2018 (5) TMI 896 - AT - Income Tax

Royalty - amount payable towards purchase of advertisement space - whether payment made by the Appellant to Google Ireland Limited in relation to purchase of advertisement space for resale to the advertisers in India under the Google AdWords Reseller Agreement ? - lndia-lreland Treaty - right to use of Trademark - TDS u/s 195 - Held that - Considering the AdWord Distributor Agreement and the Service Agreement together and we find that under these agreements assessee was licenced to use the trade marks, IPRs, brand features, derivative workss and other intangibles etc, though it may not be transferred in favour of the appellant.Therefore the consideration paid by the assessee is on account of usage of all these intangibles in order to provide better services to the GIL or to the advertisers is certainly in the nature of payment of royalty and is chargeable to tax under section 9(1)(vi) of the Act and under article 12 of the DTAA. Since the assessee has not deducted the tax at source as per provisions of section 195 of the Act, assessee was rightly held to be in default under section 201(1) of the Act. We therefore confirm the order of the CIT(A) upholding the ordert of the AO passed under section 201(1) and 201(1A) of the Act in this regard. Beneficial owner of the royalty received - whether GIL is the beneficial owner of the payment received in the form of royalty? - Held that - From a reading of this agreement, it is not clear as to how much revenue is shared by different holdings. In the absence of the relevant evidence either in the form of agreement executed between the various holding companies or otherwise, it is not clear as to whether the GIL has full control over the receipt received under Google AdWord Program or the GIL was acting as a conduit of its parent holdings. We therefore are of the view that this aspect requires a fresh look by the AO in the light of all the relevant evidences. We accordingly restore the matter to the AO after setting aside the order of the CIT(A) in this regard in all these appeals to readjudicate the issue of beneficial ownership in the light of the license agreements executed between the parent holdings of the GIL. We direct the appellant to extend all sort of cooperation by producing the agreement executed between the various parent holdings of the GIL. Thus the matter is restored to the file of the AO to readjudicate the issue of beneficial ownership Rejection of books of accounts - Held that - AO has not pointed out the specific defect in maintenance of books of accounts. Moreover, after recasting the profit and loss account, there was no change in the profit originally reported by the assessee in its financial statements. It is also noticed that assessee has been following the same method of accounting in earlier years but it was never rejected by the AO. We also find force in the contention of the learned Counsel for the assessee that the lower authorities have not identified the accounting standards that has to be followed by the assessees. In the light of these facts, we are of the considered opinion that rejection of the books of accounts by the AO is not proper Application of section 10A - Held that - We find that AO has accepted the claim of deduction under section 10A of the Act and he has not raised any dispute with regard to amount received by the assessee from Google Ireland for rendering services in India to the advertisers which was claimed as export proceeds under section 10A - It is also a settled position of law that at the second appellate stage, the Revenue cannot improve upon the case made out by the AO. There are various provisions under the Income Tax Act where the Revenue can rectify its mistakes but before the Tribunal no additional grounds can be raised which was not a subject matter of appeal or dispute before the lower authorities. The Tribunal, being a second appellate authority, is supposed to adjudicate those issues which were raised before it and also was of subject matter of dispute before the lower authorities. The Revenue cannot improve upon its case. Therefore, we are of the view that additional grounds raised by the Revenue are not admissible Computation of deduction under section 10A - Held that - Matter to be decided relying on jurisdictional High Court case of CIT Vs. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT to exclude reimbursement of expenditure incurred in foreign currency both from export turnover as well as total turnover. Reopening of assessment - assessee contented reopening on no forming a belief that income chargeable to tax has escaped the assessment and notice under section 143(2) was not issued within the prescribed period - Held that - Notice under section 143(2) was issued in time. Moreover, we do not find any procedure either in the Act or in Income Tax Rules wherein it has been laid down that after issuance of notice under section 148, the returns are to be filed and thereafter assessee has to seek the reasons recorded for reopening of the assessment and thereafter file the objection thereto. After disposal of the objections the AO can only issue the notice under section 143(2) of the Act. For completing the assessment under section 147 the procedure laid down under section 143 is to be followed. Nowhere it has been mentioned either under section 143 or under section 147 that the notice under section 143(2) cannot be issued before disposing of the objections filed by the assessee against the reasons recorded for reopening the