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

Topic: Taxation For E-Commerce critical analysis

Submitted to:

Submitted by:

Mr. Anil Sain

Aman Sachan

Asst. Professor (law)

Roll no.: 13

Electronic commerce conducted over the internet has exploded over the past several years.
India's e-commerce market was worth about $3.8 billion in 2009, it went up to $12.6 billion in
2013. In 2013, the e-retail segment was worth US$2.3 billion. 1 Such potentially astonishing
growth has worried many Governments that they are not adequately prepared to tax this flood of
new commerce. The Internets commercial potential is growing at an unbelievable rate and is
revolutionizing home and work life in the whole world.
Right now, the Government of India allows 100 percent Foreign Direct Investments in single
brand retail, and up to 51 percent FDI in multi-brand retail. As per the commerce ministry, the
same FDI norms are also applicable to all e-commerce companies.2
Taxation in India are of two types: Direct taxes, mainly consisting of income tax, and indirect
taxes, consisting of service tax, VAT, excise and customs. As of now, income tax is not an issue
for e-commerce companies, and there are settled laws uniformly applicable to all e-commerce
The problem lies with indirect taxes, mainly VAT/CST &service tax. VAT/CST comes under the
ambit of respective state governments, and service tax comes under the ambit of the central
government. While there are several business models followed by the e-commerce companies in
India, they can be broadly classified into inventory-based model or market place model.
In case of the inventor-based model, the company engages in commerce directly. Conversely, in
case of the market place model, the e-commerce company facilitates the provision of ecommerce transactions by acting as platform in return for a commission from the sellers of the
goods/services. From the perspective of an e-commerce company, in case of the inventory based
model, VAT or CST, as the case maybe, is levied on the sale of goods; whereas, in case of the
market place model service tax is levied on the commission earned.

1 Evolution of e-commerce in India Creating the bricks behind the clicks by PwC last
accessed on 22-March-2015
2 last accessed on

A variant of the market place model is the fulfilment model3, wherein, apart from acting as a
facilitator, the e-commerce company also provides services such as warehousing, delivery and
In this type of trade, the e-commerce companies being facilitators have to pay service tax on
their commission income and the sellers have to pay VAT/CST on the sales of goods. However,
when the seller and warehouse of the e-commerce company are situated in two different states,
additional VAT is demanded by the state in which the warehouse of the e-commerce company is
situated. This leads to either loss to the state, where the warehouse is situated, or double taxation
on the part of the e-commerce company.
Many in Government see in it a new source of tax revenue. It is of course just and equitable that
e-commerce businesses pay their fair share of tax like any other business, but this new platform
for delivering goods and services presents some unique problems of taxation. E-commerce has,
inter alia, the following features, which make it difficult to bring it under the traditional concepts
of taxation4 :
(i)Computer to computer transactions rarely leave a paper trail.
(ii)Because computers are communicating with each other, the purchase and sale transactions are
anonymous, particularly when new forms of exchange, such as electronic cash, are used.
(iii)With anonymous transactions, there is a lack of information regarding the locations of seller
and purchaser, but sales tax laws are dependent on this information.
(iv)E-commerce makes possible electronic delivery of property and goods (Books, CDs and
movies in the electronic form), and services (brokerage or accounting services), so there is no
physical delivery by a common carrier. Also the form of the goods is converted from tangible (a
physical CD) to intangible (a downloaded computer program of music), which does not exist as a
physical object. Many sales tax regimes exempt intangibles from taxation.

3 11ECNews31102014 (Came up after Amazon case in Karnataka.) In last accessed on 22-March-2015
4 [2002]124 TAXMAN 242 (ART) tax literature/taxation of e-commerce by Rachna


