Technology, Media and Telecom (TMT) : Online Businesses and Disruptive Technologies - Key India Tax and Regulatory Aspects

Technology, Media
and Telecom (TMT)

Online businesses and disruptive technologies
– key India tax and regulatory aspects
September 2020
Table of contents
Foreword .........................................................................................................03
Segment-wise perspectives on key direct tax, indirect tax and regulatory

aspects.............................................................................................................04
01 02 03
Online advertising.... 04 OTT.......................... 09 Robotics and artificial

intelligence.............. 14
04 05 06
Online gaming......... 18 Online education..... 22 Cloud....................... 26
07
Digital payments...... 29
How PwC can help..........................................................................................32
2 PwC Technology, Media and Telecom: Online businesses and disruptive technologies
Foreword
The global pandemic has been a mixed bag of outcomes Taking a two-pronged approach, this endeavour
for technology, media and telecommunications (TMT) involves the most significant reforms of the international
businesses. As with most sectors, disruptions to supply tax system in decades: (i) a reallocation of taxing
chains and the economic slowdown are likely to have a rights and revised nexus rules, and (ii) the introduction
negative impact on these businesses. However, there has of a global minimum tax. This effort is made even
been an upswing in the demand for digital services across more ambitious and significant because of the aim to
sectors in response to the changing consumption habits produce a final report to the G20 by the end of 2020.
and need for ensuring business continuity. Thus, all businesses with multinational operations must
be aware of this project’s scope and speed in order to
Within TMT, the hardest hit segments are likely to be prepare for the eventual impact (or fallout if the project
those that monetise social and physical interaction – fails, increasing the adoption of unilateral measures).
such as cinema, hospitality, sports/events and out-of-
home advertising (OOH) advertising. Telecom operators Several countries, including India, have introduced
offering the critical commodity of reliable connectivity are unilateral measures to tax digital transactions. Since
reasonably isolated from the COVID-19 fallout. As people the taxation system in India is largely based on the
are forced to work remotely, enterprises are expected to physical presence of an entity, the real test lies in
accelerate their pace of digitisation, powered by cloud, bringing transactions in the digital environment that
automation, artificial intelligence and big data. Thus, the a foreign player has with Indian residents within the
other segments that are likely to benefit are over-the- tax regime. Taking a cue from BEPS Action Plan 1,
top (OTT) players, internet service providers (ISPs), data the Government of India (GoI) has introduced various
warehousing companies, and the likes. measures such as the introduction of an equalisation
levy (EL) on online advertisements (at the rate of
This will present unprecedented opportunities for 6%), and EL on e-commerce operators (at the rate of
TMT companies. We are already seeing multiple 2%); introduction of provisions relating to significant
collaborations amongst technology B2B players, economic presence (SEP); withholding tax on certain
Indian telecom operators and media companies as e-commerce transactions; and inclusion of digital
enterprises strive to meet new consumer dynamics and supplies in the scope of the Goods and Service Tax.
shifting preferences for digital applications and online In addition to the digital taxes, other significant recent
services. The intersection of technology, media and developments like the multilateral instrument (MLI)
telecommunications has never been more exciting. While coming in force from April 2020 (in the case of India),
the demand for technological innovation has largely been the implications of the Principle Purpose Test (PPT) and
consumer-led, we expect to see a spike in demand from the new preamble in the covered tax treaties will have
organisations as well, as they seek to build efficiencies to be taken into account by TMT companies in addition
and digitise operating models. Given the central role to the evolution of regulations around data localisation
that TMT plays in the transformation of the business laws, e-commerce policy, etc., while identifying the right
landscape, companies will need to continue to adapt business models for operations in India.
and innovate in response to the pandemic and ensure
compliance with regulations at a time when they may face In this report, we have attempted to highlight aspects
increased scrutiny. related to India’s direct tax, indirect tax and regulatory
laws that TMT businesses operating in seven select
As more countries look at unilateral measures to tax segments need to bear in mind for tax-efficient and
remote activities and digital services, there are unique tax compliant operations in India. There is considerable
challenges for TMT companies who are global not only in overlap between the tax and regulatory-related
terms of operations but also by aspiration. To remain fit aspects of one TMT business and those of other
for a growing digital economy, companies must ensure businesses. In order to provide a comprehensive
tax effectiveness with an operating model that factors in overview for all businesses on a standalone basis,
the risks of the digital age. we have captured the key aspects for each of them
separately in this report.
Over the past several years, the OECD/G20 Inclusive
Framework on BEPS has been working on a project We hope you find this report interesting and welcome
to update international tax rules to account for the tax your feedback.
challenges arising from the digitalisation of the economy.
