The amount paid to Google Ireland under the AdWords program is not a royalty: ITAT
An income tax court has ruled that the amount received by Google Ireland from Google India for the marketing and distribution rights of the AdWords program is not royalty and therefore cannot be taxed in the hands of the taxpayer (Google Ireland).
The ruling by the Bangalore-based Income Tax Appellate Tribunal (ITAT) could have implications for similar transactions by multinationals, experts say.
Explaining the matter, Amit Maheshwari, tax expert at AKM Global, said that Google Ireland had received Rs 8,662.93 crore under the Google Reseller Agreements and had not filed income tax returns on the grounds that the income from the sale of online advertisements was not taxable were in India.
However, income tax officials noted that in the case of Google India, a coordinate bench had earlier held that payments made by Google India to the taxpayer were in the nature of royalties and subject to tax deduction at source (TDS). As such, officials sent notices to taxpayers claiming that royalty income was escaping assessment.
The Receiver submitted that the order of the Coordinate Bench treating Google India as a defaulting trustee for royalty payments had been set aside and transferred to ITAT by the Karnataka High Court, pursuant to which a Coordinate Bench held that the sale of online advertising space was not liable to be taxed in India either under the Income Tax Act or under the Direct Tax Avoidance Agreement (DTAA) between India and Ireland.
However, the revenue officer has passed the draft assessment orders taxing the alleged royalty income taking into account the importance of the income and the fact that filing of appeals in the said cases is pending. The Dispute Settlement Panel confirmed the draft assessment.
However, ITAT removed the addition by following the coordinate bank ruling.
Maheshwari said the ruling provides substantive clarification regarding the tax treatment of payments within reseller agreements relating to online advertising space.
The decision has significant implications for multinational companies in the technology sector as it has the potential to set a precedent favoring taxpayers in similar transactional and online AdWords sales tax cases.
First print: March 27, 2024 | 7:20 PM IST