PE is the basis of source-based taxation. Most tax treaties use the concept of PE to tax income
generated out of cross-border trade by determining the contact necessary to tax business profits
in the source countries. The concept of PE is based on the requirement that an enterprise has a
sufficient presence through which it conducts business in the source country before it can be
subjected to taxation by that country. Generally, PE is defined as a fixed place of business
through which the affairs of an enterprise are wholly or partly carried on. However, PE has been
defined differently under various tax treaties. For example the definition of PE by OECD refers
to the fixed place of business. PE is defined under article 5 of the OECD Model Tax
Convention, 1995 (OECD MC) and is interpreted in the commentary. It excludes place of
business which is mobile. It refers to a physical location of business in a particular place with a
certain degree of permanence. However, the activity of a business enterprise would be deemed to
result in a PE only if it satisfies the fixed place of business test.5
In October 1998, two important reports were ratified at the Organization for Economic Cooperation and Development (OECD) Ministerial Conference on E-Commerce in Ottawa. The
joint declaration of business and Government representatives indicate that the taxation
framework for electronic commerce should be guided by the same taxation principles that guide
Governments in relation to conventional commerce.6
The global character of e-commerce makes it difficult for any one country to monitor and tax ecommerce income. International cooperation is needed to handle e-commerce taxation, but such
cooperation is not easy, given the conflicting interests of different countries. In addition, the
virtual nature of e-commerce makes it difficult to monitor and control e-commerce transactions
even if countries are cooperating.

5 [2008] 175 TAXMAN 67 (MAG)

6 last
accessed on 22-March-2015

Case Studies - A Brief Insight Into Certain Illustrative Cases

The tax issue in Karnataka7
Amazon identifies itself as an online platform and a facilitator between the sellers and the
buyers, and in no way control the transactions that happens in the parties. Amazon to comply
with the FDI regulations in India, does not buy the goods directly from the seller, but merely
provides an online platform to display the goods. Once, a buyer purchases a good, Amazon will
inform the seller about such purchase, either the seller has the option to use its own logistics to
deliver the product or can choose the logistics services provided by Amazon. Amazon also
provides a service called Fulfilled by Amazon program, which constitutes 75% of the sales of
Amazon in India. Under this program, the seller would store its products in one of the
warehouses provided by Amazon, to reduce the delivery time. Amazon would use state of the art
technologies, including data-mining and critically anlayse the available data to predict the
popularity of certain products and store the same in the warehouse to have a quick turn-around
time in providing the services to the client.In both the case, Amazon would collect the money
from the buyer, take a percentage of the sells proceeds as commission or providing the service,
and would return the rest to the seller. In turn Amazon would pay Service tax to the Central
Government and the sellers would pay the applicable VAT or sales tax directly.
Analysis The tax authorities slapped notice on the sellers who have listed Amazon warehouse as
an additional place of business. Though, there is not rule fixing the limit on a maximum number
of vendors that can register in a warehouse, a complete reading of other provisions of the law
would reveal that such a registration need to manned by certain requirements in terms of having
a separate place to keep the goods and have provision to display notice boards outside the
premises of the warehouse. However, in case of Amazon, to optimize distribution, it would keep
similar products belonging to different sellers at the same place, for example, a headphone of the
same brand belonging to different sellers can be stored at the same place.

7 11ECNews31102014 (Came up after Amazon case in Karnataka.) In last accessed on 22-March-2015

Moreover, the tax authorities are claiming that Amazon is acting as a dealer and is liable to pay
VAT as per the provisions of the Karnataka VAT Act, 2005, as it is not merely a service provider
but is providing value addition in terms of state-of-the art data analysis and prediction systems
which helps in storing and arranging the products and is also acting as a commissioning agent as
per the Karnataka VAT Act. However, Amazon has categorically stated that they are not a dealer
as the legal ownership of such products is not transferred to Amazon and is merely acting as a
service provider to provide fast delivery to the buyers.
Now if we analyze the position of Amazon as per the definition given, it seems to qualify as a
dealer as Amazon is distributing the goods on behalf of the sellers. However, it seems like the tax
department has overlooked the principle of noscitur a socii, where the terms supplying and
distributing should be read taking into account the other adjacent words in the sections which
would clarify the true meaning of the applicability of the provision.
Interestingly, going by the FDI rules, a foreign entity cannot engage in retail trade in India. So, if
Amazon is identified as a dealer, it would not be able to continue its business in India.

