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TMI Blog2022 (10) TMI 1039X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready 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. - IT(TP)A No. 1513, 1514, 1515, 1516/Bang/2013 - - - Dated:- 19-10-2022 - Shri George George K, JM And Ms.Padmavathy S, AM For the Appellant : Sri.Percy Pardiwala, Sr.Advocate, Sri.Anmol Anand, Advocate, Miss.Priya Tandon, Advocate Sri.Vinay Mangla, CA For the Respondent : Sri.K.V.Aravind, Standing Counsel ORDER PER GEORGE GEORGE K, JM : These appeals at the instance of the assessee were originally disposed by the ITAT vide its common order dated 23.10.2017. On further appeal at the instance of the assessee, the Hon ble High Court vide judgment dated 17.04.2021 in ITA No.883/2017, 897/2017 to 899/2017, restored the matter to the ITAT for de novo consideration. The relevant finding of the Hon ble High Court reads as follows:- 12. This Court by an order dated 15.11.2017 has admitted the present appeal on the following substantial questions of law; III(1) Whether the Tribunal erred on facts and in law in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bet set aside? III(3) Whether the Tribunal grossly erred in law in placing reliance on unverified material available in public domain to conclude that payments made by the Appellant to GIL constituted royalty under the provisions of the Act and DTAA and more so since the Appellant was not confronted with such material, thereby violating the principles of natural justice? 15. Heard the learned counsel for the parties at length and perused the record. 16. The basic question before this Court is whether the Tribunal while passing the common order dated 23.10.2017 has violated the principles of natural justice and fair play as it has not afforded an opportunity to the appellant to rebut fresh evidence especially when the fresh evidence was based on Google study. The relevant paragraph of the order passed by the Tribunal i.e., paragraph 38 reads as under; 38. Beside filling these written submissions, no other literature or books or documents were filed by the assessee or by the Revenue for the benefit of the Bench so that the Bench can appreciate the working of Google Adword and Google analytics, as the parties have failed to bring any tangible material excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in public domain at Google Adword or Google analytics and also gone through the website of the Google and the Adword links and based upon the above research carried out by the Tribunal, they have summarized the Google Adword functions. The material on which Google Adword functions were summarized does not find place in the order of the Tribunal nor the material was brought to the notice of the appellant, meaning thereby some material collected behind back of the appellant has been used by the Tribunal and the material brought on record through proper application has not been looked into. 18. The Madras High Court in similar circumstances, in the case of Ramco Industries Ltd., (supra) in paragraphs 5 to 10 has held as under; 5. This Court paid its best attention to the rival submissions and also perused the materials placed before it. 6. Sub-section [6] of Section 255 of the Income Tax Act, 1961, in turn, refers to Section 131 of the Act and under Sub-section [1] of Section 131 of the Act, the authorities have the same powers that are vested in a Court under the Code of Civil Procedure, 1908 - the details of which, have been enumerated in the earlier paragraphs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so keeping in view the fact that the material on the basis of which the order has been passed was not furnished to the appellant at any point time, the order passed by the Tribunal is certainly violative of principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut fresh evidence especially when such evidence was based on Google study. \ 20. Another important aspect of the case is that details of the material has also not been reflected in the order passed by the Tribunal and therefore, this Court is of the opinion that as there is a violation of principles of natural justice and fair play, the matter deserves to be remanded back to the Tribunal for hearing it afresh in accordance with law. 21. In light of the aforesaid, the questions are answered in favour of the assessee and against the revenue and the other questions are left open. Accordingly, the appeal in ITA.No.879/2017 is allowed. The order passed by the Tribunal is set aside. The matter is remanded back to the Tribunal for fresh adjudication in accordance with law. 22. The parties will appear before the Tribunal on 3.5.2021 and within a period of 15 days the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... program to the advertisers in India. 