of which ITES division of the Appellant in India is one of such centre. Online advertisements flagged for manual review from around the world are sent to any of such divisions located around the world based on language used in the advertisement and operative time of each such ITES centre around the world. The routing of advertisement for review is a purely system driven automated process with no human intervention. It was further contended that while performing the manual Ad review via its ITES division as specifically identified, has no control over choosing advertisements/advertisers for manual review, uploaded by a specific advertiser from a specific country. For providing these services, GIL pays a service fee to the Appellant in terms of the agreement dated 01.04.2004. 23. The learned Counsel for the assessee further invited our attention to certain facts with the submission that in order to carry out its distribution function under the distribution agreement, the appellant has a separate sales and marketing team working from its Gurgaon and Mumbai Office and its team operates independently of the ITES and other divisions of the Appellalnt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... businesseswanting to display advertisement in relation to their websites and products on Google online property or a third party online property. The advertisers are required to upload his/her billing information, without which he/she will not be able to conclude the account of creation process and his/her advertisement would not be displayed. Once the advertiser chooses India as his/her location and INR as his billing currency, he gets into a contract with the appellant, subject to him agreeing terms and conditions. The advertisers that use Google AdWords Program for advertising on Google Search Engine can create relevant advertisement by selecting anappropriate title and text to describe its business and the forms of text of the advertisement. The advertiser also selects keywords or phrases that may match with a search query (relevant to the business of such advertiser) that people input while using Google Search Engine. The keywords are used to trigger an advertisement that is relevant to the search query of the user. Multiple advertisers can choose the same Keyword. The keywords or phrases are neithersold or allowed to be used exclusively by anyone advertiser. 26. It was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... torial guidelines of Google and local Government regulations of the jurisdiction where advertisement needs to be displayed. 28. Mr. Pardiwala further contended that the fundamental submissions of the assessee which has been completely missed by the AO is that the revenue arising from the distribution agreement dated 12.12.2005 and superceded by the reseller agreement dated 01.07.2012 whereby the distributor or reseller s rights were granted to the assessee owing to the nature of the business income in the hands of the non-resident and in the absence of the permanent establishment such non-resident in India no portion of such income could have been brought to tax. It was further submitted that the resort to section 9(1)(vi) of the Act is contrary to the legal position since 9(1)(vi) is applicable only to taxation of passive income. Thus in the absence of any permanent establishment, the income of non-resident was not chargeable to tax in India and consequently there arose no occasion for the applicability of section 195 and 201 of the Act. He further placed reliance upon the order of the Tribunal in the case of ITO Vs. Right Florist Pvt. Ltd., (2013) 25 ITR (T.) 639, Pinstrom Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts are in the nature of royalty income. 31. The learned Counsel Mr. Pardiwala further invited our attention that from July 2016, the legislature in its wisdom has introduced the equalization levy. The whole purpose of bringing this levy was to avoid protected litigation on the existence of permanent establishment and to capture the income of non-resident who on account of absence of permanent establishment as per the existing provisions under treaty, escaped the net of taxation in India. It was further contended that in assessment year 2017-18, 2018-19, the department has taken a position that equalization levy is applicable on payment made by the advertiser to non-resident for the purchase of online advertisement space. These oscillating views taken by the department reflects the confusion behind department s logic to bring to tax receipts under dispute tax in India and are thus devoid of any merit. Therefore, the order CIT(A) treating the remittance to GIL as royalty, deserves to be set aside. 32. The learned Counsel for the assessee further invited our attention to provisions of Finance Bill, 2016 with the submission that the legislature has introduced the equalization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Inc., 313 ITR 267 in support of his contention that use of intellectual property (Trade mark ) as incidental to main purpose of agreement, does not enable the payment thereof to qualify under the definition of Royalty under the Act or by AO. 36. Mr. Percy Pardiwala further contended that assessee had a bonafide belief for nondeducting the TDS on the payment made on account of AdWord Program to the GIL, as there was no disallowance at earlier occasion. Moreover, the GIL has no PE in India therefore the assessee/appellant was under a bonafide belief that TDS is not required to be deducted on the payment to GIL which in fact is a business receipt in its hand. In support of his contention he placed a reliance of the judgement in the case of CIT Vs. Kotex Securities Ltd., 383 ITR 0001 (SC). 37. In oppugnation, learned Standing Counsel for the department, Shri. K. A. Arvind invited our attention to the fact that in Google AdWord Program distribution agreement dated 12.12.2005, the GIPL was granted the marketing and distribution rights of AdWord Program to the advertisers in India. The amount credited by GIPL to the account of GIL could constitute sum chargeable under the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 3.3, the GIPL shall perform the services only for Google Ireland or its affiliates and consequently it shall not render any similar services to any other person. It was further contended that as per clause 6.1 of Service Agreement, the GIL will disclose certain confidential information to Google India solely to permit Google India to perform its obligations under the agreement. It was also stipulated in the Service Agreement that the Appellant agrees that such confidential information shall be kept secret by the Appellant during the term of the Agreement and as per clause 12.5, on termination of the Service Agreement, Google India shall discontinue using of confidential information, documentation, intellectual property and the software technology and shall have no further rights with respect thereto. On termination, the Appellant shall immediately return to Google Ireland or destroy all copies of confidential information, documentation and the software embodiments in its possession or control. Upon termination of this agreement, GIL will have the option in its sole discretion of (1) electing at any time to fulfil any unfinished service itself or by contracting with other affi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India by different divisions does not take away the impact of reading of both the agreements together, therefore both the agreements are inseparable. By reading of the obligations of Google India in both the agreements, it makes it clear that both the agreements has to be read together and cannot be acted upon independent of each other. Hence the contention of the assessee that both the agreements are different is an after-thought and liable to rejected. 42. It was further submitted by Mr. Arvind that IP of Google resides in search engine technology, associated software and other features and hence right to use for performing various activities like accepting advertisements and providing after sales services would clearly fall within the ambit of Royalty . As per the terms of the distribution agreement, the appellant has been authorized to sell or offer for sale the Adword program to the advertisers which is nothing but granting of licence to appellant to sell or offer for sale to advertisers with certain rights. By acquiring the distribution and marketing rights, the appellant has been granted licence in respect of Adword s program to sell or offer for sale certain rights to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Google India for selling advertisement space to the advertisers is a process and the search engine technology is an IP. Hence consequential payment for the licence to use the process being an IP is royalty. In view of clause 3.1 of the distribution agreement, the appellant was granted transfer of know-how and has also been provided access to internal tools for performing the obligations under the Adword agreement. The statements recorded from the persons concerned of the Google India which is reproduced by the AO in his order, would make it clear that marketing, distribution and maintenance of the Adword program is a responsibility of Google India involving knowledge of tools and training on its usage, knowledge of trademark policy, add content policy, access to database and access to confidential information. Such knowledge has been imparted through extensive training by Google Ireland to the appellant which would amount to transfer of know-how and liable for tax u/s. 9(1)(vi) of the Act as royalty. 47. The ld. Standing counsel further invited our attention to nondisclosure agreement which is Exhibit-B of the distribution agreement with the submission that it clearly demon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IPR and is liable for tax under the Act as well as the DTAA as royalty. Further reliance was also placed upon the judgment of AAR in the case of Cargo Community Network Ltd. reported at 289 ITR 355 in which it was held that portal is a scientific equipment and amounts paid towards right to use in industrial, commercial and scientific equipment would be covered by the expression royalty under the Act as well as the DTAA. He further placed reliance upon the order of the Delhi Bench of the Tribunal in the case of Gracemac Corporation v. ADIT (2010)41 DTR 65 in which it was held that licence to use the copyright would fall within the ambit of royalty under the Act as well as the DTAA. 50. The ld. Standing counsel further invited our attention to the documents relating to functioning of Google Adword program from pages 416 to 528 of the Paper book filed by the appellant through which the assessee has tried to explain the functions of Google Adword program, with the submission that from the reading of the relevant material filed before the Tribunal, it is clear that the appellant has provided the following services in brief to the advertisers:- a. Display network tab b. Too ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the advertiser would be rendering the following services:- a. Display Keyword Targeting b. Placement Targeting. c. Topic Targeting. d. Interest Categories. e. Remarketing. f. Gender Targeting. g. Age Targeting. h. Parent Status Targeting. i. Display Campaign Optimiser j. Location Targeting, Network Targeting k. Physical Location Targeting l. Schedule Targeting m. YouTube Targeting n. Device Targeting o. AdSense 54. He further invited our attention to the reply of the assessee dated 28.01.2013 filed before the TPO for the AY 2009-10 in which it has been clearly admitted that the payment for rendering ITES (pre and post sale services) are on the basis of the percentage of distribution fee from India. The above aspect further makes it clear that distribution agreement and the service agreement is interdependent and has to be read together and inseparable. 55. The ld. Standing counsel further contended that in view of the above position, it is clear that licence granted by Google Ireland in favour of the appellant is for exploitation of the search enginge being IPR and the IPR has been used by the appellant as tool of the trade a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions, it is clear that the amounts paid by the assessee to Google Ireland are chargeable under the Act on accrual basis. Hence contention of assessee that amount is chargeable in the hands of Google Ireland on receipt basis is misplaced. 59. It was further contended that if the language of definition of royalty under DTAA with Ireland under article 12(3)(a) is read, the wordings of 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 the 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. 60. The ld. Standing counsel further invited our attention to the fact that the assessee has provided IT services IT enabled services to Google Ireland in addition to marketing and distribution services for the adverts program. The assessee will be receiving amounts for IT services and IT enabled services from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipt in the hands of Google Ireland is liable to be taxed on cash basis is completely baseless, also for the reason that Google Ireland itself has filed return of income for the AY 2007-08 and 2008-09 and has declared its method followed for accounting as mercantile system of accounting. It was further contended that in the case of Vodafone South Ltd., the Tribunal has categorically held that applicability of DTAA is not automatic and what is to be considered at the time of payment by the assessee is only regarding the chargeability of income under the Act and the assessee cannot be permitted to take shelter under the DTAA as the benefit of DTAA is conferred only on the non-resident recipient. He further placed reliance upon the judgment of the Apex Court in the case of Standard Triumph Motor, 201 ITR 391 wherein it has been held that method of accounting adopted by the recipient is irrelevant and credit in the books of account of the payer is sufficient to attract taxability. He also placed reliance upon the judgment of the Apex Court in the case of Palam Gas Service v. CIT reported at (2017) 81 taxmann.com 43 (SC). 62. The judgments relied upon by the assessee in support of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the distribution agreement coupled with IPR as tool of the trade and hence payment towards use of trademark is also in the nature of royalty and liable to tax under the Act as well as the DTAA. 65. With regard to judgment of the Hon ble Delhi High Court in the case of Sheraton International 313 ITR 267, Formula One World Championship (2016) 76 taxmann.com 6 (Del) and the other judgments referred to by the assessee, the ld. Standing counsel has submitted that in those cases the main services provided was for the advertisement and no licence to use the IPR was involved, whereas in the present case, the use of IPR is involved. Therefore, the Hon ble Court has held that use of trademark was incidental to the main purpose of the agreement which was referred to as advertisement, publicity and sales promotion, whereas in the instant case, the assessee was selling the Adword space to the advertisers with the use of IPRs for the said purpose. 66. With regard to equalization levy, the ld. Standing counsel has submitted that section 164 and 165 are introduced by Finance Act, 2016. The Parliament has proposed the equalization levy on the amount to be paid to the non-resident on digit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualization levy is applicable on payments made by the appellant to non-resident for the purchase of online advertising space. All these views undertaken by the department reflect the confusion with the department s logic to bring to tax receipts under dispute to tax in India and are thus devoid of any merit. It was further contended that Adword is a registered trademark in the name of Google Inc., the Adword program is an auction based advertising program that lets advertisers deliver relevant advertisement targeting to such queries on web content across Google site and through the Google network. To clarify, Google Adword programmit was contended that there are following 5 parties involved as far as transaction involving Indian advertisers are concerned:- 1. Google Inc. USA The program owner of the Adword and legal owner of Google web properties like Google search eninge. 2. GIL has got licence to exploit rates in Google web properties and commercially exploit Google Adword program globally, except America s region. 3. GIPL The appellant has got distribution rights under distribution agreement to sell online advertisement space to advertisers in India. 4. The adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. Counsel for the assessee has submitted that the argument of the department is contrary to the precedent set by the Hon ble High Court of Delhi in the case of Formula One World Championship (2016) 76 taxmann.com 6 (Del) and DIT Vs. Sheraton International Inc. 313 ITR 267 wherein the Hon ble Delhi High Court has held that use of intellectual property that is incidental to the main purpose of agreement does not enable the payment made thereof to qualify under the definition of royalty under the Act or DTAA. It was further contended that use of Google brand feature is probably the only intellectual property granted to the appellant under distribution agreement, however, the same has been granted to the appellant for the purpose of appellant achieving its obligation under the said agreement. Therefore, use of Google brand feature under distribution agreement would not render payment of royalty under the Act or under India-Ireland DTAA in the light of judgments of Formula One World Championship (supra) and Sheraton International Inc. (supra). 74. With regard to contentions of the revenue that GIPL has access to database of GIL, the ld. Counsel has submitted that the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident having Permanent Establishment in India. 77. The ld. Counsel for the assessee further contended that grant of distribution right in Adword program does not involve transfer of right in copyright. The appellant is a mere non-exclusive distributor or reseller of ad space through the Adword programe in India. The appellant merely purchases the advertisement space under the Adword program from GIL and distribute the same to advertisers in India. He quoted an example by saying that for advertisements in other mediums like newspaper magazine, the customer approaches an advertisement agency to have the advertisement public in one or more newspaper. The advertisement agency in turn approaches the respective newspaper entity or an entity that has bought media space for publishing of the advertisement of their customers. The consideration paid by the customer to advertisement agencies is in the nature of advertisement fees and the consideration paid by the advertisement agencies to the respective newspaper entity is also in the nature of advertisement fees, inspite of the fact that the advertisement may be displayed by considerable use of technology. Similarly, in the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., Google Ireland. There is no professional interaction between the distribution team and the ITES team since these are separate functions performed independent of each other. In fact they operate from separate location. ITES division operates out of units situated at Hyderabad and Gurgaon, whilstthe distribution division operates out of Mumbai and Gurgaon. It was further contended that even under ITES agreement, only limited rights to use intellectual property of Google Ireland is granted to the appellant i.e., to carry out only specific services under the said agreement. Under the ITES agreement, there are no rights that are granted to Google India for commercial exploitation of such intellectual property. Under the ITES segment, providing such limited right to use intellectual property to Google Ireland is entered in April 1, 2004 which is much before the agreement for Adword program on 12.12.2005. The ld. Counsel for the assessee has further quoted example of Indian distributor of luxury car. 79. With regard to the judgments referred to by the revenue, the ld. Counsel for the assessee has contended that all the judgments are distinguishable on facts, therefore they cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia developments of any derivative works works and software embodiment and hereby irrevocably agrees that such determinative networks and software embodiment shall be the sole and exclusive property of Google Ireland throughout the world from the date of its creation. From time to time promptly upon receipt of Google Ireland s request, Google India shall provide Google Ireland with assignments, in substantiallythe form of Exhibit-B hereto, facilitate Google Ireland sperfection of its rights in derivative works works and software embodiment in its jurisdiction in the world. 