aman tax project

8/19/2019 Aman Tax Project

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DR. RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY

B.A. LL.B. (Hons.), Semester VIII, Section A

Topic: T!tion "or E#$ommerce %critic& n&'sis

Submitted to: Submitted by:

Mr. Anil Sain Aman SachanAsst. Professor (law) Roll no.: 13


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Introction

Electronic commerce conducted over the internet has exloded over the ast several !ears.

"ndia#s e$commerce mar%et was worth a&out '3. &illion in **+, it went u to '1.- &illion in

*13. "n *13, the e$retail sement was worth /S'.3 &illion.1 Such otentiall! astonishin

rowth has worried man! 0overnments that the! are not adeuatel! reared to tax this flood of

new commerce. 2he "nternets commercial otential is rowin at an un&elieva&le rate and is

revolutioni4in home and wor% life in the whole world.

Riht now, the 0overnment of "ndia allows 1** ercent 5orein 6irect "nvestments in sinle

&rand retail, and u to 71 ercent 56" in multi$&rand retail. As er the commerce ministr!, the

same 56" norms are also alica&le to all e$commerce comanies.

2axation in "ndia are of two t!es: 6irect taxes, mainl! consistin of income tax, and indirect

taxes, consistin of service tax, 8A2, excise and customs. As of now, income tax is not an issue

for e$commerce comanies, and there are settled laws uniforml! alica&le to all e$commerce

comanies.

2he ro&lem lies with indirect taxes, mainl! 8A29S2 ;service tax. 8A29S2 comes under the

am&it of resective state overnments, and service tax comes under the am&it of the central

overnment.


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A variant of the mar%et lace model is the =&i&ment moe&/,> wherein, aart from actin as a

facilitator, the e$commerce coman! also rovides services such as warehousin, deliver! and

ac%in.

"n this t!e of trade, the e$commerce comanies &ein facilitators have to a! service tax on

their commission income and the sellers have to a! 8A29S2 on the sales of oods. @owever,

when the seller and warehouse of the e$commerce coman! are situated in two different states,

additional 8A2 is demanded &! the state in which the warehouse of the e$commerce coman! is

situated. 2his leads to either loss to the state, where the warehouse is situated, or dou&le taxation

on the art of the e$commerce coman!.

Man! in 0overnment see in it a new source of tax revenue. "t is of course ust and euita&le that

e$commerce &usinesses a! their fair share of tax li%e an! other &usiness, &ut this new latform

for deliverin oods and services resents some uniue ro&lems of taxation. E$commerce has,

inter alia, the followin features, which ma%e it difficult to &rin it under the traditional concets

of taxationB :

(i)omuter C to comuter transactions rarel! leave a aer trail.

(ii)Decause comuters are communicatin with each other, the urchase and sale transactions are

anon!mous, articularl! when new forms of exchane, such as electronic cash, are used.

(iii)


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THE $ON$E0T O" 0ERMANENT ESTABLISHMENT (0E)

PE is the &asis of source$&ased taxation. Most tax treaties use the concet of PE to tax income

enerated out of cross$&order trade &! determinin the contact necessar! to tax &usiness rofits

in the source countries. 2he concet of PE is &ased on the reuirement that an enterrise has a

sufficient resence throuh which it conducts &usiness in the source countr! &efore it can &e

su&ected to taxation &! that countr!. 0enerall!, PE is defined as a fixed lace of &usiness

throuh which the affairs of an enterrise are wholl! or artl! carried on. @owever, PE has &een

defined differentl! under various tax treaties. 5or examle the definition of PE &! E6 refers

to the Ffixed lace of &usiness. PE is defined under article 7 of the E6 Model 2ax

onvention, 1++7 (FE6 M) and is interreted in the commentar!. "t excludes lace of

&usiness which is mo&ile. "t refers to a h!sical location of &usiness in a articular lace with a

certain deree of ermanence. @owever, the activit! of a &usiness enterrise would &e deemed to

result in a PE onl! if it satisfies the Ffixed lace of &usiness test.7

"n cto&er 1++, two imortant reorts were ratified at the rani4ation for Economic o$

oeration and 6eveloment (E6) Ministerial onference on E$ommerce in ttawa. 2he

oint declaration of &usiness and 0overnment reresentatives indicate that the taxation

framewor% for electronic commerce should &e uided &! the same taxation rinciles that uide

0overnments in relation to conventional commerce.-

2he lo&al character of e$commerce ma%es it difficult for an! one countr! to monitor and tax e$

commerce income. "nternational cooeration is needed to handle e$commerce taxation, &ut such

cooeration is not eas!, iven the conflictin interests of different countries. "n addition, the

virtual nature of e$commerce ma%es it difficult to monitor and control e$commerce transactions

even if countries are cooeratin.

