Taxability of Digital and E-commerce Transactions

Agenda

1 The Digital Economy

2 Indian Apex Court on Software Royalty Tax

3 Equalisation Levy

4 Taxation of E-commerce Transactions

5 Other Tax Considerations

6 Regulatory Considerations

7 Case Studies

The Digital Economy

`Digital Economy – Physically absent, fiscally present

*Source: Estimates as per data available on public domain

Economic activity resulting from billions of everyday online connections among people, businesses, devices, data, and processes. Hyper-connectivity between people, organisations and machines is the backbone of digital economy

2021 Total Economic Value Active internet users Active Mobile users Social Media users

Global USD 12 Trillion 5 Billion 4.32 Billion 4.2 Billion

India USD 200 Billion 624 Million 469 Million 448 Million

USD 1 Trillion

975 million users

2025

4

`Challenges in taxing digital economy

01

02

03

Nexus without physical presence – Businesses are operating globally without any local presence. Tax laws are evolving from traditional method of taxation based on "source" and “nexus" jurisdiction

Value Attribution – Cross border access to data has benefitted businesses and customers. Imperative to design a mechanism to link value of transaction with jurisdiction that enables 'fair' and 'just' taxation rights

Income Characterization – As businesses evolve, traditional characterisation of income creates ambiguities. Revision of tax laws in lines with business models necessary to avoid undue hardships to taxpayers

5

`DST around the Globe

Austria DST @ 5 percent– Online advertisements– Threshold limits:

Global turnover- Euro 750M+ &Domestic turnover- Euro 25M+

FranceDST @ 3 percentApply "French digital presence" ratios on– Digital Interface– Digital advertising services based on

users' data

United Kingdom

DST @ 2 percentRevenue in excess of 25 million pounds derived from UK users from:– social media platforms– internet search engine– online market place

Turkey DST @ 7.5 percent– Digital advertising services– Digital content– Digital interface services

DST @ 3 percentGross revenue from:– online advertising services– sale of online advertising and– sale of user-data

Argentina Italy

Spain

DST @ 5 percentBets made through a digital platform in or from Argentina

DST @ 3 percent– Digital advertisements– Digital intermediary services– Transmission of user data

Kenya DST @ 1.5 percent– Digital content services– Transmission of data– Digital marketplace– Subscription based media services– Search Engine– Online learning/e-learning

6

`Significant Economic Presence – Global Developments

7

IndonesiaForeign digital entities without physical presence in Indonesia with prescribed consolidated gross revenue, sales amounts and/or the size of active members in Indonesia

IsraelForeign entity deriving income from online transactions with Israeli residents will create a PE, even if activity is of a preparatory or auxiliary character only

NigeriaNR company will have an SEP in Nigeria in any FY if it has gross turnover or income of more than NGN 25 million ($64,601) from specified digital activities

Slovak RepublicNR operators without physical presence that regularly facilitate the conclusion of contracts for providing transportation and accommodation services via a digital platform

TurkeyA significant and continuous economic presence in the territory of the state built in such a way as not to result in any physical presence in the same territory

ItalyA significant and continuous economic presence in the territory of the state built in such a way as not to result in any physical presence in the same territory

`

Next

• Royalty/ FTS tax#

• GST – OIDAR• Significant Economic

Presence (SEP)• Approaches emanating out

of global consensus as a result of consultations at OECD and UN level

• UN suggestions – Article 12B and updated Royalty definition

• Newly introduced TCS and TDS provisions?

• Equalisation Levy –Repealment after global consensus?

Then• Royalty tax• FTS tax

Now • Royalty/ FTS tax#

• Equalisation Levy 1.0: Online advertisements

• Equalisation Levy 2.0: e-commerce sale of goods/ supply of services

• Section 194-O• GST – OIDAR

#Transactions not covered by the recent Apex Court ruling

8

Digital Taxes in India – Then, Now and Next

Indian Apex Court on Software Royalty Tax

`Software Royalty Tax – Chequered history of 2 decades!

Mumbai ITAT

Madras HC

Karnataka HC

Samsung Electronics Co LtdSynopsis International Old Ltd

Verizon Communications Singapore Pte Ltd

AAR

Citrix Systems Asia Pacific Pty LtdDassault Systems, KKGeoquest Systems BV

Ericsson AB Infrasoft LtdZTE CorporationNokia Networks OY

Reliance Communication Ltd

Kolkata ITAT

HITT Holland Institute of Traffic Technology BV

Delhi HC

And many more rulings

Judgements pronounced by Courts and Tribunals over 2 decades divergent on taxability of software supplied by NRs to Indian residents. Some courts had held such payments as 'Royalty’ whereas others upheld non-taxability in absence of a PE in India. At times, taxability (withholding per se) for a

foreign supplier was dependent on location of Indian customer, based on jurisdictional court/ tribunal ruling