84. It is also noticed from the agreement that under the head Confidential information , during the course of performance of the agreement, Google Ireland will disclose certain confidential information to Google India, the appellant, solely to permit the appellant to perform its obligation under this agreement. Except as otherwise provided in this agreement, Google India agrees that such confidential information shall be kept secret by Google India during the term of agreement and Google India shall not disclose or facilitate disclosure of such confidential information to any person without the prior consent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd conditions of this Agreement; and C WHEREAS, Google India has expertise in rendering the above services and is willing to render such services for Google Ireland as an independent contractor on the terms and conditions of this Agreement; NOW. THEREFORE, in consideration of the mutual covenants and conditions contained herein. the parties agree as follows: 1. DEFINITIONS. 1.1 'Affiliate' shall mean any Person, whether de Jure or de facto, that directly or indirectly participates in the capital, control or management of either party or is under common ownership with a party to this Agreement or other entity actually controlled by, controlling, or under common control with a party to this Agreement. 1.2 Confidential Information' shall mean all data and information of a confidential nature, Including know-how and trade secrets, relating to the business, the affairs, the products, the development or other projects or services of Google Ireland or its-suppliers or its affiliate, including but not limited to Intellectual Property. Confidential Information may be communicated orally, in writing, or in any other recorded, electronic or tangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patent applications. patentable Ideas, Inventions, innovations and improvements; (iv) all know-how and trade secrets; v) all design and code documentation, methodologies, processes, design information, design flows, encoding techniques, applications, product information, formulae, engineering specifications, technical data, testing procedures, drawings and techniques and other proprietary information and materials of any kind; (vi) all software programs in both source code and object code format, including all testing software and software tools; (vii) all documentation, records, databases, drafts, designs, codes, drawings and algorithms; and (viii) all confidential and proprietary information related to any of (i) through (vii) above. - . 1.10 Software Embodiments shall mean all designs, discoveries, inventions, Products, procedures, improvements, developments, drawings, notes, Documentation, information, materials, Intellectual Property and Derivative works Works made, conceived or developed by Google India alone or with others which result from or relate to the Services 1.11 Software Technology shall mean all Intellectual Property, Confidential Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual Property, Software Technology and Documentation shall remain the exclusive property of Google Ireland and, as applicable, its licensors and/or suppliers. 5.2 Ownership of Derivative works Works and Software Embodiments. Google India shall keep Google Ireland promptly informed of Google India's development of any Derivative works Works and Software Embodiments and hereby irrevocably agrees that all such Derivative works Works and Software Embodiments shall forever be the sole and exclusive property of Google Ireland throughout the world from the date of its creation. As between Google Ireland and Google India no additional action shall be required to vest all right, title and ownership of such Derivative works Works and Software Embodiments in Google Ireland. Google India shall furnish to Google Ireland all such Derivative works Works and Software Embodiments developed by Google India as soon as they become available. From time to-time, promptly upon receipt of Google Ireland's request, Google India shall provide Google Ireland with assignments, in substantially the form of Exhibit B hereto to facilitate Google Ireland's perfection of its rights in the Derivat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dential Information shall remain the sole property of Google Ireland or its licensors and suppliers. Such materials shall be promptly returned: (i) upon Google Ireland's reasonable request, or (ii) in accordance with Section 12 upon termination of this Agreement, whichever is earlier. . . 12.5 Rights and Duties on Termination. ( a) Upon termination or expiration of this Agreement. ( i) Google India shall have the right to retain any sums already paid by Google Ireland under this Agreement and Google Ireland shall pay all sums accrued, but not yet paid, that are due under this Agreement as of the date of such termination; ( ii) Google India shall discontinue all use of the Confidential Information, Documentation, Intellectual Property and other Software Technology and shall have no further right with respect thereto. ( iii) Google India shall (except as specified in subsection (b) below) immediately return to Google Ireland or (at Google Ireland's request) destroy, all copies of the Confidential Information, Documentation and other Software Embodiments, in its possession or control. Google India hereby expressly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its obligation hereunder in a professional and workman-like manner consistent with reasonably applicable industry standards and in accordance with this agreement. Distributor will distribute Adword program in accordance with the training provided by Google (GIL). Further, as per clause 2.3 under the head Adword program Sign up process , distributor shall be responsible for uploading of advertisers information that is required by Google for participation in the Adword program. Under clause 2.5 distributor or the appellant shall conduct the business in a manner that reflects favourably at all times on the Adword program and on Google s goodwill and reputation and agrees to adhere to minimum levels of service as specified in Exhibit-C and breach of this section will constitute material breach of this agreement. Under clause 2.6, distributor will provide after sales service to advertisers in accordance with the broad instructions, training and standards of Google. 86. Under the head Google obligations , Google agrees to provide advertising space through Adword program for distribution by distributor to advertisers as set forth herein. GIL has also agreed to train the distributor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or terms of this agreement. It has been clarified that Google owns all right, title and interest in and to all information and data, including the user data collected by Google relating to advertisers in connection with the provisions of the Adword program. Distributor shall maintain all user data in accordance with the local law and regulation applicable to such data and shall implement policies and procedures with respect to user data, that are atleast as protective of the rights of the advertisers as is provided in the Google privacy policy set forth and all relevant policies implied therein. Upon termination or expiration of this agreement, all rights and licence granted by one party to other including but not limited to rights to use the other party s brand features shall cease immediately and each party shall promptly return to the other party or destroy and certify the destruction of all confidential information as defined in the non-disclosure agreement and section 7 of this agreement of the other party. As per the terms conditions, the distributor will make payment at mutually agreed intervals during the year and make the final trued-up payment on the basis of duly audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt ( Agreement ) is entered into as of December 12, 2005 (the Effective Date ) by and between Google Ireland Limited, with offices at 1st 2nd Floors Gordon House, Barrow Street, Dublin 4 Ireland ( Google ),and Google Online India Private Limited, a company incorporated under the Indian Companies Act, 1956 and having its registered office at 1st Floor, Prestige Sigma, No. 3 Vittal Mallya Road, Bangalore 560 001 ( Distributor ). WHEREAS 1. Google wishes to enter into the Distribution Agreement for its AdWords Program with Distributor; 2. Whereas Google Inc., a Delaware corporation, and Distributor entered into a Google AdWords Program Distribution Agreement, dated as of December 12, 2005.(the Prior Agreement ), and Google Inc. assigned its rights and obligations under the Prior Agreement to Google; and 3. Google and Distributor desire to terminate the Prior Agreement and further desire that this Agreement supersede and replace the Prior Agreement in its entirety; NOW, THEREFORE, in consideration of the promises and the mutual covenants, agreements, representations and warranties hereinafter set forth, Google and Distributor hereby agree as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oogle AdWords Program to Advertisers, all under and in accordance with the terms and conditions set forth in this Agreement. Distributor shall conduct its business for its own account, in its own name, aid not as an agent, employee, partner, or franchisee of Google. Distributor may not solicit business from and shall not distribute AdWords Program to (even if unsolicited), any entity that does not have a principal place of business within the Territory. For the avoidance of doubt, an entity's principal place of business will be determined by the place of such entity's registration. All inquiries by any such entity for sale of advertising space shall be referred to the designated Google contact within three (3) business days of receipt by Distributor of such inquiry. 2.2 Distribution Marketing of AdWords Program. Distributor agrees to market and distribute AdWords Program to Advertisers in the designated Territory, within the broad guidelines provided by Google, with its reasonable commercial expertise and own sales force and customer service infrastructure. Distributor shall not subcontract any of its functions or obligations under this Agreement to any third partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provided by Google. Google will make available to Distributor online information about Advertiser activity, on an aggregate and individual basis, which information shall contain include (i) the total number of Keywords purchased by Advertisers, (ii) the number of impressions of Advertisers' advertisement delivered across the Google network, (iii) the number of clicks delivered across the Google network for Advertisers' advertisement an (iv) the cost of clicks delivered across the Google network for Advertisers' advertisement. Distributor must set up AdWords Program advertising accounts in order to receive such online information. Google reserves the right, but has no obligation, to send reports about an Advertiser's activity directly to such Advertiser. If an Advertiser makes a request to Distributor to receive a user name and password to access such Advertisers individual AdWords Program account activity, Distributor' will grant such request after approval from Google. . 6. Brand features. Each party shall own all right, title and interest, including without limitation all Intellectual Property Rights, relating to its Brand Features. Google ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore making any public announcements or communication, including, but not limited to, any press releases, online publishing or direct mailings concerning or related lo the existence or terms of this Agreement. In addition, Distributor agrees to waive all claims against and release Google (and its affiliates, partners and representatives) from any claims or losses in connection with any above publications made by Google. 8. User Data. Google owns all right, title, and interest in and to all information and data, including the User Data, collected by Google relating to Advertisers in connection with the provision of the AdWords Program. Distributor shall maintain all User Data in accordance with local law and regulation applicable to such data, and shall implement policies and procedures with respect to the User Data that are at least as protective of the rights of the Advertisers as is provided in the Google Privacy Policy set forth at http://wwvv.qoogle.com/privacy.html and all relevant policies implied therein. . . 9.4 Effect of Termination. Upon any termination or expiration of this Agreement, (i) all rights and licences granted by one party to the other, inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails sent from Distributor to Google related to Advertiser issues, but excluding general communications between Distributor and Google (e.g. billing questions, training information) and technical issues that only Google can solve. E-Mail Escalation Limit ' shall equal five (5) e-mails per month for every one hundred (100) Advertisers serviced by Distributor, provided, however that the EMail Escalation Limit shall only apply beginning thirty (30) days after the completion of tile training. Timing for responses to Customer Queries from Distributor beyond the E-Mail Escalation Limit shall be at Google's sole discretion. Distributor agrees that Google will have the right, to review samples of communications sent to Advertisers to assess the quality of responses and modify communications accordingly. Google shall also have the right to send questionnaires to Distributor's customers to ensure that Distributor is providing an adequate level of service. Mutual Non-Disclosure Agreement This Mutual Non-Disclosure Agreement ( Agreement ) is made and entered into between Google Ireland Limited, for itself and its subsidiaries and affiliates ( Googl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same degree of care, but no less than a reasonable degree of care, as the Recipient uses with respect to its own information of a similar nature to protect the Confidential Information and to prevent: (a) any use of Confidential Information in violation of this agreement; and/or (b) communication of Confidential Information to any unauthorized third parties. Confidential Information may only be disseminated to employees, directors, agents or third party contractors of Recipient with a need to know and who have first signed an agreement with either of the Parties containing confidentiality provisions substantially similar to those set forth herein. .. 6. This Agreement imposes no obligation upon a Recipient with respect to Confidential Information that: (a) was known to the Recipient before receipt from the Discloser; (b) is or becomes publicly available through no fault of the Recipient; (c) is rightfully received by the Recipient from a third party without a duty of confidentiality; (d) is independently developed by the Recipient without a breach of this Agreement; (e) is disclosed by the Recipient with the Discloser's prior written approval; or (f) is requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serves the right to immediately terminate this SA upon written notice to customers and immediately suspend the entire customer account. This Google advertising agreement is available in revenue s paperbook at pages 1 to 6. The relevant clauses of this agreement are also extracted hereunder for the sake of reference:- This Adwords Agreement ('SA') shall be governed by terms and conditions ('Terms and Conditions) available at the following URL: http:l/www.google.co.in/ads/adwordsterms.html All terms contained in the Terms and Conditions are made a part of this SA through incorporation by reference. The signatory of this Service Agreement represents that she has read and agrees to such Terms and Conditions and the terms of SA. There shall be no force or effect to any different or additional terms of any related SA, purchase order or sales document. Google may decide at any lime, in its sole discretion, to change, suspend or discontinue all or any aspect of its advertising programs, including their availability, and shall notify Customer of material changes and discontinuations. Google shall have no liability for such decision. By signing belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Customer are subject to Google s approval. Google reserves the right to review, reject or remove any SA, advertisement, or URL link, except that Google will not cancel placement of an SA, advertisement, or URL link due to inventory demand for other advertisers. Customer pre-authorises Goo gle to modify or rearrange the text elements in advertising creative submitted by Customer. Google India Private Limited Advertising Program Terms 2. The Program. Customer is solely responsible for all: (a) ad targeting options and keywords (collectively Targets ) and all ad content, ad information, and ad URLs ( Creative ), whether generated by or for Customer; and (b) web sites, services and landing pages which Creative links or directs viewers to, and advertised services and products (collectively Services ). Customer shall protect any Customer passwords and takes full responsibility for Customer's own, and third party, use of any Customer accounts. Ads maybe placed on (y) any content or property provided by Google ( Google Property ), and unless opted-out by Customer (z) any other content or property provided by a third party ( Partner ) upon which Google places ads ( P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement ( Use ). Customer represents and warrants that (y) all Customer information is complete, correct and current; and (z) any use hereunder and Customer s Creative, Targets, and Customers s Services will not violate or encourage violation of any applicable laws, regulations, code of conduct, or third party rights (including, without limitation, intellectual property rights). Violation of the foregoing may result in immediate termination of this Agreement or customer s account without notice and may subject Customer to legal penalties and consequences. 93. We have also examined the statement of Shri Arijit Sarker, Director, India Operation, Head of Information Technology Enabled Services, GIPL, and he explains the functions of outsource ad reviews by stating that advertisers upload the ads which resides in data servers outside of India and these ads are reviewed in accordance with Google policies. 94% of these ads are automatically reviewed by the system, 6% of ad comes from manual review which is done through proprietary web application (approval bin) by the ad review team. Here the dispute is raised with regard to the 6% of ads which comes for the manual review to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the queries of client's customers: The queries generated by the customers of Google entities flow from customers through a workflow based on pre-determined parameters. On receiving the query, the team responds to the query. The response to is routed through Google Ireland; and * Reviewing advertisements for the purpose of running the same on the Google website: These services mainly involve IT enabled data processing work. The data comes from the customer and is routed to GIPL through a workflow based on language and tier. On receiving the data, the team reviews the advertisement to ensure that the advertisement conforms with the Google editorial guidelines. If the advertisement does conform, the customer's advertisement can then be viewed on the websites of Google or its partners located outside India. * GIPL reviews the advertisement on accordance with the company law and the local law regulation, through various software. These are automated software which provides assistance by filtering the content of the ads with specified keywords and helps GIPL in reviewing the content of the ads. Further, we wish to submit that the provision of IT enabled ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grants Google permission to utilize and automated software program to retrieve and analysis websites associated with the services for ad quality and serving purposes, unless customer specifically opts out of the evaluation in a manner specified by Google . What is the program utilized by Google for the above. Ans. The tool used in the applicable cases is Google Analytics and the same is available online. The same can be access by people who have been given user Id and passwords by the respective customer. Q10. Under what conditions and circumstances a ad is disabled and what are the tools used for the same Google disables ads which are in non-conformity with the local law and also not in accordance with Google ad policies. The compliance in this context is looked into by a central support team of GIPL and they take appropriate action. I will revert on the exact technicalities of disabling the ad serving and the team responsible. Q11. What are the tools available to the sales team for optimization of the ad campaign Ans. The sales team uses Google Analytics tools for the optimization as well as Google Adword and Adwords editor. Q12. What is the policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspects. The software is tested at Hyderabad unit of Google India before it is ready for release. These services mainly involve IT enabled data processing. The data comes from the customer and is routed through Hyderabad unit through a workflow based on language and tier. On receiving the data, the Adword team reviews the advertisement according to company policy and thereafter advertisement can be viewed on websites of Google or its partners located outside India. While explaining the profile of AE i.e., Google Ireland Ltd., it was explained that Google Ireland Ltd., is the wholly owned subsidiary of Google Ireland Holdings. It is an operating company of Google group and deals in business of selling, marketing and supporting certain internet search, advertising system and information organization and management technology products and services. Pursuant to licenceagreement with Google Netherland Holdings BV which in turn has a licence agreement with Google Ireland Holdings, GIL makes use of Google intangible assets and pays an arms length royalty to Google Netherland Holdings BV which in turn pays royalty to Google Ireland Holdings. 