Bad news for the world’s favourite search engine. On Tuesday, the Indian tax office gained an upper hand in its six-year-long battle with Google India in a ruling that would set a precedence for some of the other multinational companies.The rift owes its origin to the arrangement and fund flow between Google India and the global giant’s office in Ireland — a jurisdiction known for its lax tax rules.When the income-tax (I-T) department in Bengaluru noticed that for years Google India had been routinely remitting a chunk of the advertisement revenue generated from India to Google Ireland , it put a question mark on the transactions.According to the tax office, since no tax was deducted by Google India while remitting funds to Google Ireland, it was a clear case of tax evasion.Google India contested the claim, coming out with a barrage of arguments in six appeals pertaining to the assessment years 2007-08 to 2012-13. All the appeals were dismissed on Tuesday by the Income-Tax Appellate Tribunal (ITAT) which said, “…the intention of the assessee (Google India) as well as of the GIL (Google Ireland) is clear and conspicuous that they wanted to avoid the payment of taxes in India. That is why, despite the duty of the assessee to deduct the tax at the time of payment to GIL, no tax was deducted nor any permission was sought for paying the amount (sic).”Google India now stares at a tax demand on Rs 1,457 crore — the total amount that it had remitted to Google Ireland during the period under review. The key element of the relationship between Google India and Google Ireland is the ‘Adwords’ programme — a product through which an advertiser is able to publish advertisements on the Google website.Google India, a subsidiary of Google International LLC, US, is an authorised distributor of the Adwords programme to Indian advertisers by Google Ireland.Google India had explained that Google Ireland had not transferred the intellectual property rights to the Indian arm; that it was only a distributor of advertising space and had no access or control over the infrastructure or the process involved in running the Adwords programme with the platform running on servers located outside India.But according to the tax tribunal, since Google India has used the information and patented technology from Google Ireland, the remittance to the foreign entity is royalty which, under law, is to be taxed in the contracting state (India).The ruling could emerge as a benchmark for MNCs (such as Google Ireland) which may not have a permanent establishment or physical presence in India but nonetheless come under the glare of local tax authorities due to income generated in India.“…the argument of the assessee (Google India) that it was only using customer data, IPR etc, for rendering the services relating to ITeS (Information Technology-enabled Services) is incorrect…in our view amount was being paid by the assessee to Google Ireland for the use of patent invention, model, design, secret formula, process, etc. Further, the payer is required to maintain books of account and deduct TDS (tax deducted at source) for both resident as well as non-resident. No separate treatment had been envisaged under the Act, for the payer paying to a non-resident,” said the Bengaluru bench of ITAT.Google India had argued that the amount payable by it was not in the nature of ‘royalty’ under the law and the India-Ireland double taxation avoidance agreement (DTAA). But the tribunal was not impressed.“If we go by literal meaning of double taxation avoidance agreement, then unscrupulous persons may misuse the provision and avoid payment of taxes,” said the order.