10

`Software Royalty Tax – The Apex Court Verdict

11

Recently, the Supreme Court of India in its landmark judgement1 has held that payment made to non-residents for imported software cannot be taxable as royalty

1 Engineering Analysis Centre of Excellence Private Limited. Following this ruling, Karnataka jurisdiction, with most number of unfavourable rulings, has now ruled in favour of taxpayer in case of Technicolor India Pvt Ltd and Altisource Business Solutions Private Limited

Software purchased directly by an end-user from NR supplier/ manufacturer

Software purchased from a NR by an Indian distributor/ reseller and resold to Indian end-users

Software embedded in hardware sold by NR to Indian distributors or end-users

Software purchased from a NR by a NR distributor/ reseller and resold to Indian distributors or end-users

01 02

03 04

Key Observations

Treaty supremacyReaffirms past rulings - withholding obligations arise only when income is chargeable to tax under provisions of the Act read with tax treaty

Royalty Transfer of all or any right in copyrighted article (software) is mandatory for classification as 'Royalty'

Distribution/ EULAGrants non-exclusive and non-transferable license to 'resell' software to distributors. No rights given to reverse engineer, modify, reproduce software in any manner

01

02

03

Income Tax Act 2012 amendment expanding scope of Royalty cannot be clarificatory in nature having retrospective effect and does not impact tax treaties

OECD CommentaryHighlighted relevance of OECD commentary in interpreting tax treaties and its persuasive value in interpreting ‘Royalty'

CopyrightsOwnership of copyright in a work is different from ownership of physical material in which copyrighted work may be embodied. 'Right to reproduce' distinct from 'Right to use' computer software

04

05

06

`Software Royalty Tax – Key Considerations

All 4 categories of transactions treated as sale of goods. If same principles are ascribed for domestic sales and no TDS is done under Section 194J, evaluate TCS under Section 206C(1H) and TDS under Section 194Q

Apex Court ruling based on premise of no PE in India. NRs to build strong arguments and fortify facts/ documents to establish 'no PE' before income tax authorities, if examined

Where ‘No Royalty' position taken, NR sellers/ service providers to revisit applicability of 2 percent Equalisation levy for period post April 1, 2020

Where no TDS position under Section 194J/ Section 195 is taken, evaluate impact on domestic software resellers based on CBDT Notification No 21/ 2012

Evaluate impact of Apex Court ruling on concluded/ to be renewed APAs and MAPs

12

`Software Royalty Tax – Way forward for non-petitioners

Revision application against assessment order

Chief Commissioner has discretionary power to revise assessment order on merits

If unfavorable, remedy by way of appeal to HC

Review contract pricing if withholding tax was marked up in commercial contract

Domestic buyers may consider filing Form 15E for Nil withholding on software payments made to NR sellers (in case of substantial payouts)

Reassess contracts

Open litigation

Refund claim before tax officer

TDS refund by Indian payer

Closed assessments/ appeals

Possibilities of revising TDS returns by Indian Payer (specially where FTC has been denied to foreign recipient) –CBDT Circular No 7/2007 & No 7/ 2011

Unjust enrichment principle could be tested with respect to FTC if already availed by foreign payee

Foreign supplier could file a revised income tax return, wherever permissible (based on timelines) –CBDT Circular No 9/ 2015

Request for condonation and revise income tax return to claim refund (also explore constitutional remedy under writ route)

Additional ground may be raised before relevant Appellate Authority

Procedure for raising additional grounds under faceless appeals to be ascertained

13

`Impact of verdict on other category of transactions

14

Wipro Limited (Karnataka HC)Gartner Ireland Limited (Mumbai ITAT)

Dishnet Wireless Limited (AAR)

Google India Private Limited (Bangalore ITAT)

Verizon Communications Singapore Pte Ltd (Madras HC)Cognizant Technology Solutions India Pvt Ltd (Chennai ITAT)

CGI Information Systems & Management Consultants (P) Ltd (Karnataka HC)

Advertisement Space

Network Connectivity/ Transponder

Database Subscription

MasterCard Asia Pacific Pte Ltd (AAR)Interface Processor

Submarine Cable System

Intranet

Equalisation Levy

`Equalisation Levy 1.0 – Advertisement Payments

16

ApplicabilitySpecified services provided to• Indian resident carrying on business or

profession (B2B)• NR having PE in IndiaIf aggregate consideration in a FY is over INR 100,000 (payer wise) (~USD 1350)

Exclusions• NR service provider having PE in India

and specified services is effectively connected with that PE

• For purpose other than business or profession (B2C)

Specified Services• Online advertisement,• Any provision for digital advertising space• Any other facility or service for the

purpose of online advertisement• Other notified services

Payers are required to deduct equalisation levy @ 6 percent from the amount paid or payable to a NR in respect of the specified services

Key Consideration• Credit of taxes deducted in home

country may not be available• Compliance burden on resident payer.