98. The complex functioning of the online a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation and other types of files. While producing these results, there are sponsored search results also, which is de facto advertising, and these sponsored search results help those advertisers visibility of their respective websites. Unlike web directories, which are maintained only by human editors, search engines also maintain realtime information by running an algorithm on a web crawler, and, therefore, the advertising services offered by these search engines are practically without any human touch and entirely automated. When we use these search engines, the search results are produced which are termed as search engine result pages , and, as we have seen a little while ago, these SERPs also include sponsored search results or online advertising. The online advertising on SERPs is a part of the business of search engines like Google. To an advertiser, it is generally a three step process advertiser creates advertisement and chooses keywords, which are words or phrases relating to his business. When people search on Google using one of the assigned keywords, the advertisement may appear next to the search results. The advertisements are then before an audience which is alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were made by the assessee. Let us, for example, take the case of a florist in Shillong who intends to use these services. His potential customer is a person looking for a florist in Shillong. When such a person actually uses the search words florist and Shillong in Google, the search engine result page could be like this: 99. The above search engine result page shows several sponsored results, termed and marked as ads and it is for these sponsored results being shown on the search engine result page that the Google charges a fees. The mechanism for this online advertising could be further appreciated by the following screenshots: 100. During the course of hearing, the ld. Standing counsel had placed reliance upon the book of Learning Google Adwords and Google Analytics authored by Benjamin Mangold, who was the first trainer certified by Google for both Google Adwords and Google Analytics in which he explained the functioning of Google Adword program. According to the author, the following services are required to be provided under the Adword program: a. Display Keyword Targeting b. Placement Targeting. c. Topic Targeting. d. Interest Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement, delivery and conversion which is only possible on the Google network with the access of tools of search engine and google analytics. Appellant is having the access to IP address at desktop or laptop or IP address of the tablet, photographs, time spent on website, eating habits, wearing preferences. With the help of IP address, Google search engine is having access to various information and data pertaining to the user of the website in the form of name, sex, city, state, country, phone number, religion, etc. Besides the above basic information, Google is also having the access of the history of the user as well as the behaviour of the person searching in google engine. Based on various inputs mentioned above and contents of more than 2 million website, the Appellant was able to provide the effective focus ad campaign to the advertiser. The AdWord Program and tools therein gives the advertiser to pick up the keywords, phrases which are similar in nature and germane, and in a digitalised and tabulated form and grouped together. The advertiser is having the access to this Google Analytics Program through the appellant. Whenever one particular keyword is searched, the targeted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f advertising initially with the help of broad match thereafter with the phrase match and thereafter with the exact match. With the help of keyword management, the Google AdWord Program takes care of misspelling, singular, plural, abbreviation, achronynms, stemming, etc. For example, if the advertisement shows the formal shoes, then the keywords are the formal plus shoes. If it is broad match keywords then the advertisement will show formal shoes, sports shoes, black shoes, party shoes, etc. However, if the advertiser had only opted for exact word match, then search result will show only a formal shoe. 105. The appellant helps the advertiser with the help of tools of AdWord Program to include or delete various variation of keywords in the realm of advertisement compaign and similarly the advertiser may with the help of Google tool can avoid the unnecessary traffic on its website. For example, if an advertiser does not want the visit of a surfer who is searching the service apartment on rent basis and only wants the person surfing to buy the apartment, then the Appellant can help him by putting negative words of rent in the keyword search. Therefore, the only person who is search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istributor agreement and the service agreement are to be read together as they are interconnected with the navel cord and without resorting to the service agreement the terms and conditions under the Google AdWord Distribution Agreement cannot be complied with. Therefore, in order to understand the function of Google Adword program, we have to read both the agreements together. 109. Now the question comes as to whether the payment made by the appellant to Google Ireland is in the nature of payment of royalty or a business profit in the hands of Google Ireland. In this regard, our attention was invited to the fact that Google Ireland is a non-resident and does not have any Permanent Establishment in India, therefore the payment made to Google Ireland is in the form of business profit and not taxable in India. But the revenue has treated the payment made by the appellant to Google Ireland after retaining a particular percentage of advertisement receipts as a payment of royalty and is chargeable to tax u/.s 9(1)(vi) of the Act. Since the appellant has not deducted tax at source on such payments u/s. 195 of the Act, the AO had treated the assessee to be in default and raised the dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as that these payments are made to foreign entities who did not have any permanent establishment in India. Therefore, the same were not taxable in India. The AO rejected the claim of the assessee. The assessee s contention that even under section 9(1) of the Income Tax Act, only so much of the income of the non-resident can be brought to tax as reasonably attributable to the operations carried out in India were rejected by the AO and he observed that irrespective of whether or not, in assessee s opinion, the income was taxable in India, the assessee ought to have approached the AO under section 195 prior to making the foreign remittance. Assessee s failure to do so, according to the AO, was contrary to the law laid down by the Hon ble Supreme Court in the case of Transmission Corporation of AP Ltd., Vs. CIT 239 ITR 587. With these observations, AO has disallowed the payment made by the assessee under section 40(a)(ia) of the Act. Assessee carried the matter before the CIT(A) but did not find favour with him and finally the matter travelled to the Tribunal. The Tribunal, having examined the nature of the advertisement programmes and the services rendered by the non-resident, was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving moved an application under section 195 or not, or on the payer or the payee having obtained an advance ruling in their favour or not. The law is now very well settled in this regard by Hon'ble Supreme Court's judgment in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456) wherein Their Lordships have categorically held that, where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof . In the said case, Their Lordships have, rejecting revenue's reliance on Hon'ble Supreme Court's judgment in Transmission's case (supra) - which has also been referred to by the Assessing Officer, observed as follows: ....... In Transmission Corporation case (supra) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax in India , then no TDS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Section 195(1) which in clear terms lays down that tax at source is deductible only from sums chargeable under the provisions of the I.T. Act, i.e., chargeable under Sections 4, 5 and 9 of the I.T. Act. 30. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that there was no failure in deduction of tax at source by the assessee before us inasmuch as the assessee did not have any obligation to deduct tax at source under section 195 for the simple reason that income embedded in impugned payments was not exigible to tax in India. Accordingly, the disallowance under section 40(a)(i) was uncalled for. Learned CIT(A) rightly deleted the impugned disallowance. We uphold the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 112. In this order, the Tribunal has placed a reliance upon the other order of the Tribunal in the case of Pinstorm Technologies Pvt. Ltd., Vs. ITO (supra). 113. In the case of Pinstorm Technologies Pvt. Ltd., t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ploading and display of banner of advertisement on its portal was in the nature of business on which no tax was deductible at source since the same was not chargeable in India in the absence of any permanent establishment (PE) of Google Ireland Ltd., in India. 114. Since this case was adjudicated by the Tribunal in the light of order of the Tribunal in the case of Yahoo India Pvt. Ltd., (supra) therefore, it has become necessary for us to examine the facts in the case of Yahoo India Pvt. Ltd. In the case of Yahoo India Pvt. Ltd., the facts culled by the Tribunal in its order are that the assessee company is fully owned subsidiary of Yahoo Inc., USA which is engaged in the business of providing consumer services such as search engine content and information on wide spectrum of topics, email, chat, etc. During the course of assessment proceedings, it was noticed by the AO that assessee has made a payment of ₹ 34,86,947 to Yahoo Holdings (Hong Kong) Ltd., being cost of services/research material/ advertisement media. Yahoo Holding (Hong Kong) Ltd., is engaged in the business of providing internet services, technological tools, marketing solutions for business to customers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 40(a)(ia) of the Act. 115. Aggrieved, the assessee preferred an appeal before the CIT(A) but did not find any favour with him and ultimately the matter reached the Tribunal and the Tribunal held that since the banner advertisements hosting service did not involve use or right to use by the assessee of any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo Holdings (Hong Kong) Ltd., limited to the assessee company and uploading and display of the banner advertisement on its portal was entirely the responsibility of the Yahoo Holdings (Hong Kong) Ltd., the assessee company was only required to provide the banner advertisement to Yahoo Holdings (Hong Kong) Ltd., for uploading the same on its portal. Thus the assessee had no right to access the portal of Yahoo Holdings and there is nothing to show any positive act of utilization or employment of the portal of the Yahoo Holdings by the assessee company. In the light of these facts, the Tribunal came to the conclusion that payments made by the assessee to Yahoo Holding (Hong Kong) Ltd., for the services rendered for uploading and display of banner advertisement to the Department of Tourism o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Florist, Pinstorm Technologies Ltd., Yahoo India Ltd., Therefore, issue may be decided following the ratio laid down in the aforesaid cases. If the Tribunal takes a view contrary to the view taken in the aforesaid cases, the matter may be referred to larger bench. In this regard, we have carefully perused the facts of the aforesaid cases and we find the facts of those cases are different and therefore the ratio laid down therein cannot be followed in the instant case. Hence we do not find any merit in the contention of the assessee for making a reference to larger bench if contrary view is required to be taken. We therefore reject these contentions of the assessee. 118. A reference was also made upon the order of the Tribunal in the case of Taj TV Ltd., (Supra), and on its perusal, we find in para 3, the Tribunal has recorded the facts of the case according to which Taj TV Ltd., has appointed Taj India as distributor vide agreement dated 01.03.2002 to distribute an encrypted advertiser and/or subscription supportive television programme services known as Ten Sports for cable systemsolely for exhibitions to subscribers in India. As per the said agreement, the distribution reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontent to the cable operators. operators which are transmitted by them to the ultimate customer/viewers. Further, rights over the content at all times lies with the Assessee Company and are never made available with the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute royalty . 119. Whereas in the instant case, assesse was appointed as distributor under the AdWord Distributor Agreement with the condition that assesse would provide on sale and after sale service which required the involvement of technical know-how, IPRs, derivative workss, etc. In the case of Taj TV, the Taj TV has simply appointed the distributor and no licence was given to the distributor to use the technology developed by Taj TV. The distributor was simply allowed to further transmit the programs to the viewers/customers. Therefore, facts of Taj TV Ltd., and the facts of the assesse are entirely different and the ratio laid down in this case cannot be applied to the facts of the present case. 120. A reference was also made in the case of DDIT Vs. Set India Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and these services could not be provided without resorting to technical support of the ITES division including the access to technical know-how, IPRs, copyright, derivative works etc. Therefore, facts of the case of Set India Pvt.Ltd., and facts of the instant case are not similar. Thus, the ratio laid down in that case will not apply to the present case. 121. A further reliance was also placed upon the judgment of the Delhi High Court in the case of DIT Vs. New Sky Satellite (2016) 68 Taxmann.com 8 Delhi and on its perusal we find that the assessee is a company incorporated in Thailand was engaged in the business providing digital broadcasting services as well as consultancy services to its customers who consisted of both residents of India and non-residents. The assessee company provided its services through its satellite T. In the course of assessment proceedings, the AO opined that income earned by assessee in India was taxable under 9(1)(vi) and the assessee would not get benefit of article 12 of India-Thailand DTAA. The Tribunal, relying upon the judgment of Delhi High Court in the case Asia Satellite Telecommunication Company Ltd., Vs. DIT 332 ITR 340 in which it has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance from those cases in favour of the assessee. 122. We have also examined the judgements referred to by the Revenue and in the case of CIT Vs. Synopsys International Old Ltd., (supra). We find that Synopsys US, was the owner of the copyright of electronic design and automation (EDA), Tool/software in certain geographies. It granted a licence to Synopsys International Ltd., Ireland, the assessee. The technical licence agreement is for a consideration to enable the assessee to use and commercially exploit the IP in EDA, tools and software in certain geographies. Synopsys US specially required the assessee to enter into end user software licence agreement (EULA) with the customers. The EULA between the assessee and the Indian customers has elaborate and restrictive clause, primarily with the object of protecting the owner s right in the product, documentation and IP in the software. The reading of the agreement shows that Indian customers had purchased the licenced product i.e., electronic design automation (EDA), tools /software from the assessee for its use as a tool on application software. The EDA tool support the design and production of integrated circuit (ICs).As fabricat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court has observed that the licence is a permission to do something that would otherwise be unlawful and the question arise therefore as to what legal permission is granted by the software licence. For transfer of such right, if consideration is paid, it is not a consideration for transfer of copyright but for use of IP embedded in the copyright and therefore it is for the transfer of one of those rights of the owner of the copyright. It is not a copyright but it is in respect of a copyright. When copyrighted article is sold and the end user gets the right to use the intellectual property embedded therein, it is not a right in the copyright as such. Therefore, the mode adopted or the terminology given is not decisive to decide the nature of transfer, ultimately it is substance which is to be looked into. The relevant observation of the Hon ble High Court in this regard is extracted hereunder for the sake of reference: 43. A licence is a permission to do something that would otherwise be unlawful. The question arises, therefore, as to what legal permission is granted by a software licence. The answer is, briefly, that in some cases the licence will be a permission to use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright, the right to use the confidential information embedded in the software in terms of aforesaid licence makes it abundantly clear that there is transfer of certain rights which the owner of a copyright possess in the said computer software programme in respect of copyright owned. In terms of the DTAA, the consideration paid for the use or the right to use the said confidential information in the form of computer programme software itself constitutes royalty and attract taxes. The relevant observation of the Hon ble High Court is extracted hereunder for the sake of reference: As is clear from the description of the agreement it is an end-user software licence agreement. Clause 2.1 deals with grant of rights. It provides, Software License Synopsys hereby grants licencee a non-exclusive, non-transferable license, without right of sub-licence of use the licensed software and design techniques onlyin the quantity authorized by a licensee in accordance with the documentation in the use area. Licensee may make a reasonable number of copies of the licensed software for backup and/or archival purposes only. Merely because the words non-exclusive and non-transferable is used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide efficient on sale and after sale services which are only possible with the aid of ITES division. Under this AdWord Agreement and the Service Agreement, the assessee was given licence to use the confidential information, technical know-how, trade mark, brand features, derivative works, etc. Though the ownership of these intangibles remains with the GIL or the Google Inc., but the assessee was given the licence to use it in order to provide better service. Therefore, the facts of this case are similar to that case of Synopsys International Ltd. Hence the ratio laid down by the jurisdictional High Court in that case apply to the present case. 128. It was emphatically argued by the learned Counsel for the assessee that the payments made by the assessee under the AdWord Distributor Agreement was in fact a business profit in the hands of the GIL as it was paid on account of purchase of AdWord space,though the AdWord Advertisement space was further sold to different advertisers. The nature of payment remains the same i.e., the payment for purchase of AdWord space. Thus it should be the business profit in the hands of the GIL. It was further argued that there was no transfer of tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreement, all rights and licences granted by one party to other including but not limited to use the other parties brand features shall seize immediately and each party shall promptly return to the other party or destroy and certify the destruction of all confidential information as defined in the non-disclosure agreement and section 7 of this agreement on the other party. The brand features and the confidential information has been defined in this agreement and the same were also extracted in the foregoing paras of this order according to which the brand features includes the title, interest and intellectual property right relating to brand features and the confidential information means the confidential information shared by one party to other as per this agreement meaning thereby under the AdWord Distributor Agreement, the appellant has access to the confidential information, intellectual property rights and the brand features of the GIL in order to provide effective services under the AdWord Distributor Agreement. The technical services are required to be provided by the appellant under the AdWord Distributor Agreement as per services agreement, according to which the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, documentations and other software embodiments in its possession or control and not to use the same after the expiration or the termination of the agreement. 