9911796707
TMI Blog2024 (7) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... relied by the assessee before the Ld.TPO and DRP to explain the FAR of the services rendered by the assessee to the AE s under the three segments, for which rollback benefit is sought for. The Income tax Rules provide that, if the International Transactions are same in the year of APA and in the past year than both the parties, assessee and CBDT may agree for applying the agreements contained in APA agreed. An APA also provides complete guideline in respect of the international transaction, whose ALP is to be determined by applying appropriate transfer pricing methodology. . We therefore remand the issue back to the Ld.AO/TPO. The Ld.AO/TPO is directed to examine the facts closely and conclude the issue of applicability of APA to the year under consideration in principle. The Ld.AO/TPO is also directed to consider the above cited decisions relied by the Ld.AR reproduced herein above of this Tribunal as well Hon ble Delhi High Court for the legal proposition of deciding the issue in the light of APA. Comparable selection - Acentia Technologies Ltd.,eClerx Services Ltd. and Infosys BPO Ltd. - As these are not fit comparable for a captive service provider like assessee. We therefore d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench marking the IT segment to the Ld.AO/TPO in accordance with the APA with a direction not to consider the assessee to be a KPO under the IT segment. It is also directed to use TNMM as the MAM for determining the arms length of the transaction. As we have remanded the entire issue to the Ld.TPO for computing the ALP of IT segment de novo as per the directions, the issue of comparables also stands remanded. The comparables are therefore to be selected to be in accordance with law. Attribution of additional profits - HELD THAT:- As we have already held while considering Issue 4 that assessee cannot be held to be a dependent agent permanent establishment of Google Ireland, the income earned by Google Ireland cannot be taxed in India as business profits. Under such circumstances, the issue of attribution does not arise. Deduction u/s allowed on the income earned under ITeS segment - DR submitted that the Ld.AO allowed deduction u/s 10A in respect of the income earned by the assessee under ITeS segment without carrying out necessary verification - HELD THAT:- Admittedly, the necessary criteria to claim eligibility under section 10A in respect of the income earned by the assessee und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 3. Erred in selecting certain companies which are earning super normal profits as comparable to the Appellant in determining the ALP for the services. 4. Erred in considering provision for bad debts as non-operating cost in computing the net margins under Transactional Net Margin Method 5. Erred in not appreciating the fact that the Appellant operates as a risk mitigated service provider and all the key risks associated with the functions performed are borne by the Associated Enterprise ('AE') and not by the Appellant. 6. Erred in not adjusting the net margins of the comparable companies selected taking into account the functional and risk differences between the international transaction of the Appellant and the comparable transactions in accordance with the provisions of Rule 10B(1)(e)of the Income-tax Rules, 1962 . 7. Erred in not making adjustment for the difference in working capital of the Appellant vis-a-vis the comparables selected. 8. (a) Erred in not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of web based advertisement and that the AEs undertake all the economically significant functions. 18. Erred in adopting an approach different from its predecessors in assessment years up to assessment year 2008-09 in selection of most appropriate method, without any change in facts or circumstances of the case from earlier year. 19. Erred in rejecting Transaction Net Margin Method ('TNMM') and determining the ALP by applying Profit Split Method ('PSM') as the most appropriate method. 20. Erred in not applying PSM in accordance with the provisions of Rule 10B of the Income Tax Rules, 1962 and following an erroneous methodology. 21. Erred in applying PSM, not determining the correct contribution made by the AE in earning the revenue in accordance with the FAR analysis of the transactions. 22. Erred in not providing requisite adjustment for the contribution made by the AE in the form of credit granted for the amount payable by the Appellant to the AE towards purchase of the advertisement space 23. Erred in not following a consistent approach in considering the nature of provision for bad debts in determination of the ALP .B. Corporate Tax Issues Rejection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31 was required to be disallowed u/s 40(a)(i) of the Act 32. Without prejudice to the above, assuming without admitting that the amount paid/ payable by the Company to Google Ireland Limited is not chargeable to tax in India warranting any deduction u/s 195 of the Act, the Ld AO have erred in disallowing the amount paid/ payable to Google Ireland Limited u/s 40(a)(i) disregarding the fact that the demand raised by the Learned Deputy Director of Income-tax (International Taxation), Circle 1(1), Bangalore u/s 201(1) of the Act for the relevant AY has been remitted by the Appellant. C. Miscellaneous 33. Have erred in imposing the levy of interest u/s 234B of the Act. 34. Have erred in initiating the penalty proceedings initiated u/s 271 (1)(c) of the Act. The Appellant craves, to consider each of the above grounds of appeal independently without prejudice to one another and craves leave to add, alter, delete or modify all or any of the above grounds of appeal . 2.1 The revenue has raised following grounds of appeal in IT(TP)A No.191/Bag/2014: 1. The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case. 2. The DRP erred in not accepting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides expenses are to be reduced only from the export turnover. 9. the DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal filed before the Hon'ble Supreme Court. 10. DRP erred in directing to exclude Coral Hubs on the ground of functional incomparability without appreciating the fact that TNMM was applied as the most appropriate method and while applying TNMM the functions of the comparable need not be identical but a broad comparison is sufficient as many of the differences are evened out at the net margin level. 11. The DRP erred in directing that unallocated expenditure be taken into consideration in the case of Acropetal Technologies without appreciating that the comparable company itself has not taken the unallocated expenditure as operating expenditure while publishing the segmental results. 12. The DRP erred in not appreciating the fact that since M/s Google Ireland Ltd. has neither filed its return of income nor was witling to admit any tax lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not entitled to deduction u/s 10A of the Act as the services rendered by the assessee on pre sale and Post sale of advertisement in terms of Google Adword Programme Distribution Agreement dated 12.12.2005 and services rendered by Service Agreement dated 1.4.2004 would not amount to export of articles or things or computer software. 2. The assessee is not entitled to deduction u/s 10A of the Act as the receipt from Google Ireland being associated enterprise, not being consideration for export of articles or things or computer software. 3. Without prejudice to the above contention, even if it is assumed that services rendered on pre sale and post sale of advertisement is considered as articles or things or computer software, the same not being exported outside the country, the primary condition of export is not fulfilled and consequently disentitles the assessee for claiming deduction u/s 10A of the Act. 2.3. It is submitted that, no new facts needs to be considered in order to dispose of the above additional grounds raised by the assessee. It is submitted that, the additional grounds raised do not require verification of any new facts. The Ld.DR, thus prayed for the admission of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its wisdom has thought it appropriate to include orders passed by the Assessing Officer under direction under section 144A, but not under direction under section 144C(13). As per the provisions of section 144C(5), the Dispute Resolution Panel (DRP) shall in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. Explanation to sub-section (8) of section 144C duly provides that the DRP has power to enhance the variation and the power includes to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. It is nobody's case that the Assessing Officer has not followed the direction of the DRP and completed the assessment not in conformity with the direction of the DRP. Therefore, the final assessment order cannot be said to be erroneous. In fact, if the Assessing Officer had made disallowance in the final assessment order which were not as per the direction of the DRP, the said assessment order would be held to be invalid and contrary to law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that, the additional grounds raised by the revenue are directly connected with the main issue of deduction computed under section10A by the authorities below and no new facts needs to be investigated for adjudicating the same We also note that the revenue was estopped from raising this issue before the DRP due to the applicable statutory provisions. Based on the above discussion and respectfully following the decisions of Hon ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Accordingly, we admit the additional grounds raised by the revenue. 3. Brief facts of the case are as under: The assessee is an Indian company. The assessee is a wholly owned Subsidiary of Google International LLC, USA. The assessee was incorporated in December 2003 and has its registered office in Bangalore and has STPI units at Hyderabad and Gurgaon, and is engaged in the business of providing ITeS services; IT Services; and marketing and distributing Ad Words. 