4. The assessee had entered into Google AdWords Program Distribution Agreement dated 12.12.2005 with Google Ireland Limited (GIL). As per the agreement, the assessee was appointed as a non-exclusive distributor of AdWords programme to the advertisers in India. The distribution fees paid by the assessee to Google Ireland as per the agreement for the relevant assessment years are as under:- Asst.Year Distribution fee payable (in Rs.) 2009-2010 1,66,58,00,133 2010-2011 1,85,68,92,343 2011-2012 3,72,01,00,047 2012-2013 5,70,74,19,173 5. The Assessing Officer [Deputy Director (International Transaction)] initiated proceedings u/s 201(1) and 201(1A) of the I.T.Act in respect of the above payments made by the assessee to Google Ireland Limited, since, no tax was deducted at source u/s 195 of the I.T.Act. The A.O. called for and examined various details and documents. The statement of the Director of Indian operation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can call, write an e-mail or chat with a representative of the help desk team. This support is provided from some of the global English advertisers. We have a team of around 150 Google employees and 40 vendor employees and they are graduates from various colleges in India. The team guides the advertiser to access the right information or helps him to resolve the issue. This is carried out by internal web application (gcases and ICS). The Manager of the help desk team after identification of the team members sends request for creation of the user id's to Google Ireland. Once the access the created, the help desk team member can see the Advertiser issues in Advertiser's account hosted in the data center through the interface. The process of trouble shooting for issues related to Adwords is a global process and training for the same is provided locally through various means (video conferencing with teams in Ireland and US and web based). It is clarified that the support / customer services for the accounts managed by the sales team of GIPL is handled by them only using ICS and the remaining ie. Self Signup Advertisers are serviced by the Help desk. Q6: Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts managed by them. Q7: How is the deliverable of the outsourced Business Analytics team used by the Account Management Team (Sales team)? Ans:- The deliverable is used by the Sales team for a) To understand the performance of Ad Campaigns run by the Advertisers b) To optimize the performance of the Ad campaigns Q 9 Explain the process of Adword Distribution by GIPL.? Ans: Even though I am not responsible for AdWord Distribution by GIPL, my understanding of the AdWord Distribution process is as follows: a) Advertiser's are of two types i.e self sign up (approximately 95% of the total number of Advertiser's from India) and managed accounts (balance 5% through the sales team of GIPL. b) All Advertisers put up their Ads through a web interface c) The Ads are hosted in the serves / data center situated outside of India d) For the 95% self sign up GIPL's role is limited to invoicing and collections and support if there is an issue raised by the Advertiser. e) For the balance 5% managed accounts, GIPL interfaces with the Advertiser's and sells Ads space for display ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er being an advertiser are Google Trends. Google Adwords for Keywords and knowledge around the Adwords policies and the framework there in. For advertiser having a Adwords account the user have access to the Google Analytics too. and within that options like bid optimizer for running his campaigns efficiently. Q 8: Explain the structure in the GIPL Sales team Ans: In GIPL customers are classified into three subcategories; large clients (LCS), small and medium business (SMB). and the long tail set of self service customers. In the case of LCS, the sales process as discussed above. In case of 5MB another team manager a larger act of accounts on similar lines of LCS and in the case of long tail clients, the client manage end to end themselves or may take the help of the calf center. Q 9: In reference to contract with customer Clause 2 of the contract sub-part as stated Customer grants Google permission to utilize and automated Software program to retrieve and analysis websites associated with the services for ad quality and serving purposes, unless customer specifically opts out of the evaluation in a manner specified by Google . What is the program utilized by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... internal tool along with the review support team for monitoring adherence to policies. Q19: Explain according to you how the billing is done in respect of Adwords accounts? Ans: Bills are raised by the billing department for consumption of Adwords campaign being run by the Advertisers either directly on them or through the agency through whom the advertisers would be operating. Q20: According to you how the billing department gets the information regarding consumption of adwords campaign run by the advertisers? Ans: As I am not part of the billing department I will have to revert with the exact process and manner of generation of bills. However, to the best of my knowledge the billing process is an automated process linked to the Advertisers Adword Account. Q21: As per your experience of working with GIPL as Director Sales for Adword Program BFSI Travel vertical, and in light of the above statements is it possible to market, sell and maintain Adword program and accounts without the use of internal tools. Ans: In continuation of my earlier statements, the internal tools mentioned by the very nature and as the word tool means are there to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Part I of the order passed under section 201(1) 201 (1 A) of the I.T.Act, held that the activities performed by the assessee under the distribution agreement are complemented by the activities performed by the assessee under the service agreement and they cannot be divorced from each other. As per AO, for the purpose of marketing and distribution activities, the assessee is granted the right to use the valuable business assets of Google Ireland which includes intellectual property in the products and services offered by Google Ireland. It was held by the AO that transfer of distribution rights are itself IP rights covered by 'similar property' as per definition of 'royalty' under Explanation 2 to