Segment-wise perspectives on
key direct tax, indirect tax and
regulatory aspects
1. Online advertising
Post the COVID-19 crisis, new opportunities in digital

Direct model
advertising are emerging across various new platforms
such as over the top (OTT), social media and online
gaming. With the increase in awareness, access and
monetisation opportunities, businesses are expected Ad content
to focus more on digital advertising rather than hosting
traditional mediums. Website/ F Co. website/
portal servers Marketing
The advent of voice-based search technology has led and
to increased consumption of video and vernacular sourcing
services
content, and is expected to fuel digital ad spends.
Businesses across sectors have embraced digital media
for upscaling and are experimenting with non-traditional Payment
Outside of service
media platforms to connect with users. Technological fees
India
advancements are driving increased engagement and
giving rise to new ad formats such as location-based India Browsing Selling ad Payment
and targeted ads based on behavioural data. User space for ad
analytics has become a staple. space
There have been significant changes in the domestic

and international tax arena, with a view to rationalise
taxation of transactions in the digital economy. Online
advertisement players (international and domestic
players) have been following varied business models in
Viewers Advertisers/ I Co.
India – selling of advertisement space directly to Indian ad agency
customers, distribution of ad space through Indian
subsidiaries, licensing of platforms to Indian subsidiaries
Transaction flow
which sell ad space in India, etc. We have covered the
Consideration flow
key Indian tax and regulatory aspects for select India
business models.
Direct model: either resident in India or using Indian IP addresses,
• An overseas company (to be referred as F Co.) is and sale of data collected from either Indian residents
engaged in the business of selling advertisement space or person who uses Indian IP addresses. Such ECom
(ad space) on its web portal/website (including its EL is applicable if receipts from specified ‘e-commerce
Indian web portal/website which is hosted on servers supply or services’ exceed INR 20 million per annum.
located outside India). Thus, one will also need to evaluate the applicability of
ECom EL on sale of digital advertising space or data by
• For its Indian business, F Co. enters into agreements
F Co., even if such a transaction is with another non-
with Indian advertisers/ad agencies for sale of ad
resident but fulfils the specified conditions.
space. F Co.’s Indian group entity/subsidiary (I Co.)
supports F Co. with marketing activities and sourcing • Both income tax and ECom EL may cover such income
India-specific content for its web portal/website. within the tax net of F Co. for FY 2020–21. However,
effective FY 2021–22, if ECom EL is applicable to such
• F Co. raises invoices directly on Indian advertisers/ad
income, then income tax will not be applicable, subject
agencies, and Indian advertisers/ad agencies make
to satisfaction of specified conditions.
payments directly to F Co. in its foreign bank account.
In many cases, I Co. also collects the payments from • Recently, in many cases, the tax authorities have
Indian advertisers/ad agencies on behalf of F Co. and evaluated marketing and sales support services
remits the same to F Co. provided by an Indian company through its employees
and have insisted on documentation beyond the
Distributor model: intercompany agreement to demonstrate that such on-
• F Co. enters into a distribution agreement with I ground activities are not being extended to facilitation
Co. wherein I Co. shall act as a distributor of the ad of negotiation for its foreign affiliate, etc. In the absence
space (on the web portal/website of F Co.) to Indian of such documentation, the tax authorities have alleged
advertisers/ad agencies. that such Indian company constitutes an Agency PE
• As a distributor, I Co. purchases ad space from F Co. of the foreign affiliate in India. Thus, one needs to bear
and sells the same to Indian advertisers/ad agencies. in mind such PE-related aspects while considering
the business model, depending upon specific facts
of the case and the actual functions performed by I
Co. (marketing activities, collection activities, content
Key direct tax aspects sourcing activities, etc.).
F Co.: • Further, the implications of significant economic
Direct model: presence (SEP) provisions under the domestic income
• Business profits earned by an overseas entity are tax law will need to be kept in perspective. The Finance
generally not subject to income tax in India in the Act, 2020, has deferred the SEP provisions to FY 2021–
absence of a permanent establishment (PE)/business 22 and amended the existing provisions in relation to
connection, unless the profits qualify as royalties or SEP by removing the reference to digital means in case
fees for technical services (FTS). Thus, it needs to of soliciting business with users in India. However, the
be evaluated whether the payment received by F existing Indian tax treaties provide for a conventional
Co. is taxable as royalty or FTS or business income, definition of PE for taxing business profits of a non-
considering the provisions of the domestic income tax resident, and inclusion of SEP under the domestic
law and the relevant Indian tax treaty. income tax law may therefore not be extended to the
tax treaty unless the tax treaties are amended.
