2023 (4) TMI 106 - AT - Income Tax

Tribunal Finds Distribution Fees Non-Taxable, Rejects Unjust Profit Re-computation and Penalties.

M/s. Google India Private Ltd. Versus The Additional Commissioner of Income Tax, Range 11, Bangalore.

The Tribunal ruled in favor of the assessee, finding the rejection of books of accounts, disallowance of distribution fees, and re-computation of profits ... Rejection of books of accounts - disallowance of deduction of the amount payable by the assessee towards distribution right of AdWord program - assessee has reflected the receipts towards AdWord Program from various customers net of the distribution fees payable to GIL though the TDS is claimed on the gross receipts“distribution fee” should be held to be “royalty”/ fees for technical services (“FTS”) as per Article 12 of the DTAA - HELD THAT:- From the factual findings and given that there is no adverse finding with regard to the books of accounts, in our view the action of the AO by rejecting the books to recast the P&L with an intention to disallow distribution fee paid by the Assessee to GIL is not tenable. The grounds 2 to 4 with regard to rejection of books of accounts are accordingly held in favour of the assessee. Disallowance of distribution fee u/s.40(a)(i) - payment of distribution fees - treatment as Royalty / FTS - whether the assessee is the DAPE [Dependent Agent Permanent Establishment] of GIL and whether the assessee 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 contain any clauses that can lead to the conclusion that the Assessee has any authority to bind GIL. Considering discussion with respect to the clauses in the Distribution agreement between the assessee and GIL, the invoices raised on advertisers and the relevant Articles of DTAA between India and Ireland, we hold that the Assessee cannot be treated as DAPE of GIL. Accordingly the distribution fees paid by the assessee to GIL is not liable for TDS u/s.195 of the Act and therefore no disallowance u/s.40(a)(i) is warranted. Grounds 5 to 9 is held in favour of the assessee. Attribution of additional profits in the hands of the assessee - Stand of the revenue for making the addition is not tenable since each assessee has to be assessed in respect of income that accrues or is received by it, unless by a statutory enactment, the income of another is permitted to be assessed in the hands of a person. Therefore, the Assessee can only be assessed in respect of the amount it retains pursuant to the contract, which it has entered into with GIL and therefore the addition made by applying the notional rate of profit in the distribution fees is not sustainable. Appeal of assessee allowed. Issues Involved:1. Rejection of Books of Accounts.2. Disallowance of Payments towards Distribution Rights invoking provisions of section 40(a)(i) of the Act.3. Re-computation of Profits from Distribution of AdWords Program in India.4. Credit for TDS deducted on the revenue from distribution rights of AdWord programs.5. Deduction of Telecommunication Charges from Export Turnover for computing deduction u/s. 10A of the Act.6. Allowability of Deduction of the Amount Payable by the Assessee towards Distribution Right of AdWord Program.7. Claim of TDS Credit deducted by the Indian advertisers on advertising payment made to the Assessee.8. Validity of the initiation of penalty proceedings u/s 271(1)(c) of the Act.Summary of Judgment:1. Rejection of Books of Accounts:The Tribunal observed that the assessee had reflected the entire sale proceeds and the liability to pay GIL on a net basis. The AO rejected the books of accounts under section 145, primarily intending to disallow the distribution fee. The Tribunal found no discrepancies in the books of accounts and noted that the net profit was the same as declared by the assessee. Therefore, the Tribunal held that the rejection of books of accounts was not tenable and decided in favor of the assessee.2. Disallowance of Payments towards Distribution Rights invoking provisions of section 40(a)(i) of the Act:The Tribunal addressed whether the assessee was a Dependent Agent Permanent Establishment (DAPE) of Google Ireland Ltd (GIL) and whether the distribution fees paid to GIL were taxable in India. The Tribunal examined the Distribution Agreement and concluded that the assessee was not a DAPE of GIL. Consequently, the distribution fees were not liable for TDS under section 195, and no disallowance under section 40(a)(i) was warranted.3. Re-computation of Profits from Distribution of AdWords Program in India:The Tribunal noted that the Transfer Pricing Officer (TPO) had found the transactions between the assessee and GIL to be at arm's length. Therefore, no further profits could be attributed to the alleged DAPE of GIL in the assessee's assessment. The Tribunal held that the addition made by applying a notional profit rate was not sustainable and decided in favor of the assessee.4. Credit for TDS deducted on the revenue from distribution rights of AdWord programs:The Tribunal did not specifically address this issue separately in the judgment, implying that the resolution of the other issues covered this aspect.5. Deduction of Telecommunication Charges from Export Turnover for computing deduction u/s. 10A of the Act:The CIT(A) had directed the AO to recompute the deduction under section 10A by relying on the decision of the jurisdictional High Court. The Tribunal did not specifically address this issue separately, implying acceptance of the CIT(A)'s direction.6. Allowability of Deduction of the Amount Payable by the Assessee towards Distribution Right of AdWord Program:The Tribunal concluded that the distribution fees paid by the assessee to GIL were not taxable in India as business income since GIL did not have a PE in India. Therefore, the deduction of the amount payable towards the distribution right of the AdWord program was allowable.7. Claim of TDS Credit deducted by the Indian advertisers on advertising payment made to the Assessee:The Tribunal did not specifically address this issue separately, implying that the resolution of the other issues covered this aspect.8. Validity of the initiation of penalty proceedings u/s 271(1)(c) of the Act:The Tribunal held that the appeal against the levy of penalty became infructuous as the main appeal was allowed in favor of the assessee.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the rejection of books of accounts, disallowance of distribution fees, and re-computation of profits were not justified. Consequently, the appeal against the levy of penalty became infructuous.