Equalisation Levy - Sandeep Jhunjhunwala

Equalisation Levy
By: Sandeep Jhunjhunwala

CONTENTS
Background
Timeline
Development by other Countries
Key Takeaways of Committee’s Report
Key Indian Judicial Precedents
Introduction in India
Key Relevant considerations
Recommendation By Industrial Associations
Annexures
EqualisationLevy | Page 2

HOW IT ALL BEGAN?

HOW IT ALL BEGAN?
Equalisation Levy - Rationale for introduction
Distress regarding avoidance of taxes by MNCs in economies from where they derive profits – resulted in adoption of BEPS project,
wherein OECD published 15 action plans. Action plan 1 specifically dealt with tax challenges of digital economy
Application of physical presence based nexus followed in traditional brick and mortar business models - significantly undermined with
emergence of digital enterprises in 21st century
Ability of MNCs to avoid taxes in source jurisdiction – poses major concern for countries like India which follow source based taxation
Evolution of new business models in digital economy – results in tax challenges in terms of determining nexus, characterization of income
etc, which needs to be addressed
Limitation of existing PE rules in terms of restricted physical presence and lack of tax neutrality – put constraints in development of Indian
digital industry
To address these issues, OECD in its final report on action plan 1 identified 3 plausible options: a) Nexus based on significant economic
presence b) Withholding tax and c) Equalisation levy amongst which equalisation levy has been introduced in Finance Act, 2016
First two options may be ineffective due to treaty override

HOW IT ALL BEGAN?
Equalisation Levy - Rationale for introduction
Indian digital advertising market is expected to cross USD 1 Billion mark in 2016 and is expected to grow in double digits
Advertisement revenues from hosting ad banners, related content ads (sidebar ads), target ads, ad word searches, pre-roll videos based on
user preferences, etc contribute as major source of revenue for social media companies/ Internet search companies, media websites,
e-commerce companies, apps and games developers that do not have any presence in India
Known colloquially as the ‘Google tax’

BEGINNING OF THE GOOGLE TAX PROJECT
Constitution of
Committee on
taxation of
e-commerce by CG
and issuance of its
Report
February 2016September 2015 February 2016September 2013July 2013 May 2016
Finance Bill, 2016
proposing
Equalisation levy
introduced
Equalisation levy
made effective wef
from June 1, 2016
and notification of
Equalisation Levy
Rules, 2016
Issuance of final
report by task force
and its endorsement
by OECD and G-20
countries
Establishment of
task force on digital
economy with
representatives of
OECD, G-20
countries etc
Action plans
detailing activities of
BEPS project
published by OECD
India is the first country to introduce an equalization levy under its domestic tax legislation based on the recommendations of the committee formed by the Apex Tax
body (CBDT). Globally,nations have attempted to tax the digitaleconomy through a combination of anti-avoidance rules and the levy of consumptiontax. The Indian
approach is, however, different as it is in the nature of finalwithholdingtax without assuming the character of an income tax.

DEVELOPMENT BY OTHER COUNTRIES
Country Nature of levy Response to Action Plan 1
Argentina Withholding tax Introduction of turnover tax withholding system for revenues derived by non-residents from rendition of
online services (ie from use of internet to obtain access to movies, TV series, games, music and other similar
services, when payments are made to non-residents with credit card or debit card)
Issuers of credit card /debit card entrusted with the obligation of ‘withholding agents’
Rate - 3 percent
Computation - 3 percent of net price to be withheld at the time of remitting funds abroad
Effective from - November 1, 2014
Australia GST Australian Taxation Office (ATO) has issued guidance on a new law that will apply GST to international sales of
services and digital products
Triggering point - Sales to Australian customers within a 12 months period is AUD 75,000 or more
Scope - Digital products/services imported by Australian consumers (applies on B2C transactions)
Rate - 10 percent
Effective from - July 1, 2017

(CONT)
Brazil Withholding tax
+ Indirect tax
No effective changes proposed – but formal confirmation on tax treatment on foreign data centers provided
Payment by Brazilian residents to foreign companies – for provision of data centers subject to following taxes:
 Income tax withheld at source
 Contribution to the Economic Domain
 Contributions on Imports
Italy Withholding tax Proposal countering issues relating to digital economy under consideration:
 New definition of PE deliberation – to cover situations of virtual PE
 Triggering point – NR to have online activities continuously for 6 months or more, resulting in payments
exceeding 5 millionEuros/year
 Application of 25 percent withholding tax on B2B and B2C transactions
 Deduction mechanism – directly by financial institutions processing payments
 Effective from – January 1, 2017

(CONT)
Japan Consumption tax Applicability of Japan consumption tax (JCT) at the rate of 8 percent extended to provision of cross border
digital services (distribution of e-books via internet, downloading music or video, use of online software,
e-commerce, online advertisements, consulting services rendered continuously through phone/ email)
Basis of charge - location of service recipient
Collection mechanism:
 B2B transactions – Through reverse charge mechanism
 B2C transactions – Foreign service provider to file JCT return and pay JCT through tax administrators
Foreign service provider to file JCT return only in such cases where taxable sales exceeds prescribed threshold
of JPY 10 million
United
Kingdom
Diverted Profits tax
(DPT)
The levy termed as a “diverted profits tax” whereby tax payers are hit with a 25 percent levy on profits
generated in Britain but “artificially shifted” overseas
Levy is outside the tax laws and treaty benefits not available
A number of European countries, New Zealand, Korea, South Africa have started taxing digitaltransactionsunder their domestic GST laws. These were earlier not taxable
due to these foreign players not having a local presence or due to the fact that the laws being based on Place of Service rules had limited taxing rights. Italy has passed
legislationthat requires Italiancompanies to purchase their Internet ads only from locallyregistered companies.

