HC quashes order imposing tax on Royalty for ‘Adwords Program

HC quashes order imposing tax on Royalty for ‘Adwords Program’

Case Law Details

Case Name : Google India Private Ltd Vs CIT (Karnataka High Court)

Appeal Number : ITA No. 502/2018

Date of Judgement/Order : 17/04/2021

Related Assessment Year : 2007-08 to 2013-14

Google India Private Ltd Vs CIT (Karnataka High Court)

Conclusion: High Court quashed the order passed by Income Tax Appellate Tribunal (ITAT) imposing royalty taxation for ‘Adwords program’ as the material on the basis of which the order had been passed by Tribunal was not furnished to the appellant at any point time, the order passed by the Tribunal was certainly violative of principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut fresh evidence especially when such evidence was based on Google study.

Held: Appellant – company, Google India Private Ltd., had been incorporated for providing back end support services for the foreign Associated Enterprises and as such, was engaged in the business of global outsourced Information Technology and IT Enabled Services.

It was also a non-exclusive distributor of the online advertising space under the ‘Ad Words programme’ to advertisers in India. AO for the assessment years 2007-08 to 2012-13 passed an order thereby determining the appellant as ‘assessee in default’ in respect of non-deduction of tax at source for the sums payable to Google Ireland as ‘fee for distribution rights’ and consequently, attaching a tax liability of INR 7,40,47,853/- for the assessment year 2007-08. It was held that keeping in view Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and also keeping in view the fact that the material on the basis of which the order had been passed by Tribunal was not furnished to the appellant at any point time, the order passed by the Tribunal was certainly violative of principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut fresh evidence especially when such evidence was based on Google study. Therefore, the matter was remanded back to Tribunal.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

Regard being had to the similitude in the controversy involved in all these cases, they were heard analogously together and a common judgment is being passed.

2. ITA No.879/2017 is arising out of the order passed by the Income Tax Appellate Tribunal, dated 23.10.2017 in ITA No.1511/Bang/2013 (between M/s Google India Private Ltd., vs. Addl.Commissioner of Income-tax, Range-11, Bengaluru.)

3. The facts of the case reveal that the appellant – company, Google India Private Ltd., is a company incorporated under the Companies Act, 1956. It has been incorporated for providing back end support services for the foreign Associated Enterprises and as such, is engaged in the business of global outsourced Information Technology and IT Enabled Services. It is also a non-exclusive distributor of the online advertising space under the ‘Ad Words programme’ to advertisers in India.

4. In the year 2004 the appellant-company has entered into an IT Enables Services agreement with Google Ireland Limited and the appellant has established its IT Enabled Services division for provision of IT Enables Services which primarily involved rendering support services in administering the Google editorial guidelines in relation to global advertisements and responding to the queries from customers globally. The appellant under the said agreement has been rendering outsourced services for which the appellant is being separately compensated by the Google Ireland Limited.

5. The assessing officer initiated proceedings under Sections 201 and 201(1A) of the Income Tax Act, 1961 (hereinafter referred to as IT Act), vide notice dated 20.11.2012 for the assessment year 2007-08 and in the said notice, the assessing officer referred to the assessment order dated 30.11.2011 under Section 143(3) of the IT Act passed in the case of the appellant for the assessment year 2008-09 by the Additional Commissioner of Income-tax, Range-11, wherein disallowance under Section 40(a)(i) of the IT Act was made on account of non-deduction of tax at source for the sums payable by the appellant to Google Ireland under the Distribution Agreement. The assessing officer vide common order dated 22.2.20 13 for the assessment years 2007-08 to 2012-13 passed an order under Section 201(1) and 201(1A) of the IT Act, thereby determining the appellant as ‘assessee in default’ in respect of non-deduction of tax at source for the sums payable to Google Ireland as ‘fee for distribution rights’ and consequently, attaching a tax liability of INR 7,40,47,853/- for the assessment year 2007-08.

