An income tax tribunal held that the amount received by Google Ireland from Google India towards marketing and distribution rights of the AdWords programme is not royalty, and hence, cannot be taxed at the hands of the assessee (Google Ireland).
The ruling by the Bengaluru-based Income Tax Appellate Tribunal (ITAT) may have repercussions on similar transactions by multinationals, feel experts.
Explaining the case, Amit Maheshwari, tax expert at AKM Global, said Google Ireland had received Rs 8,662.93 crore under the Google Reseller Agreements.
It did not file income tax returns on the ground that revenue from sale of online advertisement was not taxable in India.
However, income tax officials observed that in the case of Google India, a coordinate Bench had earlier held that payments made to the assessee by Google India were royalty and liable to tax deducted at source (TDS).
As such, the officials issued notices to the assessee, alleging that royalty receipts escaped assessment.
The assessee submitted that the order of the coordinate Bench treating Google India as assessee in default for royalty payments was set aside and remitted by the Karnataka high court to ITAT.
This was pursuant to which a coordinate Bench held that sale of online advertising space was not liable to be taxed in India, both under the Income Tax Act and direct tax avoidance agreement (DTAA) between India and Ireland.
However, the assessing officer passed the draft assessment orders taxing the alleged royalty receipts.
The dispute resolution panel confirmed the draft assessment.
However, ITAT deleted the addition by following the coordinate Bench ruling.
Maheshwari said the ruling provides a substantive clarification regarding the tax treatment of payments within reseller agreements concerning online advertisement space.
The decision carries significant implications for multinational enterprises in the technology sector as it has the potential to establish a precedent favouring taxpayers in similar transactional and online adword sales taxation matters.