• Further, since income received by F Co. directly from
India advertisers in this example is for sale of digital • Also, with the Personal Data Protection Bill, 2019, and
ad space, it is important to consider the applicability the draft national e-commerce policy mandating the
of equalisation levy at 6% (hereinafter referred to as maintenance of a copy of data/compulsory processing
‘Advertising EL’) if the consideration exceeds INR of certain data on a server located in India or the
100,000 per annum per advertiser. In case Advertising requirement of setting up of a registered business
EL is applicable on the advertisement income of F Co. entity in India for all e-commerce apps/sites, etc.,
derived from India, it will not be subject to income tax TMT companies may be required to revisit existing
in India subject to satisfaction of certain conditions India business models. Thus, one would need to bear
(e.g. F Co. not having a PE in India). in mind related income tax implications, including any
PE exposure, if any.
• Effective 1 April 2020, a new 2% equalisation levy
(hereinafter referred to as ‘ECom EL’) has been • PE exposure in India for F Co. can lead to its profits
introduced and will apply to consideration for specified attributable to the Indian PE being subject to tax in
‘e-commerce supply or services’ provided or facilitated India at the rate of 40% (plus applicable surcharge
by a non-resident who qualifies as an ‘e-commerce and cess) on a net basis. Last year, the Central Board
operator’ as defined – including revenue from sale of of Direct Taxes (CBDT) released a draft amendment
advertisements to non-residents targeting customers of rules for profit attribution to PEs, disregarding the
Authorised OECD Approach and suggesting that a Compliances under both models
mixed/balanced approach be followed, which allocates • India compliance requirement for F Co.: Since
profits by giving appropriate weightage to both F Co. shall earn income from Indian residents
demand- and supply-side factors. Further, the OECD’s under both the models, it may be required to file
proposal to allocate more taxing rights to overseas an Indian income tax return (ITR) disclosing such
markets/consumer jurisdictions under the Pillar One income, especially considering the expansive penal
Unified Approach needs to be kept in perspective. proceedings prescribed under the domestic income
Additionally, the Finance Act, 2020, has expanded tax law. However, the Finance Act, 2020, has provided
the scope of operations in India for the purpose of exemption from filing of ITR to non-residents earning
attribution of income to a business connection in India, income only from royalty or FTS (provided taxes have
by including certain activities such as advertisements been withheld as per the rate prescribed under the
targeting Indian customers, sale of data collected from domestic income tax law). Thus, in cases where nil
persons resident in India and sale of goods or services taxation or applicability of treaty rates are claimed, F
using such data. Co. may have to continue filing ITR in India.
These developments should be kept in perspective In case ECom EL is applicable to F Co., it shall be
while computing profit attributable to a PE and required to carry out quarterly payment compliances
related exposure. and also file an annual statement in a prescribed form
disclosing specified e-commerce supply or services
Distributor model: provided or facilitated by F Co.
• Taxability of income received by F Co. from I Co.
F Co. also needs to keep in perspective any
shall depend upon its characterisation, i.e. whether
requirements to withhold tax on payments to be
digital advertisement income or royalty income (i.e.
made to Indian parties (e.g. content providers and
software, equipment or process), based on the nature
other transactions) and whether related compliances
of the arrangement between F Co. and I Co. (e.g.
therefore apply, especially considering the penal
limited/normal/full-risk distributor or providing rights
consequences prescribed for non-compliances.
to the web portal/website where I Co. acts as an
entrepreneur, etc.). I Co.:
• Subject to the above evaluation, some of the key • For I Co., it is important to consider withholding tax
income tax aspects which need to be kept in and Advertising EL-related withholding obligations and
perspective include: related compliances (including filings) while making
payments to F Co., content providers, advertising
– If income qualifies as digital advertising income – agencies, payment gateways, play stores, partners, etc.
6% Advertising EL may apply subject to satisfaction
of certain conditions.
– Alternatively, if F Co. qualifies as an ‘e-commerce Key indirect tax aspects
operator’ and transactions undertaken by F Co. with
I Co. or even with another non-resident fall within F Co.:
the specified ‘e-commerce supply or services’ Direct model
2% ECom EL may apply on the transaction value • F Co. is engaged in the business of selling ad space to
subject to satisfaction of certain conditions. customers in India. Provision of services by a company
– Conversely, if EL is not applicable and if there is outside India to a customer in India is considered as
any royalty or management service fee related import of services. I Co., in such cases, may be liable
arrangement – such consideration can be taxable to pay GST under the reverse charge mechanism and
at the rate of 10% (plus applicable surcharge and avail credit of the taxes thus paid, subject to input
cess) under the domestic income tax law subject credit restrictions.
to any beneficial provisions under the applicable • Under GST, provision of ad space can also qualify as
Indian tax treaty. online information and database access or retrieval
– Other aspects around PE, attribution, etc., in the (OIDAR) services. In such cases, the transaction may
direct model would equally apply in this model. attract GST under reverse charge in cases where the
Also, other key aspects like India’s reservation services are rendered to the business entity. However, if
on PE exposure under a limited risk distributor the services are rendered to an unregistered customer,
(LRD) model, the tax authorities’ approach of then F Co. may have to discharge GST and undertake
testing on-ground activities of I Co. vis-à-vis roles/ GST compliances (including GST registration,
responsibilities under the inter-company agreement discharging GST).
etc., need to be kept in perspective. Distributor model
• Considering that the services will be from a business
entity to another business entity, F Co. may not be
required to undertake any GST obligations.
