The Hindu Business Line : Portals are virtual permanent establishments

A foreign company that provides a portal with servers would attract tax liability in India if access to these is provided to Indian parties for a fee.

A foreign company that provides a portal with servers would attract tax liability in India where access to these is provided to Indian parties for a fee. This issue was considered by the Authority for Advance Rulings (AAR) in the case of Cargo Community Network (P.) Ltd. (2007; 158 Taxman 243).

In this case, the foreign company was providing access to an Internet-based air cargo portal, Ezycargo, in Singapore. An agent subscribing to this portal can access the databank of airlines for flight schedules, availability of cargo space, connecting flight details and so on to enable him to arrive at the economics of transporting the cargo to the final destination.

The space availability for booking cargo could be checked only for aircraft of specified airlines. The agent could book the cargo by choosing a specified airline and submitting the details asked for in the booking sheet such as the dimension and weight of the cargo.

The portal would transmit data, in English, from the agent to the airlines, in Cargo IMP data, and on receiving the reply convert the Cargo IMP into English and transmit it to the agent. For this service, the applicant charged subscription, system connection and helpdesk support and other fees.

It opened a liaison office in India with the permission of the Reserve Bank of India to act as communication channel between the head office and parties in India.

TDS Questioned

The agents proposed to deduct income-tax at source under Section 195 from the subscription amount. The applicant sought an advance ruling from the Authority on the question whether the payments made by the Indian subscribers to it at Singapore, for providing a password to access and use the portal hosted from Singapore were taxable in India and subject to TDS.

The AAR ruled that the applicant's income was from the subscription received from various cargo agents in India towards the use of the portal. The subscription consisted of one-time system connect fee, a monthly subscription fee and help-desk charges.

A plain reading of Article 7 of the DTAA (Double Taxation Avoidance Agreement) would show that where profits include items of income that are dealt with separately in other Articles of the DTAA, the provisions of those Articles shall not be affected by that of Article 7.

As the `payments' falling under any other Article would have to be dealt with under that particular provision, it is necessary to ascertain the nature of the `payments'. The system connect fee that included training charges (for two persons), a monthly subscription fee for concurrent access, fee for additional access and help-desk charges all are payments made by cargo agents for the use of the Ezycargo portal developed by the applicant and hosted on his server in Singapore.

The portal could be accessed on the computer screens of cargo agents through which they could book cargo or check its status. Therefore, it would be correct to say that the commercial equipment was used in India and the `payments' also arise in India.

The complex portal designed by the applicant was the result of long experience and research. It offered a sophisticated platform for a complete range of services that enabled the clients (forwarders) manage their time-critical transactions with major carriers. It offered global online access convenience to a comprehensive range of functions and complete management solutions for cargo booking and subsequent multi-carrier track-and-trace facility.

Integrated unit

The portal, which was a complex, commercial Internet site, provided a gateway for processing request for cargo booking to different airlines, and obtaining their acceptance. The use of the portal was not possible without the use of the server that provided Internet access to the cargo agents/subscribers, on the one hand, and to different airlines, on the other, for back and forth communication.

The portal and the server together constituted integrated commercial-cum-scientific equipment and the use of the portal without server was not possible. Whereas the portal performed complex functions of providing access to different airlines and translation of messages from English to IMP language, the server provided connectivity and Internet access for processing request for booking of cargo and subsequent multi-carrier trace-and-track facility, etc.

Therefore, the plea of the applicant that cargo booking agent did not use the server of the applicant for processing or obtaining any data, and that the use of the equipment involved at least some degree of domain or control over the equipment to suit the business needs of the user was not tenable, according to the AAR.

The factual position was that a cargo booking agent/subscriber could use the portal at will on the server platform of the applicant, at any time according to his needs for processing his request for booking cargo with various airlines, and to access other sophisticated services offered by Ezycargo.

`Royalty'

Para (3) of Article 12 defines the term `Royalties and fees for technical services'. The term `Royalties' as used in sub-clause (b) of Para (3) of Article 12 means payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment.

The Ezycargo portal on the applicant server platform is scientific equipment authorised to be used for commercial purposes. Therefore, payments made for concurrent access to utilise the sophisticated services offered by the portal would be covered by the expression `royalties' as used in Article 12.

Further, the technical and consultancy services being rendered by the employees of the service provider in training the subscribers and providing help desk support in India were covered by the description of `Fees for Technical Services'. These were ancillary and subsidiary to the application and enjoyment of the use of, or the right to use, the scientific equipment for commercial purposes.

As the AAR concluded, the payments made by the subscribers to the service provider were in the nature of `Royalties and fees for technical services' and taxable under Article 12, the payments could not, therefore, be treated as business income.

The aforesaid ruling though not binding on every foreign company lays down certain guidelines for determining when a portal with servers would result in a permanent establishment in India.

Even in the absence of a permanent establishment, fees or royalties would be taxable if they arise from the use of technical, scientific or commercial equipment.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)