6. The appellant-assessee being aggrieved by the common order dated 22.2.2013 passed by the assessing officer for the assessment years 2007-08 to 2012-13 preferred an appeal before the Commissioner of Income-tax (Appeals) and the appeal was dismissed by an order dated 20.9.2013 by the appellate authority.

7. The appellant-assessee thereafter preferred an appeal before the Income Tax Appellate Tribunal for the assessment year 2007-08 and the Tribunal has also dismissed the appeal of the appellant-assessee.

8. Learned Senior Counsel Sri.Ganesh for the appellant – assessee at the outset has argued before this Court that in order to enable the Tribunal to decide the controversy on merits voluminous documents were filed before the Tribunal and the Tribunal has not looked into the documents filed by the assessee at any point of time. He has drawn the attention of this Court towards an affidavit filed in the appeal before the Tribunal dated 19.3.2018 sworn by Mr.Hari Raju, Director of the appellant-company during the course of the hearing in the present appeal as well as other connected appeals. He has also drawn the attention of this Court towards the application preferred under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 filed before the Tribunal during the course of the hearing of ITA.No.1190/Bang/2014 (relating to ITA No.502/2018) and has also drawn the attention of this Court towards the extracts of factual submissions dated 19.3.2018 filed before the Tribunal during the course of the hearing of ITA.No.1190/Banga/2014 (relating to ITA.No.502/2018). His contention is that none of the documents produced on record were looked into.

9. Learned Senior Counsel for the appellant has further stated that the documents filed by the assessee were not looked into and altogether a different approach was adopted by the Tribunal by conducting a research and the material after conducting the research on various platforms have been made to be the basis of the judgment delivered by the Tribunal.

His contention is that it is a well settled proposition of law that if any material/any document is relied upon, the same has to be given to all the parties, otherwise it amounts to violation of principles of natural justice and fair play. He has vehemently argued before this Court that the material collected behind back of the assessee was used and relied upon by the Tribunal and therefore, the same amounts to violation of principles of natural justice and fair play, hence, the matter should be remanded back to the Tribunal permitting the parties to raise all possible grounds while arguing the matter afresh. He has also vehemently argued before this Court that a liberty be granted to all the parties to place all documents before the Tribunal enabling the Tribunal to decide the matter afresh on merits.

10. The learned Senior Counsel has also argued that erroneous findings have been arrived at by the Tribunal in paragraph 35 based upon some material which was not furnished to the assessee and therefore, the matter be remanded back to the Tribunal. Reliance has been placed upon a judgment delivered by the Division Bench of Madras High Court in the case of Ramco Industries Ltd., vs. Deputy Commissioner of Income-tax, Corporate Circle-2, [2020] 117 taxmann.com 382 (Madras) and his contention is that the Division Bench of the Madras High Court in similar circumstances has set aside the orders passed by the Tribunal and the matter was remanded back to the Tribunal for fresh adjudication.

11. Sri.Aravind, learned counsel for the Income-tax department has argued before this Court that the material which has been relied upon by the Tribunal is available on internet and merely because the material which is available on internet was not given to the assessee, it does not mean that there is violation of natural justice and fair play. He has vehemently opposed the prayer made by the learned Senior Counsel for the assessee in respect of remand.

12. This Court by an order dated 15.11.2017 has admitted the present appeal on the following substantial questions of law;

III(1) Whether the Tribunal erred on facts and in law in coming to the conclusion that the payments made by the Appellate under the “Distribution Agreement” dated 12.12.2005 to GIL constituted “Royalty” under the provisions of Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Double Taxation Avoidance Agreement between India and Ireland?

III(2) Whether the impugned order of the Tribunal is perverse in as much as the conclusions of the Tribunal are based on assumptions, conjectures and surmises and not on the basis of facts available on record and as such liable to bet set aside?

