AdWords case: ITAT order favours tax department

Google India will have to shell out a 10 per cent withholding tax for its payment to its Ireland unit for the AdWords advertising service for the assessment year 2013-14, the Income Tax Appellate Tribunal’s Bangalore bench has ruled.

AdWords is an online advertising service developed by Google where advertisers pay to display brief advertising copy, product listings and video content within the Google ad network for web users. AdWords’ system is based partly on cookies and partly on keywords determined by advertisers.

The ITAT had earlier ruled in favour of the revenue department in the case of Google India payment for AdWords for the assessment year 2006-07 to 2012-13.

However, the Karnataka high court had asked the ITAT to examine the case of assessment year 2013-14 afresh without getting influenced by its earlier ruling. 

The high court’s directions were a bit unusual in the sense that the ITATs take their rulings as precedents, say experts. 

Explaining the case, Rakesh Nangia, managing partner with Nangia & Co, said the point of contention in the matter was whether the payment by Google India to Google Ireland was in the nature of royalty, even if there were two separate agreements for distribution and service.

After minutely examining the terms of the agreements and the actual conduct of AdWords programme, the tribunal upheld that the payment for AdWords to Google Ireland was in the nature of royalty and the two separate agreements were actually interrelated and interconnected.