3.1 For the year under consideration, the assessee filed its return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. On receipt of the draft assessment order the assessee preferred objections before the DRP. 3.4 The DRP after considering various submissions of the assessee reduced the transfer pricing adjustment Rs. 82,51,71,946/- deleted the additional income that was added in respect of AdWords programme. However, upheld the disallowance u/s 40(a)(ia) of the Act. The DRP also accepted the contentions of the assessee regarding computation of deduction u/s 10A of the Act. 3.5. On receipt of the DRP directions the Ld.AO passed the final assessment order by making the necessary addition and deletion as per the directions of the DRP and computed the income in the hands of the assessee at Rs. 4,25,51,51,616/-. Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal. 4. At the outset, the Ld.AR submitted vide submission dated 14/11/2023 that Ground No.1 - 8 Grounds 10-13 are not pressed by the assessee. Accordingly these grounds are dismissed as not pressed. 4.1. Ground No.9 is raised by the assessee challenging re- characterisation of the functionality of the Assessee in the Information Technology ( IT ) segment. The Ld.AR vide submissions dated 14/11/2023 submitted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Ld.TPO in for 2010-11 which stands covered by the APA. He submitted that in the said order, para 2-3.1, the Ld.TPO, himself observed that the facts and issues pertaining to AY 2010-11 have remained the same as were for AY 2009-10. The referred order of the Ld.TPO for AY 2010-11 is placed at page 1-22 of the PB dated 07/08/2023 and the relevant observation of the Ld.TPO is at page 3 of the PB. He thus submitted that, it is undisputed that the FAR for the transaction in question for AY 2009-10 has remained the same for subsequent AYs, which are covered by the APA . (v) It is further submitted that, for all the subsequent AYs i.e., AY 2010-11 onwards, the Assessee has duly complied with the applicable law and has made necessary filings and reporting pursuant to the APA before the TPO, which have been accepted both by the TPO as well as by the AO. Reference in this regard is made to Form 3CEF filed by the Assessee for AY 2010-11 as well as order dated 24.03.2022 passed by the AO for giving effect to the modified tax return filed by the Assessee pursuant to the APA for AY 2010-11. (vi) The Ld.AR further submitted that, as far as the provision of IT services by GIPL to Google Inc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the APA have a greater persuasive value, even though, based on the critical assumptions to the set of facts related to an assessee, the APA would not have any effect on other years. Yet the concept and the methodology laid down in the APA can have the guidance value. In the present situation, the APA, between CBDT the assessee for AY 2010-11 to 2018-19, has considered all the aspects of the manner of determination of ALP which are submitted to be similar for the year under consideration. The circular relied by the Ld.DR cited supra also lays down that international transaction must be the same to which the agreement applies and the APA shall be applied only if the FAR analysis of the rollback period does not differ materially from the FAR validated for the purpose of reaching an agreement in respect of the international transaction. 4.4. We further note from Appendix I (c ) to the APA at page 153 of the PB that, the agreements considered between the assessee and the AE s are dated 01/01/2006, 01/04/2004 and 12/12/2005 for the services rendered under IT Services, ITeS Services and Google AdWords programme distribution. Thus it is clear that these agreements have been considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed adjustment of INR 83,50,87,934/- [INR 14,72,66,223 (ITeS segment) and INR 68,78,21,711/- (distribution segment)]. 5.2. The DRP, vide directions dated 30.12.2013 directed the Ld.AO as under: (i) Segregate the transactions of ITeS and distribution segment, (ii) Independently benchmark the ITeS segment using TNMM. 5.3. Pursuant to the directions of the DRP, the Ld.TPO segregated the international transaction under the ITeS segment and Distribution segment. However, as the Ld.TPO applied TNMM originally for ITeS segment, there was no reduction in the arm s length price computed for this segment i.e., INR 14,72,66,223/- 5.4. The submission of the Ld.AR regarding the said comparables sought for exclusion on functional dissimilarities are as under: Comparable FAR of the TPO s comparable Assessee s Submission For Exclusion (i) Accentia Technologies Limited 46.40% It offers services and solutions for Healthcare Receivables Cycle Management and Software Products for Business Process Outsourcing (S. No. 1 at page 82 of Paper Book dated 06.09.2023). The Company is engaged in diversified healthcare activities, including medical transcription, medical coding, billing and receivable, as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY, i.e., AY 2009-10, PAN Financial Services India Pvt. Ltd., a subsidiary of the Company, amalgamated into the Company with effect from 01.04.2008. This being an extraordinary event, the Company is not entitled to be chosen as a comparable for AY 2009-10. Reliance in regard to the above is placed on: (i) Annual Report of the Company for the relevant AY Page 190, 192, para 16.2.15 at page 223 and para 16.2.21 at page 228 of the Compilation. (ii) Arctern Consulting (Supra) - Para 22 at page 271 of the Compilation. 5.5. It is submitted by the Ld.AR that ITeS segment of the Assessee is also covered in the APA entered into by the Assessee for AY 2010-11 to AY 2018-19. It is submitted that under the APA, the ITeS segment of the Assessee is benchmarked independently of the distribution segment, using TNMM as the most appropriate method. Further it is submitted that the FAR of assessee for the year under consideration is the same as the FAR analysed under the APA for AY 2010-11 to AY 2018-19. The Ld.AR submitted that for computing correct arm s length margin under the ITeS segment, the Assessee is seeking exclusions of the aforestated 3 comparables. The Ld.AR relied on the decisions of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no segmental details available. The objections of the assessee in respect of each comparables have been reproduced herein above. The Ld.AR relied on the annual reports of the comparables in support of the submissions. 5.11. We note that in Artern Consulting (p.) Ltd. Vs. ITO, Coordinate Bench of this Tribunal for assessment year 2009-10, observed and held regarding the alleged comparables as under: 22. As already mentioned, the ground that is being pressed is with regard to exclusion of Infosys BPO Ltd., Accentia Technologies Ltd., Informed TechnologiesLtd.,Cosmic Global Ltd. and Exclerx Services Ltd. From the list of comparable companies.(Ground No. 5 a). As far as exclusion of the aforesaid companies is concerned, the learned Counsel has filed a chart before us wherein he has referred to decision rendered by the ITAT, Bengaluru Benches, in the case of assessee's rendering ITeS services and in assessee's cases also, the very same comparables chosen in the case of the assessee in this appeal was chosen as a comparable company by the TPO. In this regard, we find that in the case of e4e Business Solutions India (P.) Ltd.v.Dy.CIT [2016] 67 taxmann.com 68 (Bang. Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration. Apart from this, as per the segment reporting, this company is providing business process management services . Thus form the above observations, it is clear that these are not fit comparable for a captive service provider like assessee. We therefore direct the Ld.AO/TPO to exclude the alleged three comparables from the final list. Accordingly Ground No.14 raised by the assessee stands allowed. 6. Ground No. 16 to 23 are raised by the assessee in respect of the transfer pricing adjustment computed by the Ld.AO/TPO in the distribution segment. 6.1. It is stated that the Ld.TPO aggregated the international transaction of the assessee with GIL under the distribution segment as well as ITeS segment and sought to apply RPSM to benchmark the two transactions together. The DRP on the other hand, directed the Ld.TPO to benchmark both the transactions separately, while also directing the application of PSM instead of RPSM for the distribution segment. Pursuant to the directions of the DRP, the Ld.TPO reduced the adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessment years 2010-11 to 2015-16 is reproduced as under: 4. Issue 2: Rejection of books of accounts: Brief facts of this issue are as under: 4.1 The assessee entered into an agreement with Google Ireland for distribution of advertisement space under the AdWords program to the advertisers in India. As per the agreement, assessee was to pay to Google Ireland an amount equal to the excess of the revenue earned by Google India on distribution of advertisement space under the AdWords program . 4.2 Based on the contract, entered into by assessee with Indian advertisers for sale of advertisement space and as per the requirement under the generally accepted accounting principles in India (IGAAP), the assessee disclosed its advertisement revenue on a net basis in profit and loss account. Further it was submitted that in the profit and loss account, it was clearly stated that the advertisement revenue disclosed is net of amount payable by the assessee to Google Ireland for purchase of advertisement space. 4.3 The Ld. Counsel thus submitted that, the revenue authorities were not justified in rejecting the books of accounts of the assessee which has been duly audited based on conjectur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts for A.Ys. 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 stands allowed. 7.2. Respectfully following the above view, of the coordinate bench on this issue , we do not find any reason to uphold the rejection of the books of account. Accordingly Ground No.24 raised by the stands allowed. 