| 2017-TII-INSTANT-ALL-493 | 24 October 2017 |
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ARTICLE CASE LAWS ADIT Vs E-FUNDS IT SOLUTION INC: SUPREME COURT OF INDIA (Dated: October 24, 2017) Income Tax - Section 90 - India-US DTAA - Articles 5 & 27. Keywords: Agency PE - Business Income - Dependent PE - fixed place PE - MAP - OECD Manual on Best Practices - Service PE - The assessees are two US-based companies - e-Funds Corporation, USA and e-Funds IT Solutions Group Inc., USA. The AO decided that the assessees had a permanent establishment as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement of 1990 was attracted. Consequently, the assessees were liable to pay tax in respect of what they earned from the fixed place PE in India. The CIT (Appeals) dismissed the appeals of the assessees holding that Article 5 was attracted, not only because there was a fixed place where the assessees carried on their business, but also because they were "service PEs" and "agency PEs" under Article 5. In an appeal, the ITAT held that the CIT (Appeals) was right in holding that a "fixed place PE" and "service PE" had been made out under Article 5, but said nothing about the "agency PE" as that was not argued by the Revenue before the ITAT. However, the ITAT, on a calculation formula different from that of the CIT (Appeals), arrived at a nil figure of income for all the relevant assessment years. The appeal of the assessees to the High Court proved successful and the High Court, by an elaborate judgment, set aside the findings of all the authorities, and further dismissed the cross-appeals of the Revenue. After hearing the parties, the Apex Court held that Whether when no part of the main business and revenue earning activity of a foreign company is carried on through a fixed business place in India, merely outsourcing of work would give rise to a fixed place PE - NO: SC + it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying such tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE; + no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score. Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of the DTAA is that an enterprise must furnish services “within India” through employees or other personnel; Whether when none of the assessee's customers are located in India, it can still be said that the assessee had a Service PE in India as per Art 5(2)(l) of the DTAA - NO: SC ++ it has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) is not satisfied. However, the Attorney General, relying upon paragraph 42.31 of the OECD Commentary, has argued that services have to be furnished within India, which does not mean that they have to be furnished to customers in India; ++ article 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a “service PE” would be established in India. As has been noticed, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground namely, that “other personnel” would cover personnel employed by the Indian company as well, and that the US companies through such personnel are furnishing services in India. This being the case, it is clear that as the very first part of Article 5(2)(l) is not attracted, the question of going to any other part of the said Article does not arise. It is perhaps for this reason that the assessing officer did not give any finding on this score; Whether certain disclosures made under MAP as per Art 27 of the DTAA constitute a precedent for determining taxable income in subsequent years - NO: SC ++ a competent authority should engage in discussion with the other competent authority in a principled, fair and objective manner, with each case being decided on its own merits. It is also specifically observed that where an agreement is not otherwise achievable, then both parties should look for appropriate opportunities for compromise in order to eliminate double taxation on the facts of the case, even though a principled approach is important. The Attorney General also relied upon Best Practice No.1 of the said OECD Manual, which requires the publication of mutual agreements reached that may apply to a general category of taxpayers which would then improve guidance for the future. Best Practice No.1 has no application on the facts.of the present case, as the agreement reached applies only to the assessee companies, and not to any general category of taxpayers. It is clear, therefore, the assessee is right in relying upon Article 3.6 of the OECD Manual. It is very clear, therefore, that such agreement cannot be considered as a precedent for subsequent years, and the High Court’s conclusion on this aspect is also correct; ++ the Attorney General has also laid great emphasis on non-disclosure of documents and has relied upon a long list of documents that the assessees were asked to disclose and which they did not. From this, according to the Attorney General, an adverse inference should be drawn, and from this alone it should be inferred that a PE of the assessees, therefore, exists in India. We are afraid that this argument cannot be countenanced at this stage as it has never been raised before any of the authorities below and has not been raised before the High Court also. This being the case, we do not think it necessary to get into this aspect of the matter; + no permanent establishment in India can possibly be said to exist on the facts of the present case. We do not deem it necessary to go into the cross-appeals that were filed before the High Court, which were dismissed by the High Court agreeing with the ITAT that the calculation of the ITAT would lead to nil taxation. This point would not arise in view of our decision on the facts of the present case. It is, therefore, unnecessary to go into this aspect of the matter. Revenue's appeal dismissed GOOGLE INDIA PVT LTD Vs ADDL CIT: BANGALORE ITAT (Dated: October 23, 2017) Income tax - Sections 9(1)(vi), 195 & 201(1A) & (3) - India-Ireland