Karnataka High Court Grants Relief to Google by Quashing ITAT's Order For Imposing Royalty Taxation for 'Adwords Program'

Karnataka High Court Grants Relief to Google by Quashing ITAT's Order For Imposing Royalty Taxation for 'Adwords Program'

The Karnataka High Court (HC) in the case titled M/s Google India Pvt. Ltd. & M/s Google Ireland Ltd. (Appellants) v. Commissioner of Income Tax (Respondent) provided relief to Google India. The HC has quashed the order passed by Income Tax Appellate Tribunal (ITAT) wherein it imposed royalty taxation for 'Adwords program'.

The HC division bench comprising of Justices Satish Chandra Sharma and Vishwajith Shetty quashed the order of the ITAT and remanded the matter back to the Tribunal to decide the appeals afresh in accordance with law.

The facts of the case are that the appellant 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 'AdWords program' to advertisers in India.

It had 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 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.

The Assessing Officer (AO) initiated proceedings under Sections 201 and 201(1A) of the Income Tax Act, 1961 (IT Act). The AO for the assessment years 2007-08 to 2012-13 passed an order against the assessee of non-deduction of tax at source for the sums payable to Google Ireland as 'fee for distribution rights'.

It further ordered for attachment of tax liability of Rs 7,40,47,853/- for the assessment year 2007-08.

The assessee filed an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)] and it was dismissed by the appellate authority. Another appeal was preferred before the ITAT for the assessment year 2007-08.

The ITAT held that the agreement between the assessee and Google Ireland Limited (GIL) is not in the nature of providing the space for advertisement and displaying the advertisement to the consumers.

The Appellant Tribunal added that "If we look into the advertisement module of the AdWord Program, we will come to an irresistible conclusion that it is not merely an agreement to provide advertisement space but it is an agreement for facilitating the display and publishing of an advertisement to the targeted customers."

It was held by the ITAT that payments of Rs 1,457 crore made by Google India to Google Ireland between 2007-08 and 2012-13 are taxable as royalty.

It was contended on behalf of the appellant stated that the documents filed by the assessee were not looked into and altogether a different approach was adopted by the ITAT by conducting 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.

It was further argued that according to the provisions of law if any material/any document is relied upon, the same has to be given to all the parties, otherwise it amounts to a violation of principles of natural justice and fair play.

On behalf of the Income-tax department it was argued that the material which has been relied upon by the ITAT is available on the internet and merely because the material which is available on the internet was not given to the assessee, it does not mean that there is a violation of natural justice and fair play.

The respondent opposed the prayer of the appellant regarding remanding back of the matter to the Tribunal.

While disposing of the appeal, the HC directed that "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."

It added, "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 endeavors to decide the matters at an earlier date."