"Virtual Presence" - Is it the new norm?

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Recently, the Madras HC, in Verizon Communications Singapore Pte. Ltd. [TS-577-HC-2013(MAD)], has ruled that payment for “International Private Lease Circuit” (IPLC) is taxable in India as royalty. HC held that payment is taxable as royalty for the use of equipment/use of process under IT Act as well as under Singapore DTAA. In a first of it's kind ruling, the HC has considered the presence of assessee's equipment, its rights and responsibilities as its "virtual presence" which operates through its equipment placed in customer's premises. HC has further remarked that in the 'virtual world', physical presence of an entity in a country has become insignificant.  

 

The ruling brings alive the debate of whether the age old tax principles are still applicable in today's virtual world and if yes, to what extent? Will the ruling have an impact on other industries which also operate in the virtual world ? Does the Madras HC judgment dilute the favourable Delhi HC ruling in Asia Sat?

Mr. Rajendra Nayak
Partner,InternationalTaxServices EY
Technology and telecommunication is often borderless, but tax regulations are not. That simple sounding conflict can give rise to complex and potentially significant tax issues in cross-border arrangements involving technology and telecommunication transactions. In general, under current rules the critical taxation issues in telecommunication/ technology transactions are determining the character of the revenue derived from a telecommunication service provider and whether the telecommunication service provider has a taxable presence in the jurisdiction in which business is transacted. In 2010, the commentary to the OECD Model Convention (MC) was updated to address tax treaty issues arising from communication transactions and activities. The OECD view is that the payments for use of transmission capacity do not constitute royalty. They cannot also be viewed as payments for process royalty since the technology is not transferred to the customer. As the customer also does not acquire physically possession of the ICS equipment used in such transmission, the payments would also not be classified as ICS equipment royalty in respect of tax treaties that include the ICS equipment royalty clause. The payment for transmission capacity is instead a payment for services to which Article 7 (business profits) applies. This 2010 update also contains India's observations in...

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Mr. Nitin Gupta
Director, Tax and Trade, Alcatel Lucent
In my view the judgment may reignite the debate which one may have thought to be settled. And of late we are seeing differing views from different courts and even same court dissenting from its earlier views...the trend is disturbing at least from Tax payer perspective, wherein they cannot ascertain their costs with certainty thereby impacting their ability.
Mr. H Padamchand Khincha
CA
Trade & Commerce has moved from real to the “Virtual world”. Technology has enabled access to global market with a hand-held touch screen. The yearning for e-commerce is on a rise and on-line transactions are exploding exponentially. This transition and galloping advancement has posed challenge in taxing such transactions. Legacy tax principles and procedures are lagging behind in catching pace with the taxation in Virtual world. Recently, the Madras High Court in the case of Verizon Communications Singapore Pte Limited v ITO reported in [2013] 39 taxmann.com 70 has pronounced a ruling in the context of taxation of Internet Private Leased Circuit [“IPLC”]. The payment made by an Indian company to a non-resident [Singapore Company] for providing end-to-end internet connectivity outside India was concluded to be a royalty payment and hence taxable under section 9(1)(vi) of the Act and article 12(3) of India-Singapore Double Taxation Avoidance Agreement (“Indo-Singapore treaty”). The connectivity for Indian leg was provided by a domestic Internet service provider pursuant to Indian regulatory requirements. It was a point to point service with two half circuits starting from one of the parties and terminating at the other end. The Court in...

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T.P.Ostwal
To say that virtual presence is the basis of taxation in India requires re-writing of laws and treaties. As per the present commentaries of OECD and UN and therefore as per the treaties India has with these models, there can’t be taxation on the basis of virtual presence. If this basis is adopted, every person doing business on electronic or digital media would have a virtual presence. This could possibly trigger taxation on a net basis on the ground that they have a Permanent Establishment (PE). Therefore even on that basis, with due respect, taxation of royalty on gross basis does not find any justification. Further, if business profits are to be taxed, then only activities to the extent of their presence in India would be taxed, and India’s jurisdiction is only up to 200 nautical miles.
gautam_doshi

The decision of the honourable Madras High Court does make observations on the question whether a presence, a permanent establishment can arise in today's " virtual world" merely, on account of economic rights and obligations, though the Honourable Court does feel the need at least for some equipment. But, these observations are by way of obiter and are not part of the decision. Hence, developments in the law on this aspect will arise through some other decision or statute.

 

The decision however, refers back to the old dispute between use of equipment or process and the provision of a service with the use of equipment or process. The Honourable Court has considered Explanations 5 and 6 to Section 9(1)(vi) as changing the scope of this debate. The Honourable Court has held that the explanations have for all purposes expanded the scope of "use of equipment" or of "process" to such an extent that the two phrases would now encompass cases where a service is rendered, if the mainstay of the service involves the use of equipment or process. The Honourable Court has adopted the position that payment for such a service amounts to payment for use of equipment or process.

 

It is...

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