No compliance requirement by the NR service provider

`Equalisation Levy 2.0 – Digital Transactions

17

e-commerce supply of goods or servicesi. Online sale of goods owned by NR ECO or

services provided by NR ECO

ii. Online sale of goods or provision of services 'facilitated' by the operator

iii. Any combination of the aboveIncludes online activities like acceptance of offer for sale, placing or acceptance of purchase orders, payment of consideration and supply of goods or provision of services (partly or wholly)

i. Person resident in India

ii. NR in 'specified circumstances'

iii. Person who buys goods or services or both using IP address located in India

i. NR ECO having PE in India

ii. Where EQ Levy 1.0 is leviable

iii. Sales, Turnover or Gross Receipts of NR ECO is less than INR 20 million (~USD 270,000 in FY)

iv. Any consideration taxable as Royalty/ FTS under IT Act or DTAA

v. e-commerce transactions, where seller/ service provider is a tax resident of India or NR seller having PE in India

Important definitions

Specified recipients

Types of transactions

Non-applicability

E-commerce operators - NR who owns, operates or manages digital or electronic facility or platform for online sale of goods/ provision of services/ both

Online - facility/ service/ right/ benefit/ access that is obtained through internet or any other form of digital or telecommunication network

Specified circumstances - Sale of advertisement targeting Indian customers or sale of data, collected from Indian users

NR e-commerce operator (NR ECO) required to pay 2 percent on consideration from e-commerce supply of goods or provision of services to specified recipients

NR ECO required to first analyse applicability of royalty/ FTS tax and if not applicable, then other conditions such as turnover threshold, nature of sale of goods or provision of services should be analysed to test the applicability of EQ Levy and where EQ Levy is applicable,

required to bifurcate sales generated from seller/ service provider is a tax resident of India or NR having PE in India

`Equalisation Levy 2.0 – Overarching Impact

18

Online content

Vehicle Aggregators

Online Advertisers

Matrimony & Dating

Services

Search Engines & Research Platforms

Cloud Computing Services

Online auction

Online travel

Online payments/

wallets/ gateways

Online Marketplace

Online food delivery

platforms

Online entertainment

Targeting Technology 'driven' or Technology 'enabled' business?

Deviation from fundamental intent of law (extracts from e-commerce expert committee report#):

− Para 1: to tax supply and procurement of 'digital goods and services'

− Para 109: to bring to tax, foreign enterprises that earn significant income from a jurisdiction that erodes its tax base

− Specified services as per report, Para 193: (vii) any 'facility or service' for online sale of goods or services or collecting online payments

− India’s EL position differs from EU countries (UK, Spain, France etc) providing specific exemption to intra-group transactions

Import of goods and services

Cost allocationERP

Regardless of industry/ business segment, certain transactions if carried 'online' could attract EQ Levy sheerly for NR

Intra-group transactions

Digital Businesses

# A committee report may not have the force of law, but it is useful as a way of providing guidance with respect to manner in which a law or a change in existing law, is to be interpreted, specially where application of law to a particular set of circumstances is not clear on the face of statute

A definite need for clarification from Indian Revenue

`Equalisation Levy – Compliances

19

EQ Levy 1.0 - Payer to deduct and deposit to the government exchequer on monthly basis by 7th of following month

Payment Statement Interest and Penalty#

EQ Levy 2.0 – NR ECO to deposit to government exchequer on quarterly basis

Quarter ending Due Date

30th June 7th July

30th September 7th October

31st December 7th January

31st March 31st March

EQ Levy 1.0 - Payer to furnish annual statement in Form 1 with details of the NR specified service provider such as name, address, amount consideration, etc by 30th June of immediately following FY

EQ Levy 2.0 - NR ECO to furnish annual statement in Form 1 with details such as consideration, EQ levy, etc by 30th June of immediately following FY

Interest @ 1 percent per month for delay in depositing EQ Levy within specified due dates

Failure to deduct/ pay – Penalty equal to EQ Levy failed to deduct/ payFailure to deposit – INR 1,000 per day for every defaulted daysFailure to furnish statement –INR 100 per day for every defaulted days

Additionally, NR ECO are required to obtain PAN and bank account in India, to undertake the above compliances

# Penalty to be imposed only after issuing SCN and Taxpayers may appeal to CIT(A) against penalty orders

Refer Annexures for the Challan and Form 1

`Equalisation Levy – Collections hitherto

Financial Year Equalisation Levy regime prevalent Total Collections*

(INR Billion)

2016-17

EQ Levy 1.0: Digital Advertisements – 6 percent

3.39

2017-18 5.89

2018-19 9.39

2019-20 11.37

2020-21

EQ Levy 1.0 & 2.0:Digital Advertisements and other

online/ digital transactions - 6 percent and 2 percent

20.57

* Source: Public domain

Although there has been a steady growth in collection of EQ Levy from its inception in 2016, there has been a meagre Y-o-Y increase in collection between FY 2019-20 and FY 2020-21 and it may be fair to assume that a larger population of global digital companies (NR to whom EQ Levy 2.0 applies) are on a 'wait and watch mode' and still analysing technical positions to be adopted. Impact of Apex Court ruling on collection of EQ Levy would be an interesting area to observe, in the context of software payments.

