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By Siri Bulusu
Google India said it will dispute a $38.4 million tax demand after a tribunal ruled that its royalty payments to Google Ireland are taxable in India.
The May 11 ruling is the latest in a six-year dispute over the tax treatment of payments made from Google India to Google Ireland for the use of its copyrighted AdWords software.
“We will file an appeal in the High Court as this ruling is an inaccurate representation of our business operations in India. The order is also a clear departure from previous judgments on the issues and is not in line with India’s double taxation avoidance agreement,” a spokesperson from Google told Bloomberg Tax in a May 11 email.
Multinational companies undertaking similar transactions will likely see their tax bills increase with the application of the hotly contested “royalty payments” withholding tax provision, a senior practitioner said, and those not complying will likely be subjected to similar litigation.
The May 11 judgment, pertaining to assessment year 2013-14, is identical to a previous Bangalore ITAT order relating to assessment years 2006-2012. However the judgment is unique, according to Nangia & Co. LLP managing partner Rakesh Nangia, because a high court requested the tax tribunal to reach a conclusion without taking the previous order into consideration.
“In an unprecedented move, the Karnataka High Court told the Bangalore ITAT to look at the facts of the case with a fresh mind and not be influenced by the judgment from the preceding years,” Nangia said.
The 2006-2012 assessment resulted in a tax bill of $216.3 million to Google India, according to court documents. Since Google’s appeal of that demand is still pending before the Karnataka High Court, all subsequent years are also drawn into litigation, Nangia told Bloomberg Tax May 11.
Google India Pvt. Ltd., a wholly owned subsidiary of U.S.-based Google International LLC, challenged an Oct. 23 Bangalore Income Tax Appellate Tribunal (ITAT) ruling stating that payments made from Google India to Google Ireland for marketing and licensing of AdWords in assessment years 2006-12 were “royalty” payments and were therefore subject to a 10 percent withholding tax, according to the court documents.
AdWords, the advertising software licensed by Google’s Indian subsidiary, uses a complex algorithm that utilizes Google’s databases located outside India to help advertisements target specific consumers—which Indian tax authorities said qualifies the transaction as a “royalty payment” and differentiates the transactions from the simple purchasing of advertisement space.
In court documents, Google argued it was “merely a reseller of advertisement space.”
In a slight relief to Google India, the May 11 order denied the applicability of India’s “equalization levy” on the payments for AdWords, since the provision was introduced in 2016 and can’t be applied to transactions made prior.
India’s equalization levy places a 6 percent withholding tax when Indian merchants pay to advertise on foreign websites such as Google or Facebook Inc.
“The court rightly said the payments from Google India to Google Ireland were in the nature of royalty payments, even though the companies use two separate agreements for distribution and service,” Nangia said.
The tribunal examined the two agreements “minutely,” according to Nangia. The tribunal said Google’s AdWords program had various benefits—like tracking relevant ads and targeting of a select audience—and gives advertisers access to its tools through the use of patent technology.
“The Tribunal’s examination of the facts of the case are worth appreciation considering that they have actually gone to the extent of searching on Google to understand as how AdWords really work,” Nangia said.
To contact the reporter on this story: Siri Bulusu in New Delhi at firstname.lastname@example.org
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