III(3) Whether the Tribunal grossly erred in law in placing reliance on unverified material available in public domain to conclude that payments made by the Appellant to GIL constituted ‘royalty’ under the provisions of the Act and DTAA and more so since the Appellant was not confronted with such material, thereby violating the principles of natural justice?

III(4) Whether the Tribunal erred in ignoring that the initiation of proceedings under section 201 of the Act was barred by limitation?

III(5) Whether the Tribunal erred in law in applying the amended provisions relating to limitation in section 201 to the period under consideration given that the limitation for completion of such proceedings had already expired and could not be restored by subsequent amendments?

III(7) Whether the Tribunal erred in law in not appreciating that the amended provisions of section 201(3) as amended by Finance Act, 2012 (applicable with retrospective effect from 1.4.2010), which bestowed limitation in respect of resident payee’s was not applicable for the financial year under consideration and in the absence of any limitation prescribed, a period of 4 years was a reasonable period for initiation of proceedings under section 201 of the Act?

13. Learned Senior Counsel for the assessee while arguing the matter has fairly stated before this Court that question Nos.2 and 3 are required to be decided in the present case so far as his prayer in respect of remand is concerned and the other questions be left open.

14. Substantial questions of law III(2) and III(3) read as under;

III(2) Whether the impugned order of the Tribunal is perverse in as much as the conclusions of the Tribunal are based on assumptions, conjectures and surmises and not on the basis of facts available on record and as such liable to bet set aside?

III(3) Whether the Tribunal grossly erred in law in placing reliance on unverified material available in public domain to conclude that payments made by the Appellant to GIL constituted ‘royalty’ under the provisions of the Act and DTAA and more so since the Appellant was not confronted with such material, thereby violating the principles of natural justice?

15. Heard the learned counsel for the parties at length and perused the record.

16. The basic question before this Court is whether the Tribunal while passing the common order dated 23.10.2017 has violated the principles of natural justice and fair play as it has not afforded an opportunity to the appellant to rebut fresh evidence especially when the fresh evidence was based on Google study. The relevant paragraph of the order passed by the Tribunal i.e., paragraph 38 reads as under;

“38. Beside filling these written submissions, no other literature or books or documents were filed by the assessee or by the Revenue for the benefit of the Bench so that the Bench can appreciate the working of Google Adword and Google analytics, as the parties have failed to bring any tangible material except in the form of written note mentioned herein above, the Bench, had gone through the books available in public domain on Google Adword and Google analytics and also gone through the website of the Google and the Adword links therein. On the basis of the above, our understanding of how the Google Adword functions is as under:

i. The Google Adword gives an opportunity to the advertiser to reach its target audience with the advertising messages. The text based ads are displayed on Google search results Page – 45 IT(TP)A.1511 to 1516/Bang/2013 however the Google Adwords can also be used to message out in other forms including image, audio and videos. Another way of advertisement is displaying the advertisement as people browse and engaged with the content online.

ii. The online advertising is different from the traditional advertising like advertisement in magazine, newspaper and Television as the online advertising is measurable on cost per click basis (CPC) and also gives the advantage to the advertiser to target the particular class into age, sex, language, religion, region etc,.

iii. The online advertising (Adwords) is a patent tool used by the advertiser in conjecture with the various sophisticated tools and IPR’s of Google. Google gives the platform, techniques, data based, the IPR, I.P. address and also suggest potential user/client of the advertiser.

iv. The search advertising with the help of search engine, allows the advertiser to target the people as they search for key words. This technique is being used in the search engine, enable the advertisement pop up if the key words are searched by the people . Advertisement would be shown to the target consumer advertisement with the help of various tools, which include showing of advertisement with keywords, phrase, and broad words with generic or same meaning.

v. The Google search engine or search based campaign gives high conversion rate and better return of investment then display of advertisement on television rate, newspaper and magazine.

