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Google Adwords program is not taxable as either “royalty” or “Fee for technical services” in India

The Income Tax Appellate Tribunal, Bangalore (“Tribunal”), recently in Google Ireland Ltd. v. DCIT[1] allowed an appeal by Google Ireland Ltd (“Google Ireland”) and held that the payments received from Google India Pvt Ltd (“Google India”) for granting marketing & distribution rights of Google AdWords program were not in the nature of “royalty” or fee for technical services (“FTS”) and consequently it could not be brought to tax in India.

Google Adwords program is a computerised advertising programme developed by Google LLC, USA, for displaying advertisements on Google’s search engine based onkeywords typed by users with the abbreviation “Ad”.

Google Ireland is the exclusive licensee of the programme worldwide, outside the US. Google Ireland had engaged Google India as a ‘non-exclusive authorised distributor’ to sell online advertisement space to retail advertisers here under a distribution agreement dated December 12, 2005 (“Distribution Agreement”). Google India was remitting the fees received from the retail advertisers to Google Ireland without deducting any tax at source.

The Indian Revenue Authorities (“IRA”) had initiated proceedings against Google India, alleging that the amounts payable to Google Ireland ought to have been offered to tax in India as “royalty” under the Income tax Act, 1961 (“IT Act”), and therefore, Google India should have withheld taxes.

Section 9(1)(vi) of the IT Act lists out circumstances under which payment received by a foreign entity would be construed as “royalties” arising from India. The conditions relevant to the instant case are:

  • payments made for transfer of all or any rights in respect of patent, invention model or process or similar property;
  • payments made for “use” of any patent, invention, model, process or similar property; and
  • transfer of all or any rights in respect of copyrights, literary, artistic or scientific work. An Explanation clause included retrospectively in 2012 to state that transfer of any right in a computer software has always included transfer of rights in a property or information.

The Tribunal[2], originally, on October 23, 2017, had upheld the position adopted by the IRA and held it as “royalty” in view of the following reasons:

  • Google Adwords is a patent tool used by the advertiser in conjecture with various sophisticated tools. The intellectual property rights belong to Google Ireland. The Distribution Agreement allows Google India access to all intellectual property and confidential information, which is used by Google Ireland, implying Google India has rights over the intellectual property rights of Google Ireland.
  • Google India had access to various data with respect to age, gender, region, language, taste habits, food habits, cloth preference, behaviour on websites, etc., and it uses this information to select ad campaigns and maximise impressions and conversions of customers to the ads of advertisers. These activities should be considered as use of ‘process’ embedded in the Google Adwords program.
  • The USP of the Google Adword program is in Google Analytics, which maintains thousands of different key words used by people on websites and based on this user behaviour, Google analytics suggests appropriate key words to be used by advertisers to encourage traffic on the website. Google India is using all these tools in conjecture with advertisers at the time of granting back hand services to advertisers, as Google India has access to all this data, information, etc.
  • IP of Google vests in its search engine technology, associated software and other features. Thus, use of these tools to perform various above-mentioned activities, including accepting advertisements, providing before or after sale services, clearly fall within the ambit of ‘royalty’.
  • Moreover, grant of license to sell or make offer for sale of Adwords program by Google Ireland by virtue of the distribution agreement is by itself a copyright within the purview of Section 14(b)(ii) of the Indian Copyright Act and thus, the sums payable by Google India to Google Ireland are covered by clause (v) to Explanation 2 to Section 9(1)(vi) of the IT Act and under Article 12(3) of the India-Ireland DTAA and hence the payments are in the nature of “royalty”.

In an appeal, the Hon’ble High Court of Karnataka, vide a judgment dated April 17, 2021, set aside the above order and remanded the case back to the Tribunal for de novo consideration on the ground that the material on the basis of which the above order was passed was not furnished to Google Ireland and no opportunity was provided to it to rebut it.[3]

In remand proceedings, the Tribunal vide order dated October 19, 2022[4], relied on the Supreme Court ruling in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT,[5] wherein it was held that the definition of “royalty” under the DTAA between India and Ireland overrides the definition under the IT Act. The Tribunal further held that to attract the definition of ‘royalty’ under Article 12(3)(a) of the DTAA, Google India ought to have had exclusive rights to use the said program, whereas Google India was merely a ‘non-exclusive’ distributor.

