International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

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 & bottom lb ros

More from across our site

The controversial measure is being watered down after criticism from the European Central Bank.
More than 600 such requests were made in 2022, while HMRC has also bolstered its fraud service, it has been revealed.
The General Court reverses its position taken four years ago, while the UN discusses tax policy in New York.
Discussion on amount B under the first part of the OECD's two-pronged approach to international tax reform is far from over, if the latest consultation is anything go by.
Pillar two might be top of mind for many multinational companies, but the huge variations between countries’ readiness means getting ahead of the game now, argues Russell Gammon, chief solutions officer at Tax Systems.
ITR’s latest quarterly PDF is going live today, leading on the looming battle between the UN and the OECD for dominance in global tax policy.
Company tax changes are central to the German government’s plan to revive the economy, but sources say they miss the mark. Ralph Cunningham reports.
The winners of the ITR Americas Tax Awards have been announced for 2023!
There is a ‘huge demand’ for tax services in the Middle East, says new Clyde & Co partner Rachel Fox in an interview with ITR.
The ECB warns the tax could leave banks with weaker capital levels, while the UAE publishes guidance on its new corporate tax regime.