Sale of online advt. space by NR can’t be characterized as royalty; ITAT justified levy of EL on ‘Google’

Case Details: Google India Private Limited v. DCIT - [2022] 143 taxmann.com 302 (Bengaluru-Trib)

Judiciary and Counsel Details

• • George George K, Judicial Member & Ms Padmavathy S., Accountant Member
  • Percy Pardiwala, Sr. Adv. Anmol Anand, Ms Priya Tandon, Advs. & Vinay Mangla, CA for the Appellant.
  • K.V. Aravind for the Respondent.

Facts of the Case

The issues involved in appeal revolve around the taxability of payments received by Google Ireland Limited (GIL) from the assessee, who was engaged in the business of online advertisement space to advertisers in India.

The Assessing Officer (AO) sought to characterize these payments be royalties as defined in section 9(1)(vi). The lower authorities held that the assessee had been granted the use of or right to use trademarks, other brand features, and the process owned by Google Ireland for the purpose of distribution of the Adwords program. Thus, the sums payable to Google Ireland were royalty.

ITAT Held

On appeal, the Tribunal held that it is true that the Google Adword program was commercially and profitably exploited in a commercial sense and profitable manner in India to generate revenues from Indian customers or advertisers. This is the business or commercial aspect of the transaction.

However, the stand of the lower authorities that these payments are in the nature of Royalty cannot be upheld merely because the marketing, distribution, and ITES activities are carried out in India and revenues are generated from India or Indian Advertisers.

In the context of online advertisements, including advertisements where the payment is based on the number of clicks (i.e., CPC basis), the Technical Advisory Group (TAG) of OECD, recommended the taxability of such payments under Article 7 of the relevant DTAA. The said Article 7 deals with “business profits” and not royalty.

Unless the non-resident, who is engaged in the sale of online advertisement space, has a PE in India, no portion of business receipts earned by it from the sale of online advertisement space in India can be brought to tax in India under the Act read with the relevant DTAA.

The above view is supported by the insertion of provisions related to the Equalisation Levy (EL) by the Finance Act, 2016. If the online advertisement was already covered under the definition of royalty, then bringing it as part of the EL scheme would not arise.