17. The Tribunal in the aforesaid paragraph has held that no literature or books or documents were filed by the assessee except some of the documents mentioned in the order of the Tribunal and as the parties have failed to bring any tangible material except in the form of written note, the Bench had gone through the books available in public domain at Google Adword or Google analytics and also gone through the website of the Google and the Adword links and based upon the above research carried out by the Tribunal, they have summarized the Google Adword functions. The material on which Google Adword functions were summarized does not find place in the order of the Tribunal nor the material was brought to the notice of the appellant, meaning thereby some material collected behind back of the appellant has been used by the Tribunal and the material brought on record through proper application has not been looked into.

18. The Madras High Court in similar circumstances, in the case of Ramco Industries Ltd., (supra) in paragraphs 5 to 10 has held as under;

“5. This Court paid its best attention to the rival submissions and also perused the materials placed before it.

6. Sub-section [6] of Section 255 of the Income Tax Act, 1961, in turn, refers to Section 131 of the Act and under Sub-section [1] of Section 131 of the Act, the authorities have the same powers that are vested in a Court under the Code of Civil Procedure, 1908 – the details of which, have been enumerated in the earlier paragraphs.

7. Rule 29 of the Income Tax [Appellate Tribunal] Rules, 1963 also speaks about the production of additional evidence and Rule 30 speaks about the mode of taking additional evidence and it is relevant to extract the same:-

Rule 29:-Production of additional evidence before the Tribunal:- The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.

Rule 30-Mode of taking additional evidence:-

Such document may be produced or such witness examined or such evidence adduced either before the Tribunal or before such income-tax authority as the Tribunal may direct.

8. A perusal and consideration of paragraph No.7 of the impugned common order passed by ITAT would disclose that the Tribunal, for reaching the conclusion to confirm the order of the Assessing Officer, has also done its part by doing some research on Google Study. Admittedly, the research done by ITAT in the form of Google study was not put either to the appellant/assessee Company or to the said Revenue. As already pointed out by this Court in the earlier paragraphs, in the absence of any specific rule including the applicability of the natural justice, it is a well settled position of law that adherence to the principles of natural justice, is implied in any legislation.

9. As rightly pointed out by the learned counsel for the appellant/assessee with regard to the study or research done by ITAT, the appellant/assessee was not put on notice. Hence, on this sole ground, the impugned common order warrants interference.

10. The Substantial Questions of Law Nos.1 and 2 are answered in affirmative and in favour of the appellant/assessee company.”

19. In the considered opinion of this Court, keeping in view Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and also keeping in view the fact that the material on the basis of which the order has been passed was not furnished to the appellant at any point time, the order passed by the Tribunal is certainly violative of principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut fresh evidence especially when such evidence was based on Google study.

20. Another important aspect of the case is that details of the material has also not been reflected in the order passed by the Tribunal and therefore, this Court is of the opinion that as there is a violation of principles of natural justice and fair play, the matter deserves to be remanded back to the Tribunal for hearing it afresh in accordance with law.

21. In light of the aforesaid, the questions are answered in favour of the assessee and against the revenue and the other questions are left open. Accordingly, the appeal in ITA.No.879/2017 is allowed. The order passed by the Tribunal is set aside. The matter is remanded back to the Tribunal for fresh adjudication in accordance with law.

22. The parties will appear before the Tribunal on 3.5.2021 and within a period of 15 days the appellant shall be free to file the documents/additional documents in support of his contentions and the revenue shall also be free to file documents/additional submissions in support of their contentions. In case any other material is being relied upon by the Tribunal, the same shall also be made available to the assessee/appellant as well as to the counsel for revenue before passing a final order. The Tribunal is requested to make all possible endeavour to decide the matter at an earlier date.

23. In light of the order passed in ITA.No.879/2017, the connected appeals i.e., ITA.Nos.882/2017, 883/2017, 897/2017, 898/2017 and 899/2017 are also allowed and the order passed by the Tribunal is set aside and all the matters are remanded back to the Tribunal to decide the appeals afresh in accordance with law.

