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Distribution Fees Payment To Google Are Not Royalty

Online advertising on major search engines like Google has transformed the advertising and marketing landscape, offering businesses powerful tools to connect with their target audience. However, amidst the evolving landscape, the taxability of payment in relation to online advertisements on Google or similar portals has become a contentious subject.

Google India Private Limited v The Deputy Commissioner of Income Tax (International Taxation), Circle 1(1) Bangalore (IT(TP)A No.1513/Bang/2013 & Ors) was a tax appeal before the Indian Tax Tribunal. It involved a dispute between the taxpayer and tax authority regarding the characterisation of distributor fees paid by the taxpayer as the distributor for the AdWords program. The tax authority argued that the distributor fees should be treated as royalties. On the other hand, the taxpayer contended that the distributor fees constitute their business profits.

Brief Facts

Google India Private Limited, a wholly-owned subsidiary of Google International LLC was primarily involved in the provision of information technology (IT) and information technology-enabled services (ITES) to its group companies. Additionally, the taxpayer also operates as a distributor for AdWords Programme[1] in India.

In December 2005, the taxpayer entered into a Distribution Agreement with Google Ireland Limited (Google Ireland). As part of the agreement, the taxpayer was designated as a non-exclusive distributor[2] of the AdWords program in India. No rights or intellectual properties were transferred by Google to the taxpayer or to the advertiser.

For the relevant years of assessment, the taxpayer had paid the following distribution fees to Google Ireland as per the Distribution Agreement:

Thereafter, a dispute arose between the taxpayer and tax authority as to whether the distributor fees were royalty or business profits.

The dispute was referred to a Dispute Resolution Panel, which affirmed the assessing tax officer's findings that the payments were royalty under the Indian tax legislation and Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Ireland. The panel’s findings can be summarised as follows:

i.The taxpayer's activities under the agreement were closely linked to the activities performed under the service agreement (i.e. IT and ITES). Consequently, the taxpayer was given the privilege to utilise the valuable assets of Google Ireland, which encompass intellectual property rights.

ii.The taxpayer has been authorised by Google Ireland, through the agreement, to sell or make offers for the sale of the AdWords program. This authorisation constituted a license which fell within the scope of copyright as defined under Indian copyright legislation.

iii.The taxpayer has been granted the right to use Google Ireland's trademarks and brand features for distributing the AdWords program.

iv.The taxpayer has been authorised to use and benefit from the "process" within the AdWords platform for marketing and distribution purposes.

v.The taxpayer has gained knowledge, experience and expertise in the process of distribution, which has been imparted to them.

vi. The taxpayer's ability to fulfil its obligations under the Agreement relied on accessing the servers running the AdWords platform. Therefore, the taxpayer has the right to use the industrial, commercial, or scientific equipment, which in this case were the servers.

Dissatisfied with the panel’s decision, the taxpayer filed an appeal before the Income Tax Appellate Tribunal (ITAT). First, the ITAT ruled against the taxpayer, which resulted in a further appeal by the taxpayer to the High Court. The High Court upon reviewing matter, remitted the matter to the ITAT for further consideration.

Decision Of The ITAT

Following a re-examination of the case, the ITAT ruled that the distribution fees paid by the taxpayer under the Distribution Agreement to Google Ireland were not royalties. As such, the payments were not subjected to withholding tax.

There was no dispute that the DTAA was applicable in this matter and following the Indian Supreme Court case of Engineering Analysis Centre of Excellence (P) Ltd v CIT (Case No. 8733-8734 of 2018), the definition of the term “royalty” in Article 12(3) of the DTAA prevailed over the definition provided in the Indian tax legislation.

In order to attract “royalty”, there has to be use or right to use, inter alia, any copyright. The ITAT made reference to the case

of Engineering Analysis Centre of Excellence, where the Supreme Court had previously addressed the question of

whether the usage of computer software should be considered “royalty”. The Supreme Court ruled that a non-exclusive, non-transferable license that allowed for the mere use of a copyrighted product should be regarded as containing restrictive conditions that are ancillary to such use. This type of license did not grant the licensee the right to enjoy under the Indian copyright law.

