India: Ending the year with several important tax rulings

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

India: Ending the year with several important tax rulings

Sponsored by

logo.png
AdobeStock_28744004_jeans

India has seen several important decisions on the tax front take place in 2017.

India has seen several important decisions on the tax front take place in 2017. The Supreme Court of India ruled on several important tax matters, including on the formation of permanent establishments in India, taxation of the oil and gas sector, and the treatment of dividend income as 'exempt' for the purposes of disallowance of related expenditure.

The last few weeks saw another handful of far-reaching judgments coming out. These are summarised below.

Royalties

One recent case involved the taxation of payments made under Google's AdWords program. The Income-tax Appellate Tribunal (Bangalore) held that payments by Google's Indian subsidiary (Google India) to Google Ireland Ltd. for distribution of the AdWords programme were in the nature of 'royalty'.

Google India and Google Ireland had entered into a distribution agreement under which Google India was appointed as a non-exclusive distributor of the AdWords program to advertisers in India. Google India accordingly purchased advertising space from Google Ireland for sale to local advertisers.

While holding that the payments made were in the nature of a 'royalty', the tribunal held that:

  • The distribution agreement was not merely an agreement to provide advertising space, but was for facilitating the display and publishing of advertisements to targeted customers;

  • The intellectual property of Google vested in the search engine technology, associated software and other features, and hence use of these tools for accepting advertisements fell within the ambit of 'royalty'; and

  • The marketing and promotion of advertisements by Google India was possible only with the use of a secret formula and confidential customer data. Since these were not in the public domain, Google India was using a secret process, the payment for which would amount to 'royalty'.

This is an important decision in the digital economy context. With the introduction of the equalisation levy in 2016, pursuant to the BEPS Action 1, online advertising payments will no longer be governed by the Income-tax Act or the tax treaties. However, this judgment will still be relevant for pre-2016 disputes.

This decision has been appealed to the jurisdictional High Court (i.e. in the State of Karnataka) and the appeal has been admitted.

Permanent establishments on activities outsourced to India

On a separate case, the Supreme Court delivered an important decision that dealt with the issue of whether a foreign company would have a permanent establishment (PE) in India on account of its outsourcing activities to an Indian group company.

The court held that since the outsourcing of activities did not lead to any fixed place of business being at the disposal of the foreign company, no fixed place PE was constituted. It also held that no service PE came into existence since none of the customers of the foreign company were located in India, and hence services could not be said to have been furnished within India.

Tax Accounting Standards partially struck down

The central government had notified 10 ICDS (Income Computation and Disclosure Standards) with a view to standardise income and expense recognition for tax purposes.

These in some cases led to accelerated recognition of income or deferment of expenditure/losses. Some of these were in conflict with judicial precedents.

The Delhi High Court held that although the government was empowered to notify standards for income computation, it could not, in the exercise of such powers, override judicial precedents or statutory provisions. Accordingly, it struck down several standards (including those dealing with accounting policies, valuation of inventory, revenue recognition, construction contracts, etc.) to the extent they were contrary to binding judicial precedents or legislative provisions.

Dharawat
Gangadharan

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors LLP

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com

more across site & shared bottom lb ros

More from across our site

Reckitt Benckiser is to divest its Essential Home business, which includes more than 70 brands, to private equity firm Advent International
In the first of a new series of weekly opinion pieces, ITR Editor Tom Baker reflects on the OECD’s attempts to sanitise the US’s brazen pillar two negotiations
The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
The tax agency has increased compliance yield from wealthy individuals but cannot identify how much tax is paid by UK billionaires, the committee also claimed
Saffery cautioned that documentation requirements in new government proposals must be limited if medium-sized companies are not exempted from TP
The global minimum tax deal is not viable without US participation, Friedrich Merz has argued
Section 899 of the ‘one big beautiful’ bill would have spelled disaster for many international investors into the US, but following its shelving, attention turns to the fate of the OECD’s pillars
DLA Piper’s co-head of tax for the US and Latin America tells ITR about her fervent belief in equal access to the law, loving yoga, and paternal inspirations
Gift this article