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Royalty Taxation - Google India ITAT Bangalore Judgement
By Manish Shah Partner Sudit K Parekh & Co.

The taxation of payments in the digital economy segment has been a subject matter of considerable litigation for quite some time now in India and even globally. In digital economy, delivery of services can be easily done from overseas without necessitating any part of the activity being performed or any employees being hired in the country where customers are located, thereby avoiding taxable presence.

This is the scenario even with respect to online advertising. In India we had rulings of Pinstorm Technologies P Ltd[1], Yahoo India P Ltd[2] and Right Florist[3] in which the Income Tax Appellate Tribunal has held that payments made for online advertising would not constitute “royalty” and in the absence of any Permanent Establishment (PE) in India of the foreign companies, the payments made for online advertisement would not be taxable in India.

Recently, however, the Bangalore bench of Tribunal rendered a decision in the case of Google India[4] holding the distribution fee payment to Google Ireland for the purchase of advertising space on Google’s Adwords program to be in the nature of royalty and thus treating the Indian company as an assessee in default for not complying with the withholding tax provisions.

Let’s examine in brief, the facts and the issue before the Bangalore bench before analysing the decision.

Google India Private Limited (Google India or the assessee) is a wholly owned subsidiary of Google International LLC, US. Google India was providing following services to its overseas associate Google Ireland Limited (GIL) under 2 separate agreements:

  1. Information technology (IT) and IT enabled services (ITES) (service agreement)
  2. Marketing and distributorship services under a non-exclusive distributor agreement for resale of online advertising space under the Adwords program to advertisers in India (distribution agreement)

The flow of the activities in brief was as under:

  • Entering into contract with GIL and resale of advertising space under the Adword program to the Indian advertisers
  • Performing marketing related activities through its trained sales force
  • Contracting with Indian advertisers for resale of advertising space
  • Providing training to the advertisers to familiarize them with thee features/tools of Adword program
  • Invoicing, collecting payments and remitting payments to GIL

The broad process of Adword program functioning is as under:

The advertisers get their advertisement uploaded into Adword program and log on the Adword program website owned by Google. It follows the various steps to create the Adword account for itself. The advertisers select the key words, content and presentation related to its ads and place a bid on the online system for the price it is willing to pay every time its user clicks on its advertisement. Once the advertiser creates the account and uploads advertisement, the same automatically gets stored on Adword platform owned by Google on the servers outside India and the ads are displayed in the manner determined by the programs running on automated platform. Google India periodically raises the bill on advertisers for advertising spend incurred by the advertiser on clicks through the users.

Under the distribution agreement, Google India made a payment aggregating to INR 14.57 billion for the period from FY 2005-06 to FY 2011-12. On the premise that it is merely a reseller of advertisement space, the assessee had categorised this payment as GIL’s business income and in the absence of a Permanent Establishment of GIL in India, the payment was made without withholding any tax at source. Neither Google India nor GIL had obtained any order from the tax department for Nil tax withholding.

As Google India had not complied with the provisions of Section 195 (withholding tax) of the Income Tax Act (ITA or the Act), the tax authorities started the proceedings u/s 201 of the Act.  Before the Assessing Officer (AO), Google India filed the detailed reply for all the years. However, not convinced with the reasoning of the assessee, the AO, on a conjoint reading of Adword program distribution agreement and service agreement, treated the payment as ‘royalty’ under the provisions of the Act as well as Double Taxation Avoidance Agreement between India and Ireland and determined the withholding tax liability. The findings of the AO were as under:

