Taxation and

E-Commerce
Unit 7
Kinds of Taxes

Direct Tax- Income Tax

Basis of payment is the income

Indirect Tax- GST, customs

Basis of payment is the use of resources to provide the goods and services
Methods of Taxation
Tax Deducted at Sources- Tax deducted by the payer before making payment to the payee.
Eg Salary, Rent, Professional fee

Tax Collected at Source- Tax collected by seller while selling the product to the buyer. Eg,
Goods and Services.
Taxation Issues in E-Commerce

Substantial amount of State revenue which is generated

through direct and indirect taxes is lost when Internet
transaction remain untaxed because:

1.Permanent Establishment

2.Nature of products bought and sold- e goods/ intangible

goods
Models of E-Commerce and Taxation

Brick –n- mortar- no online activity. Eg. Offline stores

Click-n-brick- some online activity Eg. ola cabs, food

delivery

All- click model- entire business is online. Eg Softwares and

digital goods
Models of Taxation
⚫All
SubstantialBrick
nexus n All
Brick click click
Sale of tangible Delivery offline, Softwares, music,
goods in shops order online videos, games, app

Substantial
Tax by retailer in nexus,consumption Enforcement is
the bill based/ origin based difficult
tax
Consideration for Taxation
Company registered in State Y actively selling its goods in State X .Factors to
consider:

1. Business Connection

1. Purposeful availment

1. Fixed assets

1. Targeting criteria
Business Connection- Permanent Establishment
According to OECD Model Treaty 1992

1. A fixed place of business through which a business of an enterprise is wholly/partly carried out
(Art. 5.1)

1. Office of dependent agents contracting on behalf of business entity is PE

1. Factory /office- PE only if it carries out business, ancillary work offices not covered

1. Office of independent agents not PE

Virtual Permanent Establishment and Taxation

Galileo International and Amadeus Global Travel v Deputy

CIT (2008) Del

Held: Non- resident companies providing computerized

reservation system are liable to be taxed in India as they
receive booking fees from Indian residents, thereby having a
virtual PE
No Permanent Establishment without servers
⚫ ITO vs Rights Florists Ltd. (ITT ) 2013

⚫ Held that payments to websites like Google and Yahoo! for online advertisements
were not liable to be taxed in India

⚫ The tribunal held that the websites could not be construed as permanent establishments
or as taxable presence of foreign enterprises owned and maintained in India.

⚫ The web servers are located outside of India, no permanent-establishment risk to India
exists
UN Model Double Taxation Conventions
⚫ Art. 5- (Permanent Establishment)
⚫ Art. 9- (Associated Enterprises)
⚫ More taxation right to source State or Capital importing state

⚫ Stocking of goods for delivery- PE

⚫ Independent agents

⚫ Dependent agents
Permanent Establishment in India
⚫ Sec 44DA Income Tax Act- Royalties Income in case of non-residents

⚫ 163 of Income Tax Act, 1961

Appointment of an agent by a foreign company in India may fulfill business

connection and can be a PE

⚫ Business Connecti0n- Sec 9 (1) of Income Tax Act- income is deemed to

accrue or arise in India when it arises directly/indirectly through any business
connection in India
Arms Lenght Principle and Transfer Pricing

⚫ Arms Length Principle- Parties to a transaction are independent

and must be on an equal footing-

⚫ Transfer Price- amount of money paid to the particular part of the

organization for manufacturing goods/delivering services and the
cost to the part of org which purchases those products or services
Transfer Pricing Principle

⚫ Developed to check tax evasion

⚫ Entities transfer income to low tax jurisdictions and expenditure to high

tax jurisdictions

⚫ Principle followed- entities should bear cost/expenses of outsourcing

the work to its other units as if they outsourced it to an independent
vendor
Arms Length Principle and Transfer Pricing

Arms length principle is applicable to assess the profit of the foreign

non-resident that are made from business activity through its PE in
India

⚫ Cargo Community Network Pvt. Ltd. Case –

Equipment royalty
Royalty
Held: taxable in India
PE and Royalty
⚫ DCIT v Metapath Software International Ltd (2006)

Income from selling hardware and software to telecom companies

Held; No PE to carryout sales in India

Sale was not of license to use the software for commercial purposes

Income from such sales was not taxable in India

Taxation of E-Goods
⚫ Only Tangible goods subject to tax

⚫ TCS vs State of AP (2005)

Branded software which comprise of IPR become tangible when stored in
physical media

⚫ CIT vs Oracle Softwares Ltd (2010)

Manufacturing is a process that makes articles fit for use and duplicating
activity which makes a CD fit for use is a manufacturing activity
E-Goods- Goods or Services
⚫ Definition of Goods in India

⚫ Art. 366 (13) – Constitution of India

⚫ Sale of Goods Act, 1930- movable property except actionable claims, money

⚫ Central excise and salt Tax Act, 1944- anything which can be bought and sold

⚫ E-goods- goods which are bought and sold online. It is delivered onlines eg.
Softwares, e-books etc.
Taxation of E-Goods

⚫ Twnthieth Centuary Finance Corporation Limited v State of

Maharashtra (2000)

⚫ Where place of sale has not been agreed or determined through

legal rules of a statute, the place of sale will be the place where
property in the goods passes to the buyer

⚫ Destination based rule- places of consumption- is not applied