In a major setback for Google India, the Income Tax Appellate Tribunal said payments made by it to the parent firm Google Ireland constitute a royalty under the Indian law, as well as under the India-Ireland Double Tax Avoidance Treaty (DTAA), and therefore, are subject to withholding tax. A Google spokesperson said the company would file an appeal in the high court as “this ruling is an inaccurate representation of our business operations in India”. Google said it complies with all tax laws in India and pays all applicable taxes.
“The order is also a clear departure from previous judgements on the issue and is not in line with India's double taxation avoidance agreement,” it said. The latest ruling came on an appeal made by Google India against the decision of the Bengaluru bench of the ITAT. Founder of tax advisory firm KR Girish & Associates, KR Girish described it as a very “interesting judgment,” with implications for other companies too. He said adjudicators around the world are beginning to distinguish between mere form and going into the substance of a product or service being offered.
Under a distribution agreement in 2005, Google India was granted the marketing and distribution rights of the Adwords program to advertisers in India. This program enables advertisers to provide a relevant keyword.