The core issue to be understood out there is no tax evasion, but a mere case of who is liable to
pay the tax. In the present case the government is getting the full tax, but it is only paid by the
seller. The contention of the government is that it is Amazon who should be paying the taxes and
not the seller. Government should consider amending its existing rules to meet the requirement of
new industries like e-commerce sector and can have relevant guidelines in place, to avoid tax

Thai Airways International Public Co. Ltd. v. Commissioner (Adjn), Central Excise, Delhi 8
Facts:- The assessee-airlines A, operating in India, was availing facility/services from 'Computer
Reservation System' (CRS) service providers in terms of certain agreements with foreign based
companies B intended to facilitate reservation and ticket availability position to the Air Travel
Agents in India through online computer system, commonly known as 'Computer Reservation
System' (CRS) maintained by the companies.
A have worldwide operations in terms of agreements entered into by them with CRS as well as
Travel Agents. They make payments to CRS companies towards consideration on basis of ticket
8 [2015] 53 115 (New Delhi - CESTAT)

The CRS facility providing companies maintain data base and structured data relating to ticket
reservation and seat availability, fair structure, flight timings sectors etc. information supplied to
them by Airlines from time to time with right of access and retrieval of data by Airlines and Air
Travel Agents from Master Computer maintained by above CRS companies through on-line
computer system facility provided by these companies.
Issue- whether the Appellant- the branch office of Thai Airways, Bangkok in India, can be
treated as the recipient of the service provided by the CRS Companies and on this basis
subject to service tax under reverse charge mechanism9 of Section 66A.
Held- the branch office in India of Thai Airways, Bangkok, can not be treated as recipient of the
service provided by the CRS Companies, in pursuance of their agreements with the Appellant's
Head Office at Bangkok.
It is clear the agreements between the Appellant's Head Office at Bangkok and the CRS
Companies, it is clear that the CRS Companies were not providing any Indian branch specific
service. It is the Head Office at Bangkok which, in order to facilitate the booking of air tickets
though IATA agents all over the world, had negotiated with the CRS Companies and had entered
into contacts with them for storage of updated data on real time basis regarding their flight
schedules, fare, seat availability etc. and making the same accessible to their IATA agents. The
Appellant's job is only appointing the IATA agents in India, collection of sale proceeds of tickets
sold by IATA agents and remitting the same to Head Office and as such they are not involved in
taking key business decisions. Therefore, applying the underlying principle of 2nd proviso of
Section 66A(1) Provided further that where the provider of the service has his business
establishment 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 Head Office which has to be treated as the recipient of the Service provided by the CRS
Companies as it is the Head Office which is mort directly concerned with the use of the Service
provided by the CRS Companies as the Head Office has used the service provided by the CRS
9 The reverse charge mechanism was first introduced under the Service Tax Rules in 2002
whereby it was provided that in case of provision of service by a non-resident not having an
office in India, service tax would be payable by the service recipient.
Subsequently, an explanation to Section 65(105) brought in the concept of import of
services and provided that the services provided by a person based outside India and
received by a person based in India would be deemed to be taxable. Subsequently, the
government deleted the explanation and inserted Section 66A in the Act in 2006 to define
the incidence of import of service and to treat the recipient as a deemed service provider
and hence liable to pay tax.

Companies for promoting the sales of the Airlines tickets all over the world and it cannot be said
that only the India branch (Appellant) has benefited from the Service provided by the CRS
Analysis activity of the CRS Companies is covered by the definition of 'Online Database access
and/or retrieval service, as given in Section 65(75) read with Section 65(75) of the Finance Act,
1994 and this service, if provided or deemed to be provided in India, would attract service tax
under section 65(105).
irrespective of the location of service provider- whether in India or outside India, service tax is
charged in India if the service recipient is located in India i.e. the service has been received and,
hence, consumed in India, and if service recipient is located abroad i.e. the service has been
received and, hence, consumed abroad, there is no liability of the service provider in India to pay
the service tax. This is in accordance with the principle of equivalence mentioned in the Apex
Court's judgment.10
So here in this the service recipient is not in India instead the branch office in India of Thai
Airways, Bangkok is merely an agent of the company which is helping him in facilitating the