KEY INDIAN JUDICIAL PRECEDENTS
ITO vs Right Florists (2013) (Kolkata Tribunal)
Brief facts:
Assessee was florist and for the purpose of generating business used online advertisement services of Google Ireland and Yahoo USA.
Whenever anyone does a web search on the respective search engines for a particular website and uses certain keywords, the
advertisement of assessee is shown along with the searched results
During the relevant AY, the assessee made payments to Google Ireland and Yahoo USA for such advertisement services without deducting
taxes at source on the understanding that these entities did not have a PE in India
Tax officer’s order:
During the assessment proceedings, the AO held that irrespective of whether such payments were taxable or not, the assessee should
have approached AO under section 195 before making foreign remittance and accordingly disallowed payments made to Google Ireland
and Yahoo USA
CIT(A)’s order:
On appeal, the CIT(A) deleted disallowance made by the AO and held that in absence of a PE of Google Ireland and Yahoo USA such
payments are not taxable and accordingly assessee was not under any obligation to deduct taxes at source

KEY INDIAN JUDICIAL PRECEDENTS (CONT)
Tribunal’s Ruling:
Placing reliance on Mumbai Tribunal’s judgment in case of Yahoo India and Pinstorm Technologies, the Tribunal held that payments made
for online advertisement is not in the nature of ‘Royalty’
Relying on OECD commentary, the Tribunal observed that a search engine which only has presence by way of a website cannot be held as
PE unless its servers are located in same jurisdiction
Conventional PE tests fails in the virtual world, even when a reasonable level of commercial activity is crossed by foreign enterprise
India’s reservations on the OECD Commentary are relevant only with respect to tax treaties entered by India after expressing such
reservations. India’s reservations that a website may constitute a PE in certain circumstances has no relevance, as it has not specified what
are those circumstances
On business connection, the Tribunal held that there is nothing on record to demonstrate or suggest that the online advertising revenues
generated in India were supported by/ serviced by/ connected with any entity based in India
In absence of human intervention/ element in rendering such advertisement services, the payments made to Google Ireland and Yahoo US
cannot be taxed as ‘fee for technical services’

Pinstorm Technologies (P) Ltd vs ITO (2012) (Mumbai Tribunal)
Brief facts:
Assessee was engaged in the business of digital advertising and internet marketing. It utilized internet search engine such as Google,
Yahoo etc to buy advertisement space on internet on behalf of its clients
These search engine carried out its own programme, whereby assessee booked certain words called "key words”. Whenever any person
searches through the internet for a specific "key word", the advertisement of the assessee or its client was displayed
The price charged for such booking depends on type of phrase, its popularity, usage etc. The search engine renders this service outside
India through internet and even the invoice is raised and payment is made through internet
During the relevant AY, the assessee made payments for such advertisement services without deducting taxes at source on the ground that
amount paid to Google Ireland constituted ‘business profits’ and in absence of a PE, nothing is taxable in India
Tax officer’s order:
The AO during the assessment proceedings disallowed such payments on the ground that advertisement services provided to assessee
were in the nature of ‘fee for technical services’ and therefore assessee was under obligation to deduct taxes at source

CIT(A)’s order:
On appeal, the CIT(A)’s confirmed disallowance made by the AO and held that the payments made by assessee to Google Ireland were in
nature of ‘royalty’ and therefore assessee was under obligation to deduct taxes at source
Tribunal’s Ruling:
Relying on co-ordinate bench decision in the case of Yahoo India (P) Ltd vs DCIT, the Tribunal held that payments made by assessee to
Google Ireland for advertisement services was in the nature of ‘business profits’ and accordingly no taxes were required to be deducted at
source in absence of a PE in India
Principles of Yahoo India (P) Ltd vs DCIT’s judgment
Banner advertisementhosting services did not involve use or right to use by the assessee any industrial, commercial or scientific equipment.
Uploading and display of banner advertisement was responsibility of Yahoo Hong Kong and assessee was only required to provide banner
advertisement to Yahoo Hong Kong for uploading the same on its portal. Assessee had no right to access Yahoo Hong Kong’s portal and
there was nothing to show any positive act of utilization or employment of the portal to the assessee
Appeals filed Against Yahoo and Pinstrom rulings before the Bombay High Court, pending for adjudication. Jurisprudence on this matter
also available in the cases of eBay International AG, People Interactive, Pubmatic India etc