I Co.:
Direct model
• Provision of services by an Indian entity to a customer • Services provided by I Co. to F Co., being
outside India could be considered as export of services related parties, should be valued as per GST
subject to certain conditions. In the case of provision of valuation provisions.
services by I Co. to F Co., it is important to understand
• E-invoicing is set to go live from 1 October 2020. In
the place where services are supplied. The default
the initial implementation phase, the GoI has decided
provision of place of supply is the location of the
to make e-invoicing mandatory for companies with a
service recipient. However, in exceptional cases, the
turnover of INR 5 billion. If applicable to I Co., all B2B
place of supply can be different depending on the facts
invoices need to be first uploaded on the Government
of the case.
portal (i.e. the NIC portal) and must have their Invoice
• One such exception given to general provision of place Reference Number (IRN) generated from the portal.
of supply is provision of services by an intermediary. Further, B2C invoices of such companies must have a
I Co. should evaluate whether the services provided payment QR code printed on them. The GoI is expected
to F Co. are intermediary in nature. In case these to bring down the e-invoicing threshold to INR 1 billion.
are intermediary in nature, the place of provision of Hence, if I Co. has a turnover between INR 1 billion and
services could be the location of the service provider INR 5 billion, it should start planning system changes
in India, and GST could be applicable on the same (i.e. soon.
services cannot be considered as an export).
• Where provision of services by I Co. to F Co. is
considered as an export of services, input tax credit Key transfer pricing (TP) aspects
related to exports can be claimed as refund by I Co.
Direct model
• Services provided I Co. and F Co., being • Depending upon the key functions performed by I Co.
related parties, should be valued as per GST and their bearing on the risks and assets, I Co. could
valuation provisions. either be compensated on a cost-plus basis or on a
Distributor model commission basis. The evaluation between a cost-
plus model and a commission model will primarily
• In the case of procurement of services from F Co., I
hinge upon the intensity of the sales function/activity
Co. may have to pay GST under the reverse charge
undertaken by the I Co. and its impact on the risks
mechanism and claim credit of GST thus paid, subject
(such as bad debts) arising from performance of
to input credit restrictions.
such functions.
Distributor model claims, etc. F Co. may need to keep recently released
• Based on the roles and responsibilities of employees draft advertising guidelines in the context, which impose
of I Co. and intensity of the marketing functions, certain responsibilities on advertising firms, including
one needs to evaluate whether I Co. is a limited risk online companies, for misleading ads and claims made
distributor (LRD), normal risk distributor (NRD) or full- on the product.
fledged distributor (FRD), who is akin to an entrepreneur,
• The GoI released a draft national e-commerce policy in
depending upon the key functions performed by I Co.
February 2019 that restricts cross-border data flow from
and their influence on the economically significant risks
specified sources and data generated by users in India
associated with the Indian operations.
by various sources, including e-commerce platforms,
• If I Co. is characterised as an LRD/NRD, it may be social media and search engines. Restrictions have also
compensated on the basis of an arm’s-length net been imposed on sharing of sensitive data collected in
operating margin/gross operating margin on its sales. India with other foreign business entities or third parties,
even with customer consent. Other requirements in the
• If I Co. is an FRD (akin to an entrepreneur), it may pay an
policy include setting up a registered business entity
arm’s-length compensation to F Co. for the intangibles
in India for all e-commerce apps/sites and ensuring
owned by F Co. The compensation could be linked to
compliance with applicable laws and regulations.
sales in such a manner that the residual profits derived
from India operations reside with I Co. • The draft policy received several comments from
the industry on the proposed changes in the overall
• Where I Co. assists in sourcing of Indian content
framework. The Department for Promotion of Industry
for F Co., depending on the value-added functions
and Internal Trade (DPIIT) has been working on the
performed by I Co. to source the content, one will need
recommendations from various stakeholders and it is
to evaluate whether I Co. is entitled to a facilitation fee or
expected that a new draft e-commerce policy shall be
alternatively, a trading return (if the functions, assets and
released for further comments.
risks [FAR] of I Co. are akin to those of a trader). Such
facilitation fee could either be computed on a cost plus • The Ministry of Electronics and Information Technology
basis or a commission basis. has released draft intermediary guidelines seeking to
amend the Intermediary Guidelines Rules of 2011. The
• Certain contracts of I Co. with customers in India
draft guidelines require intermediaries to prohibit users
may fall under the ambit of a deemed international
from hosting certain content on their platform (e.g.
