1. Introduction

Recently, the Indian Income Tax Appellate Tribunal (ITAT) opined that Google Ireland’s income from a reseller of online advertisement space under the AdWords program amounted to “royalties”. Hence, the ITAT concluded, the said income was taxable in the Source State in accordance with the India-Ireland tax treaty.

With due respect, the ITAT’s approach and conclusion in the above-mentioned decision seem difficult to reconcile.

In case the ITAT’s approach and conclusion in the above-mentioned decision were correct, then by implication, even a payment by a reseller of tangible products (such as a major independent electronics store selling iPhone) or by a reseller of services (such as Rackspace, a leading reseller of Microsoft Office 365) – to the product manufacturers (e.g. Apple) or service providers (e.g. Microsoft Corporation) – could end up being viewed as royalty payments. But, that would be inconsistent with the “royalties” definition under a tax treaty.

In the author’s view, the above-mentioned Indian court decision could lead to far-reaching global implications. As discussed in detail in this article, the Indian tax authorities argued at length – and convinced the ITAT – that the above-mentioned payments represented consideration for use of (i) intellectual property rights including trademark and brand-features, (ii) software, (iii) process, (iv) ‘copyrighted’ Internet search engine, (v) information concerning industrial, commercial, or scientific (ICS) experience, and (vi) even ICS equipment. 

The above-mentioned Indian decision is likely to be of high persuasive value to the tax authorities and courts in many other jurisdictions. Hence, the author believes, it is of global significance and deserves a thorough analysis.