24. The other batch of cases i.e., ITA Nos.502/2018, 505/2018, 549/2018, 550/2018, 504/2018, 503/2018, 507/2018, 560/2018, 562/2018, 561/2018, 563/2018, 564/2018 and 506/2018 are arising out of subsequent orders passed by the Income Tax Appellate Tribunal.

25. It is pertinent to note that in the first batch of matters i.e., ITA 879/2017 and connected matters it was brought to the notice of this Court that other income tax appeals are pending before the Tribunal and this Court has directed the Tribunal to decide the matters without being influenced by its order dated 23.10.2017.

26. The Division Bench of this Court on 15.11.2017 has passed the following order;

“Heard Dr.A.M.Singhvi, learned Senior Counsel appearing for Sri Aditya Vikram Bhat, learned counsel for the appellant. The learned Senior Counsel submits that substantial questions of law formulated at paras III(1), III(2), III(3), III(4), III(5) and III(7) in the appeal memorandum require determination by this Court.

Sri.K.v.Aravind, learned Standing Counsel is directed to take notice for the respondent and is heard.

Perused the record.

The matter requires consideration. The appeal is admitted to consider substantial questions of law formulated at paras III(1), III(2), III(3), III(4), III(5) and III(7) in the appeal memorandum.

ORDER ON IA. NO.2/2017

The learned Senior Counsel appearing for the appellant submits that IA.No.2/2017 may be disposed of by directing the Income Tax Appellate Tribunal, Bengaluru, to dispose of the appeals namely, I.T.A.No. 1 190/Bang/2014, I.T.A. No.949/Bang/2017 and I.T.A.No.950/Bang/2017 without being influenced by the order dated 23.10.2017 passed in IT(TP) A.1511/Bang/2013 which is impugned in this appeal.

We find no legal impediment to grant the aforesaid prayer. Accordingly, we direct the Income Tax Appellate Tribunal, Bengaluru, to dispose of the appeals in I.T.A.No. 1 190/Bang/2014, I.T.A. No.949/Bang/2017 and I.T.A.No.950/Bang/2017 in accordance with law and without in any way being influenced by the order dated 23.10.2017 passed in IT (TP) A.1511/Bang/2013 which is impugned in this appeal. IA.No.2/2017 stands disposed of accordingly.”

27. Inspite of the fact that an order was passed by this Court directing the Tribunal to decide the matters without being influenced by its earlier order, the Tribunal infact has repeated its earlier order. The present appeal and connected appeals were admitted on the following substantial questions of law.

28. The substantial questions of law framed in ITA.No.502/2018 and connected appeals by this Court on 28.8.20 18 read as under;

“1. Whether the Tribunal erred on facts and in law in coming to the conclusion that the payments made by the Appellant under the “Distribution Agreement” dated 12.12.2005 (superseded by Reseller Agreement) to GIL constituted “Royalty” under the provisions of Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the Double Taxation Avoidance Agreement between India and Ireland?

2. Whether the Tribunal’s conclusion that the ITES and Distribution Agreements are to be read together and that the functions under the Distribution Agreement could only be discharged under the ITES Agreement is perverse given that the same is contrary to facts and material on record which would demonstrate that the two Agreements are for separate and distinct purposes?

3. Whether the Tribunal erred in law in not appreciating that the revenues from the Distribution Agreement (superseded by Reseller Agreement) constituted “business income” in the hands of GIL and in the absence of any Permanent Establishment of GIL in India, such receipts could not be brought to tax in India and consequently the provisions of Section 195 and 201 of the Act had no application?

4. Whether the Tribunal completely failed to appreciate that the rights granted under the Distribution Agreement were in the nature of “commercial rights” and did not partake the character of/or grant any right to use any Intellectual Property so as to fall within the ambit of Section 9(1)(vi) of the Act?