transaction if the terms and conditions of such contracts
obscene content), assist government agencies, and
are influenced by I Co.’s Associated Enterprises situated
deploy technology-based automated tools to identify
outside India.
and remove public access to unlawful information. The
• The Finance Act, 2020, has allowed the question of draft guidelines also state that intermediaries with more
determination of profits attributable to the business than 50 lakh users must incorporate a company in India.
connection/SEP in India to be covered under Advance
• The Personal Data Protection Bill (PDPB), 2019, was
Pricing Arrangements.
introduced in December 2019 with the purpose of
protecting the data privacy of individuals. The provisions
of the PDP Bill are applicable to personal data collected,
Key regulatory aspects (related to disclosed, shared or otherwise processed within India,
Foreign Exchange Management Act inter-alia by an Indian or foreign company. Further, the
bill also proposes restrictions on transfer of data outside
[FEMA] and other key regulations)
India and storage of personal data on a server in India.
• The permissibility of payments made by I Co. or Indian
advertisers to F Co. will need to be analysed in light
of import regulations read with the Current Account
Transaction Rules. The remitter will need to have in
place the required approvals/documentation (approvals
to act as a collection agent or fulfil contractual
obligations, invoices, etc.) for submission to Indian
bankers in order to remit fees to F Co. It is important
that contractual documents are drafted appropriately to
avoid unnecessary queries from bankers or the Reserve
Bank of India (RBI). Further, I Co. as well as the Indian
advertisers/ad agencies should be mindful of adhering
to the import timelines for payment.
• The Consumer Protection Act, 2019, aims to protect
the interest of consumers by imposing several
responsibilities on the goods and services provider to
address the issues of misleading advertisements, false
2. Over the top (OTT)
The new ‘at home’ environment has led to a significant

Distributor model
rise in over-the-top (OTT) viewership, including paid
subscriptions, as compared to the pre-COVID period.
Content licence fee
In the last few years, India has seen increased
consumption of personal entertainment content on OTT Acquisition of
platforms. Various other factors, such as affordable data, content
smartphone prices and increased use of smart TVs, have
played a role in the augmented use of OTT services. The
market now looks at OTT as a mainstream technology
used to deliver content. With the rise of OTT, the Indian Overseas OTT F Co. Content
audience, which has been has exposed to quality OTT server/website providers
international content, now expects a certain quality of
storytelling and cinematic experience from Indian content
too. To compete with international players, local players
are also upping their ‘value’ game by creating regional and Fees OTT Outside
services India
relevant content for the Indian viewer at competitive prices.
As players explore the possibility of various combinations India
and partnerships amongst each other, with telecom players
and with Indian content being consumed globally, there
is a demand for clarity in tax laws in relation to the OTT
business. OTT players (international and domestic players) I Co.
have been following varied business models in India –
provision of OTT services directly to Indian customers,
OTT and
sub-licensing OTT platforms to an Indian subsidiary, Fees other
distribution/monetisation of OTT services through an services Content
Indian subsidiary, etc. OTT players also have different providers
monetisation strategies, ranging from monetisation through
advertisement revenue or subscription revenue to a
combination of both. We have covered the key Indian tax
and regulatory aspects for select India business models. Subscribers/ Consideration flow
advertisers Transaction flow
• Effective 1 April 2020, a new 2% equalisation levy
Distributor model
(hereinafter referred to as ‘ECom EL’) has been
• The Overseas OTT Co. (F Co.) owns and/or operates an introduced and will apply to consideration for specified
OTT platform (including the content) hosted on a server ‘e-commerce supply or services’ provided or facilitated
outside India. by a non-resident who qualifies as an ‘e-commerce
• F Co. appoints an Indian subsidiary/group company/ operator’ as defined – including revenue from sale of
third party (I Co.) to distribute OTT subscriptions and/or advertisements to non-residents targeting customer
advertisements for the India market. either residents in India or using Indian IP addresses,
and sale of data collected from either Indian residents
• In addition, I Co. has business arrangements with or person who uses Indian IP addresses. Such ECom
telecom service providers and play stores (partners) EL is applicable if receipts from specified e-commerce
who assist I Co. in referring subscribers for a fee. supply or services exceed INR 20 million per annum.
Partners collect subscription fees from the subscribers
and then remit them to I Co. after deducting their • Thus, one will also need to evaluate applicability
commission or retaining their revenue share/fees. of ECom EL on sale of OTT services by F Co. to
Indian subscribers or sale of data by F Co., even
• I Co. may get into an arrangement with partners in India if to another non-resident, subject to fulfilment of
to address latency-related issues. specified conditions. Aspects like whether F Co. could
• F Co. obtains a licence from content providers located be regarded as an ‘e-commerce operator’, whether
outside India and in India on an on-going basis. In content viewing is provision of know-how or licensing
some cases, I Co. also provides local content sourcing/ of a copyrighted article or a service, fulfilment of the
moderation services while the content rights are requirement of online provision of services under the
directly obtained by F Co. distribution model/through aggregators, etc. should
be considered while evaluating the applicability of
Direct model ECom EL.