.2003/ 14 *M*' 54 )M*6

5 htt!"##www$rashminsanghvi$com#downloads#ta%ation#international-

ta%ation#b!o7ta%ation7in7india#Cha!ter72-a%ation7of7Electronic7Commerce$!df last

accessed on 22-March-201

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$se Sties # A Brie Insi12t Into $ertin I&&strti*e $ses

T2e t! isse in 3rnt4

Ama4on identifies itself as an online latform and a facilitator &etween the sellers and the

&u!ers, and in no wa! control the transactions that haens in the arties. Ama4on to coml!

with the 56" reulations in "ndia, does not &u! the oods directl! from the seller, &ut merel!

rovides an online latform to disla! the oods. nce, a &u!er urchases a ood, Ama4on will

inform the seller a&out such urchase, either the seller has the otion to use its own loistics to

deliver the roduct or can choose the loistics services rovided &! Ama4on. Ama4on also

rovides a service called =5ulfilled &! Ama4on> roram, which constitutes G7H of the sales of

Ama4on in "ndia. /nder this roram, the seller would store its roducts in one of the

warehouses rovided &! Ama4on, to reduce the deliver! time. Ama4on would use state of the art

technoloies, includin data$minin and criticall! anla!se the availa&le data to redict the

oularit! of certain roducts and store the same in the warehouse to have a uic% turn$around

time in rovidin the services to the client."n &oth the case, Ama4on would collect the mone!

from the &u!er, ta%e a ercentae of the sells roceeds as commission or rovidin the service,

and would return the rest to the seller. "n turn Ama4on would a! Service tax to the entral

0overnment and the sellers would a! the alica&le 8A2 or sales tax directl!.

An&'sis 2he tax authorities slaed notice on the sellers who have listed Ama4on warehouse as

an additional lace of &usiness. 2houh, there is not rule fixin the limit on a maximum num&er

of vendors that can reister in a warehouse, a comlete readin of other rovisions of the law

would reveal that such a reistration need to manned &! certain reuirements in terms of havin

a searate lace to %ee the oods and have rovision to disla! notice &oards outside the

remises of the warehouse. @owever, in case of Ama4on, to otimi4e distri&ution, it would %ee

similar roducts &elonin to different sellers at the same lace, for examle, a headhone of the

same &rand &elonin to different sellers can &e stored at the same lace.

4 11EC'ews&110201( )Came u! after *ma+on case in ,arnataka$ In

www$economictimes$indiatimes$com last accessed on 22-March-201

http://www.economictimes.indiatimes.com/http://www.economictimes.indiatimes.com/


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Moreover, the tax authorities are claimin that Ama4on is actin as a dealer and is lia&le to a!

8A2 as er the rovisions of the Iarnata%a 8A2 Act, **7, as it is not merel! a service rovider

&ut is rovidin value addition in terms of state$of$the art data anal!sis and rediction s!stems

which hels in storin and arranin the roducts and is also actin as a commissionin aent as

er the Iarnata%a 8A2 Act. @owever, Ama4on has cateoricall! stated that the! are not a dealer

as the leal ownershi of such roducts is not transferred to Ama4on and is merel! actin as a

service rovider to rovide fast deliver! to the &u!ers.

Jow if we anal!4e the osition of Ama4on as er the definition iven, it seems to ualif! as a

dealer as Ama4on is distri&utin the oods on &ehalf of the sellers. @owever, it seems li%e the tax

deartment has overloo%ed the rincile of =noscitur a socii”, where the terms =sul!in and

distri&utin> should &e read ta%in into account the other adacent words in the sections which

would clarif! the true meanin of the alica&ilit! of the rovision.

"nterestinl!, oin &! the 56" rules, a forein entit! cannot enae in retail trade in "ndia. So, if

Ama4on is identified as a dealer, it would not &e a&le to continue its &usiness in "ndia.

2he core issue to &e understood out there is no tax evasion, &ut a mere case of who is lia&le to

a! the tax. "n the resent case the overnment is ettin the full tax, &ut it is onl! aid &! the

seller. 2he contention of the overnment is that it is Ama4on who should &e a!in the taxes and

not the seller. 0overnment should consider amendin its existin rules to meet the reuirement of

new industries li%e e$commerce sector and can have relevant uidelines in lace, to avoid tax

evasion.