20

Taxation of E-commerce Transactions

`TDS on E-commerce Transactions

22

Effective from October 1, 2020, ECO is required to withhold tax @ 1 percent on e-commerce transactions

ECO deemed to be person responsible for paying e-commerce participants

Services includes FTS and fees for professional services

Applicability– ECO (resident or non-resident of India)

liable to deduct TDS @ 1 percent on gross amount of sales or services or both paid or payable to a resident e-commerce participant

– Tax to be deducted at the time of credit or payment (whichever is earlier)

– TDS rate – 5 percent for non-PAN/ non-Aadhaar cases

Non-Applicability– E-commerce participant is a non-resident– Individual/ HUF e-commerce participants,

where gross amount of sales through e-commerce operator during the year does not exceed INR 5 lakhs (PAN/ Aadhaar needed)

– On amounts received or receivable by an e-commerce operator for hosting advertisements

Supply of goods or services or both, including digital products,

over digital or electronic network

Electronic commerce

A person resident in India selling goods or providing services or both, including digital products,

through digital or electronic facility or platform for electronic

commerce

E-commerce participant

Any person who owns, operates or manages digital or electronic facility or platform for electronic

commerce

E-commerce operators

`TCS under GST

23

Under GST law, a ECO is required to collect tax @ 1 percent when a resident supplier sells any goods or provides services through its portal and payment for such supply/ provision is collected by ECO

Key definitions• e-commerce - supply of goods or services or both,

including digital products over digital or electronic network• e-commerce operator - any person (resident or NR) who

owns, operates or manages digital or electronic facility or platform for e-commerce

Non-applicability• Transportation of passengers by a radio-taxi, motorcab,

maxicab and motor cycle• Accommodation services in hotels, inns, guest houses,

clubs, campsites or other commercial place• House- keeping services such as plumbing, carpentering etc

Key compliances• Mandatory GST registration by ECO• TCS collected to be remitted to the government exchequer

and GSTR-8 to be filed by 10th of following month• Annual Statement to be filed by 31st December of the

following FY

Other Tax Considerations

`TDS/ TCS on transaction in goods

25

TDS under Section 194QTCS under Section 206C(1H)

Effective from

Applicability

Applicable rates

Trigger

Obligation on

October 1, 2020

Time of receipt

0.1 percent* on sum exceedingINR 5 mn

Seller’s turnover > INR 100 mn and Sales consideration > INR 5 mn

Seller

July 1, 2021

Time of payment or time of credit, whichever is earlier

0.1 percent# on sum exceedingINR 5 mn

Buyer’s turnover > INR 100 mn and Purchases > INR 5 mn

Buyer

* 1 percent for non-furnishing of PAN/Aadhaar # 5 percent for non-furnishing of PAN/Aadhaar

Key considerations

Applicability of Section 194Q

on transactions prior to July 1,

2021

Liability under provisions -TDS would

override

TDS applicability on

purchase of software,

securities, etc

Treatment of purchases/

sales returns

TCS obligation if buyer fails to

deduct TDS

Extra territorial nature of levy

`Higher TDS/ TCS for non-filers of tax returns

Effective from July 1, 2021 higher rate of TDS/TCS applicable on non filers of income tax returnTCS (Section 206CCA)TDS (Section 206AB)

Where higher rate of TDS/ TCS is applicable for non-furnishing of PAN in addition to new provisions for non-filers of ITR, rate of TDS/ TCS would be highest rate prescribed

• Person who has not filed ITR in 2 years prior to year in which tax is required to be deducted/ collected, for which time limit of filing ITR has expired under Section 139(1)

• Aggregate of TDS and TCS is INR 50,000 or more in each of the non-filed years

• Excludes NR without PE in India

Non-filers of income tax return

• Salary

• Withdrawal from EPF

• Winnings from lottery, crossword puzzle or horse riding

• Cash withdrawal in excess of INR 10 million

• Income in respect of investment in securitisation trust

Non-applicability of Section 206AB

Taxpayers may verify IT filing status with PAN and e-filing acknowledgment number

Mechanism/ utility to identify aggregate of TDS/ TCS of such persons in each of two relevant preceding years

Taxpayers must obtain necessary documents/ declarations such as No PE declarations from NRs, aggregate TDS and TCS is lesser than INR 50,000 etc

Mechanism/ utility to identify return filing status of person with their PAN to be prescribed

Higher of• 2x of specified rates• 2x of rate or rates in force• 5 percent

Rates

Higher of• 2x of specified rates• 5 percent

Payer/ Deductor Obligation on Payee/ Collector

26

`TDS/ TCS on transaction in goods – Process flow

27

TDS @ 0.1% TDS @ 5% TCS @ 0.1% TCS @ 5%

Yes

Yes

No No

No

No

Yes

Yes

Yes

No TDS

No TCS

No

Turnover > INR 100 mn?

