India: Google Adwords Payments Are Taxable – Recent Tax Tribunal Ruling: Impact On The Digital World

Technological innovation and internet growth have highly affected trade relations, production processes and products, as well as the company organization. The digital economy moves along two perspectives:  dematerialization of activities and fragmentation of economic functions, assets and risks, thus excluding permanent establishment. Because of these peculiarities, the digital economy poses significant problems for taxation schemes, in particular as for the qualification of the values to be taxed and their territorial location. Google seems to be winning the popularity contest in tax litigation around the globe. Recently, Google won a contentious battle against the French government and escaped having to cough up nearly 1.3 billion dollars in unpaid taxes on an issue revolving around trademark infringement. Google has also been facing tax issues in the USA, Indonesia, etc. Italy also prepares to levy 'web tax' on advert companies. Italian buyers of 'intangible digital products', such as advertising on Google or Facebook, may also have to withhold certain per cent of the value of their purchase and pay it to the treasury.

Lately, Bangalore Bench of the Indian Income Tax Appellate Tribunal ('Tribunal') in the case of Google India Private Limited1 ('GIL') characterized payments for purchase of advertisement space on Google's AdWords programme made by GIL to Google Ireland Limited ('Google Ireland') as royalties. The TRIBUNAL also held that GIL should have withheld taxes on the said royalty payments.

Key highlights

  • Advertisement fees paid by GIL to Google Ireland taxable as royalty and taxes should have been a matter of withholding
  • Use of confidential information and customer data tantamounts to right to use intellectual property ('IP')
  • Activities performed under the Distribution Agreement and Services Agreement cannot be divorced from each other as they relate to services in respect of Google AdWords program.

Facts stated in the Ruling

As reported in the judgement, Google AdWords is an online advertising service where advertisers pay to display brief advertising copy, product listings, and video content within the Google ad network to web users. By using the patented algorithm, GIL decides which advertisement is to be shown to which consumer visiting millions of website / search engines.

GIL provided following services to Google Ireland:

  • Information technology ('IT') services and information technology enabled services ('ITeS') under a services agreement dated April 1, 2004 ('Services Agreement')
  • Function as a non-exclusive authorized distributor of Google Ireland's AdWords programme in India under an agreement dated December 12, 2005 ('Distribution Agreement')
  • Marketing and distribution services under the Distribution Agreement including pre-sale and post-sale / customer support services to the advertisers.

During GIL's income-tax assessment proceedings relating to financial years 2006-07 to 2011-12, the assessing officer ('AO') noticed that in its books, GIL had accounted for an aggregate sum of around INR 1457 crores to the credit of Google Ireland. According to GIL, payments for purchase of AdWords Space under the Distribution Agreement would be characterized as business income in Google Ireland's hands. In the absence of a permanent establishment (PE) in India same would not be liable to tax in India.

As GIL had not complied with the provisions of section 195 of the Income-tax Act, 1961 ('Act') the AO initiated proceedings under section 201 of the Act treating GIL as 'an assessee in default'. The main issue for consideration before the Tribunal was on taxability of amounts credited to Google Ireland's account as business income or royalties for use of software, trademarks and other IP rights.

GIL adverted that Google Ireland had not transferred the IP rights to the Indian arm; that it was only a distributor of advertising space and had no access or control over the infrastructure or the process involved in running the Adwords programme with the platform running on servers located outside India. But according to the AO, since GIL has used the information and patented technology from Google Ireland, the remittance is royalty which is taxable under the law.

Aggrieved by the assessment order, GIL preferred an appeal before the Commissioner of Income Tax (Appeals). However, with no respite being offered at the first appellate level, GIL preferred an appeal before the Tribunal. 

Tax Tribunal's decision

The Tribunal held that the payments by GIL are taxable as royalty under the Act and well as the Tax Treaty observing as under

Royalty – In addition to providing space for advertisement, the Tribunal held that GIL would also facilitate the display and publishing of an advertisement to the target customer. If only service rendered by the taxpayer was for providing the space then there is no occasion of either directing / channelising the targeted consumers to the advertisement. Given case is of focused targeted marketing with the help of technology for reaching the targeted persons based on various parameters information, etc. The TRIBUNAL observed that the 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 both under the Act and the India-Ireland Tax Treaty.

Royalty – receipt v. accrual - ITAT clarifies that it is not within the scope of the DTAA to provide when (i.e. year of accrual or receipt), the income is required to be charged. GIL's argument that under the provisions of the Tax Treaty, royalty is subject to tax in hands of the non-resident on receipt basis needs to be rejected as the benefit of the Tax Treaty is only available to the non-resident and not the resident payer. The Tax Treaty only provide the characterization of the income, the country where it is to be paid and at what rate the said income is to be taxed. Moreover, GIL cannot claim that royalty is chargeable in the hands of the non-resident on receipt basis as GIL has no access to the accounting method followed by Google Ireland. On reference to the copy of the return of income for AY 2008-09, ITAT observed that Google Ireland had been following mercantile system of accounting. As per mercantile method of accounting, Google Ireland should have shown the income on accrual basis and not on receipt basis. Further, it is not within the scope of the Tax Treaty to provide when the income is required to be charged. In the present case, the distribution fees were credited on accrual by GIL therefore, the same is chargeable to tax when it was credited to Google Ireland's account.

