For constituting depend agent PE of a foreign entity in India, exclusiveness along with authority to concluded contract should exist mutually

Facts of the Case:

• M/s. Google India Private Ltd. (hereinafter referred to as “the Assessee”) was acting as a Distributor for the Adwords program whereby the advertisements were sold in India. The Assessee entered into an agreement for marketing and distribution of the Adword program with its associated enterprise, Google Ireland India (“GIL”).
• The Assessee filed its return of income (“ITR”) for A.Y. 2008-09 and subsequently the return was taken up for scrutiny. The Assessee in its ITR claimed the credit of entire TDS which was deducted on the sales (advertisement revenue) made by it to customers however, shows only net amount of sales, after reducing the payment of fees for distribution rights paid to GIL from the sales, to the credit of P&L.
• Assessing officer (“AO”) called upon the Assessee to furnish the details pertaining to the sales as shown in the P&L against which the Assessee filed its response in the due course, however going through the submissions made by the Assessee, AO rejected the books of accounts and recast the P&L account.
• AO shows the sale amount and distribution fees separately which did not impact the net profit in the P&L account as shown by the Assessee however, AO further held that the distribution fees had to be disallowed u/s 40(a)(i) of the Income Tax Act, 1961 (“the Act”) as TDS was not deducted as per the provisions of Section 195 of the Act while making the payment to GIL. AO believes while making such disallowance that the Assessee was constituting dependent agency permanent establishment (“DAPE”) of GIL as per the India-Ireland DTAA “DTAA” or the payment made to GIL was in the nature of Royalty/FTS as per Article 12 of the DTAA, hence such payment is subject to withholding provisions of the Act.
• Aggrieved by the AO’s order, the Assessee preferred an appeal before CIT(A), however the CIT(A) did not interfere with the findings of AO and upheld the AO’s order. Against which the Assessee further appealed before Hon’ble ITAT.

Observation And Conclusion:

Hon’ble ITAT held that:

• The net result of the impugned transaction as computed by AO was as same as reported by the Assessee, therefore there was no reason for the AO to be not satisfied with the completeness and correctness of the books of accounts and recasting of the same was bad in law.
• The AO’s contention with regards to disallowance of distribution fees u/s 40(a)(i) of the Act as withholding provision of Section 195 was applicable reason being that the Assessee was constituting DAPE of GIL or the payment being made was in the nature of Royalty/FTS as per Article 12 of the DTAA. As far as treating the distribution fees paid by the Assessee as Royalty/FTS was concerned, the matter was already settled in favour of the Assessee in Assessee’s own case by the coordinate bench.
• Further, classifying the Assessee as DAPE of GIL, the conditions of Article 5(6) & 5(8) of the DTAA had to be cumulatively satisfied. However, on the perusal of the distribution agreement contract entered into by the Assessee with GIL as well as Standard Contract entered into by the Assessee with advertisers in India do not contain any clause which can create any legal or constructive obligation for GIL, and therefore the Assessee cannot be classified as DAPE of GIL.
• Also, without prejudice to the above, even if the Assessee was treated as DAPE of GIL, the Assessee was not the person responsible, since the agent cannot be classified as the “person responsible for paying” within the meaning of Section 195 of the Act. Therefore, in that case also applicability of Section 195 and Section 40(a)(i) of the Act will not get triggered and hence due to the above-mentioned reasons, the matter was decided in favour of the Assessee.

IN THE INCOME TAX APPELLATE TRIBUNAL
M/s. Google India Private Ltd.
v.
The Additional Commissioner of Income Tax

Lakshay Prakash Jonwal, Direct Tax Associate, SW India