section 9(l)(vi) of the I.T.Act. (ii) In para II, the AO concluded that the assessee has been granted license to sell or make offer for sale of Adwords program by Google Ireland by virtue of the distribution agreement and the same is a copyright within the purview of section 14(b)(ii) of the Indian Copyright Act. It was held that the sums payable by assessee to Google Ireland are covered by clause (v) to Explanation 2 to section 9(1)(vi) of the I.T.Act and hence ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f retrospective amendments to Finance act 2012 not affecting the DTAA and other decisions relied on by the assessee. (x) In Part X of the Act, the AO concluded that the sums payable under the distribution agreement to GIL are for the (a) right to sell or right to offer for sale adwords program, (b) use of or right to use various IP rights (process, trademarks, brand features, copyright, know how) in adwords program and (c) use of or right to use industrial, commercial or scientific equipment. The AO thus concluded that such sums are covered by the definition of Royalty under the I.T.Act and the DTAA. 7. Aggrieved by the order passed u/s 201(1) and 201(1A) of the I.T.Act, the assessee filed appeals before the first appellate authority. The CIT(A) vide order dated 20.9.2013 confirmed the findings of the AO with regard to right to use intellectual property as well as trademark and copyright. The action of the AO in holding that the distribution fees is actually consideration received for the right to use/ license to use a computer program/process i.e., Adwords program was upheld. However, CIT(A) held that the assessee cannot be said to have gained right to use any scientific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the above cases, the Tribunal had held that for purchase of online advertisement space cannot be characterized as royalty and hence, the same are not chargeable to tax in India, in the absence of PE of the non-resident in India. Further, it was contended that the entire case of the Revenue heavily hinges upon the following judicial pronouncements while characterizing the subject payments to be royalty being payments made for the use of or right to use of software (copyright):- 1. Commissioner of Income-tax, International Taxation v. Samsung Electronics Co. Ltd., [2012] 345 ITR 494 (Karnataka High Court), 2. Commissioner of Income-tax v. Synopsis International Old Ltd., [2013] 212 Taxman 454 (Karnataka High Court), 3. CIT v. IBM India Ltd., [IT Appeal No. 540 of 2008, judgment dated 21- 10-2011 (Karnataka High Court)] and 4. Citrix Systems Asia Pacific Pty. Ltd., In re, [2012] 343 ITR 1 (AAR New Delhi). 10. It is submitted that the above judicial pronouncements relied on by the Revenue has been specifically overruled by the Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT Anr. reported in ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the material on working of Google AdWord Programme available online was also in consonance with the content of the above said book and in that manner it was contended that the payment in question must be characterized as royalty. The learned Standing Counsel also argued that the judgment of the Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT Anr. (supra) was distinguished since it dealt with copyright alone. It was argued that since the assessee in the present case was obliged to carry out after-sales services for which it was granted IPRs under the Service Agreement, the judgment of the Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT Anr. (supra), especially the classic book example contained therein, did not apply. The learned Standing Counsel has given the brief written submission in essence reiterating the findings of the A.O. 12. In the rejoinder, the learned Senior Counsel, specifically rebutted the contentions raised by the learned Standing Counsel and has also filed a written submission with reference to the arguments raised by him. 13. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For instance, pursuant to the search query Fresh Flower Delivery , website of Ferns N Petals is listed two times among websites of various other businesses. The listing of the website of Ferns N Petals at the top of the list is a sponsored link accompanied by a small abbreviation Ad , and the other listing is an organic search result as it does not have any such abbreviation. [Page 318 of paper book 1] This is because, Ferns N Petals utilised the Google AdWords Program to advertise its business on the Google Search Engine. The targeting of advertisement is achieved by using appropriate keywords, which can be selected only by the Advertiser. The Google AdWords Program contains a glossary of keywords together with helpful suggestions for the Advertiser to select appropriate keywords for his targeted advertisement. Google AdWords Program also contains a number of computer commands, by which the proposed Advertiser can achieve a more focused and particularised targeting, such as geographical or area targeting (advertisement to be shown only in a particular area, say the State of Karnataka) or period targeting (advertisement to be shown only in a certain period) or time targ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;') is entered into as of 1st April, 2004 (the Effective Date''), by and between Google Ireland Limited, a corporation organized under the laws of Ireland ( Ireland'') and having its office at Seagrave House, 19120 Earlsfort Terrace, Dublin 02, Ireland, and Google Online India Private Limited, a company incorporated under the provisions of the Companies Act, 1956 and