Interdependence between Service and Distribution Agreement - Inputs from ITeS are always required in the business model of GIL, without which there cannot be any targeted marketing for advertisements and promotion of sales of advertisers. Therefore, the services rendered under Service Agreement cannot be divorced with the activities undertaken by GIL under the Distribution Agreement. Both the agreements are connected by naval chord with each other. This is only a design / structure prepared by GIL to avoid the payment of taxes. The use of IP is embedded in the Google Adwords programme which is necessary to be used by GIL for rendering the services prior or post sales of the advertisement space under the distribution agreement or service agreement. GIL was using the customer data not only for rendering the services but also for promoting marketing and distributing the ad space on the search engine and websites. It is inconceivable to run marketing programme without access to the customer data. Therefore, GIL's argument that it was only using customer data, IP rights, etc., for rendering the services relating to ITeS is incorrect. Therefore, the amount was being paid by GIL to Google Ireland for the use of patent invention, model, design, secret formula, process, etc.

Patent and trademark - GIL contended that there is no specific transfer of any patent trademark. The use of Google trademark and other brand features referred in the Distribution Agreement are merely incidental to enable GIL to distribute the ad space in India. GIL relied on various decisions2. These decisions were held to be distinguishable on the facts of the present case. The use of trademark for advertising marketing and booking in the case of Hotel Sheraton as well as in the case of Formula One were incidental activities of the taxpayer therein as the main activities in the cases were providing hotel rooms and organizing car racing respectively.

However, the Tribunal held that in the facts of the case the main activity of GIL is to do marketing of advertisement space for Google Adwords Programme. GIL was getting lot of engagement and clientage only on account of Google trademark. It may not be possible to have this kind of business inflow of advertisements without using the trade mark of Google. Therefore, the payments made by GIL under the agreement was not only for marketing and promoting the Adword programmes but also for the use of Google brand features. The said Google brand features were used by as marketing tool for promoting and advertising the advertisement space, which is main activity of GIL and is not incidental activities.

Secret process - Associated videos are available in public domain but how this programme functions, for targeted marketing campaign, promoting advertisements are only possible with the use of secret formula, confidential customer only. This secret process of targeting the customers, is not in public domain therefore it is concluded that the taxpayer was using the secret process for marketing promoting displaying of the advertisement.

Reliance by GIL on OECD Technical Advisory Group Report - GIL claimed that revenue earned from advertisements is taxable as business profit and in the absence of PE, it cannot be taxed in India. GIL relied on OEDC Technical Advisory Group (TAG) report. Tribunal observed that GIL in the present case makes use of the user data / customer data and the patented technology, with algorithm to advertise / disseminate ads, which was not the case either before the High Powered Committee or in the case of Right Florist P. Ltd3. The present case is not a case of merely displaying or exhibiting of advertisement by the advertiser on the website. It is a case of use of patented technology, secret process, and use of trade mark. Therefore, decision in the case of Right Florist Private Limited is not applicable to the facts of the present case. Therefore, the payment made by the GIL to Google Ireland is royalty and not the business profit and therefore chargeable to tax in India. As clear from the Distribution Agreement, GIL is also having right, title and interest over the intellectual property right of Google. Further, as per the standard advertisement with the advertiser, which specifically empowers the taxpayer to delete / remove / withdraw the advertisement. This vesting of power in GIL clearly demonstrate that GIL's right to access the portal / Google Adword programme at any point of time.

Withholding tax proceedings - The period of limitation for initiation of proceedings for resident as well as non-resident should be 6 years from the end of the financial year. Non-resident payee should be treated at par with resident payee under the Act and the Tax Treaty. The non-discrimination clause under the Tax Treaty requires equal treatment of non-resident with resident.


The Tribunal's ruling is a clear break with earlier positions taken earlier on the characterization of advertisement revenue, and payments made under distribution arrangements. In the past, Tribunals have held that income from advertisements should be in the nature of business income, not taxable in India in the absence of a PE.

Considering the use of high end technologies, the extant fine line of difference between access to IP rights and use / right to use IP rights is tapered. In fact, it was for this very reason that the equalization levy ('EL') was introduced by Finance Act 2016, in line with the recommendation of the Base Erosion and Profit Shifting (BEPS). The intention behind the same was to capture advertising fees within the Indian tax net, in cases where the non-resident does not have a PE in India. EL is to be charged on online advertising, provision of digital advertising space, etc. Accordingly, one needs to carefully examine the services provided by the foreign company with respect to online advertising vis-ŕ-vis applicability of EL.

The Tribunal Ruling observes that both the entities are trying to misuse the provisions of the Tax Treaty by structuring the transaction with an intention to avoid payment of taxes. In view of GAAR and BEPS, taxpayers should be vigilant and take needful thoughtfulness before taking a tax position as emphasis is placed on substance of the transaction. "If we go by literal meaning of double taxation avoidance agreement, then unscrupulous persons may misuse the provision and avoid payment of taxes," states the order.

The Tribunal observed that beside filling written submissions, no other literature was filed for the Bench to appreciate the working of Google Adword and Google analytics. As the parties have failed to bring any tangible material except in the form of written note mentioned herein above, the Bench, had gone through the books available in public domain on Google Adword and Google analytics and also gone through the website of the Google and the Adword links therein. The trend that may be noted in many rulings by the Tax Authorities is that they cross verify the facts submitted by the assessee with the public domain.

Karnataka High Court has recently admitted GIL's appeal against Bengaluru ITAT ruling4.


1  IT(TP)A Nos. 1511 – 1518 / Bangalore / 2013

2 Sheraton International Inc v DDIT, [2009] 313 ITR 267 (Delhi HC); Formula One World Championship Ltd. v CIT [2016] 76 6 (Delhi HC);

3 ITA No. 1336/Kol/2011


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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