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Google Ireland exempted from tax on 8,600 crore received from India unit

Google Ireland (GIL) will not have to pay tax on over ?8,600 crore received from Google India (GIPL), the Income Tax Appellate Tribunal (ITAT) has ruled.

The payment was made during fiscal year 2012-13 to 2015-16 (assessment Year 2013-14 to 2016-17) under the Google Reseller Agreements towards marketing & distribution rights of AdWords program. While Google Ireland did not file income tax return (ITR) on the ground that revenue from sale of online advertisement was not taxable in India. However, the Income Tax Department felt that such payment is the nature of royalty and will attract Tax Deducted at Source (TDS) and issued the notice to the assessee (GIL).

GIL submitted before the Assessing Officer (AO) that the order of the ITAT dated July 23, 2017 in the case of GIPL holding that payments to GIL towards AdWords program to be royalty was set aside by the Karnataka High Court and remanded to the Tribunal. After that the ITAT in 2022 decided the issue of sale of online advertising space is not liable to be taxed in India both under the Income-tax Act and DTAA (Double Taxation Avoidance Agreement). This order was followed by the coordinate Bench of the Tribunal in the case of GIPL for AYs 2013-14 to 2016-17 and connected appeals vide order dated 15.12.2022. 

However, the AO noted that department is in process of filing further appeal in the said cases. It was held by the AO that in view of the departmental stand and the interest of the revenue, reassessment proceeding had to be completed. Accordingly, the AO added the amount as royalty income. As the assessee (Google Ireland) did not get any relief from initial hierarchy of appeal of the Dispute Resolution Panel, it moved to ITAT.

The bench took note of the previous ruling which mentioned that various ITAT decisions have held that income from the sale of advertisement space on a website is not taxable in India if there is no PE (Permanent Establishment) of the foreign enterprise in India. It was held that such income is not to be regarded as royalty or FTS (Fees for Technical Services). Such a tax challenge is addressed by the introduction of Equalisation Levy (EL). It is levied on specified services such as online advertisement, any provision for digital advertising space, or any other facility or service for online advertising purposes.

Thus, “online advertisement is now covered under EL. If online advertisement was already covered under definition of royalty, then bringing it as part of EL scheme would not arise.” With this, it was said that payment made by GIPL to GIL cannot be characterized as royalty under the India-Ireland DTAA. The March 26 ruling also followed the same and said the payments made by GIL to the assessee cannot be taxed in the hands of the assessee.

Commenting on the ruling, Amit Maheshwari, Tax Partner with AKM Global, said: “This decision is notably favourable and carries significant implications for multinational enterprises in the technology sector, as it has the potential to establish a precedent favouring taxpayers in similar transactional and online AdWords sales taxation matters. It is pertinent to note that the equalization levy implications should be considered in these cases as well.”

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