Income from Website operating in India not taxable in absence of PE

eBay INTERNATIONAL AG VS ADIT-IT APPEAL NO. 6784 & 7046 (Mum.) of 2010 DT 21/09/2002

1.      Whether assessee (eBay AG),a tax resident of Switzerland , has any dependent agent PE in form of two group companies incorporated and operating in India and rendering services only to assessee company who is operating India specific websites providing online platform for facilitating the sale and purchase of goods and services to users based in India ?
INDO SWISS DTAA                                           
The assessee (eBay AG) is a company incorporated under the law of Switzerland and is tax resident of Switzerland. The assessee operated India specific 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 Indian 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.
The assessing officer , during the assessment proceedings, held that revenue earned by the assessee from India was taxable as "Fees for Technical Services". However during the appeal before CIT (A) , the assessing officer , on remand report called by CIT (A),contended that assessee had dependent agent PE in Indian in form of eBay India and eBay Motors and accordingly the CIT(A) held that the assessee had permanent establishment in India within the meaning of Articles 5(5) and 5(6) of the DTA and accordingly the revenue earned by it was taxable in India under Article 7 of the DTA.
The assessee in response further contended that even otherwise revenue earned was only small fraction of expenses incurred under Service agreements and hence there was huge loss.
However the CIT(A) held that in absence of any supporting evidence to prove genuineness of the claim of expenses, Rule 10 of Income Tax Rules was applicable and 10% of the revenue would be taxable as business profits as income from Indian specific operations.
(a)    That the assessee had connection in India as eBay India and eBay Motors were group companies rendering services to it in India. That the entire income of eBay India and eBay Motors was derived from such services rendered to the assessee, eBay AG. Further, eBay India and eBay Motors were responsible for collecting the revenue of the assessee from its operations in India. Considering Explanation 2 to section 9(1)(vii) defining the term "Fee for technical services",  the amount received by the assessee from its operations in India was income in the form of 'Fee for technical services'..
(b)   That the even if the said income is not taxable as FTS, it would be taxable as Business Profits as the assessee has dependent agent PE ,as per Article 5(5) and 5(6) of DTA, in India in form of eBay India and EBay Motors, two group companies. That both the group companies were providing the services only to the assessee for facilitating operations of India specific websites. That the Indian companies had no independent existence and the assessee exercised full and direct control over the group companies.
(c)     That the Indian companies had no legal or financial independence and depends solely on the assessee.
(d)   That the Indian group companies were providing all kinds of services for facilitating operations of India specific websites to the assessee in absence of any other independent existence of assessee in India. The services included fulfilling the legal requirements in India, provide market data relating to industry, providing marketing and promotional services within India as directed by assessee, processing and collecting activities and remitting the same to assessee and other matters as may be requested by the assessee and furnish such reports and information for other administration and support activities as eBay International require.
(e)    The revenue further took assistance of Article 5(2)(a) to contend that Indian group companies can 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 , it was contended that eBay India and eBay Motors also constitute permanent establishment of the assessee in terms of Article-5(2).
(a)   That the revenue earned by the assessee from India specific websites is taxable as per the provisions of Article 7 of the DTA only if it has a PE in India as per Article 5 of the DTA. Since the assessee did not have any PE in India as such no amount was taxable in India.
(b)   Though, the Indian group companies makes advertisement in India so as to create awareness amongst the sellers to get attracted towards assessee's websites, they have no role in directly introducing any specific customer to the assessee.
(c)    That the agreements between the sellers of the products and the assessee, which result into user fee, being the source of the assessee's income from Indian operations, are entered online through the assessee's websites directly, without any interference or involvement of eBay India and eBay Motors.
(d)   That the transactions between the buyers and sellers of the products are finalized through the assessee's websites operated from outside India. On the successful completion of sale, it is the assessee who raises invoices on the sellers directing them to deposit their due with eBay India or eBay Motors so that forward transmission of the same could be made to it, instead of sellers sending the amount to Switzerland.