  • The `distribution rights` were `Intellectual Property (IP) rights` covered by `similar property` under the definition of royalty and the distribution fee payable was in relation to transfer of distribution rights.
  • Google Ireland had granted the assessee the right access to confidential information and intellectual property rights.
  • Google India had been allowed the use or the right to use of a variety of specified IP rights and other IP rights covered by "similar property".
  • Grant of distribution right also involved transfer of right in copyright.
  • By exercising its right as the owner of copyright in the software, Google Ireland had authorized Google India to sell or offer for sale, i.e., marketing and distribution of Adwords Software to various advertisers in India.
  • The consideration paid by Google India was for granting license/authorization to use the copyright in the Ad Words program and not for purchase of such software.
  • Google India had been given right to use Google Trademarks and other Brand Features in order to market and distribute of Adwords program.
  • Grant of distribution right also involved transfer of know-how.
  • Google Ireland was obliged to train the distributor so that Appellant could market and distribute Ad Words program.
  • Referring to Non-disclosure Agreement (`NDA`) clauses forming part of Distribution Agreement, it was held that Google Ireland, being the copyright holder of the Ad Words program, was in a position to share confidential information whenever required with Appellant.
  • Grant of distribution right also involved transfer of process.
  • Without access to the back-end, Google India could not perform its marketing and distribution activities. Google India had access to the processes running on the data centres, based on the distribution rights granted to it by Google Ireland.
  • Google India was granted the use or the right to use the process in the Adwords platform for the purpose of marketing and distribution.
  • Grant of distribution right also involved use of Industrial, commercial and scientific equipment.
  • Adwords program, in one way, was also commercial cum scientific equipment and without having access to servers running the Ad Words platform, Google India could not perform its functions as per the Distribution Agreement.

Aggrieved by the order of the AO, the assessee preferred an appeal before Commissioner of Income Tax (Appeals) [CIT(A)]. However, even the CIT(A) concurred with the view of the AO and treated the payment to be in the nature of ‘royalty’. Aggrieved by the CIT(A)’s order, the assessee preferred an appeal before Income Tax Appellate Tribunal (ITAT or Tribunal).

Before the Tribunal, the assessee had extensively argued that the said payment merely represented purchase of advertisement space and it does not amount to ‘royalty’ but in the nature of ‘business income’. The broad contours of the assessee’s arguments were as under:

  • It was merely a reseller of advertising space. It only performed market related activities to promote the sales of advertising space. No right or intellectual properties were transferred by Google to the assessee or to the advertiser.

  • The brand features were predominantly commercial rights and were incidental to the distribution activity and did not involve transfer of any separate right.

  • The assessee had no control or access to the software, Algorithm and data centre. The server on which the Adword program runs were located outside India over which it was not having control. The assessee or the advertisers did not have any right of any use or exploitation or the underlying IP and software. None of these parties were concerned with the back end functioning of the Adwords program which was solely carried out by GIL. Their objective was to benefit from the services of Google and they were not interested in the use of Search service.

  • Reliance was also placed on the reports of High Powered Committee as well as Technical Advisory Group which had concluded that the payments in relation to advertisement fees were not in the nature of royalty. Accordingly, when the payments made directly by advertisers to GIL could not be regarded as royalty, the payments made by the distributor for the same ad space also could not be characterised as royalty.
  • Clauses containing protection of confidential information and non-disclosure were generic and these clauses per se could not establish that there was grant of right to use any IP.

  • Also, what was envisaged in the Exhibits of the agreement pertaining to after sales services were that the assessee responded to all routine queries of customers and GIL was to respond to the advertisers on technical issues. Thus, no right to use any IP was granted to the assessee.

  • Use of Google brand name was merely incidental and there was no brand royalty. In this regard, reliance was placed by the assessee on the decisions in the case of Sheraton International[1] and Formula One ruling[2]

  • The assesse also relied upon the decisions of Pinstorm, Yahoo India, Right Florists. to contend that use of brand name was merely incidental.


Findings of the Tribunal:

The Tribunal to get an understanding as to how Google Adword program works, relied on the information obtained through the written submission of the assessee, the books available in public domain on Google Adword and also through the website of the Google and Adwords links therein. Based on its understanding, the Tribunal observed that:

