ITAT order imposing Royalty Taxation on Google for ‘Adwords Program’ quashed by Karnataka High Court for violation of natural justice

The Karnataka High Court recently quashed an order of the Income Tax Appellate Tribunal (ITAT) imposing royalty taxation on Google India Private Limited (Google) for 'Adwords program' on the ground of violation of principles of natural justice (Google India Private Limited v. Commissioner of Income Tax). .A Division bench of Justices Satish Chandra Sharma along with S Vishwajith Shetty allowed the appeal filed by the company and also directed the parties to appear before the Tribunal on May 3, 2021 for fresh hearing. ."ITA No.125/2020 which is in respect of assessment year 2008-09 has been filed by the department. It relates to penalty proceedings and therefore, as in respect of the assessment year 2008-09 this Court has already remanded ITA.882/2017 for fresh adjudication, the order impugned dated 6.9.2019 is set aside and the matter is remanded back to the Tribunal to decide it afresh in accordance with law. ITA No.125/2020 also stands allowed accordingly," the Court ordered. .Factual Background .Google India, was a non-exclusive distributor of the online advertising space under the 'AdWords programme' to advertisers in India..This program enables advertisers to provide a relevant keyword. When this term is searched on the Google search engine, the ad also gets displayed. The advertiser pays if the surfers click on their ads..In 2004, the appellant-company entered into an IT Enables Services agreement with Google Ireland Limited and established its IT Enabled Services for rendering support services. The appellant under the said agreement, was rendering outsourced services for which it was being separately compensated by Google Ireland Limited..The assessing officer initiated proceedings under Sections 201 and 201(1A) of the Income Tax Act, 1961, November, 2011 for the assessment year 2007-08. .The assessing officer, in a common order, for the assessment years 2007-08 to 2012-13 passed an order under Section 201(1) and 201(1A) of the IT Act, thereby determining the appellant as 'assessee in default' in respect of non-deduction of tax at source for the sums payable to Google Ireland as 'fee for distribution rights'. Consequently, it was directed to pay an amount of Rs. 7. 4 crore..Aggrieved by the order, Google preferred an appeal before the Commissioner of Income-tax (Appeals), which was dismissed by an order dated September 20, 2013 by the Appellate Authority. Thereafter, it preferred an appeal before the ITAT which was also dismissed. .This prompted the tech giant to move the High Court. .Submissions made by Parties.Senior Counsel S Ganesh submitted that the ITAT did not look into the documents filed by the assessee at any point of time. Rather, an altogether a different approach was adopted by the ITAT by conducting a research. .It was contended by him that it is a well settled proposition of law that if any material/any document is relied upon, the same has to be given to all the parties, otherwise it amounts to violation of principles of natural justice and fair play. The counsel also claimed that the material collected behind back of the assessee was used and relied upon by the ITAT and therefore, the same amounts to violation of principles of natural justice and fair play. Hence, the matter should be remanded back to the ITAT and the parties should be permitted to raise all possible grounds while arguing the matter afresh, he added. .Advocate KV Aravind appearing for the ITAT argued that the material relied upon by the ITAT is available on internet and merely because the material publicly available was not given to the assessee, would not mean that there was violation of natural justice and fair play. .What the Court heldOn the material relied upon by the ITAT in passing order, the Court opined that the order violated principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut such fresh evidence. ."In the considered opinion of this Court, keeping in view Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and also keeping in view the fact that the material on the basis of which the order has been passed was not furnished to the appellant at any point time, the order passed by the Tribunal is certainly violative of principles of natural justice and fair play as the appellant was not afforded an opportunity to rebut fresh evidence especially when such evidence was based on Google study.".Further, it said that the details of the material has also not been reflected in the order passed by the ITAT. ."Therefore, this Court is of the opinion that as there is a violation of principles of natural justice and fair play, the matter deserves to be remanded back to the Tribunal for hearing it afresh in accordance with law.".With these observations, the Court allowed the appeal and the order passed by the Tribunal is set aside. The Court, accordingly, remanded back matter to the Tribunal for fresh adjudication in accordance with law..It also directed that the parties will appear before the Tribunal on May 3, 2021 and within a period of 15 days the appellant as well as the the Revenue shall be free to file the documents/additional documents in support of their contentions. In case any other material is being relied upon by the Tribunal, the same should also be made available to the assessee/appellant as well as to the counsel for revenue before passing a final order. .[Read Order]