T2i Air5's Interntion& 0+&ic $o. Lt. *. $ommissioner (A6n), $entr& E!cise, De&2i7

Facts:- 2he assessee$airlines A, oeratin in "ndia, was availin facilit!9services from #omuter

Reservation S!stem# (RS) service roviders in terms of certain areements with forein &ased

comanies B intended to facilitate reservation and tic%et availa&ilit! osition to the Air 2ravel

Aents in "ndia throuh online comuter s!stem, commonl! %nown as #omuter ReservationS!stem# (RS) maintained &! the comanies.

A have worldwide oerations in terms of areements entered into &! them with RS as well as

2ravel Aents. 2he! ma%e a!ments to RS comanies towards consideration on &asis of tic%et

3 .201/ & ta%mann$com 11 )'ew 8elhi - CE9* :


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value.

2he RS facilit! rovidin comanies maintain data &ase and structured data relatin to tic%et

reservation and seat availa&ilit!, fair structure, fliht timins sectors etc. information sulied to

them &! Airlines from time to time with riht of access and retrieval of data &! Airlines and Air

2ravel Aents from Master omuter maintained &! a&ove RS comanies throuh on$line

comuter s!stem facilit! rovided &! these comanies.

Isse# 52et2er t2e A--e&&nt# t2e +rnc2 oice o T2i Air5's, Bn1o in Ini, cn +e

trete s t2e reci-ient o t2e ser*ice -ro*ie +' t2e $RS $om-nies n on t2is +sis

s+6ect to ser*ice t! ner re*erse c2r1e mec2nism8 o Section 99A.

He&# the &ranch office in "ndia of 2hai Airwa!s, Dan%o%, can not &e treated as reciient of the

service rovided &! the RS omanies, in ursuance of their areements with the Aellant#s

@ead ffice at Dan%o%.

"t is clear the areements &etween the Aellant#s @ead ffice at Dan%o% and the RS

omanies, it is clear that the RS omanies were not rovidin an! "ndian &ranch secific

service. "t is the @ead ffice at Dan%o% which, in order to facilitate the &oo%in of air tic%ets

thouh "A2A aents all over the world, had neotiated with the RS omanies and had entered

into contacts with them for storae of udated data on real time &asis reardin their fliht

schedules, fare, seat availa&ilit! etc. and ma%in the same accessi&le to their "A2A aents. 2he

Aellant#s o& is onl! aointin the "A2A aents in "ndia, collection of sale roceeds of tic%ets

sold &! "A2A aents and remittin the same to @ead ffice and as such the! are not involved in

ta%in %e! &usiness decisions. 2herefore, al!in the underl!in rincile of nd roviso of

Section --A(1) “ Provided further that where the provider of the service has his businessestablishment both in that country and elsewhere, the country, where the establishment of the

provider of service directly concerned with the provision of service is located, shall be treated as

the country from which the service is provided or to be provided.”

it is the @ead ffice which has to &e treated as the reciient of the Service rovided &! the RS

omanies as it is the @ead ffice which is mort directl! concerned with the use of the Service

rovided &! the RS omanies as the @ead ffice has used the service rovided &! the RS

; he reverse charge mechanism was service ta% would be !ayable by the service reci!ient$9ubse?uently> an e%!lanation to 9ection 5)10 brought in the conce!t of im!ort ofservices and !rovided that the services !rovided by a !erson based outside India andreceived by a !erson based in India would be deemed to be ta%able$ 9ubse?uently> thegovernment deleted the e%!lanation and inserted 9ection 55* in the *ct in 2005 to de


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omanies for romotin the sales of the Airlines tic%ets all over the world and it cannot &e said

that onl! the "ndia &ranch (Aellant) has &enefited from the Service rovided &! the RS

omanies.