  • The entire arrangement was not merely to provide the advertisement space but was an agreement for facilitating the display and publishing of an advertisement to the targeted customer.
  • The arrangement was not confined to use of space but also for the use of patented tools and software of GIL.
  • Google India got an access to various information and data pertaining to the user of the website in the form of name, sex, city, country, phone number, religion, history, behaviour etc. and it used this information for the purpose of selecting the ad campaign and for maximising the impression and conversion of the customers to the ads of the advertisers.
  • By using the patented algorithm, Google India decided which advertisement was to be shown to which consumer visiting millions of website/search engine.
  • The Tribunal also came to conclusion that there was no sale of space. Rather it was a bidding process where the higher bidder advertiser got preference over his competitor.
  • The Tribunal did not agree that advertisement distribution agreement and the ITES agreement were two independent arrangements. Both the agreements were connected with the naval chord with each other.
  • The Tribunal also held that payment could constitute brand royalty for the use of the name “Google”. The same can not be considered as incidental and brushed aside the reliance placed on the decisions of Sheraton International Inc. and Formula Once World Championship Ltd.
  • The Tribunal has held that the findings of the High Powered Committee would not be applicable here as this was not case of placement of the advertisement simpliciter but there was a module for targeted advertisement/focus marketing campaigns using the Google software and algorithm, patented technology, secret process, use of trade mark etc.
  • The reliance placed by the assessee on the decisions of Pinstorm, Yahoo India, Right Florists have been brushed aside.
  • The Tribunal held that IP of Google vested in the search engine technology, associated software and other features, and hence use of these tools by Google India, clearly fell within the ambit of ‘Royalty’. The Tribunal held that as no tax was withheld by Google India on payments to Google Ireland, Google India was an assessee in default.


SKP View

The above decision is a very crucial decision and is going to impact offshore giants like Amazon, Microsoft, Apple etc. who have the similar structure.  The crucial issue is that whether such payment is in the nature of ‘royalty’? In the earlier decision of Yahoo India, the Tribunal had held that services rendered by Yahoo Holdings (Hong Kong) Ltd. for uploading and display of the banner advertisement of the Department of Tourism of India on its portal would not amount to ‘royalty’. In that decision, the Tribunal had observed that advertisement hosting services did not involve use or right to use by the Indian company of industrial, commercial or scientific equipment. Further, the Indian company had no right to access the portal of Yahoo Hong Kong. Based on these facts, the Tribunal concluded that the payment made to Yahoo Hong Kong would be in the nature of business income and not royalty income.

Similar findings have been arrived at in the case of Pinstorm and Right Florists.

It appears that Tribunal in Google’s case has tried to distinguish the above rulings by holding that Google was not only a simplicitor provider of advertisement space but it also provided access to software, patented tools, information, etc. which helped Google India in targeting the customers. The Tribunal has also gone into considerable depth to understand as to how these advertisements are placed on the website of Google, how it was ensured that large number of customers visit those advertisements, how the bidding by the advertisers take place etc. and based on this it came to conclusion that Google India plays a pivotal role in all these and it was not merely placing the advertisement simpliciter.

However, one could still contend that ultimately the objective was to place the advertisement and Google India or the advertisers were not interested in the back end process of GIL and hence such payment should constitute business income. This is a possible view and Google India has already announced that it is going to appeal against the Tribunal ruling. Hence the time would tell whether such payment can be regarded as royalty or business income.

The interesting aspect would be the scenario post kicking in of Equalization Levy (EL) from 1st June 2016. As per the provisions of Equalization Levy, online advertisement would attract EL of 6 percent on payments made to non residents. The question now is whether payments made after 1st June 2016 would be liable to EL or would it still attract withholding tax treating it as royalty based on this decision. The withholding tax may be creditable in the country of residence of the payee but no credit is available for EL. Further, the taxpayer always runs the risk of the tax department applying the contrary view as compared to the view adopted by the taxpayer. Thus, even if the taxpayer wants to adopt a conservative position and pay the tax, he could still be dragged into litigation.

Let’s wait and watch how this controversy unfolds!!


[1] Pinstorm Technologies (P.) Ltd. v. ITO [2012] 24 345 (Mumbai)

[2] Yahoo India (P.) Ltd. v. DCIT [2011] 11 431 (Mumbai)

[3] ITO v. Right Florists (P.) Ltd. [2013] 32 99 (Kolkata - Trib.)

[4] Google India (P.) Ltd. v. ACIT-11, Bengaluru [2017] 86 237 (Bengaluru – Trib.)

[5] Sheraton International Inc v DDIT [2009) 313 ITR 267 (Delhi HC)

[6] Formula One World Championship Ltd. v CIT [20161 76 6 (Delhi HC)



Manish Shah- Partner , Sudit K Parkeh & co,

Nishit Parikh- Principal- Sudit K Parekh & co,

Nikhil Shah- Assistant Manager, Sudit K Parekh & co.

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