8. Ground No.25 29 raised by the assessee is regarding holding the assessee to be Dependent Agent Permanent Establishment ( DAPE ) of Google Ireland. At the outset it is submitted that this issue is covered in favour of the assessee by following decisions of this Tribunal in assessee s own case as under: (i) Google India Pvt. Ltd. v. ACIT, in ITA No.374/Bang/2013, vide order dated 31/03/2023 for AY 2008-09 (ii) Google India Pvt. Ltd. vs .DCIT Anr., in ITA No.68/Bang/2015, vide order dated 31.07.2023 for AY 2010- 11 to 2011-12, 8.1. Reliance is also placed by the Ld.AR on the of this Tribunal in assessee s own case in ITA No.68/Bang/2015, vide order dated 31.07.2023 which has followed the view taken in ITA No. 374/Bang/2013. For sake of convenience, the observation and view taken in ITA No.68/Bang/2015, which is a consolidated order for assessment years 2010-11 to 2015-16 is reproduced as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Finance Act, 2016 and observed as under: 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 specified services. Section 164(i) of Finance Act, 2016 provides that specified service means online adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill look at the relevant Article of DTAA. The term PE is defined in Article 5 of the DTAA and one of the forms of PE is DAPE, which is defined and governed by the provisions of Article 5(6) and 5(8) of the DTAA, reads as under: 6. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have 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 merchandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the nature of the relationship should be determined based on such terms. The ld AR during the course of hearing drew our attention to the following clauses of the agreement to contend that the assessee is not a DAPE of GIL. Clause 2.1 that GIL appointed the Assessee as a distributor of Google AdWords Program to advertisers in India. It has been further provided in this clause that Assessee would conduct its business for its own account, in its own name , and not as an agent, employee, partner of franchisee 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to be characterized as DAPE that the conditions of Article 5(6) of the DTAA are satisfied and that burden of proving that an assessee has a PE is on the Department (i) Hon ble High Court of Delhi in the case of Formula One World Championship Limited v. CIT, (2017) 390 ITR 199 (ii) Hon ble High Court of Delhi in Nortel Networks India International Inc. v. DIT, (2016) 386 ITR 353 (iii) ADIT v. E-Funds IT Solution Inc., (2017) 399 ITR 34 (Supreme Court) (iv) Reuters Limited 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already held hereinabove that assessee cannot be held to be a dependent agent PE of Google Ireland by relying on decisions of coordinate bench of this Tribunal in assessee s own case. Further, in the decision of Coordinate Bench of this Tribunal in case of Google India Pvt. Ltd. vs. DCIT reported in (2022) 143 taxmann.com 302 this Tribunal has already held the payments made by assessee to Google Ireland cannot be considered to be Royalty as per para 39 of the said order. The same view has been taken by another decision of Coordinate Bench of this Tribunal in case of assessee in ITA No. 1190/Bang/2014 for A.Ys. 2013-14 to 2015-16 by order dated 15.12.2022. The relevant extract of the said order is reproduced as under: 6.1 With respect to the issue regarding payments made by the assessee to Google Ireland Ltd., being held to be Royalty under the Act read with the Treaty and liability to withhold tax fastened on the assessee, the assessee's representatives fairly conceded before the ld CIT(A) that the issue is covered by CIT(A)'s earlier year order for assessment years 2006-07 to 2012-13. Following his earlier decision, the ld CIT(A) confirmed the action of the AO. 7. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce u/s 195 of the I.T.Act while making the subject payment to GIL. 14. For a proper adjudication of the above issue, it is necessary to briefly explain / examine the overview of the Google Adword Program, the role of the assessee under Adword Program distribution agreement and the service agreement (ITES). The undisputed fact on record is that Google.com is a search engine developed by Google LLC, USA available freely to the world at large providing information on any subject based on the search made by the user. The link to various websites related to the search are provided in the search result. Additionally, Google LLC, USA has also developed a computerised advertising program known as Google AdWords Program. Google Ireland Ltd (GIL) is the exclusive licensee and principal operator of the computerised advertising program i.e., Google AdWords Program for the whole world outside the USA. The Google AdWords program displays advertisements on Google's search engine. It has a separate website in which the advertisers have to agree to certain terms and conditions including the consideration payable for the targeted Advertisements and provide appropriate keywords on searching of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r display on Google Search Engine or other online properties using the Google AdWords Program. No payment is made for the same. Thereafter, the proposed advertisement is stored on the servers of Google Ireland Ltd (GIL) located outside India for undergoing a review process. 15. The review process is undertaken by GIL for advertisements uploaded by Advertisers from all around the world including India. Approximately 94% of global advertisements are reviewed by GIL through its automated system located outside India. Remaining global advertisements, which are not successfully reviewed by the automated system, are subjected to a manual review. For carrying out manual review, the balance 6% (approx.) global advertisements are forwarded to one of service centres of GIL's group entities, located in USA, Dublin, China, Korea, Japan, and India. An advertisement in English by an Indian Advertiser may go for manual review to any of these service centres. These service centres carry out the activity of manual review on a cost-plus basis. The assessee also carries out this activity under the ITES segment as per the services agreement dated 1.4.2004 entered into with GIL. The relevant terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liate. including but not limited to Intellectual Property. Confidential Information may be communicated orally, in writing. or in any other recorded, electronic or tangible form. Data and information shall be considered to be Confidential Information if (i) Google Ireland has marked them as such; (ii) Google Ireland, orally or in writing, has advised Google India of their confidential nature; or (iii) due to their character or nature, a reasonable person in a like position and under like circumstances would treat them as secret and confidential. Confidential Information does not include information: (i) that is in the public domain through no fault of the receiving party, (ii) that was previously known by receiving party, as established by written records of the receiving party prior to receipt of such information from the providing party or (iii) that was lawfully obtained by the receiving party from a third party without any obligations of confidentiality to Google Ireland. 1.3 Derivative works Work shall mean (i) for copyrightable or copyrighted material, any modification. derivative works work (as defined in 17 USC. 101), translation, abridgment, revision or other form in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h result from or relate to the Services 1.11 Software Technology shall mean all Intellectual Property, Confidential Information, Documentation, Derivative works Works and other technical data used by Google Ireland that are required, used or appropriate for the design and development of Products. including the reproduction, use, testing, operation, maintenance and service of such Products. **** **** ***** 2. SERVICES 2.1 Request Google India hereby agrees to perform certain information technology, information technology enabled services and software development services, as requested by Google Ireland from time to time, with respect to Products, utilizing Google Ireland Software Technology and other appropriate technology from Google Ireland or third parties which may be properly used for these purposes. Google Ireland will specify the information technology, information technology enabled services and software development services to be performed, the Products to be worked on or used, the time line for completion and the specific results to be achieved (the Services ). 2.2 Performance. Upon agreement between Google Ireland and Google India as to the Services and completion date fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to to facilitate Google Ireland's perfection of its rights in the Derivative works Works and the Software Embodiments in any jurisdiction in the world. Google India shall also promptly make available to Google Ireland all Residuals. If Google India has any rights to Derivative works Works or Software Embodiments that cannot be assigned to Google Ireland under law. Google India hereby waives the enforcement of such rights; and if Google India has any rights which cannot be assigned or waived under law, Google India hereby grants to Google Ireland an exclusive, irrevocable, perpetual, worldwide, transferable, folly paid licence, with rights to sub license and assign, to all such rights. Google India shall enter into agreements with its Representatives sufficient to permit Google India to make the foregoing grant of rights. ****** ****** ***** 6. CONFIDENTIAL INFORMATION 6.1 Access and Use of Confidential Information. During the course of performance of this Agreement, Google Ireland will disclose certain Confidential Information to Google India solely to permit Google India to perform its obligations under this Agreement. Except as otherwise provided in this Agreement, Google Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressly waives and agrees not to assert any right of detention whatsoever with respect to the foregoing.' 