assessment. No merit in the contention of the assessee that the notice under section 143(2) is bad in law. Revenue has assessed the appellant on business profit received by it after treating the GIPL as its Permanent Establishment in India - PE in India - Held that - Revenue has wrongly assessed the GIL for business profit received by it under AdWord Distribution Agreement. During the course of hearing, the learned Standing Counsel has candidly admitted that now the Revenue s stand is very clear that the payment made by the GIPL to GIL is in the nature of royalty and not the business profit received by the GIL. Therefore, we are of the considered opinion that assessment of business profit in the hands of GIL after treating the GIPL as Permanent Establishment of the GIL is not proper. Even if the royalty is to be paid by the GIPL to GIL the tax is to deducted on its payment and benefit of the same will be given to GIL while completing the assessment in its hands. Therefore, we set aside the order of CIT(A) and restore the matter to the AO with a direction to reframe the assessment TPA - MAM selection - selection of comparable - TPO had rejected the TP study report submitted by the assessee-company on the ground that there was no separate FAR analysis of each function performed with AEs - Held that -From perusal of TPO order it is clear that the TPO made TP analysis without referring to any evidence or actual conduct of the parties. Thus, neither the assessee-company nor the TPO had approached the issue in proper perspective and therefore in the absence of proper TP analysis in proper perspective, the comparability of international transaction cannot be judged. Therefore, in fitness of things, we remand the entire TP issues to the file of the TPO/AO for undertaking the exercise of TP analysis afresh after affording opportunity to the assessee-company to furnish TP study report covering the entire functions performed, assets employed and risks undertaken transaction-wise in respect of international transaction with AE. After the TP analysis on the above lines, the TPO shall aggregate the functions which has a direct nexus with core business activity i.e. AdWords distribution programme. As held in the appeal against order passed u/s 201(1) that the activities under ITeS services are integral part of AdWords distribution programme. Further the TPO shall examine whether the functions of the assessee-company resulted in creation of intangibles i.e. marketing intangibles or technological intangibles. Whether these intangibles so created are owned and used by the assessee-company itself or transferred to any other entity and whether the assessee-company is properly compensated for transferring such intangibles. The findings of the TPO shall be based on the actual conduct of the parties and evidence produced by the assessee-company. The comparability of all these independent transactions shall be judged with reference to uncontrolled similar transaction by adopting most appropriate method and comparability factors. In respect of transactions aggregated with AdWords business transaction, the TPO shall bench-mark the transaction by adopting Profit Split Method as most appropriate method, as the transaction of business of AdWords programme requires deployment of assets and functions of different entities located in different geographical locations in order to ultimately deliver services as the combined effort generate revenues. It is also settled proposition of law that Profit Slip Method (PSM) can be adopted as most appropriate method in cases involving multiple interrelated international transactions which cannot be evaluated separately.us, all the grounds of appeal relating to TP adjustment are set aside to the file of the AO/TPO for de novo assessment after affording due opportunity of being heard. TDS u/s 195 - payment made to Google Ireland by the assessee company on account of distribution fees paid to it on the ground that no tax was deducted at source - bonafide belief - Held that - assessee considering the fact that payee has already paid the tax and nearly for a period of decade both revenue and the assessee proceeded on a footing that provisions of section 194J was not applicable to the payment of transaction charges. It is also pertinent to note that the provisions of section 40(a)(ia) starts with non obstante clause. A non- obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the mentioned in such non-obstante clause. In case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over teh other clause see CIT vs. Navabharat Enterprises (P) Ltd. (1987 (1) TMI 26 - ANDHRA PRADESH High Court). Therefore, the plea of bona fide belief has no place in the non-obstante provisions of the Act. Addition made on account of attribution of profits to Google Ireland Ltd. - direction of the Hon ble DRP to delete addition - Held that - As in the case of Director of Income-tax (International Taxation) v. Morgan Stanley &Co.(2007 (7) TMI 201 - SUPREME Court) held that once the TP analysis undertaken, there is no further need to attribute profit to PE but added a rider that a situation would be different if TP analysis does not adequately reflect the functions performed and risks assumed by the enterprise. In such a situation there would be a need to attribute profit to PE for those functions and risks that have not been considered. In the assessee s appeal, since we have restored TP analysis afresh to the file of AO/TPO, this issue also is set aside to the file of the AO to make de novo assessment

