Income Tax

Payment of Distribution Fees is not Royalty: ITAT Bangalore

Payment of Distribution Fees is not Royalty: ITAT Bangalore

ITAT Bangalore passed a remarkable judgement on 19th October 2022 in the case titled M/s. Google India Private Limited Vs The Deputy Commissioner of Income Tax (International Taxation), wherein the tribunal dealt with the appeal of the assessee seeking clarity concerning whether distribution fees paid to Google Ireland by the assessee for the distribution of Adwords programmes must be treated as royalty or not.

The article discusses the case in detail to provide a better understanding of the tribunal’s stand on the issue raised by the assessee.

Facts of the Case

  • The appellant (Google India Private Limited) (GIPL) is a company involved in the business of rendering (IT) & (ITES) to its group companies, along with acting as a distributor for the Adwords Programme in India.
  • Google India Private Limited, i.e. the assessee, entered into 2 agreements with Google Ireland Limited. i.e. the service agreements and Google AdWords Program Distribution Agreement wherein the assessee was appointed as the non-exclusive distributor of AdWords programme to the advertisers located in India, i.e., a non-exclusive distributor of the online advertisement space in the country and Google Ireland was paid the fees accordingly.
  • It was held by the assessing officer that the fees paid to Google Ireland came under the ambit of royalty, and the TDS was not paid in respect of the same as per sec 195 of the IT Act. Therefore the AO passed an order u/s 201 (1A) of the IT Act against the assessee.
  • Consequently, the assessee filed an appeal against the CIT (A), who upheld the findings of AO regarding the fees being in the nature of royalty.
  • The appellant filed the appeal before the tribunal of Bangalore after being aggrieved by the order 
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Whether distribution fees come under the ambit of royalty? 

Contentions of the Parties

The contentions of the parties are as follows –

Contentions of Assessee

The assessee stated that the purchase of online advertisement space can’t be termed as ‘Royalty’, and hence, the same isn’t chargeable to tax in this country as there wasn’t any Permanent Establishment (PE) of the non-resident in India. Hence the contention of the assessee was regarding the payments being in nature of business profits that must be taxed in Ireland rather than India.

Contentions of Revenue

The revenue contended that according to the agreement, the assessee was responsible for uploading the online advertisement along with providing after-sales customer support involving the use of IPRs, which Google Ireland provided under the service agreement.

Another contention was regarding receiving confidential information from Google Ireland, wherein it was contented by the revenue that the assessee received some confidential information from the said company under the service agreement.


The tribunal noted that Google AdWords Program was a computerised advertising program displaying advertisements on the search engine of Google and that Google Ireland is the principal operator and Licensee of the Google AdWords Program for the entire world outside the USA.

It was further observed by the tribunal that Google Ireland had the Google AdWords Program Distribution Agreement with the company for accommodating Indian advertiser(s) that desire to make payment in Indian Rupees instead of foreign currency, whereunder the assessee was designated to be the non-exclusive distributor of online advertisement space in India. However, the Indian advertisers who wanted to make payments in foreign currency continued to transact directly with Google Ireland.

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The fact that the features of Google Adwords remained the same irrespective of whether it was being purchased from Google Ireland or the assessee was well noted by the tribunal, along with the fact that the advertisers can only make the payment once the end user clicks the said Ad. 

It was held that according to Sec 90 (2) of the IT Act, the definition of “royalty” in Art. 12(3) of India – Ireland DTAA had overridden the definition of “royalty”, as provided in Explanation 2 

Another observation was regarding Art. 12(3)(a) of the DTAA of India – Ireland, wherein the term ‘Royalty’ included the consideration received for the right to use or using any copyright of literary, scientific or artistic work, inclusive of any tapes or cinematograph film(s)for television broadcasting or radio. The Tribunal also noted that the “Google AdWords Program” is a computer program, i.e., computer software.

The tribunal referred to the judgement of the Apex Court in Engineering Analysis Centre of Excellence Private Limited vs CIT & Anr. Abut its ruling in respect of Explanation 2(v) to Sec- 9(1)(vi) of the IT Act, when it provides for “all of any rights … in respect copyright”, is more elaborate than the provision of DTAA, which provides for the right to use or “use of, “any copyright.

Additionally, the Apex Court had ruled that just the using or having the right to use a computer program in the absence of any transfer of underlying copyright in it according to Sec- 14(a), (b) or Sec- 30 of the Copyright Act, 1957, won’t satisfy the definition of ‘Royalty’ under the IT Act or the DTAA (Double Taxation Avoidance Agreement) 

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Regarding the service agreement and the distribution agreement between the assessee and Google Ireland, it was observed by the tribunal that according to the said agreements, all IP had to remain the exclusive property of Google Ireland. Also, the assessee was to employ the confidential information provided by the company in the performance of its services as per the agreement. However, they had to remain solely with Google Ireland as its property. Hence, the Bangalore tribunal observed that the payments made by the assessee to Google Ireland couldn’t be termed as royalty under the India-Ireland DTAA.


The ITAT[1] has clarified that the distribution fees paid by Google India to Google Ireland cannot be considered Royalty as the intellectual property remained the sole property of Google Ireland. Therefore, the tribunal allowed the appeal of the assessee, thereby providing the clarification sought by the assessee.

Read Our Article: Payment made to a Non-resident Supplier amount to Royalty- ITAT Case Law

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