TaxTMI 
TaxTMI 
2023 (4) TMI 106
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.... in India. For the AY 2008-09, the assessee filed return of income on 30.9.2008 declaring at total income of Rs.7,35,16,505. The case was selected for scrutiny and notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions 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 exp....
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....anent Establishment of Google Ireland Ltd under Article 5 of the India-Ireland Double Taxation Avoidance Agreement. 7. The Ld CIT(A) has erred in holding that the Assessee was not remunerated at arm's length. 8. The Ld CIT(A) has erred in upholding that the Assessee was required to deduct tax at source from Rs.119,82,61,994 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 re....
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....med TDS credit of Rs.3,55,23,891 against the amount of Rs.47,49,39,634 shown as advertisement revenue in the Profit & Loss account (net of amount remitted to GIL account). The AO called on the assessee to furnish the details pertaining to the advertisement revenue as shown in the P&L account. The assessee in response filed a reply stating that an amount of Rs.167,32,01,616 is received from the advertisers on 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 'A....
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.... Revenue from Adwords Programme 167,32,01,616 - fees remitted to Google Ireland Ltd. 119,82,61,984 - Net profit admitted in India 6,37,36,487 167,32,01,616 167,32,01,616 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 ....
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....i) Materiality - Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements." 5.8 It may be seen from the above, the financial statements 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 ....
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....d GIL with regard to AdWord Program are different and accordingly the addition made was reduced by Rs.30,65,47,268. 14. The ld AR submitted a detailed written submission with regard to the impugned additions. The arguments of the ld 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 ....
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....17. We heard the parties and perused the material on record. The trigger for the impugned additions/disallowance is that the 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. 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 disc....
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....enue of INR 47,49,39,634/-. The 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. 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 th....
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.... merchandise from which he regularly delivers goods or merchandise on behalf of the Irish entity, or (c) habitually secures orders in India, wholly or almost wholly for the Irish entity itself or the Irish entity or any of its related party. 22. Therefore, all the above conditions must be satisfied, in the present case 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 ....
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.... transactions and that all the payments had been collected by the Assessee in its own name. 25. It is noticed that inspite of giving the above findings, the CIT(A) upheld the AO's decision by reproducing the AO's observations and without bringing any contrary evidence on record from his end to prove that the Assessee has habitually concluded contracts on behalf 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.co....