having its registered office at Prestige Sigma, 1st Floor, NO.3 Vittal Mallya Road, Bangalore 560001, India ('Go ogle India') and having a branch office at RMZ Future, Block A, 4' Floor Plot No. 14, Road No.2, Hitec City Layout, Madhapur village, Ranga Reddy District, Hyderabad 500081, Andhra Pradesh. A. WHEREAS, Google Ireland is in the business of developing, licensing, selling, marketing and supporting certain Internet search, advertising system and information organization and management technology products and services to provide information, advertising, search and related services via the Internet, corporate intranets and private networks (collectively, 'Products ''); and B. WHEREAS, Google Ireland desires to avail services, relating to, information t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransformed or adapted, (ii) for patentable or patented material, any improvement thereon. and (iii) for material protected by trade secret, any new material derived from such existing trade secret material, including new material which may be protected to copyright, patent and/or trade secret. 1.4 Documentation shall mean any and all information, written or otherwise, provided by Goode Ireland to Google India describing the Intellectual Property or the Products and any updated, improved or modified version(s) of such materials including information contained in published written materials, on magnetic media or communicated by electronic means. 1.5 intellectual Property' shall mean all intellectual, proprietary, and/or intangible property rights constituting, embodied in. pertaining to, used in or with respect to the business of Google Ireland, the Products, or the provision of related services and all tangible embodiments hereof, wherever located, including but not limited to the following: (i) all trademarks, trade names, service marks, logos or trade dress, including all registrations and applications therefor; (ii) all copyrights. Moral Rights (as defined be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Services and completion date for a particular Services project, Google India will perform the Services. Google India agrees to use commercially reasonable efforts to perform the Services in a timely fashion and as described to it by Google Ireland. Google India may not subcontract work under this Agreement unless specifically and to the extent set forth in the Services. Google India shall, at all times, be responsible for work done by its subcontractors within the scope of this Agreement as it is for work done by its own employees. At the option of Google Ireland, Google India shall make Goggle Ireland a party to the agreements that Google India may execute with its subcontractors and Google Ireland shall have the right to preapprove the terms and conditions of such agreements **** **** ****** 5. OWNERSHIP 5.1 Intellectual Property. Google India acknowledges the exclusive right. title and interest of Google Ireland and its licensors and/or suppliers in and to any and all Confidential Information, Intellectual Property, Software Technology and Documentation, and Google India will not at any time do or cause to be done any act or thing impairing or tending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions under this Agreement. Except as otherwise provided in this Agreement, Google India agrees that such Confidential Information shall be kept secret by Google India during the term of this agreement and after the expiration hereof Google India shall refrain from using or exploiting any and all Confidential Information for any purposes or activities other than those contemplated in this Agreement. 6.2 Agreement Not to Disclose Confidential Information. Google India shall not disclose or facilitate disclosure of such Confidential Information to any Person without the prior consent of Google Ireland, except to its Representatives, and then only to the extent necessary for the performance of the activities contemplated by this Agreement. Google India shall cause each of its Representatives with access to the Confidential Information to enter into a nondisclosure agreement in a form approved by Google Ireland. Google India shall use the highest standard of care currently employed by any developer or distributor of high technology products in order to avoid disclosure or misappropriation of such Confidential Information. 6.3 Ownership and Return of Confidential Informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Advertiser purchases from the assessee, it pays in INR whereas where Indian advertiser purchases from GIL, it pays in foreign currency. 17. In a case where the assessee is involved in purchase and re-sale of online advertisement space to Advertiser and if such Advertiser finds it difficult to use Google AdWords Program, he can get guidance and assistance from the employees of the assessee working under the Distribution Segment. However, substantial portion of Indian Advertisers in India prepare their draft advertisements themselves, with the aid of the Google AdWords Program itself. All this is completely free and is open to any member of the public. No payment is made for any use of the Google AdWords Program. In fact, even after using the Google AdWords Program and formulating / displaying an online advertisement, no payment is made by the Advertiser, unless the Ad is clicked by an end-user. Relevant terms and conditions of the Distribution Agreement are as under:- 'Amended and Restated Google AdWords Program Distribution Agreement. This Amended and Restated Google AdWords Program Distribution Agreement ( Agreement'') is entered into as of Dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trademarks, service marks, logos, domain names, or other distinctive brand features that Google may provide to Distributor for use solely under this Agreement. 