2017 (10) TMI 1090 - AT - Income Tax

Tribunal Upholds 'Royalty' Classification in Tax Dispute

The Tribunal upheld the classification of payments as 'Royalty' under the Act and the India-Ireland DTAA, dismissing all appeals by the appellant. It ... Google Adword program functions and work - Royalty payment - Use of Intellectual Property through ITES agreement - amount payable by the Appellant to Google Ireland for the subject assessment years - whether the 'distribution rights' are 'Intellectual Property rights' covered by 'similar property' and the distribution fee payable is in relation to transfer of distribution rights? - Held that:- Google is having a targeted geography wise, region wise, gener wise, class wise data base tools. With the use of these tools there will be an increase of the CTR (Click Through Rate). For that purposes the expertise and the data base of the Google is essential. With the help of these strategies, the targets can be fixed by the advertiser with the help of Google Adword and the target can be fixed like where it is to be displayed (tablet, desktop, mobile, ipad etc.,) search network country, state, city, postal code ad schedule of the day, hour and the day of display. The Google analytics optimize the impression, based on the user behavior and this needs to be a major conversation and campaign, which results into return for investment. There are various other features of the Adword program which shows that the program is having embedded tools to display the advertisement of the advertiser to the targeted consumers. On the basis of above, in our view the agreement between the assessee and the Google Ireland was not in the nature of providing the space for advertisement and display the advertisement to the consumers. As per our understanding if the agreement was merely for sale and marketing for providing the space for advertisement, then in that eventuality, it should be treated as an agreement akin to an agreement for advertisement in newspaper / television If we look into the submission made by the learned AR, it is clear that the advertiser, selects some key words and on the basis of key words, the advertisement is displayed on the website or along with the search result as and when the customer selects the key words relatable to the advertisement. The module as suggested does not merely work by providing the space in the Google search engine, but it works only with the help of various patented tools and software. As we have analyzed detailed functioning of Adword program, it is clear that with the help of the search tool/software / data base, the Google is able to identify the targeted consumer/person as per the requirement of the advertiser. If only service rendered by the assessee was for providing the space then there is no occasion of either directing/ channelizing the targeted consumers to the advertisement of the advertiser. In our view truncated search results are displayed keeping in mind the commercial needs of the advertisers. As per the agreement dt.12.12.2005, the primary responsibility is on the Appellant to provide after or before sale services, after having access to user data, IPRS, secret formula, process, software and confidential information of Google Ireland, in its own capacity under the agreement dt.12.12.2005 and not under the agreement dt.01.04.2004. The appellant, for the purposes of managing its own affairs can afford to provide these services to the advertiser through the route of agreement dt.01.04.2004, but the rendition of services by the appellant to the advertisers in India are obligations under the agreement dt.12.12.2005 and not under the agreement dt.01.04.2004. The substance of the agreements is to be given precedence over the form of the agreements. Clause 6 of the service agreement dt.01/4/2004 provides for confidential information, access and use of confidential information and further provides not to disclose confidential information, ownership and return of confidential information and injunctive relief. In our view without exercising its right under this agreement, (1.4.2004) the obligation of the Appellant under the agreement dated 12/12/2005 and under the appel lant-advertiser agreements cannot be discharged. Therefore the AO was right in relying on this agreement dated 1/4/2004 for the purposes of bringing the case under Royal ty, as per the provisions of section 9(1)(vi) of the Act read with DTAA. As per clause 8 of the agreement dt.12.12.2005 mentioned herein above, the distributor is under an obligation to maintain the user data and therefore is having access to such data. The said user data is being used by the appellant for discharging its obligation towards the advertisers and the claim of the assessee is wrong that it does not have the access to the user data. There is no sale of space, as concluded hereinabove rather it is a continuous targeted advertisement campaign to the targeted and focused consumer in a particular language to a particular region with the help of digital data and other information with respect to the person browsing the search engine or visiting the website. Further, the argument of selling the space is not available to