(e)    Thus, the agreement between the sellers and the assessee, and the finalization of transactions between the vendors and the buyers, which eventually results into the revenue to the assessee, are done through the assessee's websites situated and controlled from abroad. The role of eBay India and eBay Motors, in this regard, is mainly compartmentlized in facilitating the sellers to make the payment to the assessee in India itself and hence the Indian group companies cannot be treated as dependent PE agents.
(f)     That even otherwise revenue earned was only small fraction of expenses incurred under Service agreements and hence there was huge loss.
Mumbai Bench discussed Section 9(1)(vii) of the Income Tax Act and Articles 5 and 7 of the DTA between India and Switzerland and observed & held as under :-
(a)    That the revenue earned by assessee from India is not taxable as "Fees for technical Services" as the assessee is not providing any managerial, technical or consultancy services to its customers.
(b)   That High Powered Committee (HPC) on "Electronic Commerce Taxation" constituted by the Central Board of Direct Taxes and The Technical Advisory Group (TAG) formed by OECD have also stated that revenue earned by operating online facility  are in nature of business profits falling under Article 7 of the treaty.
(c)    That in order to treat any person as PE within the meaning of Paras 5 and 6 of Article 5, it is of utmost importance that such person should first answer to the description of 'dependent agent' and then such dependent agent must perform either of the three activities as mentioned in Article 5 (5).
(d)   That there is no dispute about the fact that eBay India and eBay Motors are providing their exclusive services to the assessee. It has been fairly admitted that these two entities have no other source of income except that from the assessee in lieu of the provision of service as set out above. In view of the fact that eBay India and eBay Motors are exclusively assisting the assessee in carrying on business in India, they definitely become dependent agents of the assessee.
(e)    However it needs to be examined that whether or not these dependent agents constitute PE's of the assessee as per Clause (i),(ii) or (iii) of the Article 5(5) of the DTA.
(f)    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 has no application in this case because there is no requirement on the part of eBay India or eBay Motors to maintain any stock of goods or merchandize on behalf of the sellers.
(g)   Clause (iii) applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise. Obviously, this clause is also not applicable because Indian group companies are not required to manufacture or process the goods or merchandise on behalf of the assessee.
(h)   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 is seen that Indian Companies have 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 cannot be said that eBay India or eBay Motors entered into contracts on behalf of the assessee. That there is 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 fails in the present case.
(i)     Further as regards reliance placed by revenue on Article 5(2)(a) , it was held that Indian Companies were neither taking any managerial decision and 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 assessee.Hence , it cannot be said that they form 'place of management' of the assessee's overall business.
(j)     Held: Though eBay India and eBay Motors are dependent agents of the assessee, but do not constitute 'Dependent agent PEs' of the assessee in terms of Article 5 of the DTA
Comments  :-
This is a case of Electronic commerce wherein a company registered and having physical office at one place ,any where in the world,  is operating country specific websites in different countries from one location. Apart from the question as to whether local companies providing various services to the parent company would constitute PE in that Source country, another important issue arises in these business models is that whether website itself would constitute PE in the Source country like India in the present case. In these type of cases OECD,which mostly favours residence base of taxation, have always contended that web site 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 Treaty, which favours source based taxation, doesnot clearly deals with these issues relating to e-commerce.
Where companies located abroad, like in present case, 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. Moreso when companies like eBay India are working to provide all the support services. Otherwise,as we have seen in the present case, companies registered abroad and operating website 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 PE or dependent agent PE.
Taxation of e-commerce in the Source State , moreover, would reduce the opportunities that taxpayers otherwise would have to avoid taxes by shifting their income to a tax-haven.
I am sure that your goodself would find the above ruling useful.
  CA.Vipin Verma
(M): 9811156389, 9811188940
(O) : 011-27429630 / 47082580



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