Google India, the Indian arm of the global search engine, is grappling with a Rs 76-crore penalty slapped by the income-tax authorities. 

The tax office has said Google India has misled the department, deflated income, violated accounting rules laid down by the chartered accountants' institute and also attempted to show wrong revenues to avoid being subjected to transfer pricing adjustments with respect to its international transactions. 

The tax department has refused to keep the penalty in abeyance after listening to the company's explanation and interacting with its auditor, SR Batliboi & Associates, which has offered full support and co-operation in the proceedings. 

Google has gone on appeal against the penalty order that relates to assessment year 2008-09. "If the order is upheld, the total advertisement revenue of Google India will be taxed in India," said a person familiar with the case. 

According to the tax office, Google India had credited an amount of Rs 119.83 crore to Google Ireland Ltd towards distribution fees without deducting tax at source in line with the tax treaty between India and Ireland. "The entire activity of (Google's) AdWords Programme and the revenue earned thereon has happened in India with both the advertisers as well people making use of the advertisements situated in India. To this extent, the income of M/s Google Ireland Ltd was held to be accrued as well as arisen in India itself," said the order. 

Having tracked Google's operations in other markets through various sources and media reports, the tax office has kept Indian authorities abreast of the nature of transactions involving Google Ireland and aimed at avoiding tax. According to a report, Google's arms in Asia, Middle-East and other regions routed earnings through the Netherlands office before the money found its way to an entity in Bermuda, a tax haven. 

Google denies flouting norms 

The Bermuda outfit being a subsidiary of Google Ireland, the transactions were called 'double Irish' in tax parlance. "Google places great importance on following local law and we comply with applicable tax rules in all countries where we operate. We cannot comment further on this," said a Google India spokesperson, responding to an email from ET. The company had earlier told the tax department that there were no income or portion thereof that was not reported. 

Google Ireland, according to the MNC, "is in the business of selling, marketing and supporting certain Internet search, advertising system, and information organization and management technology products and services". 

But the tax department has held that since Google India "habitually concluded contracts in the name of M/s Google Ireland Ltd as well as habitually secured orders in India for M/s Google Ireland Ltd", it established itself as a dependent agency, and a "permanent establishment of M/s Google Ireland Ltd in India". A permanent establishment status can dramatically change the tax implications for an entity. The tax office, which found the "distribution fees" to Google Ireland "excessive and unreasonable", reworked the company's profit (which the department felt was deflated). 

"...declaration of revenues on a net basis instead of showing it on a gross basis is directly in violation of the accounting principles given by the Institute of Chartered Accountants of India. To this extent, the assessee company has violated the principles of accounting in declaring the incomes," said the department. In 2006-07, Google India had declared the 'AdWords' advertising revenue on a 'gross basis', but this system was changed in assessment years 2007-08 and 2008-09.