vide<\/em> this Finance Bill seek to expand the scope of the term ‘business connection’ contained in Section 9 of the Income-tax Act, 1961 (‘the Act’) by way of <\/p>\n<\/p>\n
I) Substitution of clause a) to Explanation 2 of Section 9(1)(i) of the Act and <\/p>\n
II) Introduction of Explanation 2A to Section 9(1)(i) of the Act. <\/p>\n
I. Widening of the scope of business connection arising out of Dependent Agents by way of substitution of clause a) to Explanation 2 of Section 9(1)(i) of the Act <\/p>\n
A. Current Provision prior to proposed amendment <\/h2>\n
Section 9 (1) – “The following incomes shall be deemed to accrue or arise in India :—<\/em><\/p>\n (i) All income accruing or arising, whether directly or indirectly, through or from any business connection <\/strong>in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India….<\/em><\/p>\n Explanation 2.— For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,—<\/em><\/p>\n (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or…<\/strong><\/em><\/p>\n (b) ..<\/em><\/p>\n (c) ….<\/em><\/p>\n Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business…”<\/em><\/p>\n As per Section 9(1)(i) read with Explanation 2, any person acting on behalf of a non-resident in the capacity of an agent\/broker etc. would constitute a business connection of the non-resident provided that i) such agent has an authority to conclude contracts on behalf of the non-resident which it habitually exercises in India and ii) the agent is not of independent status and iii) the activities carried on by the agent are not merely restricted to the purchase of goods for the non-resident. <\/p>\n
The definition of business connection to include Dependent Agents as contained in the Act is also very similar to the provisions contained in Article 5(5) of the OECD Model Tax Convention which is adopted in almost all Double Tax Avoidance Agreements entered into by India with other countries, wherein if any person acting on behalf of the non-resident is habitually authorised to conclude contracts for the non-resident, then such agent would constitute a PE in the source country. <\/p>\n
B. Need \/ Reason for the amendment<\/h2>\n
As provided in the Memorandum to the Finance Bill, 2018, (‘Memorandum’) it has been noted that “in many cases, with a view to avoid establishing a permanent establishment under Article 5(5) of the DTAA, the person acting on behalf of the non-resident negotiates the contract but does not conclude the contract”.<\/em><\/p>\n BEPS Action Plan 7 – Preventing the Artificial Avoidance of Permanent Establishment Status has examined the issue in detail. The Action Plan noting that the prerequisite for the application of Article 5(5) of the OECD is the formal conclusion of contracts in the name of the non-resident, has observed that the said prerequisite is often circumvented in cases where non-residents replace subsidiaries which traditionally act as distributors by commissionaire arrangements. The Action Plan defines commissionaire arrangements to mean arrangements through which a person sells products in a State in its own name but on behalf of a foreign enterprise that is the owner of these products. Under these sort of agreements, the foreign enterprise would be able to sell products in a State without having a PE to which such sales may be attributed and without therefore being taxed in that State on profits derived from such sales. The agent also would not be taxed as it would not own the products that it sells. It has further noted that the application of the Rule in Article 5(5) has been artificially avoided by the non-residents by formally concluding contracts outside India even though the contracts are substantially negotiated by the agent in India.<\/p>\n
The Memorandum referring to the BEPS Action Plan 7 has stated that “the OECD under BEPS Action Plan 7 reviewed the definition of PE with a view to preventing avoidance of payment of tax by circumventing the existing PE definition by way of commissionaire arrangements or fragmentation of business activities. In order to tackle such tax avoidance scheme, the BEPS Action Plan 7 recommended modifications to paragraph (5) of Article 5 to provide that an agent would include not only a person who habitually concludes contracts on behalf of the non-resident, but also a person who habitually plays a principal role leading to the conclusion of contracts”.<\/em><\/p>\n In fact, the recommendations made in the said BEPS Action Plan 7 have been implemented by way of inclusion in Article 12 of the Multilateral Convention to Implement Tax Treaty Related Measures (‘MLI’) to which India is also a signatory. This would imply that the recommendations proposed would automatically apply to India’s treaties with other countries if the said treaty partner has also opted for Article 12 of the MLI. Therefore, the provisions of Article 5(5) as modified by the MLI would be significantly wider in scope as compared to the current provisions of the Act (enumerated in Para A above). Since the provisions of Section 90 of the Act provide assessees an option to opt for either taxability under the Act or the DTAA, whichever is more beneficial to them, it was noted that the current provisions in the Act being narrower in scope would be more beneficial to the assessee rendering the provisions of the DTAA as amended by the MLI ineffective. <\/p>\n
Therefore, to maintain congruency with the BEPS initiative and to ensure the effectiveness of the DTAA, the Finance Bill, 2018 has laid down the following proposed amendment:<\/p>\n
C. Proposed Amendment <\/h2>\n
Explanation 2 to Section 9(1) post the proposed amendment\/substitution of clause (a) would read as under:<\/p>\n
Explanation 2.— For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out <\/p>\n through a person who, acting on behalf of the non-resident, —<\/em><\/p>\n
"(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts <\/p>\n by that non-resident and the contracts are –<\/strong><\/em><\/p>\n
i) in the name of the non-resident; or <\/em><\/strong><\/p>\n ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or <\/em><\/strong><\/p>\n iii) for the provision of services by the non-resident; or…<\/em><\/strong><\/p>\n (b) ..<\/em><\/p>\n (c) ….<\/em><\/p>\n Provided<\/em><\/strong> that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business…”<\/em><\/p>\n The amended provision requires that the person acting on behalf of the non-resident habitually plays a principal role in conclusion of the contracts and also requires that at least one of the 3 conditions contained in sub-clauses (i), (ii) or (iii) above are also satisfied.<\/p>\n
However, it must be pointed out that as evident from the proviso where an agent is carrying any of the aforesaid activities during the course of his business in his independent capacity, the said provision would not apply as per the First Proviso to Section 9(1)(i) of the Act.<\/p>\n
D. Interpretation <\/h2>\n
It is abundantly clear that the proposed amendment is wider than the existing provision as it seeks to encompass not only the agents who habitually concluded contracts but also agents who play a principal role in the conclusion of the contract. However, there are certain terms \/ phrases contained in the proposed amendment that would require proper interpretation so as to ensure that the amended provisions are not arbitrarily applied by the Income-tax Authorities. <\/p>\n
1. The word “habitually”<\/strong> contained in proposed amendment refers to a systematic course of conduct on the part of the agent and would mean regularly, <\/strong>repeatedly or continuously and would not apply to isolated cases [DDIT v. B4U International Holdings Ltd. (2012) 137 ITD 436)<\/em> which has been subsequently affirmed by the Hon’ble Bombay High Court in (2015) 374 ITR 453 (Bom)]. <\/em>Further, Para 33.1 of Action Plan 7 also states that to satisfy the condition of “habitually”, the presence maintained“in a Contracting state should be more than merely transitory”.<\/em><\/strong> However, there is no pre-determined frequency that would constitute “habitually” and it would be logical to determine the habitual nature of the agent’s activities based on the nature of the business of the non-resident in India. <\/p>\n 2. The next phrase that would be subject to interpretation would be “principal role leading to conclusion of contracts”<\/em>. In my view, the phrase should be construed strictly to avoid unintended consequences and arbitrary taxation of all non-residents having any sort of presence in India. It would be essential to ensure that while seeking to widen the tax base to avoid BEPS, bona-fide<\/em> assessees who are not contravening the provisions of the Act read with the DTAA are not roped in. The phrase “principal role leading to conclusion of contracts” would ideally cover situations where the conclusion of contract by the non-resident directly results from the actions carried out by its “agent” in India. The intention of the proposed amendment has to be kept in mind while interpreting the said phrase. As per Action Plan 7 at Para 32.5, the principal role leading to the conclusion of the contract “will therefore typically be associated with the actions of the person who convinced the third party to enter into a contract with the enterprise” <\/em>and thereforewould apply “where a person solicits and receives (but does not formally finalise) orders which are sent directly to a warehouse from which goods belonging to the enterprise are delivered and where the enterprise routinely approves these transactions”. <\/em>It therefore implies that mere marketing activity which do not directly result in the conclusion of contracts should not be brought within the scope of the amendment.<\/strong><\/p>\n 3. Further, Para 33 of the Action Plan 7 also lays down that the contracts referred to in the recommended provisions which have been sought to be introduced vide<\/em> the proposed amendment would only cover contracts relating to the activities which constitute the business of the non-resident.<\/strong> As an illustration, it has been laid down that if the person in India concludes employment contracts <\/strong>for the non-resident, the same would not be covered<\/strong> under the proposed amendment as it would not constitute the business of the non-resident.<\/p>\n 4. Keeping in view the intention of the legislature and as per Para 32.9 of the Action Plan 7, it would be safe to say that the phrase “in the name of the non-resident”<\/em> would not restrict the application of the provision only to contracts that are literally in the name of the enterprise. For example, if the agent is responsible for negotiating contracts on behalf of an entire group of companies (e.g. ABC Group) and negotiates a contract of a specific company in the group (ABC Inc), merely because ABC Inc is not mentioned in the written contract, it would not be open for ABC Inc to contend that the contract was not negotiated in its name. <\/p>\n 5. As per Para 32.11 of the Action Plan 7, the OECD has laid down that while interpreting the word ‘property’<\/em><\/strong>, whether or not that property existed\/was owned<\/strong> by the non-resident at the time of conclusion of the contract would be an immaterial consideration and that it would cover future property as well as both tangible and intangible property. <\/strong>Therefore, the myopic interpretation of property might not hold good while determining the applicability of the provision. <\/p>\n E. Consequences\/Controversies <\/h2>\n
1. The proposed amendment would definitely impact non-residents operating under the agency business model and would lead to an increase in the number of non-residents liable to file their returns<\/strong> in India as now income arising from agents playing a principal role in concluding contracts would also be taxable in India as against non-residents earning income only from agents who conclude contracts in India. <\/p>\n 2. Further, it would also increase the administrative burden on the Department to track the nature of the activities of the agents in India<\/strong> and the ultimate contract finalised by the non-resident. Further, it would be interesting to note whether the authorities would resort to the Exchange of Information clause under the DTAAs to obtain such information or whether there would be any increase in reporting requirements by way of subsequent rules. <\/strong><\/p>\n 3. It would be interesting to note whether the onus<\/strong> to prove that the agent has had a principal role in concluding contracts would be on the Non-resident Assessee or the Department.<\/strong><\/p>\n 4. Further, the aforesaid amendment particularly the interpretation of the phrase “principal role leading to conclusion of contracts”<\/em> may lead to further litigation in India.<\/strong><\/p>\n F. Suggestions <\/h2>\n
It may be advisable for the Government to include the phrase “that are routinely concluded without material modification by the enterprise” <\/em><\/strong>in the proposed clause (a) to keep the provision in further coherence with the provisions of Article 12 of the MLI and to further channelize the scope of the provision to meet the intention of the amendment to exclude cases where there has been material modification of the contract by the non-resident even where the agent has played a significant role in the conclusion of the contract. <\/p>\n II. Widening of the scope of business connection arising by way of insertion of Explanation 2A of Section 9(1)(i) of the Act – Business connection to include Significant Economic presence under the Digital economy <\/p>\n
A. Current Provisions prior to proposed amendment <\/h2>\n
Section 9 (1) – “The following incomes shall be deemed to accrue or arise in India :—<\/em><\/p>\n (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India….<\/em><\/p>\n The Act does not contain any specific provisions on the constitution of a business connection on account of Significant Economic Presence and only includes physical presence within the meaning of business connection.<\/p>\n
However, it is pertinent to point out that with the view of preventing BEPS arising out of the formulation of new business models under the digital economy, Chapter VIII of the Finance Act, 2016 had introduced an ‘Equalisation Levy’ at 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. Though Equalisation Levy does not widen the meaning of business connection in India and therefore is not pari materia<\/em> with the amendment proposed in the Finance Bill. 2018, the intention behind both are similar i.e. to tax business income regularly earned by non-residents from India without having a physical presence therein.<\/p>\n B. Need \/ Reason for the amendment<\/h2>\n
It is a well-known principle that business profits of a non-resident are taxable in India only if the non-resident has a business connection or permanent establishment in India and only to the extent that the profits are attributable to the said business connection \/ permanent establishment. Broadly, a business connection \/ permanent establishment presupposes the existence of a physical nexus between the non-resident and the country in which it is said to have constituted a business connection \/ permanent establishment.<\/p>\n
In this regard, the Memorandum, has noted that “For a long time, nexus based on physical presence was used as a proxy to regular economic allegiance of a non-resident. However, with the advancement in information and communication technology in the last few decades, new business models operating remotely through digital medium have emerged. Under these new business models, the non-resident enterprises interact with customers in another country without having any physical presence in that country resulting in avoidance of taxation in the source country. Therefore, the existing nexus rule based on physical presence do not hold good anymore for taxation of business profits in source country. As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded.”<\/em><\/p>\n The aforesaid erosion of the rights of the source country in the case of a digital economy was examined by the OECD in its BEPS Action Plan 1 – Addressing the Tax Challenges of the Digital Economy wherein it has discussed several options to tackle the direct tax challenges arising in digital businesses. One such option being a new nexus rule based on “significant economic presence”. The said recommendation proposed in the Action Plan forms the base of the proposed amendment as evident from the Memorandum which states that “As per the Action Plan 1 Report, a non-resident enterprise would create a taxable presence in a country if it has a significant economic presence in that country on the basis of factors that have a purposeful and sustained interaction with the economy by the aid of technology and other automated tools. It further recommended that revenue factor may be used in combination with the aforesaid factors to determine ‘significant economic presence”. <\/em><\/p>\n Noting that the current provisions of the Act do not capture the existence of a business connection on account of significant economic presence, and that the definition of the term ‘business connection’ contained in the Act is also narrow in its scope as a result of which emerging business models such as digitized businesses, which do not require physical presence of itself or any agent in India, would not be covered within the scope of clause (i) of sub-section (1) of Section 9 of the Act, the Government of India, vide<\/em> Finance Bill, 2018, has boldly proposed to introduce Explanation 2A in an attempt to maintain congruency with the BEPS initiative, which is provided below. <\/p>\n C. Proposed Amendment <\/h2>\n
After Explanation 2 to Section 9(1), the following Explanation is proposed to be inserted, namely:-<\/em><\/p>\n Explanation 2A – For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident shall constitute “business connection” in India and “significant economic presence” for this purpose, shall <\/p>\n mean – <\/em><\/strong><\/p>\n
(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or <\/em><\/strong><\/p>\n (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means: <\/em><\/strong><\/p>\n Provided that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India: <\/em><\/strong><\/p>\n Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.”<\/em><\/strong><\/p>\n D. Interpretation <\/h2>\n
1. Though the new explanation begins with the phrase ‘for the removal of doubts’, the Memorandum to the Finance Bill implicitly states that “This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year 2019-20 and subsequent assessment years” and therefore the said proposed amendment cannot be given retrospective operation.<\/strong><\/p>\n 2. Further, it is also pertinent to note that the insertion of the said Explanation would not impact the taxability under the DTAAs <\/strong>entered into by India and would only come into force when corresponding modification to the rules governing constitution of a PE are made in the DTAAs as well. This is also implicitly stated in the Memorandum – “The proposed amendment in the domestic law will enable India to negotiate for inclusion of the new nexus rule in the form of ‘significant economic presence’ in the Double Taxation Avoidance Agreements. It may be clarified that the aforesaid conditions stated above are mutually exclusive. The threshold of “revenue” and the “users” in India will be decided after consultation with the stakeholders. Further, it is also clarified that unless corresponding modifications to PE rules are made in the DTAAs, the cross-border business profits will continue to be taxed as per the existing treaty rules.”<\/em><\/p>\n 3. The proposed Explanation 2A prescribes two limbs vide sub-clauses (a) and (b). <\/p>\n
Sub-clause (a) includes within its purview any transactions of goods \/ services \/ property, including transactions by way of download of data \/ software, which are carried on by a non-resident in India, so long as the aggregate payments exceed such amounts as may be prescribed by the CBDT. Therefore, clause (a) is a revenue based factor and indicates that the Government is of the view that substantial revenue from India would constitute a potential indicator of the existence of a significant economic presence in India. It seeks to bring within the purview of tax, the sales income derived by a non-resident without having a physical presence in India. It is pertinent to note that while the intent of clause (a) is to bring digital economies within the purview of tax net, the language used therein seems to extend the tax net even to those regular transactions of goods \/ services which have not taken place via digitised means thus making the concept of business connection and permanent establishment redundant.<\/p>\n
4. The First Proviso states that the said transaction or activities would create a significant economic presence irrespective of whether or not the non-resident has a residence or place of business in India or renders services in India. <\/strong>The inclusion of the first proviso seems to be confirming the principle applied in the decision of the Bangalore Tribunal in ABB FZ LLC v. DCIT – (2017) 166 ITD 329 (Bang) <\/em>wherein it was held that “49..In the present age of technology where the services, information, consultancy, management etc., can be provided with various virtual modes like e-mail, internet, video conference, remote monitoring, remote access to desk-top, etc., through various software, therefore, the argument of fixed place of business raised by the assessee that three employees rendered services only for 25 days cannot be sustained, as the services can be rendered without the physical presence of employees of the assessee.” <\/em><\/p>\n 5. The interplay between Explanation 2A to Section 9(1) and Equalisation Levy introduced in Chapter VII of vide<\/em> Finance Act, 2016 is also an interesting consideration. As per the Equalisation Levy provisions, there would be a levy of 6% on the amount of consideration for specified services (i.e. online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf) received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. The services covered under the Equalisation Levy provisions could easily be covered under the wide sweeping sub-clauses of Explanation 2A.<\/p>\n Considering the fact that Section 10(50) of the Act exempts from taxation receipts which have suffered Equalisation Levy under Chapter VIII of the Finance Act, 2016, income from specified services would be taxed under the Equalisation Levy scheme and should not be subject to tax under either sub-clause of the proposed amendment. <\/strong><\/p>\n E. Consequences \/ Controversies<\/h2>\n
1. As per the literal interpretation of sub-clause (a) to Explanation 2A, since the phrase ‘through digital means’ has not been introduced therein, it seems that the proposed amendment seeks to bring within its purview ‘transactions in respect to any goods, services, or property carried on in India’ by the non-resident and is not restricted to transactions of the non-resident carried out through digital means.<\/strong> This seems contrary to the intention specified in the Memorandum and would cause an unwarranted and probably unintended increase in the tax base. Further, the provision as is would render the concept of business connection and permanent establishment redundant. <\/p>\n 2. The revenue based indicator contained in sub-clause (a) may not itself suffice to evidence a non-resident enterprise’s regular and sustained participation in a country and therefore sub-clause (b) which is a user based test acts as a further indicator of significant economic presence. <\/p>\n
The sub-clause (b) stipulates that systematic and continuous soliciting i.e. marketing of its business activities or engaging in interaction with such number of users would constitute a business connection, provided it is done via digital means. <\/p>\n
It is common for businesses in the digital economy to collect data about their customers, users suppliers and operations which would have value to the business as an input either in improving existing products \/ services or in providing products \/ services to another group of customers and therefore the sub-clause (b) assumes significance. The marketing and interaction by way digital technology has enabled businesses to leverage and monetise its activities. (Para 164 of the Action Plan 1). <\/p>\n
In fact Action Plan 1 at Para 253 has noted the benefit of digital economy vis-à-vis marketing and customer support in business – “Businesses have always needed to carry out activities such as market research, marketing and advertising, and customer support. Digital technology has however had significant impact on how these activities are carried out, for example by enhancing the ability to carry out activities remotely, increasing the speed at which information can be processed, analysed and utilised, and, because distance forms less of a barrier to trade, expanding the number of potential customers that can be targeted and reached”.<\/em> <\/p>\nFurther ongoing interactions with customers can increase the value of a particular business to other potential customers which has been illustrated in Para 257 of the Action Plan – “For example, in the case of retail business operated via a website that provides a platform for customers to review and tag products, the interactions of those customers with the website can increase the value of the website to other customers, by enabling them to make more informed choices about products”. <\/p>\n<\/em>Further user contributions may be reflected in the value of the business itself, which is monetised via the sale price when the business is sold by its owners. (See Para 258). Therefore clause (b) seeks to bring within the tax net the contribution of users, which could be subsequently monetised and sold by the non-resident as i) data to third parties ii) selling targeted advertisements or iii) by selling the business itself and treating the user contribution as an asset. – Para 273. <\/p>\n