An&'sis activit! of the RS omanies is covered &! the definition of #nline 6ata&ase access

and9or retrieval service, as iven in Section -7(G7) read with Section -7(G7) of the 5inance Act,

1++B and this service, if rovided or deemed to &e rovided in "ndia, would attract service tax

under section -7(1*7).

irresective of the location of service rovider$ whether in "ndia or outside "ndia, service tax is

chared in "ndia if the service reciient is located in "ndia i.e. the service has &een received and,

hence, consumed in "ndia, and if service reciient is located a&road i.e. the service has &een

received and, hence, consumed a&road, there is no lia&ilit! of the service rovider in "ndia to a!

the service tax. 2his is in accordance with the rincile of euivalence mentioned in the Aex

ourt#s udment.1*

So here in this the service reciient is not in "ndia instead the &ranch office in "ndia of 2hai

Airwa!s, Dan%o% is merel! an aent of the coman! which is helin him in facilitatin the

&usiness.

$se:# $se o eBay International AG *. Asstt. DIT 11 C

Facts of the case $ "n this case the assessee, a tax resident of Swit4erland, oerated "ndia$

secific we&sites rovidin an online latform for facilitatin the urchase and sale of oods and

services to users &ased in "ndia. 2he assessee entered into Mar%etin Suort Areement with

two rou comanies incororated and reistered in "ndia, viz., eDa! "ndia and eDa! Motors in

connection with "ndia$secific sites. 2he assessee claimed that revenue earned &! it from

oerations of we&sites in "ndia was not taxa&le in "ndia as it did not have an! PE in "ndia as er

Article 7 of the 62A.

Mm+i Tri+n& 2e& that the revenue earned &! the assessee from "ndia$secific we&sites was

taxa&le as er the rovisions of Article G of the "ndia$Swit4erland 62AA (62A) onl! if it had a

PE in "ndia as er Article 7 of the 62A. Since the assessee did not have an! PE in "ndia no

amount was taxa&le in "ndia.

10 *ll India @ederation of a% Practitioners v$ Anion of India .2004/ 10 9 155 and

*ssociation of Beasing @inancial 9ervice Com!anies v$ Anion of India .2010/ 2;

9 &15

11 .2012/ 2 ta%mann$com 00#.201&/ 1(0 I8 20 )Mum$ - rib$

http://www.taxmann.com/fileopen.aspx?id=101010000000075594&source=linkhttp://www.taxmann.com/fileopen.aspx?id=101010000000075594&source=link


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Issues raised by the department $ 2he deartment was of view that revenue earned &! eDa! from

"ndia would &e taxa&le as Dusiness Profits as the assessee had deendent aent PE, as er Article

7(7) and 7(-) of the 62A, in "ndia in the form of eDa! "ndia and eDa! Motors, two rou

comanies and that &oth the rou comanies were rovidin the services onl! to the assessee

for facilitatin oerations of "ndia$secific we&sites and also that the "ndian comanies had no

indeendent existence as the assessee exercised full and direct control over the rou comanies.

2he revenue further too% assistance of Article 7()(a) of the 62A to contend that "ndian rou

comanies could also &e treated as PEs of the assessee in "ndia as its #Place of manaement#? that

all the costs incurred &! eDa! "ndia were reim&ursed &! the assessee with H mar%$u. Since the

assessee was reuired to reim&urse the entire amount of exenses to eDa! "ndia, this in effect

meant that the remises for which rent was aid &! eDa! "ndia, etc., &eloned to the assessee and

all other exenses, thouh aarentl! incurred &! eDa! "ndia, were in realit! incurred &! the

assessee. "n the liht of the a&ove facts, it was contended that eDa! "ndia and eDa! Motors also

constituted ermanent esta&lishment of the assessee in terms of Article 7() of 62A.

Rulin of the !umbai Tribunal in this case $ 2he Mum&ai 2ri&unal held that there was no disute

a&out the fact that eDa! "ndia and eDa! Motors were rovidin their exclusive services to the

assessee. "t had &een fairl! admitted that these two entities had no other source of income, excet

that from the assessee in lieu of the rovision of service as set out in the areements. "n view of

the fact that eDa! "ndia and eDa! Motors were exclusivel! assistin the assessee in carr!in out

its &usiness in "ndia, the! definitel! &ecame deendent aents of the assessee. 2he next uestion,

however, was whether or not these deendent aents constituted ermanent esta&lishments of the

assessee as er clause (i), (ii) or (iii) of Article 7(7) of 62A, on which the 2ri&unal o&served as

under:K

(i) 2hat clause (ii) of Article 7(7) refers to the deendent aent ha&ituall! maintainin astoc% of oods or merchandi4e for or on &ehalf of the enterrise. 2his clause had noalication in this case &ecause there was no reuirement on the art of eDa! "ndia or eDa! Motors to maintain an! stoc% of oods or merchandi4e on &ehalf of the sellers.