INTRODUCTION IN INDIA
Finance Act, 2016 – Brief provisions:
Introduced as a separate chapter in Finance Act, 2016 (Sec 163 to 180) - not forming part of the IT Act
Effective date – June 1, 2016 (Notification 37/ 2016 dated May 27, 2016)
Chargeable on consideration received/ receivable by non-resident for specified services from:
 Indian resident carrying on business or profession or
 PE of non-resident
Rate - 6 percent (no mechanism for exemption or a lower rate, no reference to Section 206AA of IT Act)
Key definitions:
 Specified service means "online advertisement, any provision for digital advertising space or any other facility or service for the purpose
of online advertisementand includes any other service as may be notified by the Central Government in this behalf"
 Equalisation levy means “the tax leviable on considerationreceived or receivable for any specified service under the provisions of this
Chapter”

INTRODUCTION IN INDIA (CONT)
Finance Act, 2016 – Brief provisions (Cont):
Non-applicability:
 Non-resident providing specified services has a PE and such services are effectively connected with that PE; or
 Aggregate consideration for specified services in a FY is upto INR 100,000 (payer wise, not a standard deduction); or
 Payment by Indian resident or PE of non-resident – not for purpose of carrying out business or profession (covers only B2B, not B2C)
Section 10(50) of the IT Act provides exemption for income on which Equalisation Levy is chargeable
Section 40(a)(ib) of the IT Act provides for disallowance of expenditure, if payer fails to deduct and deposit Equalisation Levy on or before
the due date specified under section 139(1) of the Act
Equalisation levy deducted in subsequent year or deducted during the PY but paid after due date specified under Section 139(1) – allowed
as deduction in the year of payment
Equalisation levy to paid to CG by 7th day of the following month in which it is deducted
Consequences for delay in payment – Interest @1 percent for every month or part of a month

Penal consequences for:
 Failure to deduct Equalisation Levy – Penalty equivalent to amount of Equalisation Levy
 Failure to pay Equalisation Levy after deducting – Penalty @ INR 1,000/ day till the failure continues (maximum penalty equivalent to
amount of Equalisation Levy)
‘Statement of 'specified services’ to be filed by payer annually by June 30 of succeeding FY in accordance with the Equalisation Levy Rules
Belated/ Revised statement can be filed within 2 years from the end of FY in which specified services are provided
Processing of statement through intimation – not later than 1 year from the end of FY in which such statement is filed
Intimation can be amended by the AO to rectify mistake apparent from record – within 1 year from the end of FY in which such statement
was issued
Penalty @ INR 100/day for failure in filing such statement
Punishment for false statement – Imprisonment of upto 3 years + Fine

Appeal mechanism provided to payer against penalty imposed under Chapter VIII:
 CIT(A)* – Within 30 days from the receipt of AO’s order imposing penalty
 Tribunal* – Within 60 days from the receipt of CIT(A)’s order imposing penalty
Appeal before CIT(A) only against an order imposing penalty
No right of appeal against intimation or rectification order – Writ could be the only remedy in such cases
Powers vested on the Commissioner of Income-tax under Section 263 or Section 264 of IT Act cannot be exercised in respect of
Equalisation Levy
Prosecution proceedings not be instituted – without the previous sanction of Chief Commissioner of Income-tax
*Form of appeal before CIT(A) and ITAT prescribed under Equalisation Levy Rules, 2016

Equalisation Levy Rules, 2016 – Brief provisions:
Rounding off of consideration for specified services, Equalisation Levy, interest etc – Nearest multiple of INR 10 (Rule 3)
Statement of specified services to be filed in Form No 1, incorporating details relating to (Rule 5) –
 Name, address, PAN of payer and payee (if available)
 Financial year, amount of consideration for specified services
 Amount of Equalisation Levy deductible and deducted
 Details of payment of such levy, interest to CG (Sl No 11, Section reference mentioned wrongly as Section 167)
Due date for statement of specified services - on or before June 30 immediately following the FY (Rule 5)
Payer to file statement of specified services within 30 days of date of service of notice, if no statement filed within due date (Rule 6)
Intimation under section 168(1) of Finance Act, 2016 to be deemed to be notice of demand (Rule 7)

SOME RELEVANT CONSIDERATIONS
Constitutional validity and other aspects
Seventh Schedule of Constitution of India prescribes Union, Sate and Concurrent List, the subject matter of which can only be legislated by
CG, SG or both:
 Union List, Entry 82 – Taxes on income other than agricultural income
 Union List, Entry 92C –Taxes on services (not enforced yet)
 Union List. Entry 97 – Residual category
 State List, Entry 55 – Taxes on advertisements other than advertisements published in the newspapers and advertisements
broadcast by radio or television
Considering the definition of Equalisation Levy in clause 161(d) – these services are likely fall under Entry 55 of State List creating
ambiguity, whether Parliament has power to legislate matters covered in the State List
Power of CG to expand definition of specified services via Notification - Whether allowed under delegated legislation?
Reference to service tax laws, wherein scope of services are usually expanded during annual budget making exercise