16. Prior to December 2005, an Indian Advertiser could get into a contract with GIL only, for purchasing online advertisement space. However, to accommodate Indian Advertiser(s) desirous to pay in Indian Rupees instead of foreign currency, GIL entered into the Google AdWords Program Distribution Agreement dated 12.12.2005 with the-assessee, whereunder the assessee was appointed as a non- exclusive distributor of online advertisement space in India In terms thereof, the assessee set up its Distribution Segment for carrying out purchase and re-sale of online advertisement space to Indian Advertisers. However, Indian Advertisers who were willing to pay in foreign currency, continued to transact directly with GIL. The Google AdWords Program and its features remains the same whether the Advertiser in India purchases online advertisement space from GIL or its authorised distributor i.e., the assessee. The only difference is where Indian Advertiser purchases from the assessee, it pays in INR whereas where Indian advertiser purchases from GIL, it pays in foreign currency. 17. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the Territory (as defined herein), where principal place of business is determined by the place of an entity's registration. 1.2 ''AdWords Program means the advertising program currently offered by Google under the name ''AdWords.'' 1.3 Brand Features means the trade names. trademarks, service marks, logos, domain names, and other distinctive brand features of each party, respectively, as secured by such party from time to time. 1.4 Designated Contact means those contacts designated by each party as the point of contact or contacts for a particular function area related to this Agreement. 1.5 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.comipermissionsltrademarks. html (or such other URL that Google may provide from time to time), and such other trade names, 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning provided by Google. Failure to do so would constitute a material breach of this Agreement and shall be grounds for termination under section 9.3. 2.3 AdWords Program Sign Up Process. Distributor shall be responsible for uploading all Advertiser information that is required by Google for participation in the AdWords Program. 2.4 Licences; Approvals. Distributor shall be responsible for obtaining all licences and permits and for satisfying all formalities as may be required to enter into this Agreement and to perform its obligations in accordance with then- prevailing laws and regulations, including without limitation those necessary to enable Distributor to make payments to Google in US dollars. Distributor will promptly secure all governmental approvals as may be required in the Territory or performance of its obligations under this Agreement. 2.5 Compliance 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utor will submit all materials of any kind containing the Brand Features) to Google for written approval prior to release to the public. Furthermore, Distributor agrees to adhere to Google's then- current Brand Features use guidelines, and any content referenced or included therein, which may be found at the following URL: http://www.google.comlpermissionslguidelines.ht ml (or such other URL that Google may provide from time to time) and to such other guidelines or restrictions provided by Google in writing to Distributor in connection herewith. Except as set forth in this Agreement, Distributor shall not acquire any right, title or interest in or to the Google Brand Features. All use by Google of Distributor Brand features (including any goodwill associated therewith shall inure to the benefit 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 eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept for a termination pursuant to Section 9.2 or Section 9.3 above. Google will continue to serve advertisements as provided in this Agreement up to the earlier date to occur of (x) the date that the services provided by Google exhaust any amounts prepaid by Distributor, or (y) the date that is thirty (30) days after expiration or termination of the Agreement. Termination or expiration of this Agreement. in part or in whole. shall not limit either party from pursuing other remedies available to it, nor shall Distributor be relieved of its obligation to pay all charges that have accrued or are otherwise owed under this Agreement. Termination of this Agreement does not prevent Distributor from participating in the AdWords Program pursuant to the general terms and conditions 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 communi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to such business transaction, to fulfill each Party's confidentiality obligations to the extent the terms set forth below are incorporated therein (the ''Purpose''). The Parties have entered into this Agreement to protect the confidentiality of information in accordance with the following terms: 1. The Effective Date of this Agreement is December 12, 2005. 2. In connection with the Purpose, a Party may disclose certain information it considers confidential and/or proprietary ( Confidential Information '') to the other Party including, but not limited to, tangible, intangible, visual, electronic, present, or future information 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r governmental authority requiring the Process and such request has been denied, (b) consented in writing to the production or disclosure of the Confidential Information in response to the Process, or (c) taken no action to protect its interest in the Confidential Information within 14 business days after receipt of notice from the Recipient of its obligation to produce or disclose confidential information in response to the Process ***** ***** ******* 11. No Party acquires any intellectual property rights under II Agreement (including, but not limited to, patent, copyright, and trademark rights) except the limited rights necessary to carry out the Purpose as forth in this Agreement. 0. 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 Cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 prepayment by Google. Unused portions of prepayments will be returned to Customer after the end date to the extent that there are no amounts still ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Customer; and (b) web sites. services and landing pages which Creative links or directs viewers to, and advertised services and products (collectively Services ). Customer shall protect any Customer passwords and takes full responsibility for Customer's own, and third party, use of any Customer accounts. Ads may be placed on (y) any content or property provided by Google ( Google Property ), and unless opted-out by Customer (z) any other content or property provided by a third party ( Partner ) upon which Google places ads ( Partner Property ). With respect to Adwords online auc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erate 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 other rights) in Creative. Services and Targets needed for Google and Partner to operate Google's advertising programs for Customer (including without limitation any rights needed to host, cache, route, transmit, store, copy, modify, distribute, perform. display, reformat. excerpt, analyze, and create algorithms from and derivative works of Creative or Targets) in connection with this Agreement ( Use ). Customer represents and warrants that LV) all Customer information is complete, correct and current; and (z) any Use hereunder and Customer's Creative, Targets, and Customer's Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses (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 all charges in accordance with the applicable 10 or Program FAQ. Late payments bear interest at the rate of 1.5% per month (or the highest rate permitted by law, if less). Charges are exclusive of taxes, cesses or other applicable levies. Customer is responsible for paying (y) all applicable taxes, cesses and levies, government charges, and (z) reasonable expenses and attorneys fees Google incurs collecting late amounts. To the fullest extent permitted by law, Customer waives all claims relating to charges unless claimed within 60 days after the charge (this does not affect Customer's credit card issuer rights). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 basis for challenging the award. The arbitration will be conducted in English and the place of arbitration will be Bangalore, India. Either party may, without waiving any remedy under this Agreement, apply to the arbitrator and/or any court having jurisdiction any interim, provisional, injunctive or conservatory relief that is necessary to protect the rights or property of that party until the arbitration award is rendered or the Dispute is otherwise resolved. Any decision rendered by the arbitrator will be final and binding on the parties, and judgment thereon may be entered by any court of competent jurisdiction, including, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and Customer and Google and Partners are not legal partners or agents, but are independent contractors. In the event that these Terms or an Advertising Program expire or is terminated, Google shall not be obligated to return any materials to Customer. 11. Term: Unless terminated earlier under the terms of this Agreement This Agreement shall have a term of 1 year from the latest of the signature dates below. Customer acknowledges and agrees that if this Agreement expires or is terminated any Customer campaigns in effect as of the date of such expiration or termination or any new campaigns commenced after such expiration or termination s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reland 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 (supra), this cannot result in royalty. We proceed to examine whether the definition of 'Royalty' as per Article 12 of India-Ireland DT AA is satisfied in the present case considering the distribution agreement, services agreement and the facts on record. 23. The definition of 'Royalty' as per Article 12(3)(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-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 end-users. 