Exploring The Provisions Of Distributor Agreement, Services Agreement, Service Level Agreement, And Advertising Program Terms

Distribution Agreement

The Distribution Agreement appoints the taxpayer as a non-exclusive authorised distributor of the Google AdWords program. They are responsible for marketing and distributing the program, adhering to guidelines and training provided by Google. The taxpayer must upload necessary advertiser information and provide after-sales services.

Services Agreement

Under the Services Agreement, the taxpayer's services are governed by Google Ireland's intellectual property rights. The taxpayer can only use confidential information for service performance, and it remains the property of Google Ireland.

Service Level Agreement

The Service Level Agreement requires the taxpayer to provide customer services according to Google's procedures and standards. Google Ireland can review communications and assess service quality. Questionnaires may be sent to ensure satisfactory service levels.

Standard Advertising Program Terms

The Standard Advertising Program Terms grant Google and partners rights to use advertiser creative content and targeting options. Advertisers warrant accurate customer information and compliance with laws and third-party rights.

Considering the above, the ITAT concluded that Google Ireland had not transferred any rights under the Indian copyright law to the taxpayer. The use of confidential information, software technology and training documents fell under the category of 'literary work' with copyrights owned by the foreign entity. Since there was no transfer or license of copyrights to the taxpayer's company, the disputed distribution fees could not be considered as “royalty” under the DTAA.

Use Of Trademark

In DIT v Sheraton International Inc [2009] 313 ITR 267, the Indian High Court held that the use of trademarks and trade names was incidental to the primary service of advertising, publicity and sales promotion. It further held that when no separate consideration is payable for such usage, it cannot be classified as royalty. As such, the use of Google brand features, such as trademarks and trade names, was not subject to separate consideration payable to Google Ireland. Instead, these features were ancillary to the main purpose of marketing and distributing the AdWords program. Therefore, the previous assertion that the taxpayer was granted the right to use these intellectual property assets for distribution purposes lacks merit.

Use Of Or Right To Use Industrial, Commercial, Or Scientific Equipment

As the taxpayer did not acquire any rights to use specific equipment, it was determined that Google Ireland retained the copyright in the AdWords program and therefore, no technical know-how was transferred to the taxpayer.


The ITAT concluded that the disputed distribution fees made to Google Ireland cannot be considered as royalty under the

DTAA. Merely conducting activities and earning revenue in India does not automatically classify the payments as royalty.


At this juncture, it is important to consider Malaysia’s legal position regarding disputes related to royalty payments.

In Ketua Pengarah Hasil Dalam Negeri v Thomson Reuters Global Resources (2016) MSTC 30-124, the revenue appealed against the decision of the Special Commissioners of Income Tax’s ruling that the distribution fee paid by Thomson Reuters Malaysia Sdn Bhd (TRM) to the taxpayer was not “royalty” and hence, not subject to withholding tax.

The High Court affirmed the ruling on the basis that the definition of royalty in the Malaysia-Swiss Federal Council DTA should be given preference over the definition in the Income Tax Act 1967 (ITA).

In HSIS Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2020) MSTC 10-113, the Special Commissioners of Income Tax considered a similar appeal like the Google India case. The issue was whether the distribution fees paid by the taxpayer, as a non-exclusive reseller and distributor of the software, amounted to royalty under Section 2 of the ITA and hence, subjected to withholding tax.

The Special Commissioners of Income ruled in favour of the taxpayer that the distribution fee should not be subject to withholding tax because they do not meet the definition of royalty under the Malaysia-Singapore DTA.

These decisions reflect the importance of analysing the specific contractual arrangements and the rights granted to determine whether a payment falls within the scope of "royalty" for tax purposes. These rulings provide clarity and guidance to taxpayers, enabling them to navigate the complexities of royalty-related tax matters in Malaysia.

[1] Google Ads, formerly referred to as Google AdWords, is an online advertising platform offered by Google. It serves as an advertising solution that enables advertisers to promote their content, brand, and website by targeting specific keywords. The main objective is to generate traffic or capture leads through the use of these targeted keywords.

[2] Generally, a non-exclusive distribution agreement allows a supplier to engage with multiple distributors operating in the same market or territory.

 16 June 2023


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