Nature of Equalisation Levy, whether ‘income tax’ or ‘indirect tax’
Seems like Equalisation Levy is introduced under Entry 97 of the Union List (ie residual category) and not the usual Entry 82 of the Union
List – dealing with taxes on income other than agricultural income
Introduced as separate chapter in Finance Act, 2016 and not the under IT Act
Provisions adopt the language which is identical to the language adopted in Section 66B of the Finance Act, 1994 which imposes service tax
Chapter VIII extends to whole of India except Jammu & Kashmir. The scope is thus different from IT Act (which is applicable pan India)
Possibly to deny the treaty benefits available under the IT Act or avoid any disputes related to creation of business connection or
characterisation issues (establishing payments to be in the nature of Royalty/ FTS)
If NR were made liable to pay Equalisation Levy from the income earned, it could have been said to be inconsistent with the
Non-Discriminationclause of India’s tax treaties with other countries

Nature of Equalisation Levy, whether ‘income tax’ or ‘indirect tax’
Section 164(d) of Finance Act, 2016 defines Equalisation Levy as “tax leviable on consideration received or receivable for any specified
service under the provisions of this Chapter”
Section 164(j) of Finance Act, 2016 reads as “words and expressions used but not defined in this Chapter and defined in the Income-tax
Act, or the rules made thereunder, shall have the meanings respectively assigned to them in that Act”
Section 2(43) of Act defines the term tax as to mean “income tax chargeable under the provisions of this Act”
Most treaties cover only income tax
Committee’s observation on constitutional validity – it makes reference to Entries 92C and 97 of the Union List
Placement of Section 40(a)(ib): If Equalisation Levy were a tax other than income-tax, the same would have been covered within the
provisions of Section 43B(a)
Possibility to extend the dictum of Mumbai Tribunal ruling in the case of ADIT vs Chiron Behring GmbH & Co (2008) 24 SOT 278 (Mum) with
respect of tax credit for trade tax paid under the provisions of India-Germany tax treaty

Power of Parliament to unilaterally override tax treaties
Disregarding principles of Vienna convention
Breach of non-resident taxpayer’s right in invoking favorable provisions under tax treaties – exemption provided under Section 10(50)
Relevance of Article 51 of Constitution of India – which endeavors States to foster respect for international law and treaty obligations
Past precedents:
 Amendment in Section 90 – which abridged non-resident taxpayer’s right in challenging differential tax rate under non-discrimination
clause of tax treaties
 Retrospective amendment in the definition of term ‘Royalty’ by Finance Act, 2012
Initial classification and subsequent re-classification of transaction
Significant issues may arise in cases where at the inception a transaction is subject to Equalisation Levy, but later on in assessment these
transactions are re-classified and attributed to PE
No reference in Chapter VIII of Chapter XIX of IT Act dealing with refunds – So Equalisation Levy paid in above situation cannot be claimed
as ‘refund’

Double taxation dilemma and availability of FTC
Introduction of Equalisation levy may lead to a situation of double taxation – where India and resident country both tax same amount of
consideration received by non-resident service provider
Lack of clarity on nature of Equalisation levy being ‘income tax’ or ‘indirect tax’, further exaggerates issues relating to FTC
Revenue Secretary’s confirmation in a recent interview for Business Today Magazine (Issue dated 5 June 2016) that Equalisation levy is a
tax on income of a foreign enterprise
Para 2 of Article 2 of India – US treaty covers ‘identical or substantially similartaxes’. Interesting to see how the US IRS or tax authorities of
other countries which has similar language in the treaty considers Equalisation Levy for allowing tax credit
Applying the principles of ‘substance over form’, courts may treat this levy as income tax for the purpose of treaty benefits
Otherwise leads to a situation of treaty dodging, considered impermissible as held by the Indian courts
No refund mechanism provided either in IT Act or Chapter VIII – Resulting in dead loss of Equalisation levy paid in India
Feasibility of Committee’s recommendations on double taxation

Double taxation dilemma and availability of FTC
Practical issues relating to availability of FTC especially in cases, where other countries impose GST or consumption tax on digital
transactions and not income tax or Equalisation levy
If companies think this amounts to excessive tax, they can always set up a PE in India and pay tax as other businesses do – Risk is
profit attribution then!

Non-alignment of Equalisation Levy with BEPS recommendation
No recommendation of Equalisation Levy in final report on Action Plan 1 – although memorandum to Finance Bill, 2016 clearly specifies so
Structures proposed in final BEPS report – to cover situations of untaxed income or taxation at very low rate tax (but it is levied in all cases
irrespective of whether income from such transaction is taxable or not)
Application in case of significant economic presence – Nevertheless Chapter VIII applies irrespective of existence of such presence, subject
to a upper limit of INR 1 lakh
To be imposed only in case of disparity – however in reality no such disparity exists (as domestic taxpayers pay income tax and service tax
on these transactions vis-à-vis non-resident taxpayers pays income tax in their resident country along with service tax in India)

Are these payments excluded?
Payments made by companies for job recruitments (as it is B2B transaction but at the same time intent of advertisement is non-
commercial in nature)
Payments made by individuals for posting blogs, job seekers etc
Payments made to intermediary companies for online advertisements
Payments made to foreign media companies publishing news item about updates etc
Amounts paid to e-commerce companies for listing the products sold by merchants online
Spends by the Government for advertising pet schemes, election campaigns etc

