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TMI Blog2023 (4) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... ment as Royalty / FTS - whether the assessee is the DAPE [Dependent Agent Permanent Establishment] of GIL and whether the assessee is required to deduct tax at source u/s.195 on the impugned payments accordingly? - case of the revenue is that the assessee being the agent of GIL, the distribution fees is taxable in India i.e. assessee being the PE of GIL and therefore the payment is disallowed u/s.40(a)(i) in the hands of the assessee for failure on the part of the assessee to deduct tax at source - HELD THAT:- As pursuant to the terms of the Distribution Agreement the Assessee entered into contracts with advertisers in India called Google India Private Limited Advertising Program Terms and perusal of the sample invoice raised by the Assessee on an advertiser shows that the Assessee has raised the invoice and collected payments from the advertiser in its own name and right. Also noticed that the coordinate bench in assessee s own case found the Assessee to be the distributor of the Google AdWords Program and therefore, the characterization as a distributor would mean that the Assessee is not an agent as per the findings of the Hon ble Tribunal. Further the Distribution Agreement bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had international transactions with its AE, the case was referred to TPO for determination of ALP of the international transaction. The TPO accepted the international transaction of the assessee with its AE to be at arm s length vide order dated 31.10.2011. The AO made the additions with respect to the following during the course of assessment proceedings and also initiated penalty proceedings u/s.271(1)(c):- (1) Deduction of telecommunication charges from export turnover for computing deduction u/s. 10A of the Act. (2) Allowability of deduction of the amount payable by the assessee towards distribution right of AdWord program (3) Claim of TDS credit deducted by the Indian advertisers on advertising payment made to the assessee. 3. Aggrieved, the assessee preferred appeal before the CIT(A). 4. Before the CIT(A), the assessee contended that the following issues besides the reduction of telecommunication charges from export turnover:- (i) Rejection of books of accounts in respect of income relating to distribution of AdWord program. (ii) Disallowance of payments made towards distribution rights invoking provisions of section 40(a)(i) of the Act. (iii) Recomputation of profits fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of its failure to deduct tax, the amount of Rs.119,82,61,994 was required to be disallowed u/s 40(a)(i) of the Act. 9. The Ld CIT(A) having held that the Assessee was an agent of Google Ireland Ltd. erred in holding that Assessee 'was a person responsible for paying' any amount to Google Ireland Ltd. within the meaning of section 195 of the Act. Re-computation of profits from distribution of AdWords program in India 10. The Ld CIT(A) has erred in upholding that the profits of Google Ireland Ltd. from the AdWords program, to the extent they were attributable to activities carried on in India, could be taxed in the hands of the Assessee. 11. The Ld CIT(A) has erred in holding that 40% of recomputed profits on the Rs.167,32,01,616, being the revenues collected in India under the AdWords program, are attributable to activities carried on in India. 12. The Ld CIT(A) has erred in holding that the profit from revenues collected in India under the AdWords program is 30.535%. 13. The Ld CIT(A) has erred in rejecting cost-plus method basis of remuneration of the Assessee for the distribution of the AdWords program, disregarding the fact that the same has been concluded by the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on fee payable to GIL and the assessee in the P L account has netted these two figures and has reflected the net amount to the credit of the P L account. The AO did not accept the submissions of the assessee and rejected the books of accounts and recasted the profit loss account of the assessee by holding as under:- 16. The submissions made by the assessee company are considered. It is seen that as per this contract dated 12-12-2005 with M/s. Google Ireland Ltd., the assessee company was required to conduct the Adwords marketing on its own account and as an independent distributor of the said programme. The contract mentions in many words that the Adwords programme is sold by the assessee for its own account in its own name, and not as an agent, employee, partner or franchisee of Google . The various other clauses of the said agreement also make it clear that the assessee company was required to run the businesses on its own account. Moreover the assessee company was expected to pay fees for distribution right to M/s. Google and all this fees and payments were made subject to DTAA and Indian Tax Laws. The assessee is an Indian company incorporated under the Companies Act with the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernatively, the AO held that the distribution fee is to be held as royalty/fees for technical services as per Article 12 of DTAA. Accordingly, the AO disallowed the entire amount of distribution fees in the hands of the assessee. 10. The AO further made an addition of Rs.51,09,12,113 by applying a notional profit rate of 30.535% on the total amount received by the assessee towards AdWord program. The AO in this regard held that the profit arising in India with regard to the activity of AdWord program needs to be taxed at the percentage of profit earned by Google Inc. Worldwide. The AO considered the profits percentage of Google Inc. for the year 2006 to 2008 to arrive at the average profit rate of 30.335% and applied the said percentage on the total amount received by the assessee towards AdWord program from the advertisers and accordingly made an addition. The AO s reason for making the addition is that the assessee being a DAPE of GIL in terms of Article 5(6) r.w. Article 7(1) of the DTA and accordingly the global profit percentage should be applied on the amount received by the assessee. 