Customer Care No.

91-1145562222

Technology Tax Summary-A

peep in to the future with the
blast from the past ; time for
tax payers to obtain certainty
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Introduction
Technology has always been at the cutting edge of the
significant transformation that is taking place in the market
place today. Mobile technology, analytics, cloud computing
and wearables have emerged as new forms of technology,
and even several traditional companies have started to add
capabilities in these areas to cater to the growing customer
preferences. In this digital revolution, leading the pack is the
e-commerce segment, which is driving rapid growth of
domestic IT-ITeS industry and is attracting unprecedented
levels of global interest, funding and talent. Owing to such
rapid revolution and growth, India ranks third in start-ups
formed in the technology industry globally.
Keeping in pace with the growth in this industry, the
controversies surrounding taxation of digital transactions are
also ever on the rise. Governments and tax administrators of
many countries are constantly evaluating the tax implications
arising on operations of such entities, since transactions of the
e-commerce players raises several contentious tax issues due
to absence of national boundaries, physical presence of goods
Customer
Care No. 91-11and non-requirement
of physical delivery. In India, there are

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1. Withholding tax issues on cross border payments

involving software
Transactions in the technology industry such as payments
for purchase or usage of software, payments for online
advertising, app stores, cloud computing are under the tax
radar. Such transactions could involve:
Transfer of rights in a property (such as right to alter or
reproduce work or issue copies of the work);
Few transactions could involve payment for services such
as access / subscription to databases, standardised
applications, e-library, online games, music, news etc.;
and
Certain transactions could be a combination of both
transfer of property rights and services. For e.g.
customised
software
or
configurable
computing
resources
such
as
networks,
servers,
storage,
Customer
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91-11applications
along
with services made available to the

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The taxation and the related withholding tax implications on such payments to non-residents
would be based on the characterisation of such income (business income or royalty or fees
for technical services) under the Income-tax Act, 1961 ("the Act") read with the beneficial
provisions of the tax treaty. Non-resident tax payers in several instances were seeking to
characterise their income from such transactions as business income and offer the same to
tax in India only where such income was attributable to a permanent establishment ("PE") in
India. Hence, in order to curb such mischief, in the garb of a clarification, the Government
brought in a retrospective amendment in the Act to widen the scope of definition of
"Royalty". The amended definition of "Royalty" seeks to include transfer of any right to use a
software including the granting of a license, irrespective of the medium through which such
right is transferred. This amendment significantly targets transactions involving payments
for shrink-wrap or embedded software.
The issue of taxation of cross border software licensing transactions including payments
towards access to databases, online applications etc. have been a significant bone of
contention between the Indian Revenue authorities and the tax payers over the last decade.
Some of the key illustrative factors considered relevant by the Courts for determining the
characterisation of income are listed below:
Customer
CareofNo.
91-11 Nature
rights
granted to the payee - Whether rights in the propertywww.taxmann.com
is transferred or

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Nature of rights granted to the payee - Whether rights in the property is transferred or
mere right of usage of property is conferred;
Nature of software - Customised vis--vis standardised software;
Whether the payment is towards the use or right to use a copyrighted article or a copyright
in the article.
Degree of possession and control of the server / database / application;
Recourse to the service provider for the further requirement of any services;
Whether any specific configuration is carried out for the payee?
Whether any information is made available to the payee and right of further commercial
exploitation is conferred on the payee?
Whether the payment is made for right other that right in the intellectual property?

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Determination of taxability of transactions should be based on a holistic evaluation of the
intention of the parties involved and the primary purpose for which the payment is being
made. Issues on taxability of software payments along with taxation aspects of e-commerce
transactions were extensively researched and opined upon by the Organisation for Economic
Cooperation and Development ("OECD") - Technical Advisory Group almost two decades back.
However, India differed on most of the views of the OECD on this issue and currently maintains
an enhanced observer status to the OECD. The views expressed by India are in variance with
most of the developed countries on characterisation of income on software payments. The
current action plans initiated by the OECD under the Base Erosion and Profit Shifting ("BEPS")
also do not deal with such issues adding to the woes of the technology industry players.
Owing to lack of clarity and divergent views being expressed at various Appellate forums, the
industry players are anxiously awaiting the much needed clarity from the Supreme Court where
a batch of appeals1on this issue is pending. The theme of the current Government being nonadversarial and non-controversial investor friendly tax regime, the tax administrators should
endeavor to provide tax certainty by issuing clarifications or provide a quicker dispute
resolution mechanism.

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