2022 (10) TMI 1039 - AT - Income Tax

Royalty payment - payments made by the Appellate under the Distribution Agreement - characterisation of the payments to Google Ireland - scope of Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Double Taxation Avoidance Agreement between India and Ireland - assessee (Google India Private Limited) (GIPL) is a company engaged in the business of providing Information Technology (IT) and Information Technology Enabled Services (ITES) to its group companies. The definition of the term royalty in Article 12(3) of the India - Ireland DT AA override the definition of royalty as provided in Explanation 2 to section 9(l)(vi) of the Act by virtue of section 90(2). Therefore, the definition of the term royalty under the India - Ireland DTAA being more beneficial to the assessee must only be considered in these appeals. The findings of the AO and CIT(A) as regards the characterisation of the payments to Google Ireland as 'Royalty' under section 9(l)(vi) of the Act is therefore not relevant and consequently correctness of these findings need not be adjudicated in these appeals. Similarly, we do not think it is necessary to decide whether the services agreement and distribution agreement are interlinked or complementary to each other. ITES services are enabling the overall business and not directly related to generating revenue from Adword Program in India. Revenue is generated by end customers clicking on link and not because of ITES services. Even if it is interlinked, the internal tools / intangibles / software of Google Ireland are admittedly not transferred to assessee. The assessee has only right to use these for rendering ITES services. Applying ratio of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT this cannot result in royalty. We proceed to examine whether the definition of 'Royalty' as per Article 12 of India- Ireland DTAA is satisfied in the present case considering the distribution agreement, services agreement and the facts on record. It is not in dispute that the Adwords Program is used by the assessee in the present case be it for the purpose of discharging its functions under the distribution agreement or under the services agreement. However, the question for our consideration is whether the copyright in Google AdWords Program is used by the assessee or not? In order to attract definition of 'Royalty', there has to be use or right to use, inter alia, any copyright. The issue as to whether usage of computer software tantamounts to royalty, is now resolved by the Supreme Court decision in the case of Engineering Analysis Centre of Excellence Private Limited (supra) We find that none of the rights as per section 14(a)/(b) and section 30 of the Copyright Act, 1957 have been transferred by Google Ireland to the assessee in the present case. As held by the Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra) mere use of or right to use a computer program without any transfer of underlying copyright in it as per section 14(a)/(b) or section 30 of the Copyright Act, 1957 will not be satisfying the definition of Royalty under the Act / DTAA. Similarly, use of confidential information, software technology, training documents and others are all 'literary work' with copyrights in it owned by the foreign entity and there was no transfer or license of copyrights in favour of the assessee company. Hence, the impugned payments cannot be characterised as 'Royalty' under the DTAA. Delhi High Court in DIT v Sheraton International Inc 2009 (1) TMI 27 - DELHI HIGH COURT held that when the use of trade mark, trade name etc are incidental to the main service of advertisement, publicity and sales promotion and further when there is no consideration payable for such use of trade mark, trade name etc, the consideration cannot be characterised as royalty. Applying the said principle, in the present case, use of Google Brand Features etc are de hors any consideration payable to Google Ireland and further they are incidental and ancillary for achieving the main purpose of marketing and distributing the Google Adwords Program. Hence, the lower authorities were not right in treating the payments as Royalty. Applicability of 'use of or right to use industrial, commercial or scientific equipment the CIT(A) held that the assessee cannot be said to have gained right to use any scientific equipment, since, Google Ireland has not parted with the copyright it holds in the Adwords program and hence it cannot be said that any kind of technical knowhow has been transferred to the assessee company. The revenue has not challenged the said finding of CIT(A). Hence, the impugned payments cannot be regarded as made for 'use of or right to use industrial, commercial or scientific equipment'. The remaining portion of definition of 'Royalty' under the India - Ireland DT AA is consideration for information concerning industrial, commercial or scientific experience. AO has not characterised the impugned payments as a consideration for the above. In any case, CIT(A) has given a finding that it cannot be said that any kind of technical knowhow has been transferred to the assessee company. This has not been challenged by the revenue. We hold that the impugned payments cannot be regarded as royalty under the India - Ireland DTAA. 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 the impugned payments are in the nature of Royalty cannot be upheld especially under Article 12 of the India - Ireland DTAA merely because the marketing, distribution and ITES activities are carried out in India and revenues are generated from India or from Indian Advertisers TAG was set up by OECD and its recommendation on changes to the OECD commentary were accepted by OECD. As per the recent decision of the Hon ble Supreme Court in Engineering Analysis, (supra), OECD commentary is a necessary aid for the interpretation of provisions contained in DTAA. In fact, the High-Powered Committee ( HPC ) on electronic commerce and taxation, set up by the Central Board of Direct Taxes ( CBDT ) had also accepted the view taken by TAG and recommended taxing consideration flowing for online advertisement under Article 7, and not Article 12 of the relevant DTAA. In terms of the international guidance as stated herein, the position regarding taxability of receipts from sale of online advertisement space is clear. Unless the non-resident, who is engaged in sale of online advertisement space, has a PE in India, no portion of receipts earned by it from sale of online advertisement space in India can be brought to tax in India as Act read with the relevant DTAA. PE definition presently is based upon the physical presence criteria. The new business models also created challenges in characterizing the nature of payment whether the payment is for services or for any IPR and hence royalty or whether it represents pure business profits. Various ITAT decisions, as discussed above, have held that income from sale of advertisement space on a website is not taxable in India if there is no PE of the foreign enterprise in India. As held that such income is not to be regarded as royalty or FTS. Such tax challenges is addressed by the introduction of EL. Section 165 of the Finance Act, 2016 provides for charge of EL at 6% on consideration for specified services. Section 164(i) of Finance Act, 2016 provides that specified service means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf. 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. We hold that the impugned payment cannot be characterized as royalty under the India- Ireland DTAA. It is ordered accordingly.