11. With regard to the issue of rejection of books of accounts, the CIT(A) upheld the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed the TDS in respect of such receipts for credit. The AO in his order very elaborately mentioned that the Adwords programme sold by the Assessee for its own account in its own name, and not as an agent, employee, partner or franchisee of Google and established that the Assessee was running the business on its own account; hence the revenue from the Adwords programme should have been reflected in the profit and loss account. It has been judicially held by various courts on various occasions that the income-tax provisions will prevail over any accounting norms. The accounting norms of GAAP followed_by the Assessee is neither accepted nor notified by the CBDT. Even otherwise, the Assessee being a company should have followed the Accounting Standards of TCAT by showing the gross receipts and expenses thereon. The accounting policy followed by the Assessee is not consistent with the method of accounting and the notified accounting standards u/s 145 of the Act. Thus the accounts are inaccurate _incomplete and do not represent the true and fair view of the state of affairs of the Assessee company. This has been sufficiently explained and established by the AO in the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld AR also submitted that the books of the assessee have been rejected, primarily with the intention of disallowing Rs. 119,82,61,984/- under section 40(a)(i) of the Act. Disallowance of distribution fees u/s 40(a)(i) of the Act - Grounds No. 5 to 9 The ld AR submitted that the Department has not alleged DAPE of GIL in GIL s own assessment for AY 2008-09, or that the nature of distribution fee was FTS, as per Article 12 of the DTAA and therefore, disallowance under section 40(a)(i) of the Act on the ground that the assessee is GIL s DAPE or that the payment in question is FTS does not survive. It is further submitted that, payment of distribution fee by the assessee to GIL has been held to be not royalty and hence, not taxable in India by this Hon ble Tribunal in assessee own case (ITA No.1513-1516/Bang/2013) and in GIL s appeal (ITA 2845/Bang/2017). The ld AR therefore contended that the assessee was not required to withhold tax while paying distribution fee to GIL and accordingly, no disallowance under section 40(a)(i) of the Act is sustainable. Attribution of additional profits in the hands of the assessee - Grounds No. 10 to 14 The ld AR reiterated that the revenue in GIL s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices in the books of account of the assessee and that there has been no finding to the effect that the books of the Assessee were unreliable or that the entire revenue earned by the assessee from distributing and marketing online advertisement space, was not credited in the books. This is supported by the fact that the net profit of the assessee as disclosed in the financials and the net profit computed by the AO (refer page 22 para 17 of assessment order) are the same. In our considered view when the assessee has presented the results of the impugned transactions that reflects the substance of the transaction we see no reason for the AO not to be satisfied with the correctness or completeness of the books of accounts of the assessee. The ld AR during the course of hearing drew our attention to the observations of the coordinate bench of the Tribunal where by virtue of Grounds No. 2 to 4 (refer para 176 of order dated 11.05.2018) the issue was decided in favour of the Assessee. It was further brought to our attention that the said finding of this Hon ble Tribunal was never challenged in appeal by the Department and that this issue was not the subject matter of appeal before the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person: (a) has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 5 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control as that enterprise. 8. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see of GIL. Clause 2.2 that the Assessee would market and distribute Google AdWords Program with its reasonable commercial expertise and own sales force and customer service infrastructure. Clause 2.6 that the Assessee would provide after-sales services to advertisers in India. Clause 14 that the Assessee and GIL shall remain independent contractors and nothing in the Distribution Agreement shall be deemed to create any agency, partnership, or joint venture between the Assessee and GIL. It has also been provided in this clause that neither Assessee nor GIL shall have any right or authority to create any obligation on behalf of each other. 23. We further notice that pursuant to the terms of the Distribution Agreement the Assessee entered into contracts with advertisers in India called Google India Private Limited Advertising Program Terms and perusal of the sample invoice (page 359 of Paper Book Volume 1) raised by the Assessee on an advertiser shows that the Assessee has raised the invoice and collected payments from the advertiser in its own name and right. It is also noticed that the coordinate bench in assessee s own case found the Assessee to be the distributor of the Google Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT, (2015) SCC OnLine ITAT 8760 (Mum- Trib) (v) Taj TV Ltd. v. DCIT, (2022) 136 taxmann.com 278 (Mum-Trib) (vi) ESS Distribution (Mauritius) SNC et Compaginie v. DDIT, (2022) 145 taxmann.com 267 (Delhi-Trib) (vii) DDIT v. B4U International Holdings Ltd., (2012) 23 taxmann.com 372 (Mum-Trib) 27. In view of the above discussion with respect to the clauses in the Distribution agreement between the assessee and GIL, the invoices raised on advertisers and the relevant Articles of DTAA between India and Ireland, we hold that the Assessee cannot be treated as DAPE of GIL. Accordingly the distribution fees paid by the assessee to GIL is not liable for TDS u/s.195 of the Act and therefore no disallowance u/s.40(a)(i) is warranted. Grounds 5 to 9 is held in favour of the assessee. 28. The ld AR also made a without prejudice submission that even if the assessee is to be treated as DAPE of GIL, the assessee is not the person responsible since the agent cannot be classified as the person responsible for paying within the meaning of section 195 of the Act. Given that we have already held that the assessee cannot be treated as DAPE of GIL, this contention has become academic not warranting a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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