Purchases > INR 5 mn?

Seller filed ITR for 2 previous years and has

valid PAN?

Turnover > INR 100 mn & Sold goods > INR 5 mn?

Buyer filed ITR for 2 previous years and has

valid PAN?

The above is an illustrative flow of transaction between a single buyer and a seller

Buyer Seller

`GST OIDAR – A lesser known devil

# Where OIDAR services are facilitated by intermediary, such intermediary is responsible for GST payments and compliances

OIDAR Service Provider

Others(B2B)

Service Recipient(Reverse charge)

Non-taxable online recipient (B2C)

OIDAR service provider#

(Forward charge)

IndiaForeign Country

Where service recipient is outside India, place of

supply deemed to be in India if any 2 prescribed particulars such as IP

address, billing address, country code of SIM card, bank account, credit card,

debit card, etc, are in India

Service Provider to charge GST @ 18 percent on B2C transactions -requirement to have mechanism to identity transactions with customers and obtain information to comply with Indian GST laws

SC issues notice over PIL seeking mechanism to track and identify total receipts generated by foreign OIDAR service provider from India and necessary changes to be made in GST formsSimilar mechanism required for tracing transactions from Indian payers for compliance with EQ Levy (IP based transactions, sale of Indian user data, etc)

Under reverse charge mechanism, Service Recipient to deposit 18 percent of invoice value and claim input tax credit of the same

EQ Levy 2.0 could be

applicable on foreign supplier

for B2B as well as B2C

supplies

28

`Web of applicable taxes

Cross-border Transactions with Resident Indians

Nature of transaction TCS under GST Income Tax EQ Levy

R supplier → NR ECO 1% TDS @ 1% under Section 194-O Not Applicable

NR supplier → NR ECO

Not Applicable

Not Applicable 2%

Software (Goods) If no Royalty position taken, EQ Levy at 2% to apply

Software (Service) Royalty/ FTS to be tested. If not, EQ Levy at 2% to apply

Direct Sale of Goods/ Provision of Services

Goods - PE to be testedServices - FTS to be tested 2%

Domestic Transactions

Nature of transaction TCS under GST Income Tax EQ Levy

R supplier → R ECO 1% TDS @ 1% under Section 194-O

Not ApplicableNR supplier → R ECO

Not Applicable

Not Applicable

Software (Goods) If no Royalty position taken TDS/ TCS @ 0.1% under Section 194Q/ Section 206C(1H)

Software (Service) Test for WHT @ 10% under Section 194J

# GST/ Customs Duty at applicable rates to be considered separately

29

`Significant Economic Presence – Taking PE issues south

30

Expands the scope of income of a NR which accrues or arises in India that results in a 'business connection' in India for that NR

Resulting income, attributable to SEP, taxable in India

Transactions/ activities to constitute SEP in India, whether or not NR has a residence or place of business in India, or renders services in India, or agreement for such transactions or activities is entered in India

or

Systematic and continuous soliciting of its business activities or engaging in interaction with 0.3 million or more users in India

Transaction in respect of any goods, services or property carried out by a non-resident with any person in India, including provision of download of data or software in India, if payment exceeds INR 20 million

Key considerations

Interplay with current 2 percent EQ Levy

Cross border business profits to continue

taxed as per existing treaty rules unless

amended

Provisions may be innocuous unless

relevant amendments are made to tax

treaties

Profit attribution Rules not prescribed yet –

Would existing Rule 10 apply?

Terms such as 'Goods', 'Property’,

'Digital means', 'systematic and

continuous soliciting' etc need clarity

A new nexus rule in form of SEP for NR without any physical presence in India, is effective April 1, 2021. Recently, the Government has notified new Rule 11UD prescribing thresholds for SEP

Beneficial owner test and Principle Purpose Test for treaty network countries would become relevant while accessing tax treaty/ MLI

`USTR Investigation

31

Investigation

USTR initiates Sec 301 investigation into India's

EQ Levy 2.0

India response

EQ Levy 2.0 is a non-discriminatory levy that

is imposed as per BEPS Action Plan 1 and

cannot be said to have extra-territorial

application

Report

EQ Levy 2.0 discriminatory against

US companies and unreasonably contravenes

international tax principles

Action

As a retaliatory measure against US proposes an additional tariff of upto 25 percent ad valorem

on certain goods

Public hearing

Convened virtual public hearing for commentspertaining to proposed action against India on

May 10, 2021

June 2020 July 2020 January 2021 March 2021 May 2021

Last year, office of United States Trade Representative (USTR) initiated Section 301 investigation against Digital Services Taxes adopted or under consideration by various countries including India

Even after the USTR’s investigation report, India as defended its position on EQ Levy and also issued certain clarifications in the Finance Act, 2021, that expanded the scope of EQ Levy to cover almost all transactions undertaken

online including transactions undertaken online partly.