Summary

Issues Involved:
1. Whether the payments made under the "Distribution Agreement"� to GIL constituted "Royalty"� under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Ireland?
2. Whether the Tribunal's conclusions were based on assumptions, conjectures, and surmises, and not on the basis of facts available on record?
3. Whether the Tribunal violated the principles of natural justice by relying on unverified material available in the public domain?
4. Whether the initiation of proceedings under Section 201 of the Act was barred by limitation?
5. Whether the amended provisions relating to limitation in Section 201 applied to the period under consideration?
6. Whether the amended provisions of Section 201(3) as amended by the Finance Act, 2012, applied to the financial year under consideration?

Issue-wise Detailed Analysis:

1. Payments Constituting Royalty:
The Tribunal examined whether the payments made by the assessee to Google Ireland Limited (GIL) under the "Distribution Agreement"� constituted "Royalty"� under Section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA between India and Ireland. The Tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited v. CIT, which clarified that mere use of or right to use a computer program without any transfer of underlying copyright does not constitute royalty. The Tribunal concluded that the payments did not constitute royalty under the DTAA, as there was no transfer of copyright or any other rights as per Section 14(a)/(b) and Section 30 of the Copyright Act, 1957.

2. Tribunal's Conclusions Based on Assumptions:
The Tribunal found that the conclusions of the previous order were based on assumptions and conjectures rather than facts available on record. The Tribunal highlighted that the material on which the Tribunal based its understanding of the Google AdWords program was not presented to the appellant, violating the principles of natural justice. The Tribunal emphasized that the findings should be based on facts and evidence presented during the proceedings.

3. Violation of Principles of Natural Justice:
The Tribunal noted that the previous order relied on unverified material available in the public domain, particularly a Google study, without confronting the appellant with such material. This reliance on external material without giving the appellant an opportunity to rebut the evidence violated the principles of natural justice and fair play. The Tribunal stressed the importance of adhering to procedural fairness and ensuring that all evidence relied upon is presented to the parties involved.

4. Initiation of Proceedings Barred by Limitation:
The Tribunal examined whether the initiation of proceedings under Section 201 of the Act was barred by limitation. The Tribunal referred to the Finance Act, 2012, which amended the limitation provisions in Section 201. The Tribunal concluded that the amended provisions did not apply retrospectively to the financial year under consideration. Therefore, the initiation of proceedings was not barred by limitation.

5. Application of Amended Provisions Relating to Limitation:
The Tribunal addressed whether the amended provisions relating to limitation in Section 201 applied to the period under consideration. The Tribunal held that the amended provisions, which bestowed limitation in respect of resident payees, were not applicable for the financial year under consideration. The Tribunal emphasized that a reasonable period for initiation of proceedings under Section 201 should be four years in the absence of any prescribed limitation.

6. Applicability of Amended Provisions of Section 201(3):
The Tribunal considered whether the amended provisions of Section 201(3) as amended by the Finance Act, 2012, applied to the financial year under consideration. The Tribunal reiterated that the amended provisions were not applicable to the period under consideration. The Tribunal concluded that the proceedings were initiated within a reasonable period and were not barred by limitation.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, setting aside the previous order and remanding the matter back to the Tribunal for fresh adjudication in accordance with law. The Tribunal emphasized the importance of adhering to principles of natural justice and ensuring that findings are based on facts and evidence presented during the proceedings. The Tribunal also clarified that the payments made under the "Distribution Agreement"� did not constitute "Royalty"� under the DTAA between India and Ireland.