5. Whether the Tribunal also erred on facts and in law in concluding that the entire payment made by the Appellant constituted “Royalty” under Section 9(1)(vi) of the Act and Article 12 of the DTAA on the basis that since the Appellant had the right to use brand features, patent, technical know-how, IPRs, trademark, process, derivate work, brand features etc. of GIL?

6. That without prejudice, whether the Tribunal failed to appreciate that there could not arise any withholding tax obligations on the Appellant for part of the payment that was paid during AY 2014-15 and hence were taxable income of GIL only in AY 2014-15 since “Royalty” as per the DTAA is taxable on receipt basis?

7. Whether the Tribunal failed to appreciate that the withholding obligations on the Appellant were integrally linked/dependent with/on the taxability of the amounts in the hands of GIL and in the absence of such taxability for the period under consideration, there could be no withholding obligations?”

29. The order passed by the Tribunal dated 11.5.2018 has been passed in a mechanical manner. It is nothing but a cut, copy, paste order and in some of the paragraphs the earlier order dated 23.10.2017 has been relied upon word by word.

30. The following is the comparison of extracts of order dated 11.5.2018 vis-à-vis order dated 23.10.2017;

32. The fact remains that the documents which were supplied either by the assessee or by revenue were certainly looked into, but the research material on the basis of which the so-called research was carried out by the Tribunal, was not brought on record. The subsequent order is based upon the first order passed by the Tribunal and there is word by word repetition in some of the paragraphs. It has also been stated by the Revenue in the written synopsis that the scope of interference in a case where violation of principles of natural justice are alleged unless it causes prejudice is quite limited.

33. Reliance has also been placed on a judgment rendered by the Hon’ble Supreme Court in the case of State of U.P vs. Sudhir Kumar Singh and Ors., Civil Appeal No.3498/2020, decided on 16.10.2020.

34. This Court has carefully gone through the aforesaid judgment. However, the facts of the present cases are distinguishable. In the present cases, in the first round of litigation the Tribunal has relied upon the material which was never given to the assessee. It is undisputed fact that based upon the first order dated 23.10.2018 the second order has been passed in another batch of cases. Therefore, the proper course of action for this Court is to remand all the cases for fresh hearing as directed earlier.

35. In the considered opinion of this Court as the order in the present batch of appeals has been passed by repeating the earlier orders, complete material was not handed over to the appellant-assessee before the Tribunal based on which the order has been passed by the Tribunal and in light of the fact that this Court has remanded the first batch of appeals, the second batch of appeals are also deserve to be remanded back to the Tribunal for deciding it afresh on merits without being influenced by its earlier orders dated 23.10.2017 and 11.5.2018.

36. Net result is, ITA Nos.502/2018, 505/2018, 549/2018, 550/2018, 504/2018, 503/2018, 507/2018, 560/2018, 562/2018, 561/2018, 563/2018, 564/2018 and 506/2018 are allowed. The order passed by the Tribunal in the said appeals are set aside and the matters are remanded back to the Tribunal to decide the appeals afresh in accordance with law. The parties will appear before the Tribunal on 3.5.2021 and within a period of 15 days the appellant shall be free to file the documents/additional documents in support of his contentions and the revenue shall also be free to file documents/additional submissions in support of their contentions. In case any other material is being relied upon by the Tribunal, the same shall also be made available to the assessee/appellant as well as to the counsel for revenue before passing a final order. The Tribunal is requested to make all possible endeavour to decide the matters at an earlier date.

37. ITA.No.125/2020 which is in respect of assessment year 2008-09 has been filed by the department. It relates to penalty proceedings and therefore, as in respect of the assessment year 2008-09 this Court has already remanded ITA.882/2017 for fresh adjudication, the order impugned dated 6.9.2019 is set aside and the matter is remanded back to the Tribunal to decide it afresh in accordance with law. ITA.No.125/2020 also stands allowed accordingly.

INCOME TAX

HC quashes order imposing tax on Royalty for ‘Adwords Program’

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