131. From the careful perusal of this AdWord Distribution Agreement and the Service Agreement, we find that appellant has not only purchased the advertisement space from the GIL and resold it to the advertisers against certain advertisement charges but the appellant was required to provide on sale and post sale technical services to the advertiser and the GIL, which are not possible without resorting the service agreement. In fact, the assessee obtained the advertisement space under the AdWord Distribution Agreement and resell it to different advertisers along with on sale and after sale services. With the aid of ITES division, the appellant is required to execute the programs and also provide all technical support to the advertisers and GIL. As per the agreement with the advertisers, the advertisers are required to approach only the appellant and not the GIL. Appellant is in fact required to sort out all glitches to be faced by the advertisers while putting the ads on the AdWord Program. Having examined functioning o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning technical, industrial, commercial or scientific knowledge, experience or skill ; 57[(iva) the use or right to use any industrial, commercial or scientific equipment58 but not including the amounts referred to in section 44BB;] ( v) the transfer of all or any rights (including the granting of a licence) in respect of's any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or ( vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to 57[( iv), (iva) and] (v). [ Explanation 3.-For the purposes of this clause, computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.] 60[Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has alway ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 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 film 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 industrial, commercial or scientific experience; ( b) The term fees for technical services means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d find that the assessee has an access to patent, technical know-how, IPRs, trade mark, the process, derivative works, brand features, etc., of the GIL, therefore the payments of advertisement fees made by the assesse after retaining a particular part of it to GIL is not the payment simpliciter towards the purchase of AdWord space which may be treated as business profit in the hands of the recipient but it is a payment of royalty to the GIL in the light of definition of royalty given under the Act and the DTAA. Therefore, we conclude that the payment made by the assesse to GIL is a payment of royalty and as per provisions of section 9(1)(vi) of the Act, it is an income deemed to accrue or arise in India. 136. Ld counsel for the asseessee has also raised an argument that Royality can only be taxed on receipt basis in the light of definition given in Article 12 of DTAA and not as per domestic law. In this regard.We have examined the judgment of the Apex Court in the case of Palam Gas Service Vs. CIT [2017] 81 taxmann.com 43 (SC) referred to by the Revenue in which their Lordship have examined the scope of provisions of section 40(a)(ia) in respect of word payable occurring therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to deduct the tax at source and paying it over to the Central Government is read holistically, it cannot be held that the word 'payable' occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellant herein, then even when it is found that a person, like the appellant, has violated the provisions of Chapter XVIIB (or specifically Sections 194C and 200 in the instant case), he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences. The Punjab Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects. We would again quote the following paragraphs from the said judgment, with our complete approval thereto: 26. Further, the mere incurring of a liability does not require an assessee to deduct the tax at source even if such payments, if made, would require an assessee to deduct the tax at source. The liability to deduct tax at source under Chapter XVII-B arises only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from the said judgments. 17. Insofar as judgment of the Allahabad High Court is concerned, reading thereof would reflect that the High Court, after noticing the fact that since the amounts had already been paid, it straightaway concluded, without any discussion, that Section 40(a)(ia) would apply only when the amount is 'payable' and dismissed the appeal of the Department stating that the question of law framed did not arise for consideration. No doubt, the Special Leave Petition thereagainst was dismissed by this Court in limine. However, that would not amount to confirming the view of the Allahabad High Court (See V.M. Salgaocar Bros. (P) Ltd. v. Commissioner of Income Tax, (2000) 243 ITR 383 and Supreme Court Employees Welfare Association v. Union of India, (1989) 4 SCC 187. 18. In view of the aforesaid discussion, we hold that the view taken by the High Courts of Punjab Haryana, Madras and Calcutta is the correct view and the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P) Ltd., (2013) 357 ITR 642 did not decide the question of law correctly. Thus, insofar as the judgment of the Allahabad High Court is concerned, we overrul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by the appellant under the AdWord Program, one has to read both the agreements together. In the foregoing paras, we have already adjudicated and concluded that both these agreements are connected with the navel cord and they cannot be segregated. Therefore, both the agreements are to be read together in order to find out the actual functioning of the appellant, as held by jurisdictional High Court in the case of Synopsys International Ltd., (supra) that it is necessary to look into the terms of the agreement entered into between the parties as it would be purely question of fact to be decided on the basis of the intention of the parties as could be gathered from the written words used in the agreement. During the course of hearing, our attention was also invited to return filed by the GIL for the assessment year 2009-10 in which the GIL has shown its method of accounting as mercantile system of accounting. Once the GIL has itself has declared the method of accounting as mercantile system it cannot claim that for the purpose of royalty, system of accounting should be on cash/reciept basis. Moreover, the adjustment entries are to made in the books of accounts of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to demonstrate that since the intention of the Legislature to treat the payment by the advertisers to the non-resident is a business profit in the hands of the recipient the same should be treated in other cases also where the payments are made by the residents to non-residents for a consideration of use of technical know-how, IPRs, copyrights, derivative workss and other intangibles. But we do not find any merit in this argument as the equilization levy is to charged only on consideration for specified services and not others where there is use of IPR, copyright and other intangibles. In the instant case, under AdWord Distribution and Service Agreement, the appellant has acquired licence to use IPRs, copyright and other intangibles to provide better services either to GIL or to advertisers. Therefore, the introduction of equilisation levy would not convert the nature of payment made by the appellant to GIL. 140. With regard to another limb of argument of the learned Counsel for the assessee that in providing a space on Google AdWord Program to the advertisers, the trade mark or the GIL was not involved therefore consideration paid by the appellant to GIL is not royalty, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowingthree categories constituted payment of royalty under article 12(3)(a) of the DTAA; (1) use of trade mark, trade name and the stylized S service mark, even though the agreement allowed its use at no cost it being a colourable device the payment received by the assessee had to be attributed to the user of the said intangible assets ;2) Payments towards reservation service and (3) lastly payments towards maintenance of high international standards. In respect of last category of service which were in the nature of publicity, marketing and promotion activities and had been rendered outside India, according to CIT(A), they constitute a commercial income and in the absence of PE in India the said payments could not be brought to tax. 141. The matter was carried to the Tribunal and the Tribunal examined the arguments and the related nature of services and came to the conclusion that the main service rendered by the assessee to its client was advertisement, publicity and sales promotion,keeping in mind the mutual interest and in that context, the use of trade mark, trade name or the stylized S or other illuminated sereivces referred in the agreement with the assessee were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusive nominating body at whose instance the event promoter is permitted participation. 144. The FOWC and Jaypee Sports both approached the AAR on issue whether the payment of consideration receivable by FOWC outside India in terms of RPC from Jaypee was or was not royalty as defined in article 13 India-UK DTAA. The AAR having examined the contents of the agreement in the light of rival submissions have concluded that firstly the amount paid was royalty secondly FOWC had no fixed place of business nor was doing any business activity in India and had not authorized any organization or entity to conclude contracts on their behalf and therefore had no PE in India. The assessee moved to the High Court against both the observations of the AAR and with regard to question whether the payment made by Jaypee to FOWC is in the nature of royalty under DTAA for the use of later s trade mark. The Hon ble High Court has examined the facts of the case and have come to the conclusion that from the tenure of the agreement, the main purpose of the RPC is not for grant of trade mark rights or privilege or licence to use, and the payment made to it under RPC are not the royalty either in the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the payment amounted to royalty is contrary to law. They argue that the AAR also erred in distinguishing and not following Sheraton(supra). The revenue on the other hand, supports the AAR ‟ s conclusions and findings; it urges that the terms of the ALA and the RPC clearly show that the payment of US$ 40 million was to enable Jaypee the use of the F1 trademark and logo; they point out that these marks figured prominently in the trackside advertisements and the tickets that were printed. The use of the logo, to promote the event, therefore meant use of the F1 marks. The nomenclature or terms of an agreement are not always determinative of the true nature of the transaction; in this case, it clearly was to permit the use of the F1 mark. The character of the event would have been different had the F1 marks not been used by Jaypee. It was held that the popularity of the event is a result only of the use of the Marks, and that without those marks it would not enjoy its popularity otherwise. 66. Under trademark law, particularly in India, trademark use even for advertisement purposes is to be preceded by prior consent of the proprietor and any unauthorized use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentary on Article 12 of the Model Convention states that payments solely made in consideration for obtaining the exclusive distribution rights of a product or service in a given territory are not royalty, since the resident distributor does not pay for the right to use the trade name or trade mark under which the products are sold but merely obtains the exclusive right to sell in his state of residence the product that he is agreeing to buy from the manufacturer; such payments will be characterized as business income. 69. It is relevant here to consider the conditions in the RPC and the ALA, which FOWC entered into with Jaypee. Under recital B to the RPC, FOWC clearly has the exclusive right to exploit the commercial rights in the championship and to award Jaypee the right to host, stage and promote F1 Grand Prix events. Clause 17, states that FOWC would through reasonable endeavors ensure that at least sixteen cars participate in the Event. Clause 18 forbids Jaypee from making any audio or visual image of the event; W.P.(C) 10307/2016, W.P.(C) 9509/2016 W.P.(C) 10145/2016 Page 58 likewise there are restrictions in clause 19 of the RPC. Clause 23.2 permits FOWC to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 2.3 of the ALA W.P.(C) 10307/2016, W.P.(C) 9509/2016 W.P.(C) 10145/2016 Page 59 prohibits Jaypee from using any of the licensed marks, or as part of the name of the circuit, any corporate name, any domain name, website address or other URL identification or equivalent used in association with Jaypee. Jaypee thus has no IP rights whatsoever independently of the staging and hosting of the event. The undertakings given by Jaypee, set out in Clauses 3.1(e) and 3.6 of the ALA too reinforce this conclusion. These are strong indications that the parties did not intend, through the RPC and the ALA, to license the trademark. Thus, it does not amount to royalty under the DTAA. The court is in agreement with FOWC ‟ s position on the definition of royalty as set out in the second Explanation to Section 9(1)(vi) of the Act; it is significantly broader than the definition of royalties set out in Article 13(3) of the India-UK DTAA. The definition in the Act specifically covers and includes lump-sum payments, whereas Article 13(3) of the DTAA only refers to payments. 72. The impugned order neither contains any discussion nor finding whatsoever on this crucial issue eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs, the payment made in lieu of that is certainly a payment of royalty on which appellant is required to deduct TDS. These facts were known to the appellant since the execution of both the agreements. Therefore, it cannot be said that appellant was under the bonafide belief for non-dedcution of TDS. The facts in the case of Kotak Securities Ltd.(supra), are different as in that case the appellant was under bonafide belief with regard to nature of payments as no dispute was ever raised by the Revenue in earlier years. But in the instant case, the appellant was aware of the nature of payments since the execution of agreements at different points of time as to what kind of services were required to be provided by the appellant to the GIL under the Google AdWord Program and the Revenue has disputed the nature of claim raised by the appellant since beginning. Therefore, the ratio laid down in the case of Kotak Securities will not apply to the present facts of the case. 147. We have also carefully examined the judgment of the Apex Court in the case of GE India Technology Cen. Pvt. Ltd., Vs. CIT 327 ITR 456, CIT Vs. Eli Lilly and Co., (India) Pvt. Ltd., (supra) and Transmission Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. We therefore confirm the order of the CIT(A) upholding the ordert of the AO passed under section 201(1) and 201(1A) of the Act in this regard. 149. IT(IT) A No. 1295/Bang/2014 Through this appeal, the revenue has assailed the order of CIT(Appeals) inter alia on the following grounds:- 1. The learned CIT (Appeals) has erred in partly allowing the appeal of the assessee which is opposed to law, equity, facts and circumstances of the case. 2. The learned CIT (A) erred in fact by not appreciating the Assessing Officer's conclusion based on the material available on the record that the Google Ireland Limited (GIL) is not the beneficial owner of the Royalties paid by the Google India Private Ltd(GIPL) 3. The learned CIT (A) erred in fact and law by holding that the M/s.Google Ireland Limited (GIL) is the beneficial owner of the royalties paid by the GIPL and the rate of TDS is at 10.556%. 4. The learned CIT (A) erred in not appreciating the reliance of the AO in the statement made under Oath before the Public Accounts Committee, House of Commons, British Parliament by Mr. Matt Brittin of Google UK Ltd and the various articles appearing in WW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concept of beneficial ownership was introduced in the tax treaties as a counter measure against the treaty shopping to confine bargain only to the contracting states which were intended to benefit from the treaty. The concept of beneficial ownership is a tool to protect the bargain between the two contracting states. None of the country would intend to relinquish its tax base without getting something back for it. The beneficial owner is used to confine the bargain to the parties who were intended to benefit from it. 153. The AO further noticed in India-Ireland treaty that the treaty does not use the general term owner , but uses specific term beneficial owner . Therefore treaty intends to give benefit of withholding tax at the reduced rates only to the person who can be loosely described as a final owner of income. The concept of final owner of income can be elaborated with the help of attributes of ownership of income. The AO further observed that income ownership has several attributes such as right to possess, use or manage income, power to alienate and ability to consume waste or destroy, the risk of depreciation and hope of appreciation. It is possible to split these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GIH. GNHBV in turn by license agreement has given the rights to use the Adwords program to GIL for which GIL pays royalty to GNHBV. The AO has depicted the relationship diagram in his order and for the sake of reference, we extract the same hereunder:- 155. The AO accordingly asked the assessee to furnish (1) the agreement between GNHBV and GIL, (2) the agreement between GIH and GNHBV, and (3) the agreement between Google Inc. and GIH; but the assessee did not furnish the copies of agreement before the AO and the AO observed that it would be difficult to accept the claim that GIL is the beneficial owner of royalties payable by GIPL to GIL as the terms and conditions under which GIL was given the licensing rights over Adwords program is not known. He further observed that GIL is an operational company, but this fact alone is not sufficient to state that GIL is the beneficial owner of the amounts paid/payable by GIPL. In the absence of these agreements, the AO has examined the various material on the Google group in the World Wide Web in order to understand the relationship between different entities of the Google group. He has also examined the Nineteenth report of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company undermined its own argument since it remits its non-USA profits (including from the UK) not to the USA but to Bermuda and therefore may be depriving the USA of legitimate tax revenue as well as the UK. Subsequently, Google told us that there were no outstanding issues with HMRC about Google UK's accounts. HMRC is currently carrying out a review of the tax returns filed by Google. UK for 2005-11 inclusive and Google told us this is standard practice and that it is co-operating fully with that review. Q472 Chair: You very helpfully told us that about 700 people sell into the UK-marketing people- compared with 200 in Ireland. What I do not understand is that the Irish guys pay a fee to Google Netherlands Holdings BV. Is that to save withholding tax? Matt Brittin: There was an arrangement in place to do that, but I understand that it is no longer necessary. Q473 Chair: But was it put in place to save withholding tax? Matt Brittin: That is my understanding. Q474 Chair: It was. Thank you. That is a very direct answer, and the first we have had today. But it is no longer necessary. Does it therefore go to Google Ireland Holdings? Matt Brit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eteenth Report of Session 2013-14 , dated 10th June 2013 which is available on the WWW. The relevant parts of the report are reproduced as under: Q143 Stephen Barclay: On that point, where is the intellectual property owned on the work those engineers are doing? Matt Brittin: I think it depends on the specific projects that they are working on. The intellectual property for Google is licensed, as you know and referred to earlier, to Google Ireland, in order that Google Ireland can sell that aspect of the product that is saleable-the advertising platform. Q144 Stephen Barclay: So some of the intellectual property is owned in Ireland on that work? Matt Brittin: Ireland have the right to sell those products. Q145 Stephen Barclay: Is some of it also owned in Bermuda? Matt Brittin: Yes. .. Q150 Stephen Barclay: Right. What tax rate do you pay on transfers from Ireland to Bermuda? Matt Brittin: I don't think we pay a tax rate on Ireland to Bermuda. We talked about Bermuda in the last hearing, and I confirmed that we do use Bermuda. Obviously, Bermuda is a low-tax environment. Q151 Stephen Barclay: Sure. So, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments in buildings and, as I have mentioned, we have just committed to King's Cross. 