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 important observations of the Supreme Court are summarized as follows:- 71. The transfer of all or any rights (including the granting of a licence) in respect of any copyright , in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has been held hereinabove, the expression in respect of' is equivalent to in or attributable to . Thus, explanation 2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of all of any rights ... in respect of copyright is certainly more expansive than the DTAA provision, which speaks of the use of, or the right to use any copyright. 72. However, when it comes to the expression use of, or the right to use , the same position woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 municipal laws which apply in the Contracting States must be applied unless there is any repugnancy to the terms of the DTAA. For all these reasons, the determination of the AAR in Citrix Systems Asia Pacific Pty. Ltd (supra) does not state the law correctly and is thus set aside. ***** ******** ****** 108. Fourthly, the High Court is not correct in referring to section 9(l)(vi) of the Income-tax Act after considering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income And Capital Gains. [ India-Ireland DTAA'']. Article 12 of the aforesaid treaty defining roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions or otherwise. (iii) 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 interest in any such rights so as to attract section 30 of the Copyright Act. (v) The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in State Bank of India (supra) (see paragraph 21), former amounting to parting with copyright and the latter, in the context of no exclusive EULAs, not being so. 26. Having considered the above principles in the context of copyright royalty, we proceed to examine the applicability of the above principles to the facts of the present case particularly with reference to distribution agreement, services agreement and other facts on record. As per para 2.1 of the distribution agreement, assessee is appointed as a non exclusive authorised distributor of Google Adwords program to Advertisers. Para 2.2 of the agreement states that the distributor agrees to market a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 copyright, trademark, patent, publicity or other rights) in Creative, Services and Targets needed for Google and Partner to operate Google's advertising programs for Customer (including without limitation any rights needed to host, cache, route, transmit, store, copy, modify, distribute, perform, display, reformat, excerpt, analyze, and create algorithms from and derivative works of Creative or Targets) in connection with this Agreement ( Use ). The advertiser represents and warrants that (y) all Customer information is complete, correct and current; and (z) any Use hereunder and Customer's Creative, Targets, and Customer's Services will not violate or encourage violation of any applicable laws, regulations, code of conduct, or third party rights (including, without limitation, intellectual property rights). Violation of the foregoing may result in immediate termination of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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, trademarks, service marks, logos, domain names, or other distinctive brand features that Google may provide to Distributor for use solely under this Agreement. As per para 6 of the distribution agreement, each party shall own all right, title and interest, including without limitation all Intellectual Property Rights, relating to its Brand Features and Google Irland grants to the assessee / distributor nonexclusive and nonsublicensable licence during the Term to display Google Brand Features solely for the purpose of distributor's marketing and distribution of AdWords Program under the terms and subject to the conditions set forth in this Agreement. It is thus evident that the trademark and other brand features are not used independently or de hors the distribution agreement but they are incidental or ancillary for the purpose of carrying out the marketing and distribution of Adword program. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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. As held by the Supreme Court in the case of UOI v Azadi Bachao Andolan [2003] 263 ITR 706, at page 763: We are unable to agree with the submissions that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. 34. Before concluding, it is to be mentioned that the taxability with respect to payments made for purchase of online advertisement has been decided by the following Coordinate Bench orders of the I.T.Act:- (i) Yahoo (supra): Department of Tourism of India hired the services of Yahoo India for uploading, displaying, and hosting its banner advertisement on the Yahoo portal, which was operated by Yahoo Hong Kong. For the said purposes Yahoo India engaged Yahoo Hong Kong for uploading and displaying the said banner advertise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by it for that purpose to Facebook Ireland Ltd., a non-resident, to be taxable in India. The CIT(A) upheld the order of the AO. The Tribunal relied on the decision in Yahoo (supra), Pinstorm (supra), Right Florists (supra), while setting aside the order of the AO/ CIT(A) and holding that the payments for purchase of online advertisement space were not taxable in India. (v) Urban Ladder (supra): The assessee in this case, made payments to Facebook Ireland Ltd., for online advertising. The AO held the said payments to be royalty. The CIT(A) upheld the order of the AO. However, while doing so, the CIT(A) relied upon certain functional aspects of advertisement system qua Patent Number US20040059708A1 as well as US7778872B2. These two patents are held by Google LLC., USA in connection with the Google AdWords Program hereto. The Tribunal, set aside the order of the CIT(A), while following the decision of the Hon'ble Supreme Court in En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75 (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 agency, which places online advertisements on behalf of its clients. The payments in this case were made to Facebook Ireland Ltd., which were disallowed by the AO and the CIT(A). The Tribunal observed that Interactive Avenues was utilising Google Search Engine amongst others, to buy online advertisement space on behalf of its clients. Be that as it may, the Tribunal set aside the order of the CIT(A) and held that the payments in question could not be characterised as royalty, while relying on the decisions in Urban Ladder (supra) and Play Games (supra). 35. It is also relevant to point out that in the context of interpreting Article 12(3) of India - Ireland DTAA, it is relevant to take note of the existing international jurisprudence. The Technical Advisory Group ( TAG ) set up by the Organisation for Economic Co-operation and Development ( OECD ), in its Report (2001) on treaty characterisation of electronic commerce payments analysed various e- comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 39. In view of the aforesaid discussion and the judicial pronouncements, cited supra, we hold that the impugned payment cannot be characterized as royalty under the India-Ireland DTAA. It is ordered accordingly. 40. In the result, the appeals filed by the assessee are allowed. 8.1. Respectfully following the above order of the Tribunal, we inclined to decide the assessee's appeal in IT(IT)A No.1190/Bang/2014 in favour of the assessee. 7.2.1 The above view has been followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isers in India. The Revenue had sought to characterize these payments received by GIL to be royalty as defined in section 9(1)(vi) of the I.T.Act r.w. Article 12(3) of the India-Ireland Double Taxation Avoidance Agreement (India-Ireland DTAA) and thus chargeable to tax in India in the hands of GIL. The case of the assessee is that the said payments are in the nature of business profits, which are chargeable to tax in Ireland and not in India. Further, since the Department in these proceedings has never alleged that GIL had a Permanent Establishment (PE) in India in terms of Article 5 and accordingly by virtue of Article 7(1) of the India-Ireland DTAA, the right to tax these profits is solely with Ireland. Consequently, the assessee cannot be held to be an assessee in default u/s 201 of the I.T.Act for not deducting tax at source u/s 195 of the I.T.Act while making the subject payment to GIL. 14. For a proper adjudication of the above issue, it is necessary to briefly explain / examine the overview of the Google Adword Program, the role of the assessee under Adword Program M/s. Google Ireland Ltd. distribution agreement and the service agreement (ITES). The undisputed fact on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd are achieved by simple computer commands, given by the proposed Advertiser on the Google AdWords Program. All these facilities are available on the Google AdWords Program to any member of the public, free of M/s. Google Ireland Ltd. charge, to enable him to formulate a suitable draft advertisement for his product or service. The only requirement is that the proposed Advertiser should have a website of his own / or entity giving particulars about his/ its business. The Google AdWords Program itself gives step-by-step and detailed instructions, so that even a person who has a basic knowledge of computers and internet can create a draft advertisement and target it suitably by using the necessary computer commands (or tools). No payment is made for any use of the Google AdWords Program. After formulating the draft advertisement, the Advertiser is required to upload the same for display on Google Search Engine or other online properties using the Google AdWords Program. No payment is made for the same. Thereafter, the proposed advertisement is stored on the servers of Google Ireland Ltd (GIL) located outside India for undergoing a review process. 