Dependent agent permanent establishment rejected, blocking withholding disallowance, profit attribution, and book rejection on AdWords receipts.

A distributor acting in its own name and on its own account, without authority to bind the foreign enterprise, does not constitute a dependent agent permanent establishment. On that basis, no withholding obligation arose on the distribution fee, so disallowance under section 40(a)(i) could not be sustained, and no further profits could be attributed on the AdWords receipts. The books of account also could not be rejected merely to recast revenue presentation where the accounts already reflected the gross receipts, remittance, and net profit from the transactions. The additions and disallowance were therefore set aside.

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Issues: (i) whether the books of account could be rejected and the profit and loss account recast; (ii) whether the distribution fee paid to Google Ireland was liable for disallowance under section 40(a)(i) on the footing that the assessee was a dependent agent permanent establishment and was required to deduct tax at source; and (iii) whether further profits could be attributed to the assessee on the AdWords receipts.

Issue (i): whether the books of account could be rejected and the profit and loss account recast.

Analysis: The accounts reflected the entire gross receipts from the AdWords programme and the corresponding remittance to Google Ireland on a net basis. No defect, unreliability, or incompleteness in the books was shown, and the net profit disclosed by the assessee matched the figure computed on the basis of the impugned transactions. Rejection of books was attempted only to recast the revenue presentation and to facilitate the disallowance of the remittance.

Conclusion: The rejection of books was unjustified and the issue was decided in favour of the assessee.

Issue (ii): whether the distribution fee paid to Google Ireland was liable for disallowance under section 40(a)(i) on the footing that the assessee was a dependent agent permanent establishment and was required to deduct tax at source.

Analysis: The distribution agreement showed that the assessee acted in its own name and on its own account as distributor, with no authority to bind Google Ireland or conclude contracts on its behalf. The contractual terms, invoicing pattern, and conduct did not satisfy the requirements of dependent agent permanent establishment under Article 5. Since the payment was not taxable in India on that basis, the obligation to deduct tax at source did not arise and disallowance under section 40(a)(i) could not stand.

Conclusion: The assessee was not a dependent agent permanent establishment of Google Ireland and the disallowance was deleted in favour of the assessee.

Issue (iii): whether further profits could be attributed to the assessee on the AdWords receipts.

Analysis: The transfer pricing proceedings had accepted the assessee's international transactions at arm's length. Once the assessee was not treated as a dependent agent permanent establishment, the attempt to attribute notional profits on the full AdWords receipts had no sustainable basis. The assessee could be assessed only on the income retained under the contract, not on a notional share of Google Ireland's profits.

Conclusion: No additional profits were attributable to the assessee and this issue was also decided in favour of the assessee.

Final Conclusion: The additions and disallowance arising from rejection of books, alleged withholding default, and notional profit attribution were set aside, resulting in allowance of the substantive appeal.

Ratio Decidendi: Where a distributor acts in its own name and on its own account without authority to bind the foreign enterprise, dependent agent permanent establishment cannot be inferred and no withholding or profit attribution can be made on that basis; books cannot be rejected merely to alter the form of revenue presentation when the transaction substance is already reflected in the accounts.

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