(ii) 2hat clause (iii) alies where the deendent aent manufactures or rocesses theoods or merchandi4e in that State for the enterrise. &viousl!, this clause was alsonot alica&le, &ecause "ndian rou comanies were not reuired to manufacture or rocess the oods or merchandise on &ehalf of the assessee.

(iii) 2hat as er clause (i), it is to &e seen whether the "ndian rou comanies do or

ha&ituall! exercise #an authorit! to neotiate and enter into contracts for or on &ehalf of the assessee.# D! erformin the activities as narrated in the areement, it was seen that"ndian comanies had at no stae neotiated or entered into contract for or on &ehalf of the assessee. Siml! &! rovidin mar%etin services to the assessee or ma%incollection from the customers and forwardin the same to the assessee, it could not &esaid that eDa! "ndia or eDa! Motors entered into contracts on &ehalf of the assesseeand that there was no mention in the assessment order or the contentions of 6R thatan! contract was entered into &! "ndian comanies durin the dischare of their


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functions or otherwise for or on &ehalf of the assessee. 2hus, the test laid down as er clause (i) of Article 7(7) also failed in the resent case.

(iv) 5urther, as reards reliance laced &! revenue on Article 7()(a), it was held that "ndiancomanies were neither ta%in an! manaerial decision nor had an! role to la! inmaintenance or oerations of we&sites. 2he! had no role to la! in online &usiness

areements and were reuired to erform onl! mar%etin suort services for theassessee. @ence, it could not &e said that the! formed #lace of manaement# of theassessee#s overall &usiness.

He&

2houh eDa! "ndia and eDa! Motors were deendent aents of the assessee, !et the! did do not

constitute #6eendent aent PEs# of the assessee in terms of Article 7 of the 62A.

$onc&sions

a we&site can constitute PE in the source countr!, E6 model convention o&serves otherwise.

"n these t!es of cases E6 model convention, which mostl! favours residence &ase of

taxation, has alwa!s contended that we&site cannot constitute a PE, as there is no h!sical

resence in source State. Accordin to E6 ommentar!, a PE reuires a Lh!sical resenceL

in a countr! and a we&site is Lintani&leL. @owever, the develoin countries have alwa!s

reistered their disareement. 2he /J Model convention, which favours source &ased taxation,

does not clearl! deal with these issues relatin to e$commerce.


11/12

resident comanies would have to &ear the heat of dou&le taxation.

"n its stronest statement !et on roressive tax reform, the /nited Jations (L/JL) recentl!

called on countries to introduce a lo&al car&on tax and a financial transaction tax (L522L). 1 2he

0lo&al "nternet 2ax suested &! the Euroean 2elecommunication Jetwor% erators

Association (LE2JL), which wants Ale, 0oole, and other last accessed on 2(-March-201htt!"##www$un$org#en#develo!ment#desa#!olicy#wess#inde%$shtml$

1& 9ee EA$ CDMM'> **ID' CA9DM9 A'ID'> a%ation of the @inancial

9ector>

htt!"##ec$euro!a$eu#ta%ationcustoms#ta%ation#otherta%es#


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march$*17+. 11ecnews311**1B (came u after ama4on case in %arnata%a.) "n

www.economictimes.indiatimes.com last accessed on $march$*171*. **N1B taxman B (art) ta$ literature%ta$ation of e&commerce &! rachna mahalwala11. **N 1G7 taxman -G (ma)

1. htt:99www.rashminsanhvi.com9downloads9taxation9international$taxation9&oOtaxationOinOindia9chaterO$taxationOofOelectronicOcommerce.df last

accessed on $march$*17
http://www.economictimes.indiatimes.com/http://www.rashminsanghvi.com/downloads/taxation/international-taxation/bpo_taxation_in_india/Chapter_2-Taxation_of_Electronic_Commerce.pdfhttp://www.rashminsanghvi.com/downloads/taxation/international-taxation/bpo_taxation_in_india/Chapter_2-Taxation_of_Electronic_Commerce.pdfhttp://www.economictimes.indiatimes.com/http://www.rashminsanghvi.com/downloads/taxation/international-taxation/bpo_taxation_in_india/Chapter_2-Taxation_of_Electronic_Commerce.pdfhttp://www.rashminsanghvi.com/downloads/taxation/international-taxation/bpo_taxation_in_india/Chapter_2-Taxation_of_Electronic_Commerce.pdf

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