`The OECD BEPS Prelude on 'Automated Digital Services'

32

OECD Unified Approach UN’s Article 12B

Postulates 3-tier profit allocation mechanism and bifurcation of routine and residual profits

Double tax avoidance strategies appear complicated as it requires identification of owners of deemed profits etc

Specific discussion on large consumer (including user) facing businesses

Departs from realistic concepts of beneficial owners, related party transactions, etc

Rather simple with no threshold recommendation

Standard percentage of qualified profits - 30 percent of amounts arising from profitability ratio of beneficial owner

Proposes conventional double tax avoidance strategies such as MAP under tax treaty

Though largely aligns with ADS, departs from need to have a separate approach for consumer facing businesses

In principle, imbibes concepts of beneficial owners, related party transactions, etc

Proposed amendments to include computer software under definition of 'Royalty' in UN Model Convention. Since characterisation ofsoftware payment has been cleared by the Indian Apex Court, adopting said amendment may cause multiple challenges. Could also

result in overlap with proposed Article 12B and Equalisation Levy

3-tier threshold prescribed for global revenues, in-scope revenue and de-minimus carve-out

Regulatory Considerations

`FDI in E-commerce – Tip of an iceberg!

34

As per the recent reports, it is expected that Indian Government could amend the FDI rules for e-commerce sector to bring in stricter regulations in order to create a level playing field for the small retailers

FDI PolicyUnder “E-commerce” 100 percent FDI in market place model is permitted under automatic route. E-commerce is restricted to B2B and FDI in B2C e-commerce is not permitted. Wholesale B2B trading is permitted under “Trading”

Key restrictions on B2B e-commerce• Prohibits marketplace e-commerce entities from selling products of vendors in which

they hold stakes or has ownership or control over the inventory

• Deemed control if more than 25 percent of purchases of such vendor are made by the marketplace e-commerce entity or its group companies

• Prohibits arrangements to sell products exclusively on its platform

• Obtain audit report for fulfilling conditions by September 30

IssuesMultinational companies are allegedly violating these conditions by creating complex business structures

Will an entity complying with Section 194-O of IT Act as an e-commerce operator be required to comply with FDI regulations for e-commerce? Will adopting varying positions under IT Act and FDI hold good?

`Draft E-commerce Policy – A new puzzle

35

Draft National e-commerce policy released in 2019 seeks to create a facilitative regulatory environment for growth of e-commerce sector. It is aimed at empowering domestic entrepreneurs and to encourage Make in India while

safeguarding interests of the consumers and facilitating job creation. Addresses 6 broad issues

Policy covers all models of e-commerce i.e., inventory, marketplace and hybrid model and includes all forms of entities, natural and legal with foreign and domestic investments

E-commerce operators differentiated based on turnover, market size, active users, registered sellers, sale of merchandise value, etc, and additional compliances prescribed on significant e-commerce operators

E-commerce operators shall ensure that algorithms used are not biased and that no discrimination due to digitally induced biases is prevalent

Extends restrictions on marketplace ecommerce to their associates and related parties.

Data Infrastructure development

e-commerce marketplace

Regulatory issues

stimulating domestic digital

economy

Export promotion through e-commerce

`New IT and Digital News Media Rules – Tax & Regulatory Take

Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 notified on February 25, 2021 and amendment made to Press Note 4 of 2019

– Prescribes certain obligations to internet intermediaries ie due diligence and timely grievance redressal mechanism– Creates a regulatory regime for Social Media, OTT platforms and online publishers of news and current affairs (news websites/ portals,

news aggregators and news agencies)

Aesthetics of IT Intermediary Rules presently under scanner and sub judice before the Courts for examination

Companies mandated to have physical

contact address in India for local communication

Appoint Chief Compliance

Officer, Nodal Contact and

Grievance Officer in India

Considering pathbreaking income tax jurisprudence on PE such as Formula

One, ABB FZ rulings etc, it is rather intricate to

espouse a 'no PE' position for such foreign

companies in India

Companies would need to consider restructuring

business models with dual objective of compliance with new rules and PE exposure optimisation

For digital news media Cos,

foreign shareholding

restricted to 26% (Approval Route)

36

`Upcoming Data Localisation Norms

37

Personal Data Protection Bill 2019 referred to Joint Parliamentary Committee for detailed examination. Detailed report expected by July 2021

RBI circular on storage of payment system data & draft e-commerce policy also recommend data localisation