1.6 Intellectual Property Rights shall mean any and all rights existing from time to time under patent law, copyright law, semiconductor chip protection law, moral rights law, trade secret law, trademark law, unfair competition law, publicity rights law, privacy rights law, and any and all other proprietary rights, as well as, any and all applications, renewals, extensions, restorations and re-instatements thereof now or hereafter in force and effect worldwide. 1.7 Keywords means words chosen by an advertiser through the AdWords Program for a given set of one or more advertisements that are used to target those advertisements to potential customers. 1.10 User Data means all data and information provided by users via the AdWords Program, including all registration data, names, email addresses, other addresses, contact information, and other identifying information. 2. Appointment of Territory and Distributor Obligations. 2.1 Appointment of Territory. Google appoints Distributor as a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with United States and Other Applicable Law; Conduct of Business. Distributor will comply with all United States and local laws and regulations applicable to the distributor of the goods and services. including but not limited to the Foreign Corrupt Practices Act and US regulations of international boycotts. Distributor shall (a) conduct business in a manner that reflects favorably at all times on the AdWords Program and on Google's goodwill and reputation, and (b) agrees to adhere to the minimum levels of service as specified in Exhibit C. Breach of this Section 2. 5 will constitute a material breach of this Agreement. 2. 6 After-Sales Support. Distributor will provide after-sales services to Advertisers in accordance with the broad instructions, training and standards of Google. 3. Google Obligations. 3.1 Advertising Space. Google agrees to provide advertising space through the AdWords Program for distribution by Distributor to Advertisers as set forth herein. 3.2 Training. Google agrees to train Distributor. 3.3 Non-Exclusivity. This Agreement shall constitute a non- exclusive relationship between Google and Distributor. ***** ***** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Distributor and all use by Distributor of Go ogle Brand Features (including any goodwill associated therewith) shall inure to the benefit of Google. No party shall challenge or assist others to challenge the Brand Features of the other party (except to protect such party's rights with respect to its own Brand Features) or the registration thereof by the other party, nor shall either party attempt to register any Brand Features or domain names that are confusingly similar to those of the other party. 7. Confidentiality; Limitation on Public Announcements. Disclosure of confidential and/or proprietary information disclosed hereunder, including the User Data (including any aggregated User Data), the existence and content of this Agreement, and any information provided pursuant to this Agreement, shall be governed by the Google Standard Mutual Non-Disclosure Agreement (introductory paragraph and Sections 1 through 12, inclusive), executed by the parties prior to or concurrently with this Agreement (the NDA ''), which is attached hereto as Exhibit B, and which is incorporated by reference herein. Each party acknowledges and agrees that it will obtain the other p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions made publicly available by Google from time to time in its sole discretion. ***** ***** ***** EXHIBIT C Service Level Agreement Distributor shall be solely responsible for providing all customer services to Advertisers. according to the procedures, and in compliance with standards, provided by Google. All Advertisers shall be instructed by Distributor to contact Distributor directly for support and not to communicate directly with Google. Distributor agrees that it shall provide at least the following minimum levels of service: Business hours phone support to all Advertisers. E-mail queries from Advertisers shall be responded to within one (1) business day with immediate resolution of any issues when possible. Issues that cannot immediately be resolved by Distributor based on training and procedures provided under the Agreement must be communicated promptly to Google by Distributor and Google will assist Distributor in determining the best solution. Google agrees that it shall provide at least the following minimum levels of service to Distributor: Customer Queries (as defined below), up to the E-Mail Escalation Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation such as: (a) trade secrets; (b) financial information, including pricing; (c) technical information, including research, development, procedures, algorithms, data, designs. and know-how; (d) business information, including operations, planning, marketing interests, and products; (e) the terms of any agreement entered into between the Parties and the discussions, negotiations and proposals related thereto; and (f) information acquired during any facilities tours. 