TMI Blog2023 (4) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... see is required to deduct tax at source u/s.195 on the impugned payments accordingly? - case of the revenue is that the assessee being the agent of GIL, the distribution fees is taxable in India i.e. assessee being the PE of GIL and therefore the payment is disallowed u/s.40(a)(i) in the hands of the assessee for failure on the part of the assessee to deduct tax at source - HELD THAT:- As pursuant to the terms of the Distribution Agreement the Assessee entered into contracts with advertisers in India called Google India Private Limited Advertising Program Terms and perusal of the sample invoice raised by the Assessee on an advertiser shows that the Assessee has raised the invoice and collected payments from the advertiser in its own name and right. Also noticed that the coordinate bench in assessee s own case found the Assessee to be the distributor of the Google AdWords Program and therefore, the characterization as a distributor would mean that the Assessee is not an agent as per the findings of the Hon ble Tribunal. Further the Distribution Agreement between the Assessee and GIL as well as Standard Contract entered into by the Assessee and advertisers in India do not contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions with its AE, the case was referred to TPO for determination of ALP of the international transaction. The TPO accepted the international transaction of the assessee with its AE to be at arm s length vide order dated 31.10.2011. The AO made the additions with respect to the following during the course of assessment proceedings and also initiated penalty proceedings u/s.271(1)(c):- (1) Deduction of telecommunication charges from export turnover for computing deduction u/s. 10A of the Act. (2) Allowability of deduction of the amount payable by the assessee towards distribution right of AdWord program (3) Claim of TDS credit deducted by the Indian advertisers on advertising payment made to the assessee. 3. Aggrieved, the assessee preferred appeal before the CIT(A). 4. Before the CIT(A), the assessee contended that the following issues besides the reduction of telecommunication charges from export turnover:- (i) Rejection of books of accounts in respect of income relating to distribution of AdWord program. (ii) Disallowance of payments made towards distribution rights invoking provisions of section 40(a)(i) of the Act. (iii) Recomputation of profits from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94 remittable by the Assessee to Google Ireland and in view of its failure to deduct tax, the amount of Rs.119,82,61,994 was required to be disallowed u/s 40(a)(i) of the Act. 9. The Ld CIT(A) having held that the Assessee was an agent of Google Ireland Ltd. erred in holding that Assessee 'was a person responsible for paying' any amount to Google Ireland Ltd. within the meaning of section 195 of the Act. Re-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 Assessee. 11. The Ld CIT(A) has erred in holding that 40% of recomputed profits on the Rs.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 Assessee for the distribution of the AdWo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the TDS of Rs.3,55,23,891 is deducted at source. Of this amount, an amount of Rs.119,82,61,984 is the distribution fee payable to GIL and the assessee in the P L account has netted these two figures and has reflected the net amount to the credit of the P L account. The AO did not accept the submissions of the assessee and rejected the books of accounts and recasted the profit loss account of the assessee by holding as under:- 16. The submissions made by the assessee company are considered. It is seen that as per this contract dated 12-12-2005 with M/s. Google Ireland Ltd., the assessee company was required to conduct the Adwords marketing on its own account and as an independent distributor of the said programme. The contract mentions in many words that the Adwords programme is sold by the assessee for its own account in its own name, and not as an agent, employee, partner or franchisee of Google . The various other clauses of the said agreement also make it clear that the assessee company was required to run the businesses on its own account. Moreover the assessee company was expected to pay fees for distribution right to M/s. Google and all this fees and payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 167,32,01,616 9. The AO further held that the distribution fee of Rs.119,82,61,994 is to be disallowed u/s. 40(a)(ia) since the assessee has remitted the amount without deducting tax at source u/s. 195. The AO held that the distribution fee is chargeable to tax in India for the reason that assessee being a Dependent Agent Permanent Establishment (DAPE) of GIL in terms of Article 5(6) of India-Ireland Double Taxation Avoidance Agreement. Alternatively, the AO held that the distribution fee is to be held as royalty/fees for technical services as per Article 12 of DTAA. Accordingly, the AO disallowed the entire amount of distribution fees in the hands of the assessee. 10. The AO further made an addition of Rs.51,09,12,113 by applying a notional profit rate of 30.535% on the total amount received by the assessee towards AdWord program. The AO in this regard held that the profit arising in India with regard to the activity of AdWord program needs to be taxed at the percentage of profit earned by Google Inc. Worldwide. The AO considered the profits percentage of Google Inc. for the year 2006 to 2008 to arrive at the average profit rate of 30.33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s should disclose all the material items, the knowledge of which might influence the decisions of the user of the financial statements apart from other important considerations mentioned therein. In the instant case, the Assessee has not included the revenue receipt of Rs.167,32,01,606/- in the profit and loss account on the ground that they followed (GAAP Accounting Norms;) The obligation on the part of the Assessee is very important to show the said receipt in the profit and loss account particularly when it claimed the TDS in respect of such receipts