Amazon, Microsoft and Apple to seek clarity on Google tax

After I-T tribunal ruling, global majors worried taxmen could invoke GAAR for using patents held abroad

Online firms are planning to meet finance ministry officials this week to seek clarity on the applicability of general anti-avoidance rules (GAAR) in cases where the websites use patents based out of an offshore jurisdiction. 

The move comes after the recent Bengaluru Income Tax Appellate Tribunal (ITAT) judgment against Google India, asking it to pay up taxes on Rs 1,457 crore of income that the Indian arm had transferred to its Ireland unit pertaining to Google’s AdWords service, used by advertisers to display ads. 

Lawyers preparing the representation say having intellectual property (IP) in a country like Ireland was only for security reasons and not for tax avoidance and the firms would seek a clarification from the government on whether such issues were exempt from GAAR. 

Most top firms such as Apple, Amazon, and Microsoft (LinkedIn and Bing) use similar structures. 

“The ITAT judgment is a classic example of an adverse interpretation of tax laws. If the interpretation holds, the I-T department will also have the powers to invoke GAAR in such scenarios. It will have serious ramifications on online services and the e-commerce industry as a whole. Hence, we are meeting top officials to request a clarification on the subject,” said a lawyer representing a top social media platform.

Legal experts say that digital companies are concerned about the ITAT judgment as the tribunal has interpreted transfer of ad revenues as royalty payment.

In the Google case, Google India had remitted a portion of the revenue generated from Google AdWords to Google Ireland where the patents for the programme were registered. Although Google India was legally a mere distributor for the programme, the tribunal took the view that since Google India used the patents of its Ireland parent, the amount transferred would be considered as royalty payment.

Amazon, Apple, and Microsoft did not answer Business Standard’s queries.

According to Riaz Thingna, director, Grant Thornton, although the judgment is currently under appeal, the interpretation would set a precedent. “It is a harsh judgment and would have far-reaching impact on business arrangements, especially in the e-commerce and information technology sector. The decision will have a bearing on business structures where big data and other IPs are held in jurisdictions outside India and Indian subsidiaries or group companies have access to the IPs against a payment of fee,” he added.

Tax experts said one of the worrying aspects of the case was that rather than taking a holistic view on the AdWords business, the tribunal interpreted the case in a technical manner. “One peculiar aspect of the judgment is that the tribunal has not given credence to predominate nature of activity, which is to provide advertisement space. Instead, it dissected the said activity into more subsets to analyse the technical aspects and reached the conclusion that the payments made qualify for royalty,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

Although Indian markets have scores of online service providers, including homegrown e-commerce firms like Flipkart and Snapdeal, none of these companies have any IP registered in India. The online players are very particular about their IPs as they are their most important assets. According to legal experts, the key reason for choosing foreign jurisdictions is that Indian IP laws are comparatively weaker.

PATENTLY PROBLEMATIC

• Bengaluru Income Tax Appellate Tribunal (ITAT) ruled against Google India, stating payments made for AdWords to Google Ireland amounted to royalty
• Tech giants worried payments made on account of patents registered out of an offshore jurisdiction could be treated as tax avoidance
• Having patents outside India is a popular practice; players such as Amazon, Apple, and Microsoft use similar structures
• However, due to the ITAT decision, these structures could be interpreted as tax avoidance arrangements; general anti-avoidance rule provisions could be invoked
• Jurisdictions like Singapore, the Netherlands, and Ireland are popular destinations for tech firms to register patents
• These jurisdictions are also known for lighter tax rules, giving taxmen the teeth to bite hard