Rate of Equalisation Levy
No rationale provided in Finance Act, 2016 for fixing rate of 6 percent
Observations made in Committee report:
 Rate to be fixed in such a way – which leads to same tax incidence, if such income is taxable under existing tax treaty framework
 No single profit margin can be presumed universally in all businesses
 Rate of such levy may range from 6 to 8 percent – as businesses may take time to cope up with it
 Preferable option to restrict rate of 6 percent initially and review it subsequently
 Lower rate of 6 percent in comparison to rate of royalty under Act – provides inherent incentive to taxpayers (in terms of bypassing
issues relating to characterization of such income)
 No tax credit to be given as per the tax treaty - “As the Equalization Levy is not charged on income, it is not covered by Double Taxation
Avoidance Agreements or tax treaties. Thus, no tax credits under the tax treaties will become available to the beneficial owner in the
country of its residence, in respect of Equalization Levy charged in India”

High cost of doing business in India - Impact on start ups and SMEs
Aimed at the big boys, Google tax could end up hurting the small and vulnerable
Would burn a hole in the cash-crunched small pockets of Indian startups
Applicability of service tax @15 percent (including Krishi Kalyan Cess) under reverse charge mechanism for online advertising services as
they same fall under Rule 3 of Place of Provision of Services Rules, 2012 + Equalisation Levy - Results in total cost of 21 percent
To cope up this, taxpayers may need to re-negotiate their existing contracts and can result in additional issues relating to bearing of cost,
compliance burden, grossing up etc
Grossed up Equalization Levy would be a direct cost as the levy may not be creditable unlike service tax
So while the government does get an extra inflow of tax revenue, Indian SMEs will be impacted negatively
Computation mechanism – Clarity provided in Committee report, chargeable on amount received excluding indirect taxes/ levies paid in
India

Others open areas
Can the foreign company apply for an Advance Ruling?
Requirement to file income tax returns as full/ final tax has been paid?
Interplay between Section 163(3) and Section 165(1)
Interplay between Section 163(3), 164(d) and 165(1) – whether Equalisation Levy is applicable on consideration in kind or discharged by
way of adjustment?
How to determine ‘non resident’ status at the time of payment? Foreign company whose POEM is in India will be ‘resident’ and
consequently EL is not chargeable for specified services provided by such company – No PE declaration a must
Deduction and payment of EL – not a condition precedent for exemption under Section 10(50) of the IT Act
Inclusive definition of PE under Chapter VIII – Sec 164(g) - Whether other forms of PE like Construction PE, Supervisory PE, DAPE, Service
PE are also covered?
Whether exceptions to PE status like having an liaison office, preparatory or auxiliary work also covered?

Others open areas
Principles of grossing up under Section 195A of the IT Act missing in Chapter VIII – though mathematically possible
If payer pays 6 percent out of pocket – whether requirement of Chapter VIII, Section 40(ib) of IT Act satisfied?
Whether EL paid out of pocket eligible for deduction under Section 37 of the IT Act?
– Page 101 of EL report contemplates deduction of Equalisation Levy for a NR as a business expenditure
– TDS paid out of pocket - eligible for deduction - ACIT vs Bobcards Ltd [2013] 29 taxmann.com 234 (Mumbai ITAT)/ CIT vs Standard
Polygraph Machines P Ltd [2002] 124 Taxman 669 (Mad) - Whether same principles could be extended to payment of Equalisation
Levy?
– Liability to deduct and pay Equalisation Levy is a statutory duty - expended wholly and exclusively for the purpose of business or
profession. The fact that the levy is attracted only if the specified services are procured for the purposes of carrying out business or
profession further substantiates this view.
Should such transactions pass through Form 15CA and 15CB certification?

Others open areas
Provisions of transfer pricing and general anti-avoidance rules to apply to such transactions?
Whether the threshold of INR 1 lakh to be examined from vendor or consumer perspective – Section 165(2)(b) of the Finance Act 2016
read with Section 166(1)?
Whether the liability to deduct Equalisation Levy would arise on date of invoice, on due date or on the date of actual payment?
Cancellation of amount payable - implications?

FOOTING THE BILL

RECOMMENDATIONS
FICCI
Introduction of following proposals in Chapter VIII relating to:
 Refund mechanism
 Disputing applicability of Equalisation levy
 Right to appeal
Suitable mechanism for payers so that they can apply to tax officer to determine whether particular transaction is subject to Equalisation
levy or not
Introduction of nil/ lower Equalisation levy certificates
Applicability of beneficial provisions envisaged under Section 90(2) to Chapter VIII etc
ASSOCHAM
Introduction of Equalisation Levy as part of Act and not as a separate chapter

CASE STUDY I
Company A is paying fees for online advertisement services to
Company B
Such services includes placement of Company A’s ads on a website
hosted on a server outside India
Period: January 1, 2016 to March 31, 2016
Company B raised an invoice on Company A for the online
advertisement on 31 March 2016
Payment made by Company A on June 11, 2016
Would Equalization Levy apply?
Interplay between Section 163(3), 164(d) and 165(1) of the Finance
Act 2016 is crucial to understand and interpret
No Equalisation Levy position is possible, similar to service tax
applicability only on notification of covered services
Company B
Company A
Outside India
India