15. The review process is undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndering the above services and is willing to render such services for Google Ireland as an independent contractor on the terms and conditions of this Agreement: NOW THEREFORE, in consideration of the mutual covenants and conditions contained herein the parties agree as follows: 1. DEFINITIONS 1. 1 'Affiliate' shall mean any Person, whether de Jure or de facto, that directly or indirectly participates in the capital. control or management of either party or is under common ownership with a party to this Agreement or other entity actually controlled by, controlling. or under common control with a party to this Agreement. 1.2 Confidential Information' shall mean all data and information of a confidential nature, Including know-how and trade secrets, relating to the business, the affairs, the products. the development or other projects or services of Google Ireland or its-suppliers or its affiliate. including but not limited to Intellectual Property. Confidential Information may be communicated orally, in writing. or in any other recorded, electronic or tangible form. Data and information shall be considered to be Confidential Information if (i) Google Ireland has marked th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design and code documentation, methodologies, processes, design information, design flows, encoding techniques, applications, product information. Formulae, engineering specifications, technical data, testing procedures, drawings and techniques and other proprietary information and materials of any kind; (vi) all software programs in both source code and object code format. including all testing software and software tools: (vii) all documentation, records, databases, drafts, designs, codes, drawings and algorithms: an (viii) all confidential and proprietary information related to any of (i) through (vii) above **** **** ****** 1.10 Software Embodiments shall mean all designs, discoveries, inventions. Products. procedures, improvements, developments, drawings, notes, Documentation. information. materials, Intellectual Property and Derivative works Works made, conceived or developed by Google India alone or with others which result from or relate to the Services 1.11 Software Technology shall mean all Intellectual Property, Confidential Information, Documentation, Derivative works Works and other technical data used by Google Ireland that are required, used or appropriate for the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 5. 2 Ownership of Derivative works Works and Software Embodiments. Google India shall keep Google Ireland promptly informed of Google India's development of any Derivative works Works and Software Embodiments and hereby irrevocably agrees that all such Derivative works Works and Software Embodiments shall forever be the sole and exclusive property of Google Ireland throughout the world from the date of its creation. As between Google Ireland and Google India no additional action shall be required to vest all right, title and ownership of such Derivative works Works and Software Embodiments in Google Ireland. Google India shall furnish to Google Ireland all such Derivative works Works and Software Embodiments developed by Google India as soon as they become available. From time to-time, promptly upon receipt of Google Ireland's request, Google India shall provide Google Ireland with assignments, in substantially the form of Exhibit B hereto to facilitate Google Ireland's perfection of its rights in the Derivative works Works and the Software Embodiments in any jurisdiction in the world. Google India shall also promptly make available to Google Ireland all Residuals. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Google Ireland's reasonable request, or (ii) in accordance with Section 12 upon termination of this Agreement, whichever is earlier. **** ********* ****** 12.5 Rights and Duties of Termination. (a) Upon termination or expiration of this Agreement: (i) Google India shall have the right to retain any sums already paid by Google Ireland under this Agreement and Google Ireland shall pay all sums accrued, but not yet paid, that are due under this Agreement as of the date of such termination; (ii) Google India shall discontinue all use of the Confidential Information, Documentation, Intellectual Property and other Software M/s. Google Ireland Ltd. Technology and shall have no further right with respect thereto. (iii) Google India shall (except as specified in subsection (b) below) immediately return to Google Ireland or (at Google Ireland's request) destroy, all copies of the Confidential Information, Documentation and other Software Embodiments, in its possession or control. Google India hereby expressly waives and agrees not to assert any right of detention whatsoever with respect to the foregoing.' 16. Prior to December 2005, an Indian Advertiser could get into a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prestige Sigma, No. 3 Vittal Mallya Road, Bangalore 560 001 ( Distributor''). WHEREAS 1. Google wishes to enter into the Distribution Agreement for its AdWords Program with Distributor; 2. Whereas Google Inc., a Delaware corporation, and Distributor entered into a Google AdWords Program Distribution Agreement, dated as of December 12, 2005.(the Prior Agreement ), and Google Inc. assigned its rights and obligations under the Prior Agreement to Google; and 3. Google and Distributor desire to terminate the Prior Agreement and further desire that this Agreement supersede and replace the Prior Agreement in its entirety; NOW, THEREFORE, in consideration of the promises and the mutual covenants, agreements, representations and warranties hereinafter set forth, Google and Distributor hereby agree as follows 1. Definitions. The following capitalized terms shall have the meanings set forth below. 1.1 ''Advertiser'' means an individual or business resident or having its principal place of business located within the Territory (as defined herein), where principal place of business is determined by the place of an entity's registration. 1.2 ''AdWords Program ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not have a principal place of business within the Territory. For the avoidance of doubt, an entity's principal place of business will be determined by the place of such entity's registration. All inquiries by any such entity for sale of advertising space shall be referred to the designated Google contact within three (3) business days of receipt by Distributor of such inquiry. 2.2 Distribution Marketing of AdWords Program. Distributor agrees to market and distribute AdWords Program to Advertisers in the designated Territory. within the broad guidelines provided by Google, with its reasonable commercial expertise and own sales force and customer service infrastructure. Distributor shall not subcontract any of its functions or obligations under this Agreement to any third parties. Distributor shall perform its obligations hereunder in a professional and workmanlike manner consistent with reasonably applicable industry standards and in accordance with this Agreement. Distributor will distribute AdWords Program in accordance with the training provided by Google. Failure to do so would constitute a material breach of this Agreement and shall be grounds for termination unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; advertisement an (iv) the cost of clicks delivered across the Google network for Advertisers' advertisement. Distributor must set up AdWords Program advertising accounts in order to receive such online information. Google reserves the right, but has no obligation, to send reports about an Advertiser's activity directly to such Advertiser. If an Advertiser makes a request to Distributor to receive a user name and password to access such Advertisers individual AdWords Program account activity, Distributor' will grant such request after approval from Google. ***** ***** ****** 6. Brand features. Each party shall own all right, title and interest, including without limitation all Intellectual Property Rights, relating to its Brand Features. Google grants to Distributor nonexclusive and non sub- licensable licence during the Term to display Google Brand Features solely for the purpose of Distributor's marketing and distribution of M/s. Google Ireland Ltd. AdWords Program under the terms and subject to the conditions set forth in this Agreement. Notwithstanding the foregoing, Distributor will submit all materials of any kind containing the Brand Features) to Google for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations made by Google. 8. User Data. Google owns all right, title, and interest in and to all information and data, including the User Data collected by Google relating to Advertisers in connection with the provision of the AdWords Program. Distributor shall maintain all User Data in accordance with local law and regulation applicable to such data. and shall implement policies and procedures with respect to the User Data that are at least as protective of the rights of the Advertisers as is provided in the Google Privacy Policy set forth at http://wwvv.qoogle.comlprivacy.html and all relevant policies implied therein ****** ****** ****** M/s. Google Ireland Ltd. 9. 4 Effect of Termination. Upon any termination or expiration of this Agreement, (i) all rights and licences granted by one party to the other. including but not limited to rights to use the other party's Brand Features shall cease immediately, (ii) each party shall promptly return to the other party, or destroy and certify the destruction of all Confidential Information as defined in the NDA and Section 7 of this Agreement) of the other party, and (iii) except for a termination pursuant to Section 9.2 or Section 9.