the assessee and we are of the opinion that it is not merely selling the space but it is rendering the services by making available the technology permitted by the Google to the appellant and permitting the same to be used by advertiser. For purpose of targeted focused advertisement campaign by using the gateway of Google India / assessee. Thus the activities clearly fall within the ambit of ‘Royalty’ as mentioned in Income Tax Act and under DTAA. In our view though Appellant claimed to be separately earning revenue from ITES segment, under a separate outsourcing service agreement with Google Ireland which is independent of the distribution of advertising space to the advertisers in India, we are not in agreement with the same. Under the advertisement distribution agreement, it is the prime responsibility of the Appellant to give post and prior sales service for resolving the issues of the advertisers, and to ensure due compliances of applicable laws. All these functions are to be discharged by the Appellant through it ITES segment. Further inputs from ITES are always required in the business model of Appellant, without which there cannot be any targeted marketing for advertisements and promotion of sales of advertisers. Therefore, the services rendered under ITES agreement cannot be divorced with the activities undertaken by the assessee under the distribution agreement. Both the agreements are connected with naval chord with each other. The assessee was duty-bound to provide as per the distribution agreement various ITES services, which the assessee had wrongly claimed to have been provided not under the distribution agreement, but under the service agreement. This is only a design / structure prepared by the assessee to avoid the payment of taxes. The appellant cannot be compensated by the GIL for rendering the services to itself or for rendering the services which the appellant is required to render under the distribution agreement. The use of intellectual property is embedded in the Google Adwords programme which is necessary to be used by the appellant for rendering the services prior or post sales of the advisement space under the distribution agreement or service agreement. The payment made by the Appellant to GIL also falls within the four corners of royalty as defined under the provisions of ACT as well as under the DTAA. In the present case the Google India has been provided access to the IPR, Google Brand features, secret process embedded in Adwords Programme as tool of the trade for generation of income. Therefore the payment made by the appellant to Google Ireland is royalty and not the business profit and therefore chargeable to tax in India. Grant of distribution rights involves transfer of rights in process - vesting of power in the appellant, clearly demonstrate give the appellant in India right to access the portal / Google Adword program at any point of time. Limitation for initiation of proceedings under 201 - Held that:- The assessee / payer in the eyes of law whether making payment to resident or non-resident under the provisions of section 201, constitutes one class only. Accordingly, the same period of limitation is required to be applied equally for payee i.e Resident or non-resident, Law abhor vacuum and uncertainty. There is no classification given under section 201. Section 201(1) only talks about person who is required to deduct any sum for the payment made. Therefore, borrowing the same reasoning of the special bench, whereby it held that the same period of limitation should be applied to resident as well as non-resident, we are of the considered view that limitation for initiation of proceedings for nonresident payee should be 6 years instead of no-limitation.as is the limitation for resident-payee. In view of the above ground No.12 in assessment year 2007-08 deserves to be dismissed and accordingly we dismiss the same. Withholding of tax - sec 195 applicability - Held that:- The scope and ambit of Section 195(2) is clear and unambiguous, which mandates the AO to decide whether any payment( Royalty ) paid by the appellant to GIL is chargeable to Tax on cash / receipt basis or not. However, to trigger 195(2), the payer (assessee) was duty-bound to make an application with the AO. Unless an application is made to the AO, there would not be any occasion for him to determine the chargeability of payment of royalty to tax by referring to DTAA or under the ACT. Therefore, the finding given by the Hon’ble Supreme Court GE India Technology Centre P. Ltd (2010 (9) TMI 7 - SUPREME COURT OF INDIA ) does not come to the rescue of the assessee. The applicability of DTAA cannot be suo-moto be determined by AO without there being any application under section 195( 2) of the Act for the purposes of deducting the Tax at source. SEE Transmission Corporation of AP Ltd. v. CIT [1999 (8) TMI 2 - SUPREME Court] wherein held conclusions that the assessee who made the payments to the three non-residents was under obligation to deduct tax at source under section 195 of the Act in respect of the sums paid to them under the contracts entered into ; and (ii) the obligation of the respondent-assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act, are