• Under the direct model, F Co. will sell subscription/
advertisements directly to Indian customers. It may • Both, income tax and ECom EL may cover such income
have its Indian subsidiary/group company (I Co.) within the tax net of F Co. for FY 2020–21. However,
provide marketing support services, content sourcing/ effective FY 2021–22, if ECom EL is applicable on such
moderating services, collection agent services, etc. income, then income tax will not be applicable, subject
to satisfaction of specified conditions.
• Foreign companies operating in India via the direct or
Key direct tax aspects distributor model have witnessed a spate of litigation,
especially due to allegations on significant difference
F Co.: in the role of the Indian group company/subsidiary
• For subscription revenue: F Co. will need to consider as defined in the service/distribution agreement vis-
whether sale of subscription qualifies as royalty (e.g. à-vis actual on-ground conduct of such an Indian
copyright royalty, process or equipment royalty) group company. In the above case, aspects like
considering the provisions of the domestic income tax technology/digital infrastructure utilised/accessed/
law and the applicable Indian tax treaty. Legal aspects controlled in India by the foreign company, how latency
such as the recent Finance Act, 2020, amendment to arrangements provide (if any) supervision or control
remove the benefit of exemption on consideration from over any assets or infrastructure in India, role of an
sale, distribution, exhibition of cinematographic film Indian group company in relation to the negotiation
from royalty provision under the domestic income tax process, documentation beyond the inter-company
law, or applicability of the retrospective amendment agreement to demonstrate activities of the Indian
in the domestic income tax law to tax treaties, or group company and India’s position in the multilateral
factual aspects such as whether the content can be instrument (MLI) have been considered to allege PE
downloaded on subscribers’ devices and its period exposure for the foreign company in India.
of validity and other aspects will also need to be kept
• Further, implications of the SEP concept under the
in perspective to determine taxability under royalty
domestic income tax law will need to be kept in
provisions.
perspective. The Finance Act, 2020, has deferred the
• For advertisement revenue from advertisers/I Co.: applicability of SEP provisions to FY 2021–22 and
F Co. will need to consider any equalisation levy amended the existing provisions in relation to SEP
exposure at 6% (hereinafter referred to as ‘Advertising by removing the reference to digital means in case of
EL’) in case the consideration exceeds INR 100,000 soliciting business with users in India. However, the
per annum per advertiser. In case Advertising EL is existing Indian tax treaties provide for a conventional
applicable on the advertisement income of F Co. definition of PE for taxing business profits of a non-
derived from India, it will not be subject to income tax in resident, and inclusion of SEP under the domestic
India subject to satisfaction of certain conditions, such income tax law may therefore not be extended to tax
as F Co. not having a PE in India. treaties unless they are amended.
• Also, with the Personal Data Protection Bill, 2019, withholding tax provisions, where applicable, on the
and draft national e-commerce policy mandating the consideration paid to acquire content from overseas
maintenance of a copy of data/compulsory processing (under the second source rule) or Indian content
of certain data on a server located in India and the providers or payment gateways, play stores, etc.,
requirement of setting up a registered business entity especially in light of extensive penal consequences.
in India for all e-commerce apps/sites, etc., TMT The withholding tax rate can vary from nil to 10%
companies may be required to revisit their existing depending upon the applicable withholding tax
India business models. Thus, one would need to provisions, nature of contract (e.g. service vs work for
bear in mind any income tax implications, including hire vs licence contract), etc.
PE exposure.
• The Finance Act, 2020, has introduced an obligation
• PE exposure in India for F Co. can lead to its profits on an e-commerce operator to withhold taxes while
attributable to the Indian PE being subject to tax in making a payment to an e-commerce participant
India at the rate of 40% (plus applicable surcharge (one whose specified sale of goods or provision of
and cess) on a net basis. Also, last year, the CBDT services are facilitated through a digital platform of the
has released a draft amendment of rules for profit e-commerce operator). It will be important to evaluate
attribution to PE (Draft Rules), disregarding the the implications of the same on F Co. (as well as I
Authorised OECD Approach. It has suggested that a Co. in the case of a distribution model) – specifically,
mixed/balanced approach be followed, which allocates whether it will qualify as an e-commerce operator under
profits by giving appropriate weightage to both any of the business models.
demand- and supply-side factors. Further, the OECD’s
I Co.