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only apply beginning thirty (30) days after the completion of tile training. Timing for responses to Customer Queries from Distributor beyond the E- Mail Escalation Limit shall be at Google's sole discretion. Distributor agrees that Google will have the right, to review samples of communications sent to Advertisers to assess the quality of responses and modify communications accordingly. Google shall also have the right to send questionnaires to Distributor's customers to ensure that Distributor is providing an adequate level of service. Mutual Non-Disclosure Agreement This Mutual Non-Disclosure Agreement (''Agreement'') is made and entered into between Google Ireland Limited, for itself and its subsidiaries and affiliates ( Google''), and Participant' identified below, individually referred to as a ''Party'' and collectively referred to as the Parties . The Parties wish to exchange Confidential Information (as defined below in Section 2) for the following purpose(s): a) to evaluate whether to enter into a contemplated business transaction; and b) if the Parties enter into an agreement related to such business transaction, to fulf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation may only be disseminated to employees, directors, agents or third party contractors of Recipient with a need to know and who have first signed an agreement with either of the Parties containing confidentiality provisions substantially similar to those set forth herein. ***** ***** ***** 6. This Agreement imposes no obligation upon a Recipient with respect to Confidential Information that: (a) was known to the Recipient before receipt from the Discloser; (b) is or becomes publicly available through no fault of the Recipient; (c) is rightfully received by the Recipient from a third party without a duty of confidentiality; (d) is independently developed by the Recipient without a breach of this Agreement; (e) is disclosed by the Recipient with the Discloser's prior written approval; or (f) is required to be disclosed by operation of law, court order or other governmental demand ( Process''); provided that (i) the Recipient shall immediately notify the Discloser of such Process; and (ii) the Recipient shall not produce or disclose Confidential Information in response to the Process unless the Discloser has: (a) requested protection from the legal or governmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otify Customer of material changes and discontinuauons. Google shall have no liability for such decision. By signing below, Customer represents and warrants that all client information, including but not limited to credit card information and invoicing information, provided herein is complete and accurate and that no additional information is necessary for payment of Google invoices. Customer's campaign(s) may go live upon posting. at which time Google shall send Customer an email notifying customer it has 72 hours to modify Customers campaign keywords and settings as posted. During those 72 hours, Google is only liable to Customer for keywords or settings discrepancies if Customer can certify to Google by its contemporaneous M/s. Google Ireland Ltd. documental (evidence that Google posted keywords or settings other than those requested by Customer. The account (as modified by Customer, or if unmodified, as initially posted) will be deemed approved by Customer 72 hours after it initially posts. Terms of Payment. If Google, at any time, deems itself insecure with respect to Customer's ability to meet its financial obligations under this SA, Google shall have the right to req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, the customer signing these Terms or any document that references these Terms or that accepts these Terms electronically ( Customer ) and Google India Private Limited ( Google'~. These Terms govern Google's advertising program(s) ( Program ) as further described in the applicable Program's frequently asked questions at www.google.com (the FAQs') and, as applicable, Customer's participation in any such Program (s), Customer's online management of any advertising campaigns ( Online Management ) and/or any insertion orders ( IO executed by and between the parties (together the Agreement ). Google and Customer hereby agree and acknowledge: 1. Policies. Program use is subject 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 iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gram after notice that Terms have changed indicates acceptance of the Terms. 3. Cancellation. Customer may independently cancel advertising itself online through Customer's account. if any, or, if such online cancellation functionality is not available, with prior written notice to Google, including electronic mail. AdWords online auction-based advertising cancelled online will cease serving upon cancellation. All other advertising may be subject to Google's ability to re-schedule reserved inventory or cancel advertisements already in production. Cancelled advertisements may be published despite cancellation if cancellation of those ads occurs after any applicable commitment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cteristics of audience), and (vii) the adjacency or placement of advertisements within a Program. EXCEPT FOR indemnification AMOUNTS PAYABLE TO THIRD PARTIES HEREUNDER AND CUSTOMER'S BREACHES OF SECTION 1, to the fullest extent permitted by law: (a) NEITHER PARTY WILL BE LIABLE FOR ANY CONSEQUENTIAL, SPECIAL, INDIRECT, EXEMPLARY, OR PUNITIVE DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF PROFITS, REVENUE, INTEREST, GOODWILL, LOSS OR CORRUPTION OF DATA OR FOR ANY LOSS OR INTERRUPTION TO CUSTOMER'S BUSINESS) WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y without limit and defend Google, its Partners, agents, affiliates, and licensors from any third party claim or liability (collectively, Liabilities ), arising out of Use, Customer's Program use, Targets, Creative and Services and breach of the Agreement. Partners shall be deemed third party beneficiaries of the above Partner indemnity. Without limitation to the generality of the foregoing, Customer shall indemnify Google against any Liabilities or losses arising out of any claim based on any act or allegation of infringement of intellectual property, misrepresentation or defamation. 9. Arbitration. The parties agree that they will try in good faith to settle within thirty (30) days 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 M/s. Google Ire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuant to the terms hereof 10. Miscellaneous. The Agreement must be construed as if both parties jointly wrote it, governed by Indian law. The Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and replaces any other applicable agreements, terms and conditions applicable to the subject matter hereof Any conflicting or additional terms contained in additional documents (e.g. reference to a purchase order number) or oral discussions are void. Each party shall not disclose the terms or conditions of these Terms to any third party, except to its professional advisors under a strict duty of confidentiality or as necessary to comply with a government 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 M/s. Google Ireland Ltd. Department, via confirmed facsimile, with a copy sent via first class or air mail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Engineering Analysis Centre of Excellence (P) Ltd v CIT (supra) at para 108 of its judgment held as under:- 108. Fourthly, the High Court is not correct in referring to section 9(1)(vi) of the Income-tax Act after considering it in the manner that it has and then applying it to interpret the provisions under the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income And Capital Gains, India-Ireland M/s. Google Ireland Ltd. DTAA . Article 12 of the aforesaid treaty defining royalties would alone be relevant to determine taxability under the DTAA, as it is more beneficial to the assessee 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 royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 3 to section 9(l)(vi), a computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. 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). 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 end-user, resident in India, from a foreign non- resident supplier/manufacturer. Category 2: Purchase of computer software by resident Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (v) of explanation 2 to section 9(1)(vi) of the Income-tax Act, would necessarily mean a licence in which transfer is made of an interest in rights in respect of' copyright, namely, that there is a parting with an interest in any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act. To this extent, there will be no difference between the position under the DTAA and Explanation 2 to section 9(1)(vi) of the Income-tax Act. ***** ******** ****** ........... 97. When, under a non-exclusive licence, an end-user gets the right to use computer software in the form of a CD, the end-user only receives a right to use the software 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. (iii) Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, 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 M/s. Google Ireland Ltd. the licensed computer software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owns all right, title and interest in and to all information and data including the user data collected by it in connection with the provision of the Adwords Program. 27. As per the service level agreement - Exhibit C to distribution agreement, assessee distributor shall be solely responsible for M/s. Google Ireland Ltd. 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 Ireland. Distributor agrees that it shall provide minimum 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 dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Google Ireland to the assessee. 30. On a consideration of all the above agreements and the facts on record, 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 v. CIT Anr. (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. 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 distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipment 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 CIT(A) was not in agreement with the AO on the above issue without prejudice to his view in holding that the remitted amount is royalty on different grounds. 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. 