2018 (8) TMI 1818 - HC - Income Tax

Stay petition - recovery proceedings - TDS u/s 195 - payments made by the Appellant under the Distribution Agreement dated 12.12.2005 (superseded by Reseller Agreement) to GIL - withholding obligations on the Appellant were integrally linked/ dependent with/on the taxability of the amounts in the hands of GIL - HELD THAT - i) The coercive process for the recovery of the balance amount of demand may not be taken by the respondent-Revenue in view of their interest having been adequately safeguarded and the major portion of the demand having already been paid by the appellant-Assessee Company. ii) The penalty proceedings shall not be undertaken by the Revenue Authorities during the pendency of the present appeals filed by the appellant before this Court. iii) So far as the fresh proceedings to be undertaken by the TPO in pursuance of the remand directions by the Tribunal are concerned we make it clear that the said exercise can be undertaken by the TPO in pursuance of the impugned order of the learned Tribunal during the pendency of these appeals but no final order shall be passed by the TPO for all these assessment years in question in pursuance of the impugned order passed by the learned Tribunal dated 11.05.2018 without obtaining specific leave of this Court. iv) However we direct that the Assessee-Company shall co-operate with these remand proceedings and the draft order of TPO may be made available and be placed before this Court at the stage of final hearing of the present appeals and that may be taken into account by the Court at the time of final hearing. With these interim directions the stay application is disposed of. We direct the Appellant-Assessee to file Additional Affidavit before this Court in four weeks explaining in brief the Shareholding pattern of the Assessee Company and Google Ireland Limited GIL . The difference between Distribution Agreement dated 12.12.2005 and Reseller Agreement dated 01.07.2012. ITES Agreement and aforesaid two Agreements. Explain with a fact sheet the factual and technological aspects step by step for operating the Adwords Program. Whether there is any user of IPR (Intellectual Property Rights) of Google Ireland Limited (GIL) or Google Inc. USA by the Assessee Company for uploading the Advertisements of the Advertisers on the internet space or not?

Summary

Issues:
1. Interpretation of payments under Distribution Agreement as Royalty
2. Relationship between ITES and Distribution Agreements
3. Taxability of revenues from Distribution Agreement
4. Nature of rights granted under Distribution Agreement
5. Taxability of payments made by the Appellant
6. Withholding tax obligations
7. Stay of recovery of tax, interest, and penalty
8. Interim relief and directions for ongoing proceedings
9. Pending appeals before the Income Tax Appellate Tribunal

Interpretation of payments under Distribution Agreement as Royalty:
The High Court framed substantial questions of law regarding the Tribunal's conclusion on the payments made under the Distribution Agreement, considering whether they constituted Royalty under the Income-tax Act and the Double Taxation Avoidance Agreement with Ireland. The Court analyzed the nature of the payments and their classification as Royalty based on intellectual property rights and commercial rights granted under the Agreement.

Relationship between ITES and Distribution Agreements:
Another issue raised was the Tribunal's interpretation of the relationship between the ITES and Distribution Agreements. The Court examined whether the functions under the Distribution Agreement could only be discharged under the ITES Agreement, emphasizing the need to establish separate and distinct purposes for the two agreements.

Taxability of revenues from Distribution Agreement:
The Court considered whether the revenues from the Distribution Agreement constituted business income in the hands of the other party and the applicability of tax provisions in the absence of a Permanent Establishment in India. The analysis focused on the tax implications and the absence of taxability based on the nature of the receipts.

Nature of rights granted under Distribution Agreement:
The Tribunal's failure to recognize the commercial nature of the rights granted under the Distribution Agreement was also challenged. The Court assessed whether the rights were related to intellectual property and if they fell within the scope of Section 9(1)(vi) of the Income-tax Act.

Taxability of payments made by the Appellant:
Further, the Tribunal's decision on the taxability of the entire payment made by the Appellant was disputed. The Court examined the basis for considering the payments as Royalty under specific provisions and agreements, focusing on the rights granted to the Appellant.

Withholding tax obligations:
The issue of withholding tax obligations on the Appellant for specific payment periods was raised, emphasizing the timing and taxability of the amounts in the context of the Double Taxation Avoidance Agreement. The Court analyzed the interrelation between withholding obligations and taxability.

Stay of recovery of tax, interest, and penalty:
Regarding the recovery of tax, interest, and penalty, the Court granted interim relief by directing the Revenue not to undertake coercive proceedings for the balance amount of demand. The Court considered the Assessee's compliance and the protection of the Revenue's interest through payments and guarantees.

Interim relief and directions for ongoing proceedings:
The Court provided specific interim directions related to penalty proceedings and fresh proceedings by the Transfer Pricing Officer (TPO). The directions aimed to balance the interests of both parties during the pendency of the appeals and ongoing assessments.

Pending appeals before the Income Tax Appellate Tribunal:
Lastly, the Court addressed the issue of pending appeals before the Income Tax Appellate Tribunal, allowing the Assessee to seek appropriate orders to avoid repetitive decisions. The Court directed the Assessee to provide additional information and documents for further consideration during the final hearing in November 2018.