proposal to allocate more taxing rights to overseas
markets/consumer jurisdictions under the Pillar One • For I Co., it is important to evaluate withholding tax
Unified Approach needs to be kept in perspective. and Advertising EL-related obligations /compliances
(including filings) for I Co. while making payments to
• Additionally, the Finance Act, 2020, has expanded F Co., the overseas content provider, other overseas
the scope of operations in India for the purpose of advertising agencies, the Indian content provider,
attribution of income to a business connection in India, payment gateways, play stores, partners, etc.
by including certain activities such as advertisements
targeting Indian customers, sale of data collected from
a person resident in India and sale of goods or services
using such data. Key indirect tax aspects
• These developments should be kept in perspective F Co.:
while computing profit attributable to a PE and • Subscription revenue/advertisement revenue: If
related exposure. Indian customers sign an agreement directly with
F Co. and pay subscription fees, it needs to be
• India compliance requirement for F Co.: Since
evaluated whether the services provided by F Co. can
F Co. shall earn income from Indian customers under
be classified as OIDAR services. In case services are
both the models, it may be required to file an Indian
considered as OIDAR in nature, F Co. is required to
ITR disclosing such income, especially considering
take registration in India and discharge GST. In the
the expansive penal proceedings prescribed under
distributor model or in case services are not considered
the domestic income tax law. However, the Finance
as OIDAR in nature, GST may liable to be paid by I
Act, 2020, has provided exemption from filing of ITR
Co./the partners under the reverse charge mechanism,
to non-residents earning income only from royalty or
which ought to be available as input credit, subject to
FTS (provided taxes have been withheld as per the
credit restrictions.
rate prescribed under the domestic income tax law).
Thus, in cases where nil taxation or applicability of • Similarly, in the case of receipt of advertisement
treaty rates is claimed, F Co. may have to continue revenue from advertisers/I Co., the applicability of
filing ITR in India. OIDAR provisions needs to be evaluated depending on
the nature of advertisement activity.
In case ECom EL is applicable to F Co., it shall be
required to carry out quarterly payment compliances • Payments to content providers, play stores,
and file an annual statement in a prescribed form, payment gateway service providers, etc.: In the
disclosing specified e-commerce supply or services given case, the payments could be made to service
provided or facilitated by F Co. providers in India/outside India by F Co. In case the
payment is made outside India for services rendered
For payments to content providers, play stores,
outside India, the same could be considered as
payment gateway service providers, etc.: A non-
outside the purview of GST and may not be liable to
resident (like F Co.) may be required to comply with
GST. However, if the services are received from Indian
withholding tax provisions applicable to a variety
service providers, it needs to be analysed whether they
of payments made to overseas or Indian parties for
can qualify as export of services, subject to fulfilment of
carrying out India operations. F Co. will need to keep
export conditions. In the case of exports, such services
in perspective the requirement to comply with Indian
may not be liable to GST.
I Co.
• Fees earned by I Co. from subscribers in India: In either be compensated on a cost-plus basis or on a
case I Co. earns fees from subscribers in India, the commission basis. The evaluation between a cost-plus
services will be liable to applicable GST. model and a commission model will primarily hinge upon
the intensity of the sales function/activity undertaken
• However, if I Co. provides marketing and other local
by I Co. and its impact on the risks (such as bad debts)
support services to F Co., the applicability of GST
arising from the performance of such functions.
in light of the provisions of intermediary needs to be
analysed. Thus, it needs to be analysed whether the Distributor model
nature of services provided by I Co. are merely in • Based on roles and responsibilities of the employees of I
the nature of marketing support or in the nature of Co. and intensity of the marketing functions, one needs to
facilitating the overseas entity to provide subscriptions evaluate whether I Co. is an LRD, an NRD or a full-fledged
in India. In the former case, the services could be distributor (i.e. akin to an FRD), depending upon the key
considered as export of services and outside the functions performed by the I Co. and its influence on the
purview of GST. However, in the latter case, the economically significant risks associated with the Indian
services may be subject to GST. operations.
• If any services are provided by I Co. and F Co., being • If I Co. is characterised as an LRD/NRD, it may be
related parties, they should be valued as per GST compensated on the basis of an arm’s-length net
valuation provisions. operating margin/gross operating margin on its sales.
• Import of any goods in relation to abovementioned • If I Co. takes independent business decisions, drives/
services may be subject to customs duty at the time decides the content available to be viewed in India
of import. and undertakes significant advertising and marketing
• E-invoicing is set to go live from 1 October 2020. In functions, it may be characterised as an FRD (akin to an
the initial implementation phase, the GoI has decided entrepreneur). In such cases, I Co. may pay an arm’s-
to make e-invoicing mandatory for companies with a length compensation to F Co. for the technology platform
turnover of INR 5 billion. If applicable to I Co., all B2B owned by it and a separate compensation for the
invoices need to be first uploaded on the Government international content acquired by it for viewing in India.