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. M/s. Google Ireland Ltd. 33. Thus on an overall analysis of the entire fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rised as royalty. (ii) Pinstorm (supra): Pinstorm was engaged in buying online advertisement space for onward re- sale to an advertiser, much like GIPL in the present case. For such purpose, Pinstorm made payments to GIL, which were disallowed by the AO and CIT(A) under section 40(a)(i) of the Act, on the premise that the said payments were taxable in India. While the AO held the said payments to be fees for technical services ( FTS ), the M/s. Google Ireland Ltd. CIT(A) held them to be royalty. The Tribunal relied on the decision in Yahoo (supra) to delete the disallowance. It was also observed by the Tribunal that the said payments were business profits, which were not taxable in India, 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 or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that Play Games did not get any right to modify/ deal M/s. Google Ireland Ltd. with the servers, which belonged to Facebook Ireland Ltd., in any manner. It was also observed inter alia that the said servers, which hosted online advertisements, were located outside India and that Facebook Ireland Ltd. did not have a PE in India. In that manner, the Tribunal set aside the order of the CIT(A) and held the payments in question to be neither royalty, nor FTS. (viii) Matrimony.com (supra): Matrimony.com in this case, made payments to Facebook Ireland Ltd. for online advertising. The AO in this case as well, disallowed the said payments under section 40(a)(i) of the Act, which action was upheld by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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. 37. Therefore, 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. 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 cybe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing its banner advertisement on the Yahoo portal, which was operated by Yahoo Hong Kong. For the said purposes Yahoo India engaged Yahoo Hong Kong for uploading and displaying the said banner advertisement. Pursuant to such arrangement, Yahoo India received consideration from Department of Tourism of India and after retaining its margin, the balance was remitted to Yahoo Hong Kong. The payment remitted by Yahoo India to Yahoo Hong Kong was the subject matter of dispute before the Tribunal. The AO as well as CIT(A) held such payments to be royalty and in that manner, disallowed the expenditure in the hands of Yahoo India under section 40(a) of the Act. The Tribunal, in second appeal, held that banner M/s. Google Ireland Ltd. advertisement hosting services did not involve use or right to use any industrial, commercial, or scientific equipment and no such use was granted by Yahoo Hong Kong. In that manner, the Tribunal set aside the findings of the AO and CIT(A), wherein the subject payments were characterised as royalty. (ii) Pinstorm (supra): Pinstorm was engaged in buying online advertisement space for onward re- sale to an advertiser, much like GIPL in the present case. For such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0059708A1 as well as US7778872B2. These two patents are held by Google LLC., USA in connection with the Google AdWords Program hereto. The Tribunal, set aside the order of the CIT(A), while following the decision of the Hon'ble Supreme Court in Engineering Analysis (supra). The Hon'ble Tribunal also relied on the decisions in Yahoo (supra), Pinstorm (supra) and Right Florists (supra). (vi) Myntra Designs (supra): Myntra in this case, made payments to Facebook Ireland Ltd., for online advertising. The AO held the said payments to be royalty and in the alternate, as FTS. The CIT(A) upheld the order of the AO. The Tribunal followed the decision in Urban Ladder (supra), while setting aside the order of the CIT(A). (vii) Play Games (supra): Play games is engaged in the business of providing a platform for online gaming. It had made payments to Facebook Ireland Ltd. for online advertising. The AO and CIT(A) in this case as well, held that payments to be taxable in India. The Hon'ble Tribunal observed that Play Games did not get any right to modify/ deal with the servers, which belonged to Facebook Ireland Ltd., in any manner. It was also observed inter alia that the said serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Coordinate Benches in assessee s own case, relied upon hereinabove, we hold the payment towards on online advertisement paid by assessee to Google Ireland is not liable to be taxed as Royalty for the years under consideration and therefore no disallowance can be made u/s. 40(a)(i). 7.4 Regarding applicability of FTS provisions, this Bench had called for submissions from the ld. A.R., which was submitted and is placed on record. In respect of the applicability of FTS under the Act as well as DTAA, it was submitted that the issue of FTS arises only for A.Ys. 2010-11 to 2012-13. It is submitted that the FTS is defined under Article 12(3)(b) of the Double Taxation Avoidance Agreement between India and Ireland ( India Ireland Tax Treaty ), as under: The term 'fees for technical services means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. 7.5 It is submitted that the definition of FTS under the Act and India-Ireland tax treaty is identically worded and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g assessee to be a dependent agent PE of Google Ireland. 7.8 He submitted that the DRP while dealing with the issue followed the directions of its predecessors for A.Y. 2009-10, to hold the payments to be in the nature of FTS. However, the Ld. Counsel submitted that, the entire discussions by the DRP is based on characterising the said payment to be in the nature of royalty. 7.9 The Ld. Counsel while arguing against the said payment to be in the nature of FTS, submitted that, in case of certain payees as observed by the Coordinate Bench while considering the issue in the hands of Google Ireland in ITA No. 2845/Bang/2017 vide order dated 28.2.2023 held the payments to be in the nature of business profits. However, this Tribunal further held that as there is no PE, that is established in India of the Google Ireland, such payment could not have been held to be taxable in India. 7.10 The Ld.Counsel referred to the reliance placed by Coordinate Bench of this Tribunal while deciding the issue in case of Google Ireland Ltd. (supra) (which already has been reproduced hereinabove). For the sake of reference and at the cost of repetition, the same is reproduced hereinbelow: 10. As regards re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients 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 by it for that purpose to Facebook Ireland Ltd., a non-resident, to be taxable in India. The CIT(A) upheld the order of the AO. The Tribunal relied on the decision in Yahoo (supra), Pinstorm (supra), Right Florists (supra), while setting aside the order of the AO/ CIT(A) and holding that the payments for purchase of online advertisement space were not taxable in India. (v) Urban Ladder (supra): The assessee in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 M/s. Google Ireland Ltd. 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 agency, which places online advertisements on behalf of its clients. The payments in this case were made to Facebook Ireland Ltd., which were disallowed by the AO and the CIT(A). The Tribunal observed that Interactive Avenues was utilising Google Search Engine amongst others, to buy online advertisement space on behalf of its clients. Be that as it may, the Tribunal set aside the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to bring to tax the business profits of Google Ireland in India. Nothing contrary to the observations of the Coordinate Bench of this Tribunal has been brought to our notice. Respectfully following the above, we hold that the payments paid by the assessee to Google Ireland cannot be treated as FTS and therefore no disallowance could have been made u/s. 40(a)(i). Accordingly, this issue for the years under consideration stands allowed in favour of the assessee. 9.2. Respectfully following the above views, we hold that the assessee cannot be treated as a dependent agent of Google Ireland and the payments made to Google Ireland cannot be treated as FTS or Royalty. Accordingly Ground nos. 25-29 raised by the stands allowed. 10. Ground No. 33 34 raised by the assessee on Levy of interest under section 234B of the Income-tax Act, 1961 ( Act ) and the initiation of penalty proceedings under section 271(1)(c) of the Act: As these grounds being consequential in nature they need not be adjudicated. Accordingly Ground No.33-34 raised by the stands allowed. Revenue appeal in IT(TP)A No.191/Bang/2023: 11. At the outset, the Ld.AR submitted that Ground No.1-7 raised by assessee has been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-11 is raised by the revenue challenging the action of the Ld.CIT(A) in excluding Coral Hub comparable from the final set under the IT segment. 13.1. The Revenue is also challenging the issue of considering the unallocated expenditure for Accropetal Technologies Ltd., chosen by the Ld.TPO under the IT segment by treating the assessee as a KPO. We have already remanded the issue of bench marking the IT segment to the Ld.AO/TPO in accordance with the APA with a direction not to consider the assessee to be a KPO under the IT segment. It is also directed to use TNMM as the MAM for determining the arms length of the transaction. As we have remanded the entire issue to the Ld.TPO for computing the ALP of IT segment de novo as per the directions, the issue of comparables also stands remanded. The comparables are therefore to be selected to be in accordance with law. Accordingly Grounds 10-11 becomes infructuous and accordingly dismissed. 14. Ground No.12-18 are raised in respect of relief given by the Ld.CIT(A) in respect of attribution of additional profits. As we have already held while considering Issue 4 that assessee cannot be held to be a dependent agent permanent establishment of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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