correct. Assessee appeal dismissed. Issues Involved:1. Classification of the AdWords program as complex computer software.2. Determination of whether the right to use the AdWords program was granted to the appellant.3. Classification of payments towards advertisement space as 'Royalty' under the Act.4. Relationship between the Distribution Agreement and the ITES Agreement.5. Determination of whether distribution rights are IP rights under Section 9(1)(vi) of the Act.6. Attribution of payments to the right to use trademarks.7. Classification of payments towards advertisement space as 'Royalty' under Section 9(1)(vi) of the Act.8. Classification of payments as 'Royalty' under Article 12 of the India-Ireland DTAA.9. Classification of training provided as rendering services.10. Applicability of the principle laid down by the Mumbai Tribunal in similar cases.11. Applicability of the decision of the Calcutta Tribunal in a similar case.12. Validity of initiation of proceedings under Section 201(1) after the expiry of four years.Detailed Analysis:1. Classification of the AdWords program as complex computer software:The Tribunal upheld that the AdWords program is a complex computer software. The appellant's argument that it is a standard advertisement product was rejected. It was emphasized that the program involves sophisticated tools and algorithms, making it complex software.2. Right to use the AdWords program:The Tribunal confirmed that Google Ireland Limited granted the appellant the right to use the AdWords program without parting with the copyright, thus granting a license to use the software. The appellant's role was limited to marketing and distribution of advertisement space.3. Payments towards advertisement space as 'Royalty':The Tribunal held that the amount payable towards the purchase of advertisement space is in the nature of 'Royalty' under the Act. This classification was based on the use of Google's intellectual property, including algorithms and data centers located outside India.4. Relationship between Distribution Agreement and ITES Agreement:The Tribunal found that the Distribution Agreement cannot be read without the ITES Agreement. The appellant was granted the right to use intellectual property owned by Google Ireland under the ITES Agreement, which was integral to the distribution of advertisement space.5. Distribution rights as IP rights under Section 9(1)(vi):The Tribunal held that the distribution rights granted to the appellant are IP rights covered by 'similar property' under Section 9(1)(vi) of the Act. The distribution agreement involved the use of Google's AdWords program, which is considered intellectual property.6. Attribution of payments to the right to use trademarks:The Tribunal confirmed that the amount payable by the appellant to Google Ireland is attributable to the right to use Google's trademarks for marketing and distribution purposes. This use of trademarks constitutes 'Royalty'.7. Payments towards advertisement space as 'Royalty' under Section 9(1)(vi):The Tribunal reiterated that the payments made by the appellant for advertisement space are 'Royalty' under Section 9(1)(vi) of the Act. This conclusion was based on the appellant's use of Google's intellectual property and trademarks.8. Payments as 'Royalty' under Article 12 of the India-Ireland DTAA:The Tribunal upheld that the payments are 'Royalty' under Article 12 of the India-Ireland DTAA. The appellant's argument that the payments should not be classified as 'Royalty' under the DTAA was rejected.9. Training provided as rendering services:The Tribunal held that the training provided to the appellant's distribution team in relation to the AdWords program constitutes rendering of services. This training was necessary for the effective marketing and distribution of the program.10. Principle laid down by the Mumbai Tribunal in similar cases:The Tribunal did not follow the principle laid down by the Mumbai Tribunal in the cases of Yahoo India and Pinstorm Technology. It was noted that the facts and issues in those cases were different, and the Mumbai Tribunal did not examine the right to use trademarks or other IP rights.11. Decision of the Calcutta Tribunal in a similar case:The Tribunal did not follow the decision of the Calcutta Tribunal in the case of Income Tax Officer vs. Right Florists Pvt Ltd. It was noted that the facts of the present case were different, and the Calcutta Tribunal's decision was not applicable.12. Validity of initiation of proceedings under Section 201(1):The Tribunal held that the initiation of proceedings under Section 201(1) after the expiry of four years from the end of the relevant financial year is valid. The Tribunal relied on the amended provisions of Section 201(3), which provide a six-year limitation period for initiating proceedings for payments made to non-residents.Conclusion:The Tribunal dismissed all the appeals filed by the appellant, upholding the classification of payments as 'Royalty' under both the Act and the India-Ireland DTAA. The Tribunal also confirmed the validity of the initiation of proceedings under Section 201(1) within the six-year limitation period.