6.2 It is evident from the Report of the Public Accounts Committee of the House of Commons that the profits derived by GIL are transferred to the entity GIH which is controlled and managed in Bermuda, a tax haven. Even in the case of India the revenue earned by GIPL on sale of advertising space are routed through the same structure and the profits finally end up with GIH which is controlled and managed in Bermuda. The structure has been used by Google in order to avoid tax. 6.3 The fact that the profits from advertising services end in the tax haven Bermuda also appears in the discussion between the one of the Directors of OECD and the Irish Legislators in the WVVW in the link http:/ oireachtasdebates.oireachtas.ie/debates%20authoring/DebatesWebPack.nsf/comm itteetakes/FI52013072300005?opendocument. This link is regarding Global Taxation Architecture: Discussion with Director of the OECD Centre for Tax Policy and Administration Mr. Pascal Saint-Amans and the Irish legislators. At page 9 in the link, the Irish Legislator Deputy Richard Boyd Barett describes the term Double Iris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of view is subject to corporation tax. This second holding company acts as the EMEA hub where, nominally,pass through. However, for the money to flow to the Cayman Islands or Bermuda it requires the use of the Netherlands. In the Netherland's another company is created called Netherlands Holdings B.V, for example. The case of Google is perhaps the best known, although the structure exists for many, if not potentially all companies. We know, for example, that the two 'Irish' holding companies are Google Ireland Holdings and Google Ireland Limited. So, when a French, Egyptian or Indian customer buys services from Google (such as Adwords or Adsense) their credit card is debited to a bank account located in Dublin and appears as a sale in Google Ireland Limited. While Google Ireland Limited takes the sale, it has to 'buy' the rights for the Google algorithm or Google trademark from Google Ireland Holdings, which is nominally in Bermuda. However, rather than the money moving directly to Bermuda it goes to a holding company in the Netherlands, Google Netherlands Holdings B.V, from which it is passed hack to Google Ireland Holdings. The Netherland's en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et capitalization, according to regulatory filings in six countries. It's remarkable that Google's effective rate is that low, said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. Countless Companies .. Transfer Pricing The tactics of Google and Facebook depend on transfer pricing, paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries .. .. The Double Irish As a strategy for limiting taxes, the Double Irish method is very common at the moment, particularly with companies with intellectual property, said Rich ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to company filings. Law Firm Directors 7 This Bermuda-managed entity is owned by a pair of Google subsidiaries that list as their directors two attorneys and a manager at Conyers Dill Pearman, a Hamilton, Bermuda law firm. Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like Bermuda, avoiding Irish taxes. To steer clear of an Irish withholding tax, payments from Google's Dublin unit don't go directly to Bermuda. A brief detour to the Netherlands avoids that liability, because Irish tax law exempts certain royalties to companies in other EU- member nations. The fees first go to a Dutch unit, Google Netherlands Holdings B. V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees. The Dutch Sandwich Inserting the Netherlands stopover between two other units gives rise to the Dutch Sandwich nickname. The sandwich leaves no tax behind to taste, said Mur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian company is not the beneficial owner but it was only the US parent which is the beneficial owner of such shares. Accordingly benefits under Indo-Mauritus tax treaty were denied on the basis of applying look through approach. The Court observed that the voting rights, rights of management and rights of sale or alienation of shares were vested with the US entity and hence the same is the beneficial owner 6.9 The Hon ble AAR dealt with the issue of beneficial ownership in the case of Nat West Securities B.V. v. Dy. CIT [2005] 1 SOT 503 (Mum.), X Ltd., In re [1996] 220 ITR 377/86 Taxman 252 (AAR-New Delhi). A British bank incorporated its subsidiaries in Mauritius and routed investments into India through those subsidiaries and claimed benefits of Indo Mauritius tax treaty against dividend income etc. AAR observed that Mauritius subsidiaries are not beneficial owners of the shares, AAR rejected application on the ground that transaction was designed to avoid taxes. The facts placed before the AAR led to the inference that the purpose of investment through subsidiaries was only for avoidance of taxes and availing lower tax rates through Indo-Mauritus tax treaty. As the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup entity GUI which is controlled and managed in Bermuda. 7.4 GIPL did not avail the opportunities given to furnish the agreement between GIL and GNHBV, agreement between GNHBV and GIH in order to substantiate its claims that GIL has all the attributes of ownership over the sums paid/payable by GIPL. The Assessee company, GIPL has merely furnished the Financial statements of GIL to claim that GIL is the actual beneficiary of the sums paid/payable to it but the agreements between GIL and GNHBV and GNHBV and GIH have not been furnished. These agreements contain the terms and conditions under which GIL has been given the licensing rights over the Adwords program. These agreements also contain the stipulations that decide the royalty payments that have to be made by GIL on the sale of Adwords programs. GIL under the agreement may be required to transfer all the revenues from sale of Adwords programs to GNHBV after keeping a small sum to meet the administrative expenses. Therefore the submissions of the financial statements of GIL the year ending December 2012 only shows that GIL is an operational company but it does not say anything with respect to the ownership and control ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be accepted as evidence that he is a resident of that contracting state and income-tax authorities in India will not go behind the TRC and question the resident status. He also invited our attention to the clarification regarding the taxation of income from dividends and capital gain under Indo-Mauritius Double Tax Avoidance Convention (DTAC) with the submission that the clarification was issued with regard to taxation from dividends and capital gains under Indo-Mauritius DTAC. Though it has been clarified that wherever certificate of residence is issued by Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. Therefore the clarification issued would not apply to the income received in the form of royalty. Moreover, the AO has made out a case that different layers of holdings were involved in the Adwords program and the revenue has to be shared amongst them, therefore it cannot be presumed only on the basis of TRC that GIL is the beneficial owner. Therefore, the CIT(Appeals) has wrongly concluded that GIL is the beneficial owner under the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of House of Commons, Committee of Public Accounts, the ld. Counsel for the assessee has contended that report was prepared in different context, therefore it cannot be relied on while examining the beneficial ownership character of GIL. He however placed reliance upon the order of the CIT(Appeals) for the AY 2013-14. 163. Having carefully examined the orders of lower authorities in the light of rival submissions, we find that in AY 2013-14, the CIT(Appeals) has accepted the contention of the assessee that GIL is the beneficial owner of the royalty received, whereas in the succeeding years, the CIT(Appeals) has concurred with the view of the AO that GIL is not the beneficial owner. Now the assessee and revenue are before us on this issue. 164. During the course of hearing, we have directed the assessee to produce the agreements executed between Google Inc. USA and GIH, GIH GNHBV and GNHBV GIL. In response thereto, the ld. Counsel for the assessee has stated that they have no access to these agreements. He however filed the license agreement executed between GIL and GNHBV. It is also noticed from the record that GIPL is a 100% subsidiary of Google International LLC and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to Licensee for the Territory, and Licensee wishes to license those rights as provide herein. 1. Definitions.For purposes of this Agreement, the following terms shall have the meanings set forth below: LICENSED MARKS means those trademarks, service marks and trade names owned or used by Licensor as of the Effective Date of this Agreement, including those specifically listed on EXHIBIT B. LICENSED TECHNOLOGY means any and all technologies, procedures, processes, designs and design rights, inventions, discoveries, know-how, patents (including utility models and the like, and patent applications pending before any relevant authority worldwide, with any additions, continuations, continuations-inpart, divisions, reissues or extensions based thereon), copyrights (and other rights of authorship), mask work rights, trade secrets, computer programs (in source code and object code form), flow charts, formulae, enhancements updates, translations, adaptations, information, specifications, designs, process technology, manufacturing requirements, quality control standards and any other intangible property owned or licensed in, in whole or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is obligated to Licensor under this Agreement. . f. Ownership of Licensor Intangibles ( i) Licensor Ownership of the Licensed Technology. Licensee acknowledges that it is not the legal owner of the Licensed Technology and that the Licensed Technology is not proprietary to, or does not constitute a trade secret or confidential information of, Licensee. Licensee agrees not to contest Licensor's ownership of its interests in the Licensed Technology or Licensor's right to license the use of the Licensed Technology on the terms and conditions of this Agreement. . 3.2 Licensor Ownership of Licensed Marks Acknowledged. Licensee acknowledges that it is not the legal owner of the Licensed Marks and that its only rights in the Licensed Marks are those granted under this Agreement. Licensee agrees not to contest Licensor's ownership of its interests in the Licensed Marks or Licensor's right to license the use of the Licensed Marks on the terms and conditions of this Agreement. .. f. License Fee Statement. On the date that each payment is due under the terms of this Agreement, Licensee shall concurrently deliver to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g all payment obligations, provided that Licensor shall not be required to prosecute or maintain any such patents. 165. Other agreements executed between Google Inc and GIH and GIH GNHBV were not placed before us. Therefore, in the absence of these agreements, it is very difficult for us to decide as to how much share GIL will get out of the revenue collected in the form of royalty under the Adwords Distribution agreement and services agreement from the GIPL. Since the onus is upon the assessee to establish that GIL is the beneficial owner, assessee could not place any evidence except the oral submission. 166. We have also examined the clarification issued by the Ministry of Finance through Circular No.789 dated 13.04.2000 and the press release dated 01.03.2013. Through Circular No.789, it has been made clear that wherever certification of registration is issued by Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC. Through Press Release dated 01.03.2013, it has been clarified that the Tax Residency Certificate (TRC) produced by a resident of a contracting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its beneficial ownership. Question Nos. 5 and 6 modified as indicated above are answered accordingly. 169. In the case of Alibaba.com E-Commerce Vs. ADIT (supra), the Tribunal has observed that tax residency certificate is sufficient to determine the proof of residency and the Income Tax Authorities cannot ignore the valid tax residency certificate issued by the Government authority of the other contacting state. The Tribunal has also taken a cognizance of the judgment of the Apex Court in the case of Vodafone International Holding BV Vs. UOI (supra) in which the court has held that the tax residency certificate (TRC) does not prevent enquiry into a tax fraud, for example where an OCB is used by Indian resident for wrong tripping or any other illegal activities and nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of OCB in the entire transaction and held that without any evidence the Revenue cannot treat the assessee merely conduit of Alibaba.com, Hong Kong contrary to the material on record. 170. The Authority of Advanced Rules in X Ltd., (supra) did not answer the questions posed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rogram through Adwords accounts. Worldwide, hundreds or thousands of advertisers use the Adwords program. It was also observed that Google derives most of its revenue from its online advertising business, which involves publishing or displaying advertisements as sponsored links on its search results pages. It was also made clear in that judgment that participation in the Adwords program is subject to Google s Terms of Service, the Adwords Program Terms and applicable Google policies, etc. From the reading of the judgment, it is clear that Google Inc. is the ultimate body which controls the Google Adwords program and they also share some part of revenue collected on account of Adwords program. It is also undisputed fact that Google Inc. has licensed the Adwords program and other intangibles to Google Ireland Holdings (GIH), who in turn licensed to Google Netherlands Holdings B.V. (GNHBV) and in turn GNHBV further licensed the Adwords program and intangibles to Google Ireland Ltd. (GIL), who finally has given the distributor rights of the assessee for selling the Adwords space to advertisers, meaning thereby, whatever revenue is generated on account of sale of Adwords space to differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of beneficial ownership in the light of the license agreements executed between the parent holdings of the GIL. We accordingly direct the appellant to extend all sort of cooperation by producing the agreement executed between the various parent holdings of the GIL. Thus the matter is restored to the file of the AO to readjudicate the issue of beneficial ownership in terms indicated above. Accordingly appeal No. 1190/Bang/2014 is dismissed and appeal Nos. 949 950/Bang/2017 are partly allowed for statistical purposes and appeal No. 1295/Bang/2014 is allowed for statistical purposes. 173. IT(TP)A Nos. 374 and 466/Bang/2013 These are cross appeals preferred by the assessee as well as the Revenue against the order of the CIT(A) pertaining to the assessment year 2008-09. Certain grounds are common in both these appeals, therefore we adjudicate them together. However for the sake of reference, we extract the grounds of appeal raised in both the appeals as under: Grounds of appeal in IT(TP)A No. 374/Bang/2013 Based on the facts and circumstances of the case, Google India Private Limited (hereinafter referred to as the 'Appellant') respectfully sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -computation of profits from distribution of AdWords program in India 10. The Ld CIT(A) has erred in upholding that the profits of Google Ireland Ltd. from the AdWords program, to the extent they were attributable to activities carried on in India, could be taxed in the hands of the Appellant. 11. The Ld CIT(A) has erred in holding that 40% of re-computed profits on the ₹ 167,32,01,616, being the revenues collected in India under the AdWords program, are attributable to activities carried on in India. 12. The Ld CIT(A) has erred in holding that the profit from revenues collected in India under the AdWords program is 30.535%. 13. The Ld CIT(A) has erred in rejecting cost-plus method basis of remuneration of the Appellant for the distribution of the AdWords program, disregarding the fact that the same has been concluded by the transfer pricing officer to be at arm's length under the Transactional Net Margin Method. 14. The Ld CIT(A) has erred in subjecting the Appellant to tax on 40% of the re-computed profits from revenues collected in India under the AdWords program. Miscellaneous 15. The Ld CIT(A) has erred in surmising that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed return of income nor was willing to admit any taxability in India, the additional profit of ₹ 44,71,75,626/- has been taxed rightly in the hands of the assessee. 7. The CIT(A) erred in not appreciating the fact the additional profit of ₹ 44,71,75,626 represents the profits evaded from being charged to income tax in India of the service, Google Adwords run through the medium of Google website in India 8. The CIT(A) erred in not appreciating the fact as per the contract the assessee is neither a captive service provider nor a cost centre to M/s Google Ireland Ltd but the assessee claims to have be an independent distributor acting on its own account. 9. The CIT(A) erred, in not appreciating that in the facts and circumstances of the case the assessee should have declared incomes with respect to its revenues and not with respect to its cost as the whole agreement with Ms/ Google Ireland Ltd and the subsequent accounting treatment of adiftitting income only on 15.5% of the cost incurred in India to earn advertisement revenues is a ploy to evade payment of axes in India. 10. The CIT(A) erred, in not appreciating that it has been bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete and consistent disclosures including the notes to accounts have been made in the financial statements. There had been no change in the financial policy followed by the assessee during the year under consideration from the earlier years and the financial statements of the assessee had been duly audited by an independent statutory auditor. The AO has rejected the books of accounts having observed that the form of reporting of the advertisement revenues in the profit and loss account is not proper. There has been no finding of the AO that books of accounts were unreliable or that entire revenue was not credited in the books of accounts and it was not possible to compute the actual profit on the basis of the books of accounts. The learned Counsel for the assessee further invited our attention that after rejecting the books of accounts, the AO recasted the profit and loss account without making any change in the revenue. The learned Standing Counsel for the Revenue has placed a reliance upon the order of the CIT(A). 176. Having carefully examined the orders of lower authorities on this issue, we find that AO has not pointed out the specific defect in maintenance of books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 in IT(TP)A No. 466/Bang/2013 relating to disallowance under section 40(a)(ia) with regard to additional profit computed by the AO on the basis of transfer pricing adjustment are concerned, we are of the view that since in the transfer pricing appeals the issue of computation of arm s length price of payment made under Google AdWord Program by GIPL to GIL has been restored back to the AO / TPO for recomputation of arm s length price in terms of directions issued by Tribunal, the disallowance of additional profit calculated on the basis of transfer pricing adjustment, cannot be made under section 40(a)(ia) of the Act. We therefore set aside the order of CIT(A) and delete the disallowance made in this regard. Ground No. 18 of assesse s appeal relating to initiation of penalty proceedings under section 271(1)(c) is premature and we dismiss the same. 179. During the course of hearing of the appeal, the Revenue has also moved an application for the admission of additional grounds with the submission that assessee has accepted in the written submissions filled before the Tribunal that it is providing services through ITES division in connection with the distribution of the advertise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the additional grounds, the learned Standing Counsel further contended that it was admitted by the assessee that it performs ad review services under ITES division with Google Ireland for which the assessee was separately compensated. Therefore in the light of specific contentions that the amount received by the assessee from Google Ireland for rendering services in India to the advertisers cannot be claimed as exemption under section 10A of the Act. Since this aspect was not examined by the AO, the additional grounds now may be admitted and matter be restored to the AO for its adjudication in accordance with law. The learned Counsel for the assessee strongly objected the application for the admission of the additional grounds with the submissions that this ground was never raised either before the CIT(A) or before the Tribunal at the time of filing of the appeal. Moreover, this ground was also not raised before the Tribunal at the time of hearing of the appeal by different bench. Now this ground has been raised at the advanced stage of the hearing of the appeal. The learned Counsel Mr. Percy Pardiwala further contended that AO has not raised the dispute in this regard during the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cated the issue in the light of judgment of jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd., (supra) and the judgment of Tata Elxsi has been approved by the Hon ble Apex Court. Since the CIT(A) has adjudicated the issue in the light of judgment of jurisdictional High Court, we find no infirmity in his order and accordingly we confirm the same in this regard. Accordingly, the appeal of the assessee is partly allowed and that of the Revenue is dimissed. 