Summary

Issues Involved:
1. Nature of Payment (Royalty vs. Business Profit)
2. Permanent Establishment (PE) Status
3. Transfer Pricing Adjustments
4. Rejection of Books of Accounts
5. Disallowance under Section 40(a)(i)
6. Re-computation of Deduction under Section 10A
7. Validity of Reopening of Assessment
8. Attribution of Profits to Google Ireland
9. Additional Grounds for Deduction under Section 10A
10. Levy of Interest under Sections 234A, 234B, and 234D

Detailed Analysis:

1. Nature of Payment (Royalty vs. Business Profit):
The Tribunal concluded that the payments made by the appellant to Google Ireland Limited (GIL) under the Google AdWord Distribution Agreement constitute "royalty" as per Section 9(1)(vi) of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) with Ireland. The Tribunal examined the agreements and found that the appellant had access to intellectual property rights, trademarks, and other intangibles owned by Google Inc., which were used to provide services under the AdWord Program. Therefore, the payments were not merely for the purchase of AdWord space but for the use of these intangibles, classifying them as royalty.

2. Permanent Establishment (PE) Status:
The Tribunal held that Google India Private Limited (GIPL) could not be considered a Permanent Establishment (PE) of Google Ireland Limited (GIL). The relationship between GIL and GIPL was on a principal-to-principal basis, and GIPL was not acting as an agent of GIL. Therefore, the profits attributable to GIL could not be taxed in India as business profits through a PE.

3. Transfer Pricing Adjustments:
The Tribunal directed the Transfer Pricing Officer (TPO) to undertake a fresh TP analysis, considering the functions, assets, and risks (FAR) analysis of each transaction separately. The Tribunal emphasized that the TPO should aggregate functions directly related to the core business activity of the AdWord distribution program and apply the Residual Profit Split Method (RPSM) as the most appropriate method for transactions involving multiple interrelated international transactions.

4. Rejection of Books of Accounts:
The Tribunal found that the rejection of the books of accounts by the Assessing Officer (AO) was not justified. The AO had not pointed out specific defects in the maintenance of the books, and the profit remained unchanged even after recasting the Profit and Loss account. Therefore, the Tribunal set aside the AO's order and directed the AO to accept the books of accounts prepared by the appellant.

5. Disallowance under Section 40(a)(i):
The Tribunal upheld the disallowance made under Section 40(a)(i) of the Income Tax Act for non-deduction of TDS on payments made to GIL, as the payments were classified as royalty. The Tribunal rejected the appellant's plea of bona fide belief for non-deduction of TDS, stating that the provisions of Section 40(a)(i) start with a non-obstante clause, and the plea of bona fide belief has no place in these provisions.

6. Re-computation of Deduction under Section 10A:
The Tribunal directed the AO to recompute the deduction under Section 10A by reducing the telecommunication expenses incurred in foreign currency from both the export turnover and the total turnover, following the law laid down by the jurisdictional High Court in the case of Tata Elxsi Ltd.

7. Validity of Reopening of Assessment:
The Tribunal held that the reopening of the assessment under Section 147 was valid. The AO had formed a prima facie belief that income chargeable to tax had escaped assessment based on the assessment framed in the case of the payer (GIPL). The Tribunal also found that the notice under Section 143(2) was issued within the prescribed period, and there was no procedural irregularity in the reopening process.

8. Attribution of Profits to Google Ireland:
The Tribunal remanded the issue of attribution of profits to Google Ireland back to the AO for de novo assessment. The AO was directed to make the assessment in light of the principles laid down by the Hon'ble Supreme Court in the cases of Morgan Stanley & Co. and E-funds IT Solution Inc., which state that once the TP analysis is undertaken, there is no further need to attribute profit to the PE unless the TP analysis does not adequately reflect the functions performed and risks assumed by the enterprise.

9. Additional Grounds for Deduction under Section 10A:
The Tribunal rejected the additional grounds raised by the Revenue for recomputation of deduction under Section 10A, stating that the issue was not raised before the lower authorities and could not be introduced at the second appellate stage.

10. Levy of Interest under Sections 234A, 234B, and 234D:
The Tribunal held that the levy of interest under Sections 234A, 234B, and 234D is consequential and does not require separate adjudication.

Conclusion:
The Tribunal's detailed analysis and directions provide a comprehensive resolution to the complex issues involved in the case, ensuring that the assessments are made in accordance with the law and established principles of transfer pricing and international taxation.