3. The Party receiving Confidential Information (a Recipient'') will only have a duty to protect Confidential Information disclosed to it by the other Party ( Discloser''): (a) if it is clearly and conspicuously marked as confidential or with a similar designation; (b) if it is identified by the Discloser as confidential and/or proprietary before, during. or promptly after presentation or communication; or (c) if it is disclosed in a manner in which the Discloser reasonably communicated, or the Recipient should reasonably have understood under the circumstances including without limitation those described in Section 2 above, that the disclosure should be treated as confidential whether or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt the limited rights necessary to carry out the Purpose as forth in this Agreement. 12. Each Party acknowledges that damages for improper disclosure Confidential Information may be irreparable; therefore, the injured Party is entitled to seek equitable relief, including injunction and preliminary injunction, in addition to all other remedies available to it. 18. The standard agreement entered into between the assessee and the advertisers is as under:- Google Advertising Agreement Customer Invoicing address Advertising third party Name and address Advertiser Advertising third party Customer will promptly notify Google of any change in address and contact name information for billing purpose. Agreement name. Agreement type Agreement Id Purchase order # ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to meet its financial obligations under this SA, Google shall have the right to require pre-payment of the total amount due for the SA in advance of the Target Start Date or as otherwise requested by Google. Customer must remit all payments under this SA to Google by the due date indicated on the Invoice(s). In the event of nonpayment, Google reserves the right to immediately terminate this SA upon written notice to Customer and immediately suspend the entire Customer account. Late payments are subject to interest payments as set forth in the Terms and Conditions. Methods of Billing: Monthly Invoicing: Customer will be billed at the end of the month, based on the actual number of clicks or other billing methods Customer may choose to participate in as described in the FAQ (e.g. cost per impression programs). Customer's credit must first be approved by Google in order for this billing method to apply. Prepayment: Customer will pay the total agreement budget prior to any campaign launch. Acceptance and terms of prepayment are at Google's sole discretion. Prepayment does not obligate Google to deliver any Ad Words ads notwithstanding acceptance of prepaym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to all applicable Google and Partner ad specification requirements and policies, including without limitation the Editorial Guidelines (adwords google.com/select/guidelines.html) Google Privacy Policy ( www.google.com/privacy.html ) and Trademark Guidelines ( www.google.com/permissions/guidelines.html ), (collectively, Policies ). Policies may be modified any time. Customer shall direct only to Google communications regarding Customer ads on Partner Properties. Some Program features are identified as Beta, Ad Experiment, or otherwise unsupported ( Beta Features ). To the fullest extent permitted by law, Beta Features are provided as is and at Customer's option and risk. Customer shall not disclose to any third party any information from Beta Features, existence of non-public Beta Features or access to Beta Features. Google may, at its sole discretion and without any prior consent from the Customer, modify ads to comply with any Policies. 2. The Program: Customer is solely responsible for all: (a) ad targeting options and keywords (collectively Targets ) and all ad content, ad information, and ad URLs ( Creative ), whether generated by or for Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment date as set forth in advance by the Partner or Google in which case Customer must pay for those ads. Google may cancel immediately any 10, any of its advertising Programs, or these Terms at any time with notice, in which case Customer will be responsible for any ads already run. Google may modify any of its advertising Programs at any time without liability. Sections I, 2, 3,5, 6, 7, 8, and 9 will survive any expiration or termination of this Agreement. 4. Prohibited Uses; License Grant; Representations and Warranties. Customer shall not, and shall not authorize any party to: (a) generate automated, fraudulent or otherwise invalid impressions, inquiries, conversions, clicks or other actions; (b) use any automated means or form of scraping or data extraction to access, query or otherwise collect Google advertising related information from any Adwords website or property except as expressly permitted by Google; or (c) advertise anything illegal or engage in any illegal or fraudulent business practice. Customer represents and warrants that it holds and hereby grants Google and Partners all rights (including without limitation any copyright, trademark, patent. publicity or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF ANY LIMITED REMEDY; AND (b) EACH PARTY'S AGGREGATE LIABILITY TO THE OTHER IS LIMITED TO AMOUNTS PAID OR PAYABLE TO GOOGLE BY CUSTOMER FOR THE AD GIVING RISE TO THE CLAIM. Except for payment obligations, neither party is liable for failure or delay resulting from a condition beyond the reasonable control of the party, including but not limited to acts of God, government, terrorism, natural disaster, labor conditions and power failures. 6. Agency. Customer represents and warrants that (a) it is authorized to act on behalf of and has bound to this Agreement any third party for which Customer advertises (a Principal'') (b) as between Principals and Customer, the Principal owns any rights to Program information in connection with those advertisements, and (c) Customer shall not disclose Principal's Program information to any other party without Principal's consent. 