for credit. The AO in his order very elaborately mentioned that the Adwords programme sold by the Assessee for its own account in its own name, and not as an agent, employee, partner or franchisee of Google and established that the Assessee was running the business on its own account; hence the revenue from the Adwords programme should have been reflected in the profit and loss account. It has been judicially held by various courts on various occasions that the income-tax provisions will prevail over any accounting norms. The accounting norms of GAAP followed_by the Assessee is neither accepted nor notified by the CBDT. Even other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR, during the course of hearing is summarizes as under Rejection of books u/s.145 of the Act - I. Grounds No. 2 to 4 The ld AR submitted that the AO/CIT(A) did not point out any discrepancy in the books of account of the assessee, owing to which, the accounts are not correct and complete. The ld AR further submitted that the profit of Rs.6,13,46,430/- from advertising services, determined by the AO/ CIT(A) after rejecting books u/s. 145 of the Act, is the same as has been declared by the assessee in its books of account. The ld AR also submitted that the books of the assessee have been rejected, primarily with the intention of disallowing Rs. 119,82,61,984/- under section 40(a)(i) of the Act. Disallowance of distribution fees u/s 40(a)(i) of the Act - Grounds No. 5 to 9 The ld AR submitted that the Department has not alleged DAPE of GIL in GIL s own assessment for AY 2008-09, or that the nature of distribution fee was FTS, as per Article 12 of the DTAA and therefore, disallowance under section 40(a)(i) of the Act on the ground that the assessee is GIL s DAPE or that the payment in question is FTS does not survive. It is further submitted that, payment of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TDS is claimed on the gross receipts. The AO therefore as a first step rejected the books of accounts u/s.145 before proceeding to make other additions/disallowances. We notice that the assessee has reflected the income in the following manner in the P L account 18. From the above it is clear that the assessee has reflected, in the books, the entire sale proceeds of Rs.167,32,01,618/- and the liability to pay GIL, a sum of Rs. 119,82,61,984/-, on net basis. We notice that the only observation of the AO is concerning the form of reporting of revenue from advertisement services in the books of account of the assessee and that there has been no finding to the effect that the books of the Assessee were unreliable or that the entire revenue earned by the assessee from distributing and marketing online advertisement space, was not credited in the books. This is supported by the fact that the net profit of the assessee as disclosed in the financials and the net profit computed by the AO (refer page 22 para 17 of assessment order) are the same. In our considered view when the assessee has presented the results of the impugned transactions that reflects the substance of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for failure on the part of the assessee to deduct tax at source. Before proceeding we will look at the relevant Article of DTAA. The term PE is defined in Article 5 of the DTAA and one of the forms of PE is DAPE, which is defined and governed by the provisions of Article 5(6) and 5(8) of the DTAA, reads as under: 6. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person: (a) has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 5 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) has no such authority, but habitually maintains in the first- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for the Assessee to be characterized as DAPE of GIL and in this regard one needs to examine the terms of Distribution Agreement, as the nature of the relationship should be determined based on such terms. The ld AR during the course of hearing drew our attention to the following clauses of the agreement to contend that the assessee is not a DAPE of GIL. Clause 2.1 that GIL appointed the Assessee as a distributor of Google AdWords Program to advertisers in India. It has been further provided in this clause that Assessee would conduct its business for its own account, in its own name , and not as an agent , employee, partner of franchisee of GIL. Clause 2.2 that the Assessee would market and distribute Google AdWords Program with its reasonable commercial expertise and own sales force and customer service infrastructure. Clause 2.6 that the Assessee would provide after-sales services to advertisers in India. Clause 14 that the Assessee and GIL shall remain independent contractors and nothing in the Distribution Agreement shall be deemed to create any agency, partnership, or joint venture between the Assessee and GIL. It has also been provided in this cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of GIL. 26. During the course of hearing the ld AR relied on various judicial pronouncements to submit that none of the requirements of Article 5(6) of the DTAA are satisfied since it is necessary for the Assessee to be characterized as DAPE that the conditions of Article 5(6) of the DTAA are satisfied and that burden of proving that an assessee has a PE is on the Department (i) Hon ble High Court of Delhi in the case of Formula One World Championship Limited v. CIT, (2017) 390 ITR 199 (ii) Hon ble High Court of Delhi in Nortel Networks India International Inc. v. DIT, (2016) 386 ITR 353 (iii) ADIT v. E-Funds IT Solution Inc., (2017) 399 ITR 34 (Supreme Court) (iv) Reuters Limited v. DCIT, (2015) SCC OnLine ITAT 8760 (Mum- Trib) (v) Taj TV Ltd. v. DCIT, (2022) 136 taxmann.com 278 (Mum-Trib) (vi) ESS Distribution (Mauritius) SNC et Compaginie v. DDIT, (2022) 145 taxmann.com 267 (Delhi-Trib) (vii) DDIT v. B4U International Holdings Ltd., (2012) 23 taxmann.com 372 (Mum-Trib) 27. In view of the above discussion with respect to the clauses in the Distribution agreement between the assessee and GIL, the invoices raised on advertisers and the relevant Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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