Case:- Case of eBay International AG v. Asstt. DIT11

Facts of the case - In this case the assessee, a tax resident of Switzerland, operated Indiaspecific websites providing an online platform for facilitating the purchase and sale of goods and
services to users based in India. The assessee entered into Marketing Support Agreement with
two group companies incorporated and registered in India, viz., eBay India and eBay Motors in
connection with India-specific sites. The assessee claimed that revenue earned by it from
operations of websites in India was not taxable in India as it did not have any PE in India as per
Article 5 of the DTA.
Mumbai Tribunal held that the revenue earned by the assessee from India-specific websites was
taxable as per the provisions of Article 7 of the India-Switzerland DTAA (DTA) only if it had a
PE in India as per Article 5 of the DTA. Since the assessee did not have any PE in India no
amount was taxable in India.
10 All India Federation of Tax Practitioners v. Union of India [2007] 10 STT 166 and
Association of Leasing & Financial Service Companies v. Union of India [2010] 29
STT 316
11 [2012] 25 500/[2013] 140 ITD 20 (Mum. - Trib.)

Issues raised by the department - The department was of view that revenue earned by eBay from
India would be taxable as Business Profits as the assessee had dependent agent PE, as per Article
5(5) and 5(6) of the DTA, in India in the form of eBay India and eBay Motors, two group
companies and that both the group companies were providing the services only to the assessee
for facilitating operations of India-specific websites and also that the Indian companies had no
independent existence as the assessee exercised full and direct control over the group companies.
The revenue further took assistance of Article 5(2)(a) of the DTA to contend that Indian group
companies could also be treated as PEs of the assessee in India as its 'Place of management'; that
all the costs incurred by eBay India were reimbursed by the assessee with 8% mark-up. Since the
assessee was required to reimburse the entire amount of expenses to eBay India, this in effect
meant that the premises for which rent was paid by eBay India, etc., belonged to the assessee and
all other expenses, though apparently incurred by eBay India, were in reality incurred by the
assessee. In the light of the above facts, it was contended that eBay India and eBay Motors also
constituted permanent establishment of the assessee in terms of Article 5(2) of DTA.
Ruling of the Mumbai Tribunal in this case - The Mumbai Tribunal held that there was no dispute
about the fact that eBay India and eBay Motors were providing their exclusive services to the
assessee. It had been fairly admitted that these two entities had no other source of income, except
that from the assessee in lieu of the provision of service as set out in the agreements. In view of
the fact that eBay India and eBay Motors were exclusively assisting the assessee in carrying out
its business in India, they definitely became dependent agents of the assessee. The next question,
however, was whether or not these dependent agents constituted permanent establishments of the
assessee as per clause (i), (ii) or (iii) of Article 5(5) of DTA, on which the Tribunal observed as
(i) That clause (ii) of Article 5(5) refers to the dependent agent habitually maintaining a
stock of goods or merchandize for or on behalf of the enterprise. This clause had no
application in this case because there was no requirement on the part of eBay India or
eBay Motors to maintain any stock of goods or merchandize on behalf of the sellers.
(ii) That clause (iii) applies where the dependent agent manufactures or processes the
goods or merchandize in that State for the enterprise. Obviously, this clause was also
not applicable, because Indian group companies were not required to manufacture or
process the goods or merchandise on behalf of the assessee.
(iii) That as per clause (i), it is to be seen whether the Indian group companies do or
habitually exercise 'an authority to negotiate and enter into contracts for or on behalf of
the assessee.' By performing the activities as narrated in the agreement, it was seen that
Indian companies had at no stage negotiated or entered into contract for or on behalf of
the assessee. Simply by providing marketing services to the assessee or making
collection from the customers and forwarding the same to the assessee, it could not be
said that eBay India or eBay Motors entered into contracts on behalf of the assessee
and that there was no mention in the assessment order or the contentions of DR that
any contract was entered into by Indian companies during the discharge of their

functions or otherwise for or on behalf of the assessee. Thus, the test laid down as per
clause (i) of Article 5(5) also failed in the present case.
(iv) Further, as regards reliance placed by revenue on Article 5(2)(a), it was held that Indian
companies were neither taking any managerial decision nor had any role to play in
maintenance or operations of websites. They had no role to play in online business
agreements and were required to perform only marketing support services for the
assessee. Hence, it could not be said that they formed 'place of management' of the
assessee's overall business.
Though eBay India and eBay Motors were dependent agents of the assessee, yet they did do not
constitute 'Dependent agent PEs' of the assessee in terms of Article 5 of the DTA.