184. IT(IT)A No. 2845/Bang/2017 This appeal is filed by the assessee against the order of the CIT(A) on following grounds: 1. On the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer (Id. AO') u/s 143(3)/ 147/ 144 C(5) of the Income-tax Act, 1961 ('the Act), wherein income of ₹ 93,66.27,879 has been assessed as being in the nature of 'Royalty' is bad in law as the same has been passed by completely misconstruing the facts of the case and is based on an incorrect interpretation of the provisions of the Act read with Double taxation Avoidance Agreement between India and Ireland ( DTAA'). Therefore, the said order as well as the conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire proceedings for re-assessment and the consequential order/ demand is void and is liable to be quashed. 8. On the facts and in the circumstances of the case and in law, the re-assessment proceedings are bad in law since the notice u/s 143(2) of the Act was not even issued before the timeline for receipt of the said notice by the Appellant. as per provision of the Act. 9. Without prejudice to the grounds above, the conduct of re-assessment proceedings based on the notice under section 143(2) of the Act purportedly issued on 28 August 2014 even before furnishing of 'Reasons to believe' to the Appellant is bad in law. being against the established law and procedure of conduct of reassessment proceedings as laid down by the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd v ITO (2003) (259 ITR 19) (SC). 10.On the facts and in the circumstances of the case and in law, the reassessment proceedings are bad in law as the 'Reasons to believe' were furnished to the Appellant beyond reasonable time from the date of filing of letter by the Appellant requesting for furnishing of reasons pursuant to which the re-assessment proceedings w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law, the Ld. AO/ Hon'ble DRP has erred in holding that the amounts receivable by the Appellant from sale of online advertisement space under the AdWords Program from Google India is taxable as Royalty' income under the Act as well as under the DTAA. 14.On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP has erred in holding that the amounts receivable by the Appellant from Google India towards sale of online advertisement space under the Ad Words Program is taxable as 'Royalty' under various sub-clauses of Explanation 2 to section 9(1)(vi) of the Act. 15.On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP erred in holding that the income from other advertisers amounting to INR 510,874,532 in India towards sale of online ad space is chargeable to tax as 'Royalty' under the Act and the DTAA and without following the decisions by the Hon'ble Kolkata Tribunal in the case of ITO vs. Right Florists (P.) Ltd. (154 TTJ 142) and Hon'ble Mumbai Tribunal in the case of Pinstorm Technologies vs ITO (54 SOT 78) squarely applicable to the facts of the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des that the Copyright means the exclusive rights to do or authorise the doing of any of the acts mentioned in section 14 of the Copyright Act. d) That the Ld. AO in para 5.18 of the impugned order has mentioned that the very nature of software is that it, being a computer programme. cannot be sold without the transaction involving some transfer of copyright. 20.Without prejudice to the grounds above, the Ld. AO/ Hon'ble DRP has erred in not appreciating that the clauses of Explanation 2 to section 9(1)(vi) are mutually exclusive and same amount receivable by the Appellant from Google India towards sale of online advertisement space under the AdWords Program cannot be taxed under multiple clauses of the said Explanation. 21.On the facts and in the circumstances of the case and in law, the Ld. AO/ Hon'ble DRP has erred in disregarding the judicial precedents squarely applicable to the facts of the Appellant and not considering the reliance placed by the Appellant on the High Powered Committee constituted by the Central Board of Direct Taxes vide Notification No. F No 500/ 122/ 99 dated December 16, 1999. 22.On the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 01.04.2004 for rendering of Ad-review services by the ITES division results in use/ access to IP tools, confidential information, data etc. Ld. AO failed to appreciate that the Ad review process done by the ITES division comprises of approximately 6% of the total Ads that are reviewed and consequently 94% of the Ads which are reviewed automatically, without any involvement of the ITES division and therefore by no stretch of any imagination there could be any access to or use of IP tools, confidential information. data etc. for majority of the Ads. 29.On the facts and circumstances of the case and in law, the Ld. AO has erred in holding that grant of right to use Google brand features and trademark and Intellectual Property provided to Google India under the ITES agreement is independent of the distribution agreement. 30.On the facts and circumstances of the case and in law, the Ld. AO has erred in not appreciating that the right to use Google brand features and trademark provided to Google India under the Distribution agreement was not the main purpose of the Distribution agreement and was rather incidental to the main purpose of distribution of online advertisem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 147 of the Income Tax Act (hereinafter called as an Act ), and issued a notice under section 148 dated 29.03.2014. In compliance thereof, the appellant, Google Ireland Ltd., furnished the return of income and objected the reasons furnished by the AO. Although appellant was not served with the notice under section 143(2) of the Act, but the objection in this regard has been raised before the AO and thereafter transfer pricing proceedings was initiated by the TPO. The learned Counsel for the assessee has further submitted that the reassessment proceedings under section 147 was initiated by the AO without having any jurisdiction. The learned Counsel for the assesse further contended that as per judgment of the Hon ble Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. ITO 259 ITR 19 the AO has to dispose off the objections filed against the reasons for reopening the assessment by passing a speaking order before proceeding with the assessment. It was further contended that before disposing of the objections filed by the assessee, the AO cannot proceed with the assessment. Therefore notice under section 143(2) cannot be issued before disposing of the objections against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be correct unless contrary is proved. In the order sheet, it is clearly mentioned that notice under section 143(2) was issued on 28.08.2014, therefore contention of the assessee cannot be accepted that notice was not issued in time. The learned Standing Counsel has placed the reliance on the judgment of the Apex Court in the case of Rajesh Javeri Stock Broker 291 ITR 500 in support of his contention that the prima facie belief is required to be formed by the AO to reopen the assessment. 188. Having carefully examined the orders of authorities below, in the light of rival submission in this regard, we find that the assessee has disputed the reopening of the assessment mainly on two aspects, one is that the AO has reopened the assessment without forming a belief that income chargeable to tax has escaped the assessment and secondly the notice under section 143(2) was not issued within the prescribed period. Before proceeding to deal with the issues on merit, we want to record certain facts hereunder: 189. Notice under section 148 was issued on 16.04.2014 according to the assessee. The assessee has filed the return of income on 14.08.2014 in response to notice under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find no merit in the contention of the assessee that the notice under section 143(2) is bad in law. With regard to other arguments of the asseessee that AO has not formed a proper belief that income chargeable to tax has escaped assessment, we find that the asseessee has not filed any return of income and in the hands of payer, the AO treated the payments made to the payee ie. the asseessee to be royality though the payer claimed it to be business profit in the hands of the asseessee. In view of the judgement of the Apex court in the case of Rajesh Javeri Stock Brokers(Pvt) Ltd (supra) the AO is required to form a prima facie belief that income chargeable to tax has escaped asseesseement and not to make out a full proof case. From a carefull reading of the reasons recorded for reopening the asseesseement we are of the view that the AO has formed a primafacie belief that income chargeable to tax has escaped asseesseement. and we therefore hold that reopening is valid. 190. So far as assessment on merit is concerned, we find that Revenue has assessed the appellant on business profit received by it after treating the GIPL as its Permanent Establishment in India. The issue of charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Gurgaon. It is engaged in the business of providing IT services as well as IT enabled Services (ITes) and also Marketing and Distribution of AdWords programme to its group companies including Google Inc and Google Ireland and other group of companies. It filed return of income for the assessment year 2009-10 on 30.09.2009 and later revised declaring total income of ₹ 16,57,21,800/- after claiming deduction of ₹ 184,32,46,295/- u/s.10A of the Income-tax Act. The assessee-company also reported the following international transactions with its AE in form 3CEB : Particulars in respect of purchase of other tangible property Clause 8C INR Name and address of the associated enterprise with whom the international transaction has been entered into Description of the property and nature of transaction Nature of units of each property Amount paid/payable Method used for determining arm's length price (see section 92C(1) As per books of account As computed by assessee having regard to the arm s length price Clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) As per books of account As computed by Assessee having regard to the arm s length price clause 8C(a)) Clause 8C(b) Clause 8C(c) Clause 8C(d)(i) Clause 8C(d)(ii) Clause 8C(e) Google IT China Co.Ltd. Tsinghua Science Park Building 6, No.1 Zhongguancun East Road Haidian District Beijing 1084 Sale of fixed assets and equipment Items are numerous in quantity and hence quantitative information cannot be given 278,468 278,468 Refer note below Google Singapore Pte Ltd. #38-01/01A 8 Shenolon Way Singpore 068811 Sale of fixed assets and equipment Items are numerous in quantity and hence quantitative information cannot be given 2,824,249 2,824,249 Refer note below Total 3,102,717 3,102,717 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 10(a) Clause 10(b) Clause 10(c)(i) Clause 10 (ii) Clause 10(d) Google Ireland Limited 1 st 2 nd Floor, Gordon House Barrow Street, Dublin 4 Ireland Informati9on technology enabled services 2,892,019,907 2,892,019,907 Refer note below Google Inc 1600 Amphitheatre Parkway, Mountain View CA 94043 Information technology enabled services 2,483,571,117 2,483,571,117 Refer note below The total amount received/receivable from the associated enterprises for rendering the services is ₹ 5,375,591,024/- as per the books of account. The said amount of ₹ 5,375,591,024/- has been determined/computed by the assessee having regard to arm s length price on application of the Transactional Net M:argin Method as prescribed under section 92C/92 of the ;Income-tax Act,1961 Particulars i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said transactions amounting to Rs. ₹ 274,319,953/- have been determined /computed by the assessee having regard to arms length price on application of the Comparable Uncontrolled Price Method as prescribed under section 92C/92 of the Income-tax Act, 1961 Particulars in respect of recovery of expenses Clause 13 INR Name and address of the associated enterprise with whom the international transaction has been entered into Description of the property and nature of transaction Amount paid/payable Method used for determining arm's length price (see section 92C(1) As per books of account As computed by assessee having regard to the arm s length price Clause 13(a) Clause 13(b) Clause 13(c)(i) Clause 13C(c)(ii) Clause 13(d) Google Inc.USA 1600 Amphitheatre Parkway Mountain View CA 94043 Reimbursement of expenses 258,431,140 258,413,140 Refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2 On perusal of group profile given on page 13 and 14 of the TP study it is observed that Google Inc. USA is the ultimate holding company of the group. Google Inc is a public and profitable company focused on search services. Google Inc is the legal owner of AdWords Software product, Brand Names, and all other related Intellectual Property Rights (IPRs). Google Inc. has given rights to use intangible assets to Google Ireland Holdings which is an Ireland based subsidiary of Google Inc. Google Ireland Holdings in turn has by license agreement given rights to use the same intangible assets to Google Netherlands Holdings BV; a Netherlands based subsidiary. Google Netherlands Holdings pays royalty to Google Ireland Holdings for the same. Google Netherlands Holdings again in turn by license agreement has given the rights to use these intangible assets to Google Ireland Limited; an Ireland based subsidiary. Google Ireland Limited pays royalty to Google Netherlands Holdings BV. Google Ireland Limited has entered into an agreement with Google India Limited on December 12, 2005 for distribution of AdWords program. In the TP Report the assessee has mentioned on page 13 that as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Technology Services have been rendered by the assessee to Google Ireland Limited and ALP of the services has been determined at ₹ 2,892,019,907. Payment of fees for distribution rights have been made by the assessee to Google Ireland Limited and the ALP has been determined by the assessee at ₹ 1,681,852,823. This being the factual position in respect to services rendered or taken by the assessee, the assessee should have furnished for each service the FAR analysis of the assessee and the Associated Enterprise concerned to whom the services have been rendered. As against it, in the TP Study FAR analysis has been given of assessee on one hand and the 'whole group' on the other hand. FAR analysis furnished by the assessee in the TP study, therefore, is not considered proper. How can the functions performed, assets used and the risks incurred by the whole group can be taken in to consideration with the functions performed, assets used and the risks incurred by the assessee in respect to specific international transactions undertaken by the assessee with specific Associated Enterprise. To be precise Google India has under taken the international transactions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered by IT services rendered to Amount 2006-07 Google India Google Inc USA 1,181,826,53 9 2007-08 Google India Google Inc USA 1,981,054,354 2008-09 Google India Google Inc 2,483,571,117 Likewise Business strategy and conceptualization function has not been performed by Google Ireland Limited. Some group company must have performed this function but in respect to relevant international transactions in this case Google India and Google Ireland Limited are relevant Companies and their functions should be performed. Therefore, it cannot be said that Google Ireland Limited has performed this function and Google India has not performed this function. Market Research activity Google India has performed but nothing can be said about Google Ireland Limited as in the study on page 48 comparisons has been made with the Whole Group' which vitiates the comparison and makes it unreliable. Likewis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the business. The TPO further observed that Google Ireland is not a legal owner of AdWords Software programme and the same were acquired by it through an arrangement among the group companies and therefore in order to find out the economic substance of the transaction, the TPO also analysed the functions performed by different units of the assessee-company and finally concluded that the ITeS business is closely connected with the AdWords programme as they are not separable from each other. The relevant finding of the TPO as given in para 3.2 of TPO s order is reproduced herein below: 3.2 In para 2.1 above brief description has been made of the kind of work which has been done by different units of Google India. The description is based on the discussion given in the TP study submitted by the assessee. A part of it related to ITES Services and AdWords services are repeated here. STPI Units at Hyderabad and Gurgaon also perform (apart from IT Services) certain IT enabled services, which involve approving and administering of the advertisement. Hyderabad and Gurgaon Units are involved in performing back office functions for the Adwords Business such as approval of advertiseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on business the contribution of Google India is not routine or low end. Google India has apart from rendering IT and ITES Services to Google Inc USA and Google Ireland Limited respectively has contributed Intangible assets in earning super profits in Adwords Business. Therefore, I find the Cost Plus Mark up method used to evaluate the IT, ITES and AdWords Business efforts of Google India is absolutely improper. It is not considered as acceptable. This method ignores the extraordinary contribution made by Google India in providing IT, ITES Services, doing Marketing and distribution business and contributing Intangible assets to earn super profit. Therefore, I propose to also determine the Arm's Length Price of Intangible Assets contributed by Google India. 197. Finally the TPO concluded that the entire transactions of the assessee-company with its AEs cannot be considered in isolation since the assessee also contributed towards the development of intangibles, namely, market intangibles to Google Ireland Ltd., and Technology intangibles to Google Inc and gives the possession of this valuable nonroutine intangibles. All the transactions are inter-related and inter-linked the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the iulbrmation needed for consisting accounting treatment, it as likely that the comparable profit split method will seldom be a viable approach. The residual profit split method allocates operating profit or losses from controlled transactions in proportion to the relative contributions made by each party in creating the combined profits or losses. Relative contributions may be determined by functions peiforined, risks assumed, resources employed, costs incurred and value drivers contributed to the overall business. According to paragraph 3.5 of the 1995 OECD report, the profit split method .first identifies the profit to be split for the associated enterprises from?, the controlled transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length The Method is generally used where multiple entities, operating in an integrated manner, contribute to a large extent, to the creation of valuable business drivers that add to future growth prosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t method provides a routine return for routine services and also accommodates a compensation for non-routine services and investment in non-routine assets; hence it is considered to be the most reliable method to evaluate the license fees received for Ad-words by Google Ireland, and it also provides the best level of conformity to the OECD Guidelines. Step 1 Identification of total cost for the different activities performed by Google India Step 2 Assignment of a routine return for the contract IT Enabled Services performed by Google India for Google Ireland Step 3 Ascertaining the residual profit by carving out the routine return profits from the total relevant profits earned by Google India relating to sale of Ad-words. Step 4 Splitting the residual profit between Google India and Google Ireland as the return for their respective nonroutine intangibles viz. marketing intangibles and technology intangibles respectively. Step 5 Identifying the amount of revenue to be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords during the relevant period 2,433,217,266 Less: cost of sales and marketing service 632,684,698 Total profit earned by Google India during the relevant period 2,369,532,568 Less return on contract ITES @ 25.04% on cost ₹ 2,430,651,096 (Para 7.0) 608,635,034 Residual return for attributable to the non-routine intangibles of technology and marketing relating to Adwords 1,760,897,534 6.2.3.4 Step 4 Splitting the residual profit between Google India and Google Ireland as the return for their respective non-routine intangibles viz. marketing intangibles and technology intangibles respectively. The residual profit is split between the holder of non-routine technology intangibles (Google Ireland) and the holder of non-routine marketing intangibles (Google India) in an arm's length manner. For this reliance is placed on the economics of bargaining and game them. Set out in Appendix B; which suggests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, Google India has computed the arm 's length price of international transactions short by ₹ 937,714,990. Adjustment in respect to international transactions with Google Ireland therefore is proposed for ₹ 937,714,990. 