Proposed Section 33 restricts transfer of data outside national borders and mandates storage of data on a server or data center in India. Exposure of creating a PE for foreign companies mandated to place servers in India (Mastercard AAR ruling)

Proposed Section 30 requires significant data fiduciaries to appoint data protection officers based in India to represent them locally. May cause risk of creating a Agency/ Service PE in India for foreign enterprise

Foreign companies could avail services of cloud computing networks instead of maintaining their own infrastructure for purposes of storing data, to avoid creation of a PE in India. However, with implementation of SEP, significant exposure could still exist

Digital Businesses would have to retrace their business strategies and arrangements around the new laws of the land

Case Studies

`1. Electronic delivery of software by non-resident supplier

India

Foreign country

Facts

• F Co owns copyright in a software which is accessible online

• End users obtain licence either directly or through an intermediary to download software on their server and use the same

• Apex Court ruling is on 'conventional mode' of software transactions and there is need to analyse whether ruling could apply to new-age software transactions as well (non-shrink-wrapped software cases)

• As per OECD Commentary on Article 12 - Method of transferring computer program to transferee is not relevant. For example, it does not matter whether transferee acquires computer disk containing a copy of program or directly receives copy on hard disk of computer via modem connection

• Most relevant factor is whether end-user or distributor has any exclusive right to exploit/ use 'copyright' in software and if any copyright has been parted with

• Principles emanating from Apex Court ruling may be relied upon irrespective of mode of delivery for characterisation of software transactions

• 2% EQ Levy could still apply

Points to Ponder

Indian end-user customers

Software subscription agreement & Fees

Access & Download Software

Software accessible on website

Licence Key

Subscription Fees

F Co

Distributor

39

`2. Grant of database access by non-resident vendor

I Co.

F Co

Subscription Fees

Access database

Credentials to access database

India

Foreign country

Employees

Maintenance of database

online

Licence to use

database

1 CIT vs Wipro Ltd. (2013) 355 ITR 2842 CIT vs Samsung Electronics Co Ltd (2012) 345 ITR 494

Facts

• F Co engaged in research/ advisory and maintains tools, database and advisory reports online

• I Co engages F Co to avail access services with respect to database maintained by F Co, for purpose of its business

• I Co pays subscription fees as a consideration and can only access database. I Co does not have any right to transfer or reproduce the database.

• Karnataka HC in the case of Wipro1 held that payment towards license to access database is to be treated as ‘Royalty' by relying on its own decision in Samsung's case2

• Apex Court ruling does not directly deal with payment for database access. However, SC has overruled Samsung’s case2 relied by Karnataka HC and has laid down a principle that parting of copyright is mandatory for characterisation as 'Royalty'

• Taxability as FTS (whether devoid of human intervention or not & make available exemption) and applicability of 2% EQ Levy to be analysed

Points to Ponder

40

`3. Cloud computing by non-resident service provider

India

Foreign country

Facts

• F Co provides cloud computing services (IaaS, PaaS or SaaS)

• I Co contracts with F Co to obtain on-demand access to software application and other server/ infrastructure services for its employees

• Employee access software through internet and I Co pays subscription fees for same

• Whether it is merely service transaction or involves provision of services along with software is to be determined

• Where there is parting with any copyright in software, payment may be characterised as 'Royalty'

• Where it is mere use of copyrighted article with non-exclusive and non-transferable licence, transaction may not constitute 'Royalty'. Arguments may be drawn from the principles laid out in the Apex Court ruling

• Taxability as FTS (whether devoid of human intervention or not & make available exemption) and applicability of 2% EQ Levy to be analysed

Points to Ponder

I Co.

F Co

Subscription Fees

Access cloud to use

software

Software application and other

server/ infrastructure

Credentials to use software

Employees

41

`4. Software Reseller

Facts

• Software company in USA sells its software through a reseller in India

• Reseller pays a license fee to the software company

• Reseller receives commission for each sale made

• EQ Levy is applicable on the license fee paid by the reseller (subject to turnover limit of INR 20 million of the US software company)

• EQ Levy will also be applicable on any online after-sales services provided by the Software Company in USA, either directly or through a service provider in India

• Principles emanating from Apex Court in software-royalty ruling may be relied upon irrespective of mode of delivery for characterisation of software transactions and can take no royalty position

• TDS on domestic transaction to be evaluates based on on CBDT Notification No 21/ 2012

Points to Ponder

42

Resident Reseller/ Partner (India)

Software CompanyUSA

Indian Customer

License feeCommission

Subscription fee

Sales, implementation

and other support services

Access credentials

Software access

`5. Purchase of goods through e-commerce (Resident seller)

43

ResidentCustomer

Online platformUSA

Facts

• Indian resident customer orders a product online on a NR e-commerce platform

• Payment made by the customer via online platform

• Seller is a Indian resident

• ECO is required deduct tax at source under Section 194-O of IT Act @ 1% on gross amount