CASE STUDY II
Company A is paying fees for online advertisement services to
Company B
These advertisements are aimed at marketing Company A’s products/
services and offers thereon only to customers in India
Company A fails to deduct and pay the equalization levy, and is
defunct, with no assets
Can any action be taken for recovery of dues against Company B?
Collection and Recovery provisions (Section 166 of the Finance Act,
2016) fails to bring under its ambit, non-resident company in cases of
failure by the resident deductor
Company B
Company A
Outside India
India

CASE STUDY III
Company A is paying fees to Company B for online advertisement
services that Company B provides to place Company A’s ads on its
website
services and offers thereon only to customers in a country outside
India ie these advertisements are likely to boost Company A’s
revenue outside India
Is Equalization Levy attracted?
The Committee on Taxation of E-Commerce in its report has stated
that if the services are either received, utilized, provided or
performed in India, it has a nexus with India. The Committee has
recommended that the levy be made applicable to services which
have a nexus with India. However, these does not seem to be an
express provision in the Finance Act 2016 exempting services that
have no nexus with India.
Company B
Company A
Customers
Outside India
India

CASE STUDY IV
Company A is paying fees to Company B for online advertisement
services to increase its overseas branch sales.
In this scenario, the service provider, recipient, and source of income
are all located outside India.
Is Equalization Levy attracted?
Place of rendering of services by NR is not relevant
Place of utilization of services by R or PE of NR may be anywhere in
world
No exemption is provided. Therefore levy is applicable on services
consumed by the foreign branch of the Indian company, Company A.
Company B
Company A
Customers
Overseas
Branch
Outside India
India

CASE STUDY V
Company A is reimbursing its share of the advertisement cost to
Company B towards fees for online advertisement services that
Company B has availed from Company C for placing the whole group’s
ads on its website
These advertisements are aimed at marketing the group’s products/
services and offers thereon to customers both in India and outside
India ie these advertisements are likely to boost the group’s revenue
both in India and outside India.
Will the reimbursement of expenses attract Equalization Levy?
The Committee on Taxation of E-Commerce in its report has stated
that Equalization Levy should apply to such reimbursement of
expenses
However, the same has not been specifically covered in the Finance
Act, 2016.
Company B
Company A
Customers
Company C
Outside India
India
Customers

CASE STUDY VI
Company A is paying to Company B, fees for online advertisement
services that Company B provides to place Company A’s ads on its
website
services and offers thereon only to customers in India ie these
advertisements are likely to boost Company A’s revenue in India
Company A fails to deduct any amount from the payment to
Company B. However, it voluntarily pays the amount of Equalization
Levy applicable on the said transaction to the credit of the CG within
the due date.
Has Company A failed to ‘withhold’ in terms of Section 166(1) of the
Finance Act, 2016?
Can it be said that the case of the Company falls under Section 166(3)
and Section 171(a) of the Finance Act 2016, and hence, Company A is
liable to a penalty?
Company B
Company A
Outside India
India
Customers

CASE STUDY VII
Company A is paying Company B for services that Company B
provides to Company A
Company A opines that the transaction is applicable to Equalization
Levy. Company B disagrees. What options does Company B have to
challenge or seek clarity on the proposed deduction of Equalization
Levy by Company A or B?
No. Finance Act, 2016 does not provide for an appeal mechanism.
Writ petition under Article 226 or Special Leave Petition under Article
136 are the possible avenues
No provision for seeking an advance ruling regarding the equalization
levy
Company B
Company A
Outside India
India

CASE STUDY IX
Company A buys digital advertisement space from Company B and
acts as a reseller in India
Payments to be made to Company B is exigible to Equalisation Levy at
the rate of 6 percent
Commercially, it is agreed that Company B will bear only 3 percent of
such Equalisation Levy and the balance 3 percent would be passed to
the ultimate consumers in India as service charges
Company B withholds 6 percent and pays the net amount to
Company A. The balance 3 percent cost is billed by Company A to the
ultimate consumers in India as service charges.
How can this recovery of 3 percent from the ultimate consumers be
passed by Company A to Company B?
Subsequent upward tuning of prices may not work because of service
tax and Equalisation Levy (21 percent)
Company B
Company A
Outside India
India
Customers

ABBREVATIONS
Abbreviation Meaning
Act Income-tax Act, 1961
AO Assessing officer
AY Assessment year
BEPS Base erosion and profit shifting
CG Central government
CIT(A) Commissioner of Income-tax (Appeals)
Committee Committee on taxation of e-commerce
FTC Foreign tax credit
FY Financial year
MNCs Multinational corporations
OECD Organisation for economic co-operation and development
PE Permanent establishment
SG State government
Tribunal Income-tax appellate tribunal