It further held that a non-transferable licence, merely enabling the use of a copyrighted product with restrictive conditions, cannot be construed as transfer of copyrights under the Copyright Act, 1957, and therefore, it would not be considered as royalties under Article 12(3)(a) of the DTAA. The usage of trade names, trademarks, logos, etc., were incidental or ancillary for the purpose of carrying out the marketing and distribution of the Adword program. It relied on the Delhi High Court judgement in DIT v. Sheraton International Inc[6] to hold that when the use of trademark, trade name, etc., are incidental to the main service of advertisement, and when there is no consideration payable for such use of trademark, trade name, etc., the consideration cannot be characterised as royalty. Accordingly, the case was decided in favour of Google India.

The IRA has initiated other similar cases against the recipient, Google Ireland.[7] In the present case, Google Ireland submitted that the issue of characterising income received from India as “royalty” was no longer res integra and was squarely covered by the order of the Tribunal in the aforementioned case of Google India (as discussed above). The IRA, on the other hand, argued that it is in the process of filing further appeal in the aforementioned cases and hence, the earlier decisions of the ITAT should be ignored.

The Tribunal held that its coordinate bench had already dealt with the issue in great detail, wherein it was held that the payment made by Google India to Google Ireland is neither in the nature of “royalty” nor “FTS” and consequently cannot be taxed. The ITAT did not see any reason to deviate from its earlier decision and accordingly held that the payments made by Google India under the Distribution Agreement is not chargeable to tax in India.

Significant Takeaways

The decision in the Google Ireland case is a landmark one since it has been categorically held that payment for online advertisement spaces or advertisement hosting services would not be taxable in India and such payment was also not in the nature of royalty or FTS. It was followed in several other cases[8] as well, apart from Google Ireland’s cases. However, this has not yet reached finality because the IRA has already challenged these decisions before the Hon’ble Karnataka High Court. Given the facts of the case and the nuanced nature in which the Adwords program works, it would be difficult to predict the outcome at this stage. Therefore, taxpayers cannot heave a sigh of relief until the case is finally decided by the Supreme Court.

It is worthwhile to highlight that the Finance Act 2016 had introduced Equalization Levy (“EL”), famously referred to as Google Tax, primarily to impose taxes on these types of payments received by foreign companies from online advertisements made in India. As per said regime, a 6% levy would be charged on consideration received or receivable for rendering online advertisement services. It may be noted that EL is not considered as tax on income and therefore, would not get beneficial treatments provided under the DTAA. As per reports[9], the Government has approximately collected INR 40 to 50 billion every year from 2016 onwards through the EL regime from various MNEs including Google, Facebook, Amazon, etc.

It is also pertinent to note that all these developments are a part of the various threads through which the Indian Government is trying to tax the digital economy. It is worthwhile to consider that major developed and developing economies unanimously agree that there should be uniform principles regarding taxation of global technology giants. In this regard, the initiatives and major work carried out by the Organisation for Economic Cooperation and Development (“OECD”) is both commendable and noteworthy. It is highly anticipated that we will soon see global taxation principles adopted by major economies.

[1] IT(IT)A Nos.191 to 194/Bang/2024, dated 26.03.2024.

[2] Google India P. Ltd. v. Addl. CIT (2017) 60 ITR (Trib) (S.N.) 40 (Beng)

[3] Google India (P.) Ltd. v. CIT (International Taxation) [2021] 127 36/435 ITR 284 (Kar.)

[4] M/s. Google India Private Limited v. DCIT, [2022] 143 302 (Bangalore – Trib.)

[5] [2021] 125 42

[6] [2009] 178 Taxman 84

[7] IT(IT)A No.2845/Bang/2017 dated 28.02.2023.

[8] Yahoo India (P.) Ltd. v. Play Games 24×7 (P.) Ltd. v. Dy. CIT IT Appeal No. 1533 (Mum.) of 2019, dated 23.03.2022, Matrimony.Com Ltd. v. ACIT IT Appeal No. 1391 (Chny.) of 2019, dated 20.04.2022, ESPN Digital Media (India) (P.) Ltd. v. Dy. CIT [2022] 140 442 (Chennai – Trib.), Interactive Avenues (P.) Ltd. v. Dy. CIT IT Appeal No. 3130 (Mum.) of 2019, dated 07.07.2022, etc.