portal (i.e. the NIC portal) and must have their Invoice • If I Co. is also engaged in procuring Indian content for F
Reference Number (IRN) generated from the portal. Co., depending on the value-added functions performed
Further, B2C invoices of such companies must have by I Co. to procure the content, one will need to evaluate
a payment QR code printed on them. The GoI is whether I Co. is entitled to a facilitation fee or alternatively,
expected to bring down the e-invoicing threshold to a trading return (if the FAR of I Co. is akin to that of a
INR 1 billion. Hence, if I Co. has a turnover between trader). Such facilitation fee could be computed either
INR 1 billion and INR 5 billion, it should start planning on a cost-plus basis or a commission basis. However,
system changes soon. if I Co., is not actually assisting in procuring the content
and merely monitoring the content with a view to ensure
that it adheres to the censorship guidelines issued by
Key TP aspects the industry bodies/regulatory bodies, such monitoring
activities can be viewed as being incidental to the main
Direct model activity of distribution and, thus, could be aggregated and
• Depending upon the key functions performed by I Co. benchmarked with the overall distribution activity.
and their bearing on the risks and assets, I Co. could
Key regulatory aspects (related to FEMA • The Information Technology Act, 2000, is the
overarching law that governs electronic transactions in
and other key regulations) India today. The act has provisions for cyber security,
• The permissibility of cross-border trade payments data protection, intermediary liability, takedown,
between I Co. or its Indian subscribers and F Co. government interception, etc.
needs to be analysed in light of export and import • The Ministry of Electronics and Information Technology
regulations read with the Current Account Transaction has released draft intermediary guidelines seeking to
Rules. The required approvals/documentation amend the Intermediary Guidelines Rules of 2011. The
(approvals to act as a collection agent or fulfil of draft guidelines require intermediaries to prohibit users
contractual obligations, invoice, etc.) for submission to from hosting certain content on their platform (e.g.
Indian bankers for remittance of fees to F Co. should obscene content), assist government agencies, and
be in place. It is important that contractual documents deploy technology-based automated tools to identify
are drafted appropriately to avoid unnecessary queries and remove public access to unlawful information.
from bankers or the RBI. Further, I Co. as well as the The draft guidelines also state that intermediaries with
Indian subscribers should be mindful of adhering to the more than 50 lakh users must incorporate a company
timelines for settlement of import and export proceeds. in India.
• If third-party payment aggregators are involved in • The Personal Data Protection Bill (PDPB), 2019,
collecting funds from individual subscribers (using was introduced in December 2019 with the purpose
payment modes such as net banking and debit cards) of protecting the data privacy of individuals. The
for remittance to F Co., it is imperative to ensure provisions of the PDP Bill are applicable to personal
compliance with the Payments and Settlements Act data collected, disclosed, shared or otherwise
and relevant RBI guidelines. processed within India, inter-alia by an Indian or foreign
• Separate e-commerce rules have been notified under company. Further, the bill also proposes the restriction
the Consumer Protection Act, 2019, that separately on transfer of data outside India and storage of
lay down the responsibility of e-commerce platforms personal data on a server in India.
and the sellers towards the consumers. F Co. and
I Co. would need to analyse the applicability of the
aforesaid rules, as well as the compliance requirements
under them.
• The GoI released a draft national e-commerce policy
in February 2019 that restricts cross-border data flow
from specified sources and data generated by users in
India through various sources, including e-commerce
platforms, social media and search engines.
Restrictions have also been imposed on sharing of
sensitive data collected in India with other foreign
business entities or third parties, even with customer
consent. Other recommendations in the draft policy
include the requirement for setting up a registered
business entity in India for all e-commerce apps/sites
and ensuring compliance with applicable laws and
regulations.
• The draft policy received several comments from
the industry on the proposed changes in the overall
framework. The Department for Promotion of Industry
and Internal Trade (DPIIT) has been working on the
recommendations from various stakeholders and it is
expected that a new draft e-commerce policy shall be
released for further comments.
3. Robotics and artificial intelligence
Today, robots find usage beyond manufacturing

Direct model
in areas like e-commerce, logistics, retail and
healthcare. There is a significant overlap between
robotics and artificial intelligence (AI). Broadly,
robotics refers to the branch of technology that
deals with the design, construction, operation, Robotic / AI Agreement to
Developer provide design for
and application of robots, as well as computer
robots
systems for their control, sensory feedback, and F Co.
Software
information processing. The advent of business development
process automation (BPA) has given rise to a for the robot /
concept called robot process automation (RPA), AI solution
Assembling
Commission/remuneration for services
Marketing and sales support services
which is an emerging form of BPA technology and integration

in which software is used to automate high- service
Sale of robotic / AI Solutions
volume, repeatable tasks that previously had to

be performed by humans. However, RPA requires
Consideration
a huge capital investment which has given rise to

another concept of robotics as a service (RaaS), Software
where robots are offered as a service rather than Co.
as a product to manage an organisