Equalisation levy and its applicability on intra-group transactions

1. Background:

• Identifying the taxpayer;
• Locating the transaction; and
• Establishing nexus between taxable transaction and taxing jurisdiction etc.

2. EL2020– scope expanded (introduced by Finance Act, 2020):

• EL2020 shall apply to “e-commerce supply or services” in India by a NR who owns or manages digital facility/ platform for online sale of goods or online provision of services or both (e-commerce operator), at the rate of 2% on gross consideration received from:
  • A person resident in India;
  • A person buys such goods or services or both using IP address located in India;
  • Sale of advertisements targeting a customer, resident in India or a customer who accessed advertisements through IP address located in India;
  • Sale of data collected from a person resident in India or from a person who uses IP address located in India.
• Here the term “e-commerce supply or services” means:
  • Online sale of goods owned by the e-commerce operator; or
  • Online provision of services provided by the e-commerce operator; or
  • Online sale of goods or provision of services or both facilitated by the e-commerce operator; or
  • Any combination of the above.
• Finance Act, 2020 provides exclusion from levy of EL2020in the following cases:
• Where e-commerce operator has a PE in India and such supply or services is effectively connected with such a PE; or
• If such e-commerce operator is chargeable to EL2016 at the rate of 6%; or
• If the sales, turnover, or gross receipts of the e-commerce operator does not exceed INR 20 million during the financial year.

3. Whether EL covers within its ambit intra-group services and transactions undertaken over email/ telephone/ Internal platform or portal

• Considering the ambiguities involved in EL provisions, the Finance Act 2021 provided a definition to the term “online sale of goods” and “online provision of services” to include acceptance of offer for sale, placing the purchase order, acceptance of the purchase order, payment of consideration and partly or wholly supply of goods /services.
• To summarize, EL shall be levied on the income of NR e-commerce operator who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both and any leg of the transaction as mentioned above,is undertaken through an online platform.
• However, what constitutes a digital platform is left open for interpretation. Also, no exemption has been provided for inter-company transactions, which means an order placed on an intranet/ ERP software by a subsidiary of a NR operator could potentially be subjected to EL. It may also may construed by the tax officers that transactions partially conducted over email or telephone along with the help of an online platform, would also be covered for the purpose of EL.
• Given the above, it is crucial to analyse meaning of the term “digital or electronic facility or platform” as the same has not been defined in the Finance Act, 2020.
• Basis the intent with which EL was enacted, the transactions meant to be covered would be those conducted primarily through digital networks and thereby avoiding the need of a physical presence in India, i.e. transactions which lead to profits that are not appropriately taxed in India because of the limitations of physical presence-based tax rules. However, the literal interpretation of the amendment suggests that EL would be leviable on the transactions, even if any leg of such transaction is undertaken online.
• As per OECD³, in spite of the apparent flexibility of this e-commerce definition (supra), it is important to highlight that not every digitally-enabled commercial transaction falls within this definition of e-commerce. As a result, e-commerce transactions according to the OECD definition only include orders conducted through methods specifically designed for the purpose of receiving or placing orders.
• The interpretation guidelines associated with the OECD definition accordingly exclude transactions realised by manually typed e-mails, telephone, online messages, social media or fax as these methods are usually not specifically designed for the purpose of receiving or placing orders. However, in case social networks have specifically designed functionalities for transactions conducted using such applications (like Facebook Marketplace) it would fall within the boundaries of the OECD e-commerce definition.
• In addition to the above, it is important to apprehend that EL would apply only to an e-commerce operator i.e., a NR who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services. Therefore, e-commerce operator who is maintaining the online platform/ facility for his business or profession, i.e., for commercial purposes should be liable to discharge EL.
• Accordingly, where the e-mail/ telephone facility maintained by such NR is merely a means of communication, such NR may not be regarded as E-commerce operator.
• Also, in the case of rendition of intra-group services by one entity to other group entities, it would need to be determined whether the digital facility is maintained by the first mentioned entity for commercial purposes, i.e. on a cost-plus markup basis. Therefore, in case the services are provided to the group entities for efficiency of work or to save cost and no convenience fee etc. is being charged by the entity maintaining the facility, it may not be considered as an e-commerce operator for EL purposes.
• However, it cannot be ruled out that the tax authorities may allege such NR entity to be an e-commerce operator and may scrutinise such intra-group transactions to check applicability of EL, particularly the NR entity is engaged in large scale intra-group transactions which could be considered to be done for commercial purposes, for instance entities engaged in providing raw material supplies to the group or IT/ITes services to the group.

4. Concluding remarks