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On October 23, 2017, setting another benchmark regarding MNCs trying to evade taxes, the Income Tax Appellate Tribunal (ITAT) Bengaluru dismissed Google India’s arguments on almost every ground. In 2007, the Income Tax Department, Bengaluru had put a question mark over Google India’s advertisement revenues getting transferred to its Ireland office without paying any taxes. Google India has so far transacted $231 Mn (INR 1457 Cr) to its Google Ireland office without paying any tax to the Indian Income Tax department.

Pronouncing its order in an open court session, the Tribunal, after considering all the common arguments raised in cross-appeals bearing Nos.IT(IT)A.374 & 466/Bang/2013, finally dismissed all the six appeals raised by Google India.

Google India’s Defence

In its submission, tribunal observed that Google India is registered under the provisions of the Companies Act and wholly subsidiary of Google International LLC, US. Google India is appointed as a non-exclusive authorised distributor of Adword programs to the advertisers in India by Google Ireland. Google is specialized in Internet search engines and related advertising services. Google maintains an index of websites and other online content which is made available through its search engine to anyone with an Internet connection. Under the Google Adword Program Distribution agreement dated December 12, 2005, Google India was granted the marketing and distribution rights of Adword program to the advertisers in India.

In its appeal, appellant Google India had raised a number of points in its defence for the assessment years 2007-08 to 2012-13. The company argued that it was merely a reseller of advertisement space. The assessee only performs market-related activities to promote the sales of advertisement space. No right or intellectual properties were transferred by Google to the assessee or to the advertiser. The assessee has no control or access to the software, algorithm and data centre. The server on which the Adword program runs are located outside India over which it does not have control. Google India or the advertisers do not have any right of any use or exploitation or the underlying I.P. and software. The advertisers select keywords and place a bid on the online auction. The assessee periodically raises invoice on advertisers for advertising spend incurred by the advertisers.

The company also submitted that the ITES division of the Appellant is a separate outsourcing business segment, for which it earns revenue under a separate outsourcing service agreement with Google Ireland.

The Judgment Day  

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Hearing all the 11 grounds that Google India presented during the course of six years and the counter-facts presented by DIT Bengaluru, the tribunal in its 134-page long judgement agreed with counter-facts submitted by DIT.

The Tribunal observed, “Even if we consider that the appellant is selling advertisement space then, at which location/ web place, the said ad- space was sold by the appellant to the advertiser. It is the case of the assessee that the ads are stored in the servers situated outside India. In our view, the appellant has not sold the storage space on the server outside India nor it has sold the identified/demarcated ad on the web site/search engine. Further, if the ad-space is sold, then the Adword program would be incapable of functioning as the advertisement would be shown to various locations, persons and targeted consumers. In our view, there is no sale of space, as concluded herein above rather it is a continuous targeted advertising campaign to the targeted and focused consumer in a particular language to a particular region with the help of digital data and other information with respect to the person browsing the search engine or Page – 61 IT(TP)A.1511 to 1516/Bang/2013 visiting the website.”

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Further, it said that the argument of selling the space is not available to the assessee and the bench is of the opinion that it is not merely selling the space but it is rendering the services by making available the technology permitted by the Google to the appellant and permitting the same to be used by the advertiser. For purpose of targeted focused advertisement campaign by using the gateway of Google India/assessee. Thus the activities clearly fall within the ambit of ‘Royalty’ as mentioned in Income Tax Act and under DTAA.

Taking note of the Delhi High Court’s judgement over Sheraton International Inc’s case, Tribunal further stated, “The argument of the assessee that it was only using customer data, IPR etc., for rendering the services relating to ITES is incorrect. In our view, the conclusion of the authorities below that the use of the confidentiality clause and confidential data by the appellant was correct. Therefore in our view amount was being paid by the Assessee to Google Ireland for the use of patent invention, model, design, secret formula, process, etc.”

In April 2007, Vodafone too was embroiled in a $2.5 Bn tax dispute with Income Tax department of India. The telecom giant had acquired India’s Hutchison Essar Telecom services at $11.2 Bn that time. Vodafone in its defence went to the Supreme Court of India, saying that since a London-headquartered company has bought a subsidiary of a Hongkong-based Hutch, the tax over the transaction doesn’t fall under India’s Income Tax department criteria.

In January 2012, when Supreme Court ruled in favour of Vodafone, the Indian government, in fact, went on to change its Income Tax Act retroactively to make sure that Vodafone will have to pay $3.3 Bn tax over the same. Recently, Vodafone India diluted its shares to Aditya Birla Group agreeing to merge with the latter’s Idea in order to create India’s largest telecom company.

Monday’s jurisdiction over Google India-Ireland payment transaction set another precedent for MNCs which try to bend their balls to evade taxes across the countries. The current jurisdiction by ITAT might alarm many global companies including Apple which are enthusiastically looking for a tax waiver by the government of India.

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