2024 (4) TMI 342 - AT - Income Tax

Income taxable in India - Royalty or FTS - PE in India or not? - taxability of payments received by the assessee from GIPL as per terms of Reseller Agreements - HELD THAT - As decided in own case 2023 (3) TMI 1304 - ITAT BENGALURU for AY 2007-08 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. The above view is also supported by insertion of provisions related to Equalisation Levy (EL) by Finance Act, 2016. The root for the emergence of the EL can be traced to the dynamic business models that have the ability to transcend the link between an income producing activity and a specific location since these business are carried in the cyber place. The PE definition presently is based upon the physical presence criteria. 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. It was 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. Thus we hold that the impugned payment cannot be characterized as royalty under the India-Ireland DTAA. Payment made by the payer (GIPL) to the assessee (GIL) is not in the nature of royalty or FTS and consequently it cannot be brought to tax in the hands of the assessee - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of payments received by the assessee from GIPL under the Reseller Agreements.
2. Characterization of payments as 'royalty' under the Income-tax Act and India-Ireland DTAA.
3. Validity of reassessment proceedings initiated by the AO.

Summary:

Issue 1: Taxability of Payments Received by the Assessee from GIPL:
The assessee, Google Ireland Limited (GIL), did not file returns for AYs 2013-14 to 2016-17, believing that revenue from the sale of online advertisement space was not taxable in India. The AO issued notices u/s 148 of the Act, leading to draft assessment orders treating payments received from Google India Pvt. Ltd. (GIPL) as royalty income. The Dispute Resolution Panel (DRP) upheld the AO's findings, leading to final assessment orders. The assessee appealed, arguing that the issue was covered in its favor by previous Tribunal decisions.

Issue 2: Characterization of Payments as 'Royalty':
The Tribunal examined whether payments received by GIL from GIPL for the AdWords program constituted 'royalty' under the Income-tax Act and the India-Ireland DTAA. The Tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, which distinguished between a copyright right and a copyrighted article. The Tribunal concluded that the payments did not involve the transfer of any rights as per section 14(a)/(b) or section 30 of the Copyright Act, 1957. Consequently, the payments could not be characterized as 'royalty' under the DTAA. The Tribunal also noted that the use of Google Brand Features was incidental to the distribution agreement and not independently compensable.

Issue 3: Validity of Reassessment Proceedings:
The AO initiated reassessment proceedings based on information from GIPL's case, where payments to GIL were treated as royalty. The Tribunal found that the reassessment proceedings were based on a consistent departmental stand and upheld the AO's actions.

Conclusion:
The Tribunal held that the payments received by GIL from GIPL could not be characterized as 'royalty' under the India-Ireland DTAA. The appeals filed by the assessee were allowed, and the payments were not brought to tax in the hands of the assessee. The Tribunal's decision was consistent with previous rulings in similar cases, emphasizing that the payments were not taxable as royalty or fees for technical services under the Act and DTAA.