7.0 The Assessee Company has considered its markup in respect to ITES at arm's length on the basis of comparison of its profit margin (operating profit/operating cost) with the profit margin of uncontrolled comparables computed using TNMM as the most appropriate method. TPO finds that the identification of uncontrolled comparables' profit margin is not proper. Therefore, the TPO rejects the ALP computed by the Assessee U/s 92 C (3) (c) of the Income Tax Act 1961 and proceeds to compute the PLI of Uncontrolled Comparables identified by me (TPO). The detailed discussion thereon is given in annexure 'A' to this show cause. It is computed at 25.04 percent. Accordingly, markup on ITES is computed by applying the mark up percentage of 25.04 percent on cost-base computed by the Assessee at ₹ 2,430,651,096 8.0 theAssessee Company has also entered into international transaction of IT Services. This international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utsourcing Services. Therefore, the TPO considers that the data used to determine the ALP of IT Services is incorrect and not reliable. Therefore, it is rejected U/s 92 C (3)(c) of the Act and substituted by the study conducted by the TPO of KPOs. Please see Annexure 'C' to this show cause. Accordingly the Arm's Length Margin of the KPO 's 43.68 % per annexure is applied to the cost base of the Assessee to determine the Arm.'s length price of International Transactions, which the Assessee has entered into with Google Inc USA.Accordingly, the Arms length price of the international transaction is as follows- Particulars IT Services to Google Inc(as per TPO IT Services to Google(as per Assessee) Cost Base (A) 2,048,315,417 2,048,315,417 Markup percentage 43.63% 21.25% Amount of Markup (B) 883,680,016 435,255,700 Amount of Markup (A+B) 2,931,995,433 2,483,571,117 8.3 T here f ore, the d iffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rio the payments which Google India deserve will be equal to what I have proposed in the showcause notice dated 18.01.2013. I continue to reiterate that the Assessee has made efforts to show itself inferior by giving in the FAR analysis the functions risks and the assets of Google India on one hand and comparing it corresponding functions risks and the assets of any other group entity belonging to Google group and therefore the analysis was between Google India on one hand and Go ogle Group on the other and therefore, Google India wasought to look inferior. However, in one to one comparison for FAR analysis with that AE which entered into international transaction with Google India then one will find that the contribution of Google India is far more superior as compared to what Google India has been pained to be. 3.4 Assessee has submitted that Google India has entered into several agreements with its AEs for rendering services and Google India has performed those services as per the agreements andaccordingly remunerated also. Assessee has therefore submits that agreements cannot be disregarded and due consideration should be given to such commercial transactions. I hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly mentioned in your self's notice. It shows that Assessee is not ready to accept even those facts which have been furnished by the Assessee in the TP Study. One can refer to page 13 of the TP study filed by the Assessee. Assessee has very clearly given this fact that there are 250 employees in Delhi and Mumbai sales team. Then why wrong statement by the Assessee in reply dated 28.01.2013? I therefore continue to abide with each and every statement I have made in two show reproduce above. Perhaps, Assessee is required to read its own TP study carefully as TPO did. On careful study of FAR given by the Assessee I found that ITeS and Sales and Marketing activities performed by Google India cannot be viewed separately. They can be evaluated only on aggregate basis. My conclusion is based on proper analysis of TP Study. Assessee is finding its own submissions in TP Study as inconvenient and therefore making wrong statement in an effort to declare that ITeS and Ad Words Business are two independent streams and there is no confluence of them at any point.That is why Assessee is supply new meaning to certain other terms as Assessee has done in respect to 'non-exclusive' in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing intangibles. Assessee has also mentioned in para 53 that Finance Bill 2012 has clarified the term intangible property used in the definition of International Transactions. Assessee has reproduced Claue (ii) of Explanation to Section 92 B. I have already explained in the show cause that Assessee has contributed intangible assets of 'Customer base of Google India', 'Well trained marketing ream of Google India', ' Promotion of Google brand name my performing the functions efficiently' etc. If Assessee wants to know where Google India's contribution in terms of intangible fits in, I would point out that it fits in human capital related intangible assets such as trained and organized work force. Employment agreements, union contracts. It also includes customer related intangible assets such as customer list, customer contracts, customer relationship, open purchase orders. It also includes Goodwill related intangible assets such as institutional goodwill, professional practice goodwill, personal goodwill of professional celebrity goodwill, general business going concern value. What other description Assessee requires for this purpose. If technology is vita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT V Gujarat Oil Allied Industires (201 JTR 325). This is more or less the same view taken by the Hon Apex Court in the case of Director of Inspection of Income Tax (Investigation) V Pooran mal Sons (96 ITR 390) and in the case of Sainik Motors VS State of Rajasthan (air 1961 SC 1480). Hence, while finding the most appropriate method it is not that n'aodern valuation methods fitting the type of underlyingservice or commodities have to be ignored. Fixing enterprise value based on discounted value of future profits or cash is a method used worldwide. Endeavor is only to arrive at a value whichwould give a comparable uncontrolled price for shares sold. If viewed from this angle, we cannot say that the discounted cash flow method adopted by the TPO was not in accordance with Sec 92 C (1). 3. Thereforeallthe objections raised by the Assessee Company have been attended to. There is nothing which TPO which may have a compelling force to change the approach adopted by the TPO and therefore, I proceed to take action in accordance to the proposal contained in this regard in the show cause dated 18.01.2013. In short it is to apply Residual profit split method takin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount (in Rupees) In respect to international transactions entered into by Google India with Google Ireland on aggregated basis 835,087,934 In respect to IT Services to Google Inc USA 448,424,329 Total 1,283,512,263 201. The AO passed draft assessment order dt.04.03.2013 u/s.143(3) r.w.s.144C of the Act incorporating the TP adjustments suggested by the TPO of ₹ 128,35,12,263/- and reducing the telecommunication charges incurred in respect of software segment of the business of ₹ 10,99,83,459/- only from the export turnover without reducing the same from the total turnover, thereby restricting the deduction u/s.10A to ₹ 181,61,83,592/-. Further the AO also disallowed a sum of ₹ 328,20,75,060/- invoking the provisions of Section 40(a)(ia) of the Act, on the ground that the assesseecompany had failed to deduct tax on the amount of distribution fees on AdWords distribution programme payable to Google Ireland. Further the TPO also made addition on account of additional profits attributable to AdWords programme of ₹ 117,37,50, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP adjustment was reduced to ₹ 82,51,71,946/- and the disallowance u/s 40(a)(ia) was reduced to ₹ 1,41,80,57,831/-. 207. Being aggrieved, the assessee-company is in appeal in IT(TP)A No.69/Bang/2014 against that part of the order of the assessment order which is against it and the revenue is in appeal in IT(TP)A No.191/Bang/2014 against that part of the order of the assessment order which is against the revenue. 208. Now, we shall take up the appeal filed by the assessee-company. The assessee raised the following grounds of appeal: Based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon'ble DRP have: A. Transfer Pricing Issues Erred in rejecting the transfer pricing documentation maintained by the Appellant and making adjustments in respect of the following international transactions with its AEs: * Provision of software services- ₹ 41,02,20,628; * Provision of Information Technology enables Services (ITeS)- ₹ 14,72,66,223; and * Purchase of advertisement space for distribution to the advertisers in India ₹ 26,76,85,095. 2. Erred in using single year data of companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP adjustments to provision of ITES 12. Erred in rejecting the contemporaneous data (i.e., data existing before the due dateof filing of return of income) and in undertaking a fresh comparable search during the course of assessment proceedings, using information/data which was not available to the Appellant at the time of satisfying the mandatory documentation requirements. 13. Erred in inter-alia using of the following additional filters in undertaking thecomparative analysis for rejecting comparable companies having: a) Diminishing revenue; and b) Different year end. 14. Erred in not undertaking an objective comparative analysis and inter-alia selectingthe following companies as comparable to the ITES services of the Appellant: a) Accentia Technologies Ltd; b) Eclerx Services Ltd; c) Infosys BPO Ltd; and d) Informed Technologies India Ltd. 15. Erred in not undertaking an objective comparative analysis and inter-alia rejecting thefollowing comparable companies: e) Lee Nee Software Ltd; and f) Microland Ltd (Call Centre segment). Grounds specific to TP adjustments relating to payment for purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receipts are taxable as business profits in India. 27. Having held that the Appellant was an agent of Google Ireland Ltd. erred in holding that Appellant 'was a person responsible for paying' any amount to Google Ireland Ltd. within the meaning of section 195 of the Act and that the Appellant gas failed to deduct tax at source on the amounts payable to Google Ireland Limited. 28. Having held that the Appellant creates a Dependent Agent Permanent Establishment of Google Ireland Limited in India, erred in attributing business profits, ignoring the fact that the Ld TPO has determined the arm's length remuneration for the Appellant andhence there was no additional income chargeable to tax in India in the hands of Google Ireland Ltd requiring any deduction of tax at source under Section 195 of the Act and hence no disallowance under section 40(a)(i) of the Act is warranted. 29. Having held that the Appellant was an agent of Google Ireland Ltd. erred in holding that Appellant 'was a person responsible for paying' any amount to Google Ireland Ltd. within the meaning of section 195 of the Act. 30. Erred in alternatively holding the amount payab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GIPL before it is ready for release. The results of evaluation are reported to the development team abroad in the form of reports, mails, oral/non documented forms and other modes of technical communication. In consideration for the said services, assesseecompany is compensated on a cost plus 17.50% mark-up basis. 212. With regard to the above international transaction, the assessee-company has carried out detailed functional analysis covering functions performed, assets utilized and the risks assumed by assessee-company and its AE i.e. Google Inc. and the same has been submitted to the TPO as part of TP documentation. 213. Based on the FAR analysis, TNMM was selected as the most appropriate method for the international transaction relating to rendering of IT services. The economic analysis was conducted by the assessee-company to identify external comparable companies engaged in similar services. Based on the comparability analysis, a set of 16 comparable companies was identified. The three year s average OP/TC of the comparable companies was computed at 16.46% as compared to OP/TC of 21.25% earned by the assessee-company. Hence, the assessee-company concluded that the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the company M/s.Acropetal Ltd. cannot be compared with that of the assessee-company as it is into the health-care software and allied products and services and also into development of products. The company has got very high intangibles and no segmental information is available. Therefore, this company cannot be compared with that of the assessee-company. 218. As regards M/s.Coral Hub Ltd., it is submitted that this company is into services like sale of books, preparation of financial statement, liquidity monitoring etc., which cannot be compared with that of the assessee-company and it was also submitted that this company outsources segmental portion of its work to outside people. Therefore, this company cannot be compared with that of the assessee-company. 219. Similarly, as regards M/s.Eclerx Services Ltd. this company was into business of consultancy and advisory services and provide analytic services and no segmental information is available. This company also cannot be compared. Therefore, this company cannot be compared with that of the assessee-company. 220. Regarding ITeS Services, learned AR of the assessee-company submitted that the services rendered in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes from the customer and is routed to the Hyderabad unit through a workflow based on language and tier. On receiving the data, the AdWords team reviews the advertisement according to company policy. The resulting advertisement approval means that a customer's advertisement can now be viewed on the web sites of Google and or its partners located outside India. Further, the Hyderabad facility also performs certain software development tasks in relation to development of a web-based language translator. This is a project that is spearheaded by Google US and Google Ireland. Google India performs the role of a contract developer. All risks relating to software development are borne by the AEs and rights in the software also vest with the AEs. Distributor for AdWords Program: Google India has entered into an agreement on 12 December 2005 with Google Ireland Ltd., Ireland for distribution of Ad Words Program. As per the agreement, Google India has to market and distribute AdWords Program to advertisers in the designated Territory, within the broad guidelines provided by Google Ireland, with its reasonable commercial expertise and own sales force and customer se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesseecompany in ITES segment are as under: Section Particulars Page No I ITES activities carried out by Google India A) Background 1 B) Details of ITES activities provided by Google India 1) Details of Global outsoured Ad revies services 2 - 4 2) Details of Global outsourced Advertisers Help Desk 4 - 6 3) Details of Global outsourced Advertisers support 6 - 7 II Difference between Distribution agreement and ITES ageement A) Details of Distribution agreeement entered into by Google India with GIL and activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment by the TPO. It is further submitted that the comparables selected by the TPO needs to be excluded on functional differences. 226. It is submitted that the company, M/s.EclerxServices Ltd, is high end diversified ITES service provider, providing data analytics and data process solutions to some of the largest brands in the world and therefore, the company is functionally different. 227. It is submitted that M/s.Accentia Technologies Ltd is also functionally different as it is engaged into Healthcare Receivables Cycle Management (HRCM) services and Software Products for Business Process Outsourcing (BPO). Further segmental data is not available. This company earns revenues from medical transcription, billing and collection and income from coding. Therefore, this company is functionally different. 228. It is submitted that M/s.Infysos BPO Ltd. is also functionally different as it provides diversified BPO services and it possesses high brand value and intangibles and extra-ordinary activities. 229. It was also submitted that the company M/s.Lee Nee Software Ltd., requires to be included in the list of comparables as it is functionally comparable since it is into I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the nature of activities carried out by the assessee-company in IT segment under the search quality evaluation and QA engineering. It is further pointed out that search quality evaluation involves review of search results appearing on Google website and based on that review, Google Inc, the assessee company ultimately takes the decision to improve the quality of search results. This review work cannot, by itself, be termed as software development services. It is more of an activity of data analytics which fall within the category of KPO services. As regards the activities under the category of QA engineering, the learned CIT(DR) submitted that it involves evaluation of Google tools for efficient bug removal, performance, evaluation and other aspects. The evaluation results are reported to development wing abroad in the form of reports, e-mails etc. 234. It was further submitted that these services and tools cannot be described as software development services and it is argued that the services performed under the IT segment are purely in the nature of KPO services and therefore the TPO was justified in characterising as a KPO services company. As regards the characterisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company was not compensated adequately for its contribution to marketing intangibles. Whereas the AE i.e., Google Ireland was paid distribution fee of more than what would have otherwise been paid in the uncontrolled situation. Thus it was submitted that the TPO was justified in adopting residual profit split method, wherein the profits from the routine activities like ITeS was reduced from the net revenue earned by the assessee-company on AdWords Distribution Programme and thereafter divide the profit between the assessee company and Google Ireland in the ratio of 50 : 50. 