DTAA - Article 12 Keywords: Adwords program - Advertising space - Distribution right - IPR - Right to use - Royalty - Reseller - Transfer of rights in process Whether the sale of advertising space on Google Search Engine is not an ordinary sale of space - YES: ITAT Whether payments made for providing access to Google Search engine and its associated software matrix and before & after sale services fall within the ambit of 'royalty' - YES: ITAT Whether post-sale services provided by the assessee as per the ITES Agreement can be divorced from the main agreement with Google Ireland - NO: ITAT Whether grant of distribution rights necessarily amounts to transfer of rights in process - YES: ITAT The assessee Google India Private Limited, a registered company, is a wholly-owned subsidiary of Google International LLC (GIL), US. Google India was appointed as a non-exclusive authorized distributor of Adword programs to the advertisers in India by Google Ireland. Google was specialized in Internet search engines and related advertising services. Google maintained an index of websites and other online content which was made available through its search engine to anyone with an Internet connection. Under the Google Adword Program Distribution agreement dated 12/12/2005, Google India was granted the marketing and distribution rights of Adword program to the advertisers in India. Assessee claimed that no rights in the intellectual property of the Google were transferred to the assessee from GIL. Assessee was mere reseller of advertising space made available under the Adword distribution program. Further it claimed to be a distributor of advertising space and it did not have any access or control over the infrastructure or the process that were involved in running the Adword program, as program ran on software, Algorithm, data center which are owned by Google and its subsidiaries outside India. It was also the case of the assessee that the Adword platform was running on servers located outside India that belonged to or hired by Google. Assessee in India had no control over the server of Google. For its return filed for AY 2008-09, the assessee had credited a sum of Rs.119 crores to the account of Google Ireland without deduction of tax at source. Further, GIL (Google Ireland) had also not obtained a NIL deduction certificate on the sums payable to it from the Department. As the assessee had not complied with the provisions of section 195, therefore the proceedings were initiated u/s.201 by issuing the notice on 20.11.2011, calling upon the assessee why it should not be treated as assessee in default for not deducting the tax at source on the sum payable to GIL. Rejecting the assessee's plea the AO determined the tax liability under Ss 201(1) and 201(1A) by considering the amounts payable to GIL as royalty under the Act and under the DTAA. The CIT(A) upheld the view taken by the AO. Having heard the parties the Tribunal held that, + the Google Adword program produces Google analytics which is connected with the Google Adword programme and which is a potential patented tool to target the key words and the negative key words. This is the USP of the Google Adword program, which is maintaining thousands of different key words used by the people to search the website and based on this user behavior, the Google analytics suggests the appropriate key words to be used by the advertiser for encouraging the traffic on the website. Similarly the Google analytics also uses the same data to filter out the negative key word on the basis of which an unattended or unwarranted persons have landed on the website of the advertiser. Assessee is using all these tools in conjectures with advertisers at the time of granting the back hand services to the advertisers, as the assessee is having access to all these data, information; + for all its strategies, the Google owns a targeted geography wise, region wise, gener wise, class wise data base tools. With the use of these tools there will be an increase of the CTR (Click Through Rate). For that purposes the expertise and the data base of the Google is essential. With the help of these strategies, the targets can be fixed by the advertiser with the help of Google Adword and the target can be fixed like where it is to be displayed (tablet, desktop, mobile, ipad etc.,) search network country, state, city, postal code ad schedule of the day, hour and the day of display. . Like for example, if a doctor is free during the noon time of every Friday, then the ad company can be strategized for showing his ability during the morning / noon time of Friday or on the evening time of Thursday. Assessee with the help of Google analytics gives the accurate impression of persons visiting the advertisement and also provide how many are converted. The Google analytics optimize the impression, based on the user behavior and this needs to be a major conversation and campaign, which results into return for investment. There are various other features of the Adword program which shows that the program is having embedded tools to display the advertisement of the advertiser to the targeted consumers; + in our view the agreement between the assessee and the Google Ireland was not in the nature of providing the space for advertisement and display the advertisement to the consumers. As per our understanding if the agreement was merely for sale and marketing for providing the space for advertisement, then in that eventuality, it should be treated as an agreement akin to an agreement for advertisement in newspaper / television; + if we look into the advertisement module of Adword program stated, then we will come to an irresistible conclusion that it is not merely an agreement to provide the advertisement space but is an agreement for facilitating the display and publishing of an advertisement to the targeted customer. If we look into the submission