7. Payment Customer shall be responsible for all charges up to the amount of each 10, or as set in an online account, and shall pay all charges in Indian Rupees or in such other currency as agreed to in writing by the parties. Unless agreed to by the parties in writing, Customer shall pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys any dispute, controversy or claim arising out of relating to or in connection with this Agreement ( Dispute''). If the Dispute is not resolved within thirty (30) days after such Dispute arose, such Dispute must be referred to and finally resolved by arbitration, to which the Parties hereto expressly agree and submit. The arbitration will be submitted to the International Centre for Dispute Resolution of the American Arbitration Association ( AAA ) and conducted in accordance with the Commercial Arbitration Rules of the AAA in force as of the date of this Agreement ( Rules''). Prehearing information exchange shall be limited to the reasonable production of relevant, non-privileged documents and carried out expeditiously. There will be one arbitrator selected by mutual agreement of the Parties. The arbitrator will not act as amiable compositeur or ex aequo et bono. It is the intent of the parties that, barring extraordinary circumstances, arbitration proceedings will be concluded within 60 days from the date the arbitrator is appointed. The arbitrator may extend this time limit in the interests of justice. Failure to adhere to this time limit shall not constitute a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment law, rule or regulation. Customer may grant approvals, permissions, extensions and consents by email, but any modifications by Customer to the Agreement must be made in a writing executed by both parties. Any notices to Google must be sent to Google India Pvt. Ltd., No.3, RMZ Infinity - Tower E, Old Madras Road, 4th Floor, Bangalore, 560016, India with a copy to Legal Department, via confirmed facsimile, with a copy sent via first class or air mail or overnight courier, and are deemed given upon receipt. Notice to Customer may be effected by sending email to the email address specified in Customer's account, or by posting a message to Customer's account interface, and is deemed received when sent (for email) or no more than 15 days after having been posted (for messages in Customer's account interface). A waiver of any default is not a waiver of any subsequent default. Unenforceable provisions will be modified 10 reflect the parties' intention and only to the extent necessary to make them enforceable, and remaining provisions of the Agreement will remain in full effect. Customer may not assign any of its rights hereunder and any such attempt is void. Google ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as compared to section 9(1)(vi) of the Income-tax Act, as construed by the High Court. Here again, section 90(2) of the Income-tax Act, read with explanation 4 thereof has not been properly appreciated. 22. Thus, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software tantamounts to royalty, is now resolved by the Supreme Court decision in the case of Engineering Analysis Centre of Excellence Private Limited (supra). The Supreme Court grouped the various appeals on the aspect of royalty issue on software payments into four categories as under:- Category 1: Computer software purchased by an enduser, resident in India, from a foreign non-resident supplier/manufacturer. Category 2: Purchase of computer software by resident Indian companies that act as distributors/resellers, from foreign non-resident suppliers for the purpose reselling the same to resident Indian users. Category 3: Purchase of software by foreign non-resident distributor from a foreign non-resident supplier for the purpose of reselling the same to Indian distributors or end-users. Category 4: Computer software affixed onto a hardware and sold as an integrated unit/equipment by foreign non-resident suppliers to Indian distributors or endusers. 25. The Supreme Court made a reference to the relevant provisions of the Copyright Act and on the interpretation of the same, it accepted the difference between a copyright right and copyrighted article. The i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and nothing more. The end-user does not get any of the rights that the owner continues to retain under section 14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof Thus, the conclusion that when computer software is licensed for use under an EULA, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect. The licence for the use of a product under an EULA cannot be construed as the licence spoken of in section 30 of the Copyright Act, as such EULA only imposes restrictive conditions upon the enduser and does not part with any interest relatable to any rights mentioned in sections 14(a) and 14(b) of the Copyright Act. ***** ******** ****** 100. Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the Income- tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income-tax Act read with explanation 4 thereof and Article 3(2) of the DTAA. Further, the expression copyright has to be understood in the context of the statute which deals with it, it being accepted that munic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rculation, and the other acts mentioned in section 14 of the Copyright Act. (iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(l)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. (v) A non-exclusive, non-transferable licence, merely enabling the use of a copyright product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act. or create any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nimum levels of service like Business hours phone support to all Advertisers, E-mail queries from Advertisers shall be responded to within one (l) business day with immediate resolution of any issues when possible. It was decided that the issues that cannot immediately be resolved by Distributor based on training and procedures provided under the Agreement must be communicated promptly to Google Ireland by Distributor / assessee, and Google Ireland will assist assessee / Distributor in determining the best solution. It was also agreed that the distributor agrees that Google Ireland will have the right, to review samples of communications sent to Advertisers to assess the quality of responses and modify communications accordingly. Google Ireland shall also have the right to send questionnaires to Distributor's customers to ensure that Distributor is providing an adequate level of service. 28. As per the standard Advertising program terms, the advertiser is solely responsible for all ad targeting options, keywords and all ad content. The advertiser represents and warrants that it holds and hereby grants Google and Partners all rights (including without limitation any copyrig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly, 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. 31. The lower authorities have held that the assessee has been granted the use of or right to use trademarks, other brand features and the process owned by Google Ireland for the purpose of distribution of Adwords program and consequently the sums payable to Google Ireland are royalty. As per Article 12 of India - Ireland DTAA, consideration for the use of or right to use any patent, trade mark, design or model, plan, secret formula or process is regarded as royalty. In the present case, as per the distribution agreement, Google Brand Features means the Google trade names, trademarks, service marks, logos, domain names, and other distinctive brand features, with some but not all examples at http://www.google.com/permissions/trademarks.html (or such other URL that Google may provide from time to time), and such other trade names, tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The remaining portion of definition of 'Royalty' under the India - Ireland DT AA is consideration for information concerning industrial, commercial or scientific experience. The 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. 33. Thus on an overall analysis of the entire facts on record, 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 Advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia, since GIL did not have a PE in India. (iii) Right Florists (supra): Right Florist was a florist who used Google Search Engine for online advertising, to generate more business for itself. In this case again, the AO had disallowed the payments made by Right Florist for online advertising under section 40(a)(i) of the Act. However, the CIT(A) reversed the said decision on the ground that none of the recipients of the payments had a PE in India. The Tribunal, in Department s appeal, upheld the order of the CIT(A), while observing that the decisions in Yahoo (supra) and Pinstorm (supra) were authorities in support of the proposition that payment by the Indian arm of a foreign owner of search engine portal, in connection with online advertising, is not in the nature of royalty as per section 9(1)(vi) of the Act. In this decision, the Tribunal also discussed the modalities involved in the online advertising business, in the context of Google Search Engine. (iv) Inception Business (supra): In this case the assessee was engaged in the business of brand management as well as posting advertisements in the social portal on behalf of their clients. The AO held the payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the CIT(A). The Tribunal followed the decision in Urban Ladder (supra), while deleting the said disallowance. (ix) ESPN Digital Media (supra): ESPN India in this case, entered into a re-seller agreement with ESPN UK, for the resale of online advertisement space. In terms thereof, ESPN India purchased online advertisement space for re-sale to Indian advertisers. For this purchase, it made payments to ESPN UK, which were characterised as royalty by the AO. The CIT(A) upheld the order of the AO. The Tribunal, in second appeal, set aside the order of the CIT(A), while observing that ESPN India was merely making payment under the re-seller agreement towards purchase of online advertisement space. It was also observed that a website is not a tangible property and is certainly not a high-tech equipment. It was also observed that the reliance of the AO and CIT(A) on the decision in Verizon Communications Singapore Pte Ltd. v. ITO, (2014) 361 ITR 575 (Madras High Court) was misplaced, since the same had been overruled by the Hon ble Supreme Court in the decision in Engineering Analysis (supra). (x) Interactive Avenues (supra): Interactive Avenues is an internet advertising agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts 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. 38. 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. 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. 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 specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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