AdWords distribution payments not royalty where no copyright rights or proprietary software rights were transferred under the treaty.

Payments under the AdWords distribution arrangement were analysed under the India-Ireland DTAA and the Income-tax Act. The arrangement was treated as a non-exclusive distribution of online advertisement space with IT-enabled support services, and no rights in the underlying copyright, software, confidential information, or proprietary technology were transferred. On that basis, the payment was held not to constitute royalty, including royalty for use of industrial, commercial or scientific equipment or for technical know-how. The India-Ireland DTAA royalty definition was treated as controlling because it was more beneficial. The use of Google brand features was regarded as incidental to the marketing function, so the payer could not be treated as an assessee in default for failure to deduct tax at source.

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Issues: Whether the payments made under the AdWords distribution arrangement were royalty under the India-Ireland DTAA and the Income-tax Act, and whether the assessee could be treated as an assessee in default for failure to deduct tax at source.

Analysis: The contractual arrangements showed that the assessee acted as a non-exclusive distributor of online advertisement space and also rendered IT-enabled support services, but no rights in the underlying copyright of the AdWords software, confidential information, software technology, or other proprietary materials were transferred to it. The Court applied the principle that a non-exclusive licence to use a software product, without transfer of any rights in the copyright under the Copyright Act, does not amount to royalty. It further held that the India-Ireland DTAA definition of royalty was the controlling provision because it was more beneficial, and that the use of Google brand features was only incidental to the marketing and distribution function. The payment also did not fall within royalty for use of industrial, commercial or scientific equipment, or for technical know-how or experience.

Conclusion: The payments were not royalty under the India-Ireland DTAA, and the assessee could not be treated as an assessee in default for non-deduction of tax at source.

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