made by the counsel for the assessee, it is clear that the advertiser, selects some key words and on the basis of key words, the advertisement is displayed on the website or along with the search result as and when the customer selects the key words relatable to the advertisement. The module as suggested does not merely work by providing the space in the Google search engine, but it works only with the help of various patented tools and software. As we have analyzed detailed functioning of Adword program, it is clear that with the help of the search tool/software / data base, the Google is able to identify the targeted consumer/person as per the requirement of the advertiser. If only service rendered by the assessee was for providing the space then there is no occasion of either directing/ channelizing the targeted consumers to the advertisement of the advertiser. In our view truncated search results are displayed keeping in mind the commercial needs of the advertisers; + in our view IP of Google vests in the search engine technology, associated software and other features, and hence use of these tools for performing various activities, including accepting advertisements, providing before or after sale services, clearly fall within the ambit of "Royalty". Therefore, contention of the assessee is not correct when the assessee is alleging that the user of the search engine is end user and not the Assessee or the advertisers and therefore it will not fall within the ambit of “Royalty”; + the services rendered under ITES agreement cannot be divorced with the activities undertaken by the assessee under the distribution agreement. Both the agreements are connected with naval chord with each other. The assessee was duty-bound to provide as per the distribution agreement various ITES services, which the assessee had wrongly claimed to have been provided not under the distribution agreement, but under the service agreement. This is only a design / structure prepared by the assessee to avoid the payment of taxes; + the appellant cannot be compensated by the GIL for rendering the services to itself or for rendering the services which the assessee is required to render under the distribution agreement. The use of intellectual property is embedded in the Google Adwords programme which is necessary to be used by the assessee for rendering the services prior or post sales of the advisement space under the distribution agreement or service agreement; Proceedings u/s 201 - Limitation for non-resident Whether, for the purpose of limitation for initiating proceedings u/s 201, the resident and the non-resident are to be treated at par even after amendment in the relevant Section - YES: ITAT + in the absence of any binding judgment by the jurisdictional High Court, we are bound to adopt the same logic as upheld by the jurisdictional High Court, by treating the resident and the non-resident at par after relying upon the decision of Special Bench in the matter of Mahindra and Mahindra, in case relating to pre-amendment assessment year. In our opinion, after the amendment of law same logic and limitation is required to be applied for non-resident well as resident thus treating non-resident at par with resident. In other words, period of imitation for initiation of proceedings for resident as well as non-resident u/s 201 should be 6 years from the end of the financial year. Further the payer is required to maintain books of account and deduct TDS for both resident as well as non-resident. No Separate treatment had been envisaged under the Act, for the payer paying to a non-resident; TDS Obligations Whether a payment made to a non-resident is treated as business income or royalty would have no impact on TDS obligations u/s 195 - YES: ITAT + as per section 195, there is an obligation on the part of the payer to deduct the TDS, in case the assessee is making payment to a non-resident. The argument that the payment made by the assessee to GIL is not being the sum chargeable under the provisions of the Act, is not available for the payer to be raised in the present proceedings. The necessary safe-guards are provided by the Act in the form of Section 195(2) which clearly provides that in case the assessee is having any doubt about the chargeability to tax of the payment, then the assessee may make an application to the AO for the purpose of determining whether the sum is chargeable to tax or not and if yes, on what proportion; + in the present case, no such application is made u/s.195(2) to the AO. The assessee on its own, without having knowledge, information and privy to the accounting standard and accounting practice of GIL, has treated the said payment as a business profit of GIL in its books of account. The uniform policy is required to be adopted for deduction of taxes at source in case, by the person responsible for paying amount to a non-resident. There is no caveat or condition laid by the Act on the person responsible for paying to non- resident. In our view, whether it is business profit or royalty, in both the circumstances, so far as the assessee is concerned, the assessee is duty-bound to deduct the TDS unless there is an adjudication by the AO to the contrary u/s.195(2); DTAA Benefits Whether the benefits of DTAA are available only to the non-resident and not its Indian registered subsidiary - YES: ITAT + the argument of the counsel that under the provisions of Indo-Ireland DTAA, the royalty is chargeable to tax in the hands of the non-resident on receipt basis needs to be rejected, as the benefit of DTAA, is only available to non-resident and not to the resident payer. Moreover, the assessee cannot claim that the royalty is chargeable to tax in the hands of the non-resident on receipt basis as the assessee has no access to the accounting method followed by GIL. Assessee's appeal dismissed
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