Address the tax challenges of the digital economy
In Chapter 7 (Broader direct tax challenges raised by the Digital economy and the options to address them), at paragraph7.6, it is stated that:
“… the application of a withholding tax on digital transactions could be considered as a tool to enforce compliance with net taxation based on this
potential new nexus, while an Equalisation levy could be considered as an alternative to overcome the difficulties raised by the attribution of
income to the new nexus” [Emphasis supplied]
At paragraph 7.6.4, the BEPS Report on Action 1 acknowledges that:
“To avoid some of the difficulties arising from creating new profit attribution rules for purposes of a nexus based on significant economic
presence, an “Equalisation levy” could be considered as an alternative way to address the broader direct tax challenges of the Digital
economy” [Emphasis supplied]
ANNEXURE 1

ANNEXURE 2
Key takeaways of the Committee Report
Need for tax neutrality
Lack of tax neutrality between digital and traditional enterprises disrupts existing market equilibrium
Distortions arising from violation of tax neutrality – has adverse impact on business of these enterprises and on economy resulting in fiscal
constraint for governments
Fiscal shortfalls resulting from lack of tax neutrality – compensated by local residents in the form of additional tax
Application of doctrine of updating construction
This doctrine suggests that in construing any law, interpreter is to presume that Parliament has intended such law to be applied at any future
date in such a way as to give effect to original intention and thus, while interpreting such law he is allowed to make reasonable allowances for
relevant changes that have occurred since passing of that law, in terms of social conditions, technology, meaning of words and other matters

ANNEXURE 2 (CONT)
Difference between withholding tax and Equalisation Levy
Withholding tax is only a mechanism of collecting taxes, whereas ‘Equalisation Levy’ is full and final tax
Constitutional validity of equalisation levy
Equalisation levy appears to be in accordance with Entries 92C and 97 of the Union List
Non-applicability of tax treaties on Equalisation Levy
Equalisation Levy is imposed on gross amount of transaction and not on income arising from such transaction – it is applicable irrespective of
whether or not any income arising from such transaction is taxable in India
Double taxation
Concerns regarding double taxation was also acknowledged by Committee – but it was clearly articulated that a resident country is not
precluded from granting relief under its own domestic laws, to avoid such double taxation
Possibility of reciprocal agreement can be explored in cases, where both India and resident country impose such levy

ANNEXURE 2 (CONT)
Modes of deduction
Apart from casting obligation on payer to deduct Equalisation Levy, deduction by payment gateway/ authorized foreign exchange dealer also
considered by Committee - but considering substantial modification required in existing laws, rules, regulations etc to make these modes
effective, alternate options were not recommended
Rationale for inserting Chapter VIII
Justification for inserting Chapter VIII separately – due to inherent difference in nature ‘Equalisation Levy’ and income tax; wherein former is
levied on gross consideration of digital transactions and latter is levied on income
Non-applicability of Equalisation Levy on non-residents having PE in India
Written declaration by non-resident in prescribed form including Indian PAN or tax identity number in country of residence is sufficient
Reporting compliance on Payee
Payee to file annual return of receipts for specified services, if such receipts exceed INR 10 crores. Tax deducted by payers to be accepted as
final payment

ANNEXURE 2 (CONT)
Others
Modifications in existing Tax Audit Report form (ie Form 3CD) to include particulars of Equalisation Levy – Similar to TDS details prevalent
in Form 3CD
Extended definition of specified services also provided by Committee
Amendment in definition of ‘Business Connection’ under Section 9 to enhance its scope by including ‘significant economic presence’
Payer to obtain certificate from the Auditor within 60 days after end of the year – for appropriate deduction and payment of Equalisation
Levy to Central Govt within 30 days of deduction

Observation of Committee on doctrine of updating construction:
“74. The question of whether the “doctrine of updating construction” can be applied on existing provisions of tax treaties, does not seem to have
been taken up as yet in a tax dispute in India or outside. However, in its essence, it would be the basis of, and necessary justification for changes
that are made from time to time in Commentaries on OECD and UN Model Tax Conventions with the aim and objective of modifying the
interpretation of provisions existing in treaties based on these Models. Holding this doctrine inapplicable would mean negating the legitimacy
of these changes, and accepting it may open the possibility of dynamic interpretation of tax treaties that may allow the taxability of digital
economy to be covered by existing provisions. Either way, such an application has the potential to open new areas of interpretational
disputes, greater uncertainty and unpredictability.”
ANNEXURE 3

Section 40(a)(ib) of the Act:
“any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under the provisions of
Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date
specified in sub-section (1) of section 139:
Providedthat where in respect of any such consideration, the equalisation levy has been deducted in any subsequentyear or has been deducted
during the previous yearbut paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in
computing the income of the previous year in which such levy has been paid”
Section 10(50) of the Act:
“any income arising from any specified service provided on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016
comes into force and chargeable to equalisation levy under that Chapter.
Explanation - For the purposes of this clause, “specified service” shall have the meaning assigned to it in clause (i) of section 161 of Chapter VIII of
the Finance Act, 2016
ANNEXURE 4

ANNEXURE 5
Placement in domestic laws:
“129. If the equalisation levy is to be imposed under the domestic laws of India, if it is not to be imposed on income, and if it is not to be covered
by the treaty obligations imposed by the tax treaties, then it will need to be separated from the laws determining the tax imposed on income in
India. As the equalisation Levy on a transaction is, in any case, inherently different from a tax on income, it need not be included within the laws
governing tax on income. Accordingly, it would be necessary to impose the equalisation Levy through statutory provisions outside the Income Tax
Act, 1961. Instead, the provisions for equalisationLevy can be included in the Finance Act. Past precedence exist for imposition of similar taxes on
transactions, like the Security Transaction Tax (STT) and the Service Tax. In view of these precedents, and the need to keep the ‘equalisation Levy’
separate from the taxes on income, this Committee is of the view that the ‘equalisation Levy’ on payments for digital goods and services should be
imposed through statutory provisions in the Finance Act.”

ANNEXURE 6
“135. Any sum paid or payable or credited as a considerationfor any of the following:
i) online advertisingor any services, rights or use of software for online advertising, including advertisingon radio & television;
(ii) digital advertising space
(iii) designing, creating, hosting or maintenance of website
(iv) digital space for website, advertising, e-mails, online computing, blogs, online content, online data or any other online facility
(v) any provision, facility or service for uploading, storing or distribution of digital content
(vi) online collection or processingof data related to online users in India
(vii) any facility or service for online sale of goods or services or collecting online payments
(viii) developmentor maintenance of participative online networks
(ix) use or right to use or download online music, online movies, online games, online books or online software, without a right to make and
distribute any copies thereof
(x) online news, online search, online maps or global positioning system applications
(xi) online software applications accessed or downloaded through internet or telecommunication networks
(xii) online software computing facility of any kind for any purpose
(xiii) reimbursement of expenses of a nature that are included in any of the above
Explanation – For the purposes of above, ‘online’ means a facility or service or right or benefit or access that is obtained through the internet or
any other form of digital or telecommunicationnetwork.”

ANNEXURE 7
Article 18 – Obligation not to defeat the object and purpose of a treaty prior to its entry into force
“A State is obligedto refrain from acts which would defeat the object and purpose of a treaty when:
(a) It has signed the treaty or has exchanged instruments constituting the treaty subject to ratification, acceptance or approval,until it shall have
made its intention clear not to become a party to the treaty; or
(b) It has expressed its consent to be bound by the treaty, pending the entry into force of the treaty and providedthat such entry into force is not
unduly delayed”
Article 26 – Pacta Sunt Servanda
“Every treaty in force is binding upon the parties to it and must be performed by them in good faith”
Article 27 – Internal law and observance of treaties
“A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article
46”

ANNEXURE 7 (CONT)
Article 46 – Provisions of internal law regarding competence to conclude treaties
“A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law
regarding competence to conclude treaties as invalidating its consent unless that violationwas manifest and concerned a rule of its internal law
of fundamental importance
A violation is manifest if it would be objectively evidentto any State conducting itself in the matter in accordance with normal practice and in
good faith”

ANNEXURE 8
Section 170 – Interest at 1 percent per month or part of month for late payment of Equalisation Levy
No separate levy of interest for non-deduction - unlike Section 201(1A)(a)
Period for interest computation to be considered from the date of invoice, its due date or date of actual payment?
Penalty - worded same as provisions in the IT Act
Section 201 (1A): Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in
that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he
or it shall be liable to pay simple interest, -
i. at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the
date on which such tax is deducted; and
ii. at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was
deducted to the date on which such tax is actually paid
and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of Section 200

ANNEXURE 9
USA Treaty - ARTICLE 26 - NON-DISCRIMINATION
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected
therewith which is other or more burdensome than the taxation and connected requirements to which nationals that other State in the
same circumstances are or may be subjected. This provision shall apply to persons who are not residents of one or both of the Contracting
States.
Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of
article 12 (Royalties and Fees for Included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting
State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident,
be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.
Nothing in this article shall be construed as preventing either Contracting State from imposing the taxes described in Article 14 (Permanent
Establishment Tax) or the limitations described in paragraph 3 of Article 7 (Business profits).

ANNEXURE 10
Section No Provisions covered
120 Jurisdiction of income-tax authorities
131 Power regarding discovery, production of evidence etc
133A Power of survey
138 Disclosure of information respecting assesee
156 Notice of demand
Chapter XV Liability in special cases – representative assesee etc
220 to 227 Collection and recovery
229 Recovery of penalties, fine, interest and other sums
232 Recovery by suit or under other law not affected
260A Appeal to High Court
Section No Provisions covered
261 Appeal to Supreme Court
262 Hearing before Supreme Court
265 to 269 Appeals and revision - General
278B
Offences and prosecutions
280A
280B
280C
280D
282, 288 to
293
Miscellaneous
Section 178 of the Finance Act 2016 - The provisions of these sections of the IT Act shall apply to Equalization Levy as they apply in relation to
Income Tax

ANNEXURE 11
Equalisation Levy -
Finance Act 2016
Equalisation Levy Rules
2016
Report of the Committee on
Taxation of e-Commerce

Views discussed are personal, meant for trainingsonly
Sandeep Jhunjhunwala
Associate Director | BMR & Associates LLP
E: Jhunjhunwala.sandeepr@gmail.com
M: +91 97401 55469

Equalisation Levy - Sandeep Jhunjhunwala

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