However, it may be difficult for clause (b) to apply on a standalone basis (as proposed under the amendment) as the activities covered therein may not directly result in instant revenue (though they may indirectly lead to potential revenue in the future) and therefore it may be more practical and feasible to apply a combination of clauses (a) and (b) as suggested in the Action Plan 1.<\/p>\n
3. Attribution of Profits – The 2nd Proviso to Explanation 2A states that “only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India. However, since the transactions referred to in sub-clauses (a) and (b) are of such wide import, the traditional rules of attribution would not suffice. In fact, the traditional rules of attribution are one of the reasons leading to the insertion of the amendment. Therefore, there would be a requirement for new rules of attribution specific to transactions provided for in Explanation 2A, <\/strong>in the absence of which the high probability of the amendment being misused by arbitrary attribution resulting in huge litigation cannot be ruled out.<\/p>\n 4. Further, the implementation of the new Explanation 2A would also result in increase in the administrative burden on the Department who would have the near impossible task of tracking the download of data, soliciting of business and the number of users considering the same would be done via digital means.<\/strong> The Action Plan 1 at Para 270 also notes that i) the identification of overseas sellers ii) determining the extent of sales or activities without information from the offshore seller are close to impossible. Considering the fact that the amendment has been made only under the Act and not under the DTAA, it would be interesting to note whether the authorities would be able to resort to the Exchange of Information clause under the DTAAs to obtain such information or whether there would be any increase in reporting requirements of non-residents by way of subsequent rules. <\/strong><\/p>\n 5. Another controversy arising out of the amendment would be the treatment of income arising from download of data or provision of software<\/strong> where such download of data also leads to imparting of information or the provision of software which is also covered under the definition of royalty. Would the amount be taxed as business profits on a net basis or as royalty on gross basis? Normally, the principle of applying a specific provision over a more general provision should apply. However, in the instant case, the download of data \/ provision of software are specifically covered both under the proposed amendment as well as the definition of royalty and thus the answer is not clear.<\/p>\n F. Suggestions<\/h2>\n
1. Since the proposed amendment widens the definition of business connection, the words “For the removal of doubts, it is hereby clarified”<\/em><\/strong> gives the said Explanation the flavour of retrospective amendment even though the Memorandum has clarified that the provisions would apply prospectively. The possibility of the said words being used by an officer to retrospectively apply the aforesaid amendment cannot be ruled out. Thus, it is humbly suggested that the aforesaid words may be deleted.<\/strong><\/p>\n 2. Considering the intent of the proposed amendment is to include digital economy within the ambit of ‘business connection’ and the fact that the literal interpretation of clause (a) expands the scope of “business connection” way beyond the intention, it is humbly suggested that it would be desirable if the words “through digital means” [as contained in clause (b)] are also inserted in Clause (a) to Explanation 2A consequent to which the same would read as under “(a) transaction through digital means <\/strong>in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed”. <\/em><\/p>\n 3. Currently, the proposed amendment seeks to implement the user-based indicator contained in clause (b) independently. Considering the difficulty in implementation of the said indicator on a standalone basis, it may be worthwhile to modify the applicability of clause (b) in line with the BEPS Action Plan 1 i.e. it may be worthwhile to follow the suggestion provided therein i.e. that the revenue-based indicator [as contained in clause (a)] be supplemented with a user-based indicator [as contained in clause (b)] i.e. both indicators should be cumulatively fulfilled. <\/p>\n
4. In cases where an income (e.g. from software) gets covered under the scope of “royalty” as defined under the Act as well as under the scope of business connection under sub-clause (a) of the proposed amendment, it is humbly suggested that the Government should come up with a clarification as to which provision would be applicable. <\/p>\n
Reproduced with permission from the AIFTP Journal <\/div>\n
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