• TCS under GST @ 1% shall also be collected by ECO

• EQ Levy would not apply if the services is provided by a person resident in India

Points to Ponder

Resident e-commerce participants

(Seller)

Orders a product

₹1000

₹950(after retaining ₹50

facilitation fee)

`6. Purchase of goods through e-commerce (NR seller)

44

ResidentCustomer

Online platformUSA

Facts

• Indian resident customer orders a product online on a NR e-commerce platform

• Payment made by the customer via online platform

• Seller is a Indian resident

• EQ Levy would apply @ 2% on gross consideration received by e-commerce platform

• TDS under Section 194-O of IT Act and TCS under GST will not apply as NR seller

Points to Ponder

NRe-commerce participants

(Seller)

Orders a product

₹1000

₹950(after retaining ₹50

facilitation fee)

`7. Online provision of booking services (Resident service provider)

45

Hotel search

engine in USA

Hospitality service

ResidentCustomer

₹10,000

Booking platform in USA (ECO)

₹50On click basis

₹9,500(after retaining ₹500

facilitation fee)

2% EQ Levy on ₹50?

India

Facts

• Indian resident customer searches for a hotel on a travel search engine

• Travel search engine redirects the customer to an online booking platform (e-commerce operator)

• Customer books a room in a hotel situated in India (resident e-commerce participant), on such platform and payment is also done via such platform

Leg 1 - Transaction between booking platform & search engine• EQ Levy should apply @ 2% - Covered under "specified

circumstances“ as sale of advertisements targeting Indian customers

Leg 2 - Transaction between customer & booking platform • ECO is required deduct tax at source under Section 194-O

of IT Act @ 1% on gross amount & TCS under GST @ 1%

• EQ Levy would not apply if the services is provided by a person resident in India

If e-commerce participant is a resident in India, then TDS under Section 194-O of IT Act to apply & EQ Levy to not apply

Points to Ponder

Search for hotel booking

Redirects to booking platform

Books a room online

1

2

3

`8. Online provision of booking services (NR service provider)

46

Hotel search

engine in Germany

Search for hotel booking

2% EQ Levy on $10,000 or $500?

Hospitality service

ResidentCustomer

Redirects to booking platform

$10,000

Books a room online

Booking platform in USA (ECO)

$50On click basis

$9,500(after retaining $500

facilitation fee)

2% EQ Levy on $50?

France

Facts

• Indian Resident customer searches for a hotel on a travel search engine

• Travel search engine redirects the customer to an online booking platform

• Customer books a room online on such platform and payment is also done via such platform

Leg 1 - Transaction between booking platform & search engine• EQ Levy should apply @ 2% - Covered under "specified

circumstances“ as sale of advertisements targeting Indian customers

Leg 2 - Transaction between customer & booking platform • EQ Levy @ 2% to be charged on gross consideration

including hotel charges and not only on listing fee

Points to Ponder

1

2

3

Annexures

`Annexure 1 – Equalisation Levy Challan

48

`Annexure 2 – Form 1

49

Glossary

`Glossary

Abb Meaning Abb MeaningAAR Authority for Advance Rulings IT Information TechnologyADS Automated Digital Services ITAT Income Tax Appellate TribunalAI Artificial Intelligence IT Act Income tax Act, 1961

APA Advance Pricing Agreement ITR Income Tax ReturnB2B Business-to-business IaaS Infrastructure as a Service B2C Business-to-consumer KPO Knowledge Process Outsourcing

BEPS Base Erosion and Profit Shifting MAP Mutual Agreement ProceduresBPO Business Process Outsourcing MLI Multilateral instrument

CBDT Central Board of Direct Taxes NGN Nigerian NairaCIT(A) Commissioner of Income Tax (Appeals) NR Non-resident

CXM Customer Experience Management OECD Organisation for Economic Co-operation and Development

DST Digital Services Tax OIDAR Online Information Database Access and Retrieval Services

DTAA Double Taxation Avoidance Agreement OTT Over The TopECO E-commerce Operator PAN Permanent Account Number

EQ Levy/ EL Equalisation Levy PE Permanent EstablishmentERP Enterprise Resource Planning PIL Public Interest LitigationEU European Union PaaS Platform as a Service

EULA End User License Agreement RBI Reserve Bank of IndiaF Co Foreign Company SC Supreme CourtFDI Foreign Direct Investment SCM Supply Chain ManagementFTS Fees for Technical Services SCN Show Cause NoticeFTC Foreign Tax Credit SEP Significant Economic PresenceFY Financial Year SaaS Software as a Service

GST Goods and Services Tax TCS Tax Collected at SourceHC High Court TDS Tax Deducted at SourceINR Indian National Rupee UK United Kingdom

IP Internet Protocol

51

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