236. It was further submitted by the learned CIT(DR) that the Hon ble DRP also has confirmed this method. However, the Hon ble DRP directed the TPO to apply the profit split method of residual profit split method. He argued that having regard to the FAR analysis all the functions performed by the assessee, it is clear that the assessee company also contributed towards the advertisement of marketing intangibles which, in turn, contributed to the development of AdWords business profits and the methodology adopted to compensate the assessee company on cost-plus basis, is not proper. In such circumstances, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the activities under ITeS services are integral part of AdWords distribution programme. Further the TPO shall examine whether the functions of the assessee-company resulted in creation of intangibles i.e. marketing intangibles or technological intangibles. Whether these intangibles so created are owned and used by the assessee-company itself or transferred to any other entity and whether the assessee-company is properly compensated for transferring such intangibles. The findings of the TPO shall be based on the actual conduct of the parties and evidence produced by the assessee-company. The characterisation of functions cannot be based on not merely terms of contract or description of the services given by the assessee-company. It has to be determined having regard to the actual conduct of the parties. It is pertinent to state that the AO/TPO shall have regard to the guidelines issued by the CBDT vide circular No.6 of 2013 dated 29th June 2013 in deciding the functional profile of the assessee-company. In respect of transactions independent of AdWords distribution programme, the characterisation of the functions performed shall be based on the actual conduct of the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide letter dt.15.02.2013, stating that its books of account were duly audited by the chartered accountants who had opined that the books of account have been prepared in conformity with the standard auditing practices and the income has been disclosed on net basis and the assessee-company has offered entire income from distribution service to tax. Therefore, it was contended that there was no need for recasting the P L account or re-working the profits of the company. It was further contended that there was no need for rejecting the books u/s.145, as the conditions for invoking section 145 were not satisfied in the present case. It was further contended that the books of account are correct and complete and the correct method of accounting has been followed by the assessee. The assessee-company had complied with the accounting standards notified by the Central Government and the same method of account has been regularly followed from year to year. However, the AO rejecting the above contentions, held that the books are liable for rejection, vide para.17 of the assessment order which reads as under and recast the P L account : 17. The submissions made by the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt maintained by the assessee were not correct and complete. It was further argued that the assessee company made a complete disclosure in the financial statements prepared in accordance with the prescribed accounting standard issued by the Institute of Chartered Accountants of India and there was no change in the accounting policy followed by the assessee from the earlier years and the financial statements have been duly audited by the statutory auditor who, after due verification of the books of account opined that the financial statements of the assessee are prepared in conformity with the accounting principles generally accepted. The AO was not justified in rejecting the books of account without bringing any evidence on record to demonstrate that the conditions specified in sub-section (3) of Section 145 are met. Further the Ld. Counsel submitted that the profit computed by the AO even after recasting the accounts is the same as computed by the assessee company. Thus, it was contended that the AO was not justified in invoking the provisions of Section 145 of the Act. 244. On the other hand, the Ld. Sr. Counsel for the Revenue vehemently contended that the AO was justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that if the contention of the Revenue is to be accepted that the assessee-company is only a dependent agent PE of Google Ireland Ltd, the question of disallowance u/s.40(a)(ia) does not arise. Reliance in support of this proposition was placed on the following decisions : * CIT v. Heros Publicity Services [(2001) 248 ITR 256 (Bom)] * SET Satellite (Singapore) P. Ltd [307 ITR 205] * CIT v. Century Building Industries P. Ltd [(2007) 293 ITR 80 (Kar)] * CIT v. Cargo Linkers [(2008) 218 CTR (Del) 695] 250. Without prejudice to the above, it was further contended that the reasoning given by the TDS officer in the orders passed u/s. 201(1), cannot be upheld in the light of the affidavit dt.14.03.2018 filed by the director of the assessee company, submissions made on the factual aspect of the issue before the bench on 19.03.2018 and the legal submissions made dt.20.03.2018 in the assessee s appeals against the 201(1) order. The assessee also placed reliance on the following decisions of the coordinate benches : * Pinstorm Technologies P. Ltd v. ITO [(2012) 54 SOT 78 (Mumbai)] * ITO v. Right Florists (P) Ltd [(2013) 25 ITR (T) 639 (Kol)] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee considering the fact that payee has already paid the tax and nearly for a period of decade both revenue and the assessee proceeded on a footing that provisions of section 194J was not applicable to the payment of transaction charges. It is also pertinent to note that the provisions of section 40(a)(ia) starts with non obstante clause. A non- obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the mentioned in such non-obstante clause. In case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over teh other clause [see CIT vs. Navabharat Enterprises (P) Ltd. (No.2)(1988) 170 ITR 332)(AP)] Therefore, the plea of bona fide belief has no place in the non-obstante provisions of the Act. 254. We accordingly confirm the order of the DRP in this regard 255. The miscellaneous ground of appeal raised by the assessee-company relates to challenge of levy of interest u/s.234B and initiation of penalty proceedings u/s.271(1)(c) of the Act. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing services and contribution of marketing tangibles while M/s Google Ireland Ltd. has only contributed the technology related intangibles. 8. The Hon'ble DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case Tata Elxsi Limited 349 ITR 98 and exclude telecommunication expenses of ₹ 10,99,83,459/- from export turnover also while computing the deduction u/s 1OA of the I.T.Act without appreciating the fact that there is no provision in section 10A that such expenses should be the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 9. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 10. The DRP erred in directing to exclude Coral Hubs on the ground of functional incomparability without appreciating the fact that TNMM was applied as the most appropriate method and while applying TNMM the functions of the comparable need not be iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal turnover and the cost has been held to be the escaped profit of the enterprise in India considering the fact that Google Ireland Ltd. has neither filed its return if income nor is willing to admit any tax liability in India. 19. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 20. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 258. Ground Nos.1, 19 and 20 are general in nature and do not require any adjudication. 259. Ground Nos.2 to 7 challenges computation of ALP in respect of international transactions entered into by the assessee-company with its AE. In the assessee s appeal for same assessment year 2009-10 in IT(TP)A No.69/Bang./2014, the issue of determination of ALP in respect of Information Technology (IT), ITeS and AdWords distribution programme is remanded to the file of the AO/TPO for the purpose of undertaking fresh exercise of TP analysis . In these circumstances, the grounds of appeal are also set aside to the file of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. 21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover. In the light of the decision of the Hon ble Apex Court in the case of HCL Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income from operations 50,84,400 66,31,969 83,12,186 Profit percentage 30.64% 30.43% 35.15% Impairement of equity investments 0 (10,94,757) Interest income and other.net 5,89,580 3,16,384 69,003 Income before income taxes 56,73,980 58,53,596 83,81,189 Provision for income taxes 14,70,260 16,26,738 18,60,741 Net Income $ 42,03,720 $ 42,26,858 $ 65,20,448 264. Thus an amount of ₹ 117,37,50,817/- was brought to tax as additional income attributable to Google Ireland purportedly to be in the capacity of agent of Google Ireland Ltd. The addition was deleted by the Hon'ble DRP on the ground that the required adjustment was already made under the provisions of section 92CA and no further a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing documentation and making adjustments 1 Erred in rejecting the contemporaneous transfer pricing documentation (i.e., using data available before the due date of filing of return of income) maintained by the Appellant and making adjustments in respect of the following international transactions with Associated Enterprises (AEs): a) Provision of software development services = ₹ 91,95,38,461; b) Provision of Information Technology Enabled Services ('ITES') = ₹ 25,67,89,031; and c) Purchase of online advertisement space for distribution to the advertisers in India = ₹ 32,53,45,159. Further, the Ld. TPO erred in adopting an approach different from the predecessors in assessments up to assessment year 2008-09, without any change in facts or circumstances of the transactions. Rejection of use of multiple year data 2. Erred in rejecting the use of multiple year data and using single year data of the comparable companies to determine the arm's length price of the international transactions without appreciating the fact that the same was not available to the Appellant at the time of complying with the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant owns marketing intangibles. b) Erred in not appreciating the fact that the Appellant performs a limited role in the provision of online advertisement space and that the AEs undertake the key economically significant functions. 10. Erred in rejecting Transaction Net Margin Method ('TNMM') and determining the ALP by applying Profit Split Method ('PSM') as the most appropriate method. 11. Erred in not applying PSM in accordance with the provisions of Rule lOB of the Income Tax Rules, 1962. 12. Erred in applying PSM, not determining correctly the relative contribution made by the AEs in earning the revenue on the basis of the FAR analysis of the transactions and how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances. 13. Erred in not determining the combined net profit of the international transactions to be split amongst the enterprises in proportion of their relative contribution. 14. Erred in not evaluating and providing for the relative contribution made by the AEs in the form of extended credit period to the Appellant CORPORATE TAX MATTERS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e towards purchase of advertisement space under the Agreement as either Royalties or Fees for Technical Services under Article 12 of the India-Ireland Double Taxation Avoidance Agreement. 23. Erred in upholding that the Appellant was required to deduct tax at source from the amount payable by the Appellant to Google Ireland Limited and in view of its failure to deduct tax, the amount payable by the Appellant to Google Ireland Limited was required to be disallowed u/s 40(a)(i) of the Act. OTHERS 24. Erred in considering the eligible MAT credit u/s 11 5JAA of the Act at ₹ 565,306 as against the eligible brought forward MAT credit of ₹ 8,81,87,191. 25. Erred in considering the refund already issued to the Company u/s 143(1) at ₹ 9,37,80,480 instead of the actual amount of refund of ₹ 6,58,06,480 received bythe Appellant thereby increasing the total tax demand. 25. Having erred in considering the refund amount of ₹ 9,37,80,480, erred in levying the interest u/s 234D of the Act on refund amount of ₹ 9,37,80,480 as against the actualrefund received of ₹ 6,58,06,480. 26. Erred in imposing the levy of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case the Dispute Resolution Panel erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub- clause (4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has riot become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case the Dispute Resolution Panel ought to have appreciated the fact that since MIs Google Ireland Ltd. has neither filed return of income nor willing to admit any taxability in India, the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l are dismissed. 279. Ground No.4 challenges the direction of the Hon'ble DRP to the AO to delete addition on account of attribution of profits to PE of Google Ireland Ltd. In the earlier year i.e. 2009-10, this issue was remanded to the file of the AO for de novo assessment in the light of the principles laid down by the Hon ble Apex Court in the case of Morgan Stanley Co. (supra). This ground of appeal is remitted back to the file of the AO for de novo assessment. 280. Grounds No.5 to 7 challenges the direction of the Hon'ble DRP to bench mark the transaction under ITeS and AdWords distribution separately and apply the profit split method in respect of AdWords distribution programme and selection of comparable in IT related services. For the reasons stated in theassessee s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 , we remit these grounds of appeal back to the file of the AO/TPO for the purpose of undertaking fresh TP analysis on the lines indicated therein, Thus these grounds of appeal are partly allowed for statistical purposes. 281. In the result, the appeal filed by the revenue is partly allowed for statistical purposes. 282. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to determine the arm's length price of the international transactions. 3. Non-provision of adjustment for risk differences a) Erred in not appreciating the fact that the Appellant operates as a risk free service provider and all the key risks associated with the functions performed are based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon'ble DRP have: b) Erred in not providing adjustments taking into account the functional and risk differences between the international transaction of the appellant and the comparable transactions in accordance with the provisions of Rule 10B(1)(e) of the Income-tax Rules,1962 Incorrect margin computation of certain companies 4 a) Erred in computing segmental margin of ICRA Online Ltd. (Outsourced services segment) at 34.21% vis- -vis the correct margin at 25.15% b) Erred in not allocating the unallocated income and expenditure while computing the segmental margin of ICRA Online Ltd. (Outsourced services segment) Grounds specific to comparability analysis of software services transaction 5. Erred in rejecting the Function Asset and Risk ('FAR') anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the duly audited books of account of the Appellant are incomplete and incorrect based on conjectures and surmises without appreciating the complete disclosures made in the books of accounts maintained by the Appellant. Re-computation of deduction u/s 10A of the Act 13. Erred in concluding that the communication expenses incurred by the Appellant are attributable to delivery of computer software outside India and thereby, reducing the same from export turnover for computing the deduction u/s 10A of the Act. 14. Erred in considering the whole of communication expenses (even related to telephone charges and internet expenses) incurred by the Appellant as attributable to the delivery of computer software outside India for and reducing it from export turnover for the purpose of computing the deduction u/s 1 OA of the Act. 15. Not reducing the amount of communication expenses from the amount of total turnover for the purpose of computing deduction u/s 1 OA of the Act. Disallowance of payments made to Google Ireland Limited invoking provisions of section 40(a)(i) of the Act 16. Erred in holding that the amounts payable by the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal. 287. Ground Nos.1 to 11 relates to TP analysis and selection of comparable etc. In the identical facts, in assessee s own case for assessment year 2009-10 in IT(TP)A No.69/Bang/2014, the issues raised in these grounds of appeal were restored to the file of AO/TPO for the purpose of undertaking fresh TP analysis etc. For parity of reasons given therein, these grounds of appeal are restored to the file of the AO with similar directions. 288. Ground No.12 challenges rejection of book results. As stated by us in the assessee s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang)/2014, though the AO has stated that book results are rejected, in effect there is no rejection of book results as the profit even after recasting the P L Account remained the same. Thus, this ground of appeal becomes academic in nature and is dismissed as such. 289. Ground Nos.13 to 15 challenges finding of lower authorities in reducing communication expenditure only from export turnover. The issue in these grounds of appeal is no longer res integra as the issue is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter does not arise viii. Whether the Hon'ble DRPerred in fact and law in rejecting the comparable on the ground that segmental information is not available, when the company had classified itself to be operating in one segment i.e. provision of ITES ix. Whether the order of the Hon'ble DRP in rejecting comparable cases by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under income Tax Act? x. Whether Hon'ble DRP is justified in holding that for purpose of bench marking ITES and Adword distribution segment to be treated separately in the light of the fact that international transactions related to ITES and Adword are connected to each other and they cannot be analysed and evaluated for ALP separately. xi. Whether the Hon'ble DRP is justified in directing to adopt profit split method pertaining to Adword distribution segment instead of applying the residual profit method in the light of the fact that the TPO has already demonstrated with necessary evidence on record that the Assessee has performed varied functions such as rendering ITES to Google Ireland, providing marketing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO to delete addition on account of attribution of profits to PE of Google Ireland Ltd. In the earlier year i.e. 2009-10, this issue was remanded to the file of the AO for de novo assessment in the light of the principles laid down by the Hon ble Apex Court in the case of Morgan Stanley. This ground of appeal is remitted back to the file of the AO for de novo assessment. 296. In the result, the appeal filed by the revenue is partly allowed for statistical purposes. 297 . IT(TP)A No.387/Bang/2017 [Assessee s appeal for assessment year 2012-13] 298. The assesse-company raised the following grounds of appeal: Based on the facts and in the circumstances of the case, the Ld AO/Ld TPO and the Hon'ble DRP have: TRANSFER PRICING (TP) MATTERS Rejection of transfer pricing documentation and making adjustments 1. Erred in rejecting the contemporaneous transfer pricing documentation (i.e., using data available before the due date of filing of return of income) maintained by the Appellant, and making adjustments in respect of the international transactions with Associated Enterprises (AEs) Rejection of use of multiple year data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts employed and Risks assumed ('FAR analysis') for the international transaction relating to provision of ITES and inter-alia considering high-end service providers as comparable to the Appellant. 9. Erred in not undertaking an objective comparative analysis and inter-alia selecting the following functionally different companies as comparable to the ITES services of the Appellant: a) Accentia Technologies Limited; b) BNR Udyog Limited (Medical Transcription segment); c) lnfosys BPO Limited; and d) TCS E Serve Limited 10. Erred in not undertaking an objective comparative analysis and inter-alia rejecting the following comparable companies: a) Datamatics Financial Services Ltd b) Sundaram Business Services Ltd; c) Microland Limited (Segmental); d) ACE BPO Services Private Limited; and e) Cheers Interactive (India) Private Limited. 11. Erred in rejecting certain comparable companies and adding certain companies to the final set of comparable companies for the impugned transaction on an adhoc basis, thereby resorting to cherry picking of comparable companies to determine arm's length price for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax in India. 18. Erred in holding that the Appellant, in relation to distribution of online advertisement space under the Ad Words program, create a Dependent Agent Permanent Establishment ('DAPE') of GIL under Article 5 of the India-Ireland Double Taxation Avoidance Agreement and the receipts are taxable as business profits in India. 19. Having held that the Appellant creates a DAPE of GIL in India, ignoring the fact that the Ld TPO has already determined the arm's length remuneration for the Appellant and that there was no additional income chargeable to tax in India, erred in attributing income chargeable to tax in India requiring deduction of tax at source under Section 195 of the Act 20. Having held that the Appellant was an agent of GIL erred in holding that Appellant 'was a person responsible for paying' any amount to GIL within the meaning of section 195 of the Act and that the Appellant has failed to deduct tax at source on the amounts payable to GIL 21. Erred in alternatively holding the amount payable towards purchase of online advertisement space under the Agreement as either Royalties or Fees for Technical Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014, though the AO has stated that book results are rejected, in effect there is no rejection of book results as the profit even after recasting the P L Account remained the same. Thus, this ground of appeal becomes academic in nature and is dismissed as such. 302. Ground Nos.17 to 22 challenges the addition u/s 40(a)(ia) of the Act on the ground that the assessee-company had not deducted TDS on payments of royalty made to Google Ireland Ltd. For the detailed reasons given by us in the assessee s appeal for assessment year 2009-10 in IT(TP)A No.69/Bang/2014 we confirm the addition made u/s 40(a)(ia) of the Act. Accordingly, these grounds of appeal are dismissed. 303. Ground Nos.23 to 25 challenges the direction of the Hon'ble DRP to the AO to delete addition on account of attribution of profits to PE of Google Ireland Ltd. In the earlier year i.e. 2009-10, this issue was remanded to the file of the AO for de novo assessment in the light of the principles laid down by the Honb le Apex Court in the case of Morgan Stanley Co. (supra). This ground of appeal is remitted back to the file of the AO for de novo assessment. 304. The other grounds of appeal are consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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