a website can constitute PE in the source country, OECD model convention observes otherwise.
In these types of cases OECD model convention, which mostly favours residence base of
taxation, has always contended that website cannot constitute a PE, as there is no physical
presence in source State. According to OECD Commentary, a PE requires a "physical presence"
in a country and a website is "intangible". However, the developing countries have always
registered their disagreement. The UN Model convention, which favours source based taxation,
does not clearly deal with these issues relating to e-commerce.
Where companies located abroad (like in the case of eBay) are operating country-specific
websites and generating revenue clearly attributable to the source country, law should be made
clear as to whether such websites would themselves be treated as PE in the source country 2
especially when companies like eBay India are working to provide all the support services.
Otherwise (as we have seen in the case of eBay) companies registered abroad and operating
websites relating to source country would move on without being taxed in the source State on
pretext that website is not PE and companies providing support services are also not PEs or
dependent agent PEs.
From a policy perspective, a website should be treated as a PE, if it is used to perform the
functions of a traditional office. Non-taxation of e-commerce in source State is also providing
opportunities to the taxpayers to avoid all the taxes by shifting their e-commerce income to a tax
haven. There are many offshore jurisdictions which are currently providing tax free or low tax
regime for e-commerce. Some companies may avoid paying taxes by earning profits in
subsidiary companies in offshore centers and not remitting them to parent company.
It is imperative that clear law should be laid down for taxability of e-commerce transactions, so
that neither the source country would have to forgo its share of legitimate taxes nor the non-

resident companies would have to bear the heat of double taxation.

In its strongest statement yet on progressive tax reform, the United Nations ("UN") recently
called on countries to introduce a global carbon tax and a financial transaction tax ("FTT"). 12 The
Global Internet Tax suggested by the European Telecommunication Network Operators
Association ("ETNO"), which wants Apple, Google, and other Web companies to pay to deliver
content, was proposed for debate at a meeting of the UN agency called the International
Telecommunication Union in December 2012. On May 23, 2012, the European Parliament
adopted an opinion supporting the Commission's proposal on FTT.13
a very basic point is missing from the tax debate because it ignores the cyberspace law literature
that deals with similar challenges of applying the current territorial law to the Internet. The
current tax literature pays no attention to anything beyond the borders of tax law. However, the
tax challenges are not unique to the application of the international tax regime to e-commerce.
Instead, the tax challenges are only one aspect of the difficulties in regulating the Internet and
gaining jurisdiction to set the rules, to judge, and to enforce the law. In this way, the tax
challenges are similar to other challenges of applying current legal doctrines to cyberspace.
Therefore, we must not overlook cyberspace law in the debate on e-commerce taxation.
1. United nations, world economic and social survey 2012: in search of new development
finance 4 (2012),
eur. Comm'n, taxation & customs union, taxation of the financial sector, last
accessed on 24-march-2015
3. Case of ebay international ag v. Asstt. Dit
4. All india federation of tax practitioners v. Union of india [2007] 10 stt 166
5. Association of leasing & financial service companies v. Union of india [2010] 29 stt 316
7. Evolution of e-commerce in india creating the bricks behind the clicks by pwc last
accessed on 22-march-2015
OF NEW DEVELOPMENT FINANCE 4 (2012), last accessed on 24-March-2015
13 See EUR. COMM'N, TAXATION & CUSTOMS UNION, Taxation of the Financial
m last accessed on 24-March-2015

9. 11ecnews31102014 (came up after amazon case
in karnataka.) In last accessed on 22-march-2015
10. [2002]124 taxman 242 (art) tax literature/taxation of e-commerce by rachna mahalwala
11. [2008] 175 taxman 67 (mag)
accessed on 22-march-2015