Technology Tax Summary-A peep in to the future with the blast from the past ; time for tax payers to obtain certainty Customer Care No

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 and non- requirement of physical delivery. In India, there are innumerable tax issues faced by the technology industry and in the ensuing paragraphs we have discussed the populist ones. 2 Customer Care No

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, applications along with services made available to the users through the internet. 3 Customer Care No

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: 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-à-vis standardised software; 4 Customer Care No

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-à-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? 5 Customer Care No

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 appeals 1 on this issue is pending. The theme of the current Government being non-adversarial 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. 1 6 Customer Care No

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