Direct Taxation of E-Commerce Business Start-ups

SITUATION• A orders something

at B

• B has to deliver the order to C

• D owns B

In which country would the income received by B would be taxed?

UNDERSTANDING AMAZON

AMAZON.COM INC – AMZN – HOLDING COMPANY IN USA

AMAZON SELLER SERVICES PRIVATE LIMITED - AMAZON.IN

AMAZON INTERNET SERVICES PRIVATE LIMITED - AWS Hosting

AMAZON IT SERVICES (INDIA) PRIVATE LIMITED – Development and Maintenance

AMAZON DEVELOPMENT CENTRE (INDIA) PRIVATE LIMITED –Development and Maintenance

AMAZON ONLINE DISTRIBUTION SERVICES PRIVATE LIMITED -PaywithAmazon - Payments

AMAZON TRANSPORTATION SERVICES PRIVATE LIMITED - Logistics

TAXATION OF E-COMMERCE START-UPS

In the Indian Context

OUTLINE

Understanding the e-Commerce

BusinessTaxation

Planning the Start-up

UNDERSTANDING THE E-COMMERCE BUSINESS

E COMMERCE DEFINITION – OECD 2009

An e-Commerce transaction is the sale or purchase of goods

or services, conducted over computer networks by Automated

methods.

UNDERSTANDING THE BUSINESS MODEL OF E-COMMERCE

Understanding the Business and Services

offered

Modus Operandi of the

business

Communication and other related

technologies

ISSUES FOR DIRECT TAXATION OF AN E-COMMERCE BUSINESS

Determination of the “economic attachment”

• Situs of the Business

Taxable Jurisdiction

• Inclusion of Cyberspace?

Determination of Permanent Establishment in case of a non-resident

Legal Difficulty –

• Contracting States are different, Hence which law to be applied?

Nature of Contract –

• Sale of Goods/Sale of Service

• Rental of Goods/Service

EXAMPLES OF E-COMMERCE START-UPS

India

n Sta

rt-u

ps

Fore

ign

Sta

rt-u

ps

TYPES OF E-COMMERCE BUSINESS

E -Commerce

E-Advertising

• Classifieds

• Advertisements

E-Sales

• Online Marketplace

E-Delivery

• Pure digital content

• Online Services

TAXATION

EXAMPLES OF E-COMMERCE INCOMES

Business Income

• Web/Email Hosting Services (GoDaddy, BigRock)

• ITO v/s People Interactive (I) P Ltd

• Network Connectivity Services (Cloudflare)

• Cloud Services (Google Apps)

• Electronic Services (Oyo Rooms, Trip Planning, Ola Cabs)

• Commission and Listing Charges (eBay, Amazon, Flipkart)

• Advertisement Charges (Google AdWords)

EXAMPLES OF E-COMMERCE INCOMES

Royalty

• License of off-the-shelf Computer software

• Selling or Renting of Copyrighted digital media e.g. Video, Song, Images etc.

Fees for Technical Service (FTS)

TAXATION

TDS Provisions

• Resident

• Non Resident

Business Income

Royalty

TDS PROVISIONS

• Provisions of Chapter XVII

Resident

• Section 195 – Payment to Non Resident or Foreign Company @ the prescribed rates in force (40%)

• Royalty @ the prescribed rates in force (10%)

Non Residents

TDS Deduction Issues

• International Transactions

• Friendly Procedural Laws

TAXATION

Resident

Worldwide income

Non Resident

Income Earned in India (Section 9)

Business Income (Permanent

Establishment)Royalty

TAXATION OF E-COMMERCE BUSINESS AS A RESIDENT

Global Income Taxed in India at

30% + SC + CESS

TAXATION OF E-COMMERCE BUSINESS AS A NON-RESIDENT

Indian Income in the nature of Royaltywould be taxed in

India at 10% (Section 115A)

Indian Business IncomeTaxed in India at

40% + SC + CESS or DTAA Rates whichever

is favourable

TAXATION OF E-COMMERCE BUSINESS AS A NON-RESIDENT

A

U

T

O

M

A

T

E

D

DETERMINATION OF A PERMANENT ESTABLISHMENT FOR AN E-COMMERCE BUSINESS

Entity is dependent on Foreign

Company/Non-Resident

Presence of Continuous Business

in India

Capacity to Contract

Income is Attributable to India

Fixed Virtual

Galileo International and Amadeus Global Travel v DCIT (Delhi Tribunal)

SITUATIONS FOR A PERMANENT ESTABLISHMENT

Because of the Intangible nature of transactions, the existing tests laid down for determination of Permanent Establishment does not suffice

Situation 1: Business Functions are Carried out on own Website/ApplicationOwn Server / Leased Server Operations

Website is used for conducting business operations on a large scale.

Physical Location of server will be constituted as “Fixed place of Business”

Physical Location of Server constitutes Permanent Establishment

SITUATIONS FOR A PERMANENT ESTABLISHMENT

Situation 2 - Advertisement of Products/Services in a website or business website Generally in the form of a Website Advertisement Banner

Mere Advertising

Server of the website does not constitute Permanent Establishment

ITO v/s Right Florists Pvt. Ltd (Kolkata Tribunal) and in the cases of Advertisement Income for Google and Yahoo

Situation 3 - No physical establishment in the Host Country. Website may constitute a Virtual Permanent Establishment

Delhi Tribunal in the cases of Galileo International and Amadeus Global Travel vs DCIT

WHAT HAPPENS IF IS A NON - RESIDENT AND HAVING NO PHYSICAL ESTABLISHMENTS IN INDIA?

http://www.whois.com/whois/olacabs.com

https://who.is/nameserver/ns-1486.awsdns-57.org/

The domain olacabs.com is used for it’s mobile app background processing.

LOCATION OF SERVERS (E.G. OF AMAZON WEB SERVICES)

E-Commerce capitalized Cloud Computing Methods. Multiple Instances of

Servers can be created and removed within few seconds at any location in the

world.

PLANNING THE START-UP

ROLE OF THE ENTREPRENEUR –STRATEGIZING THE START-UP

• Define the products and services

• Define the Business Processes

• Define the Corporate Structure

• Define the Data Flows

• Define Locations for servers and their roles in Business Operations

• Implement a Taxation framework

• Execute the Business

• Taxation Laws (Direct and Indirect)

• Security, Privacy, IP, Customs, Excise, FDI, FEMA

• Corporate Structure

• E-Commerce Infrastructure Architecture

• Products

• Supporting Processes

BusinessBusiness

Architecture

Local LawsInternational

Laws

ROLE OF THE ENTREPRENEUR –STRATEGIZING THE START-UP

ROLE OF A CA - TAX CONSULTANCY OBJECTIVES Characterisation

of Income

Identification of the existence of

Permanent Establishment

Tracing the start and end

point of a transactionReviewing the

documentation to understand the nature

of the contract

Removing legal difficulties of

tax laws of various nations

Identification the taxable jurisdiction

FINAL DESTINATION

SOURCES

www.icai.org

www.nishithdesai.com

www.taxmann.com

www.ey.com

www.kpmg.com

www.caclubindia.com

www.rashminsanghvi.com

www.oecd.org/india

aws.amazon.com

who.is

whois.com

olacabs.com

QUESTIONS AND THANK YOU

Bharath Rao

mailme@bharathraob.com

Latha Kamath

simplylatha@gmail.com

The information contained in this presentation is of a general nature and is not intended to address the circumstances of

any particular individual or entity. The presenters disclaim any liability to any person in respect of anything as the

technical contents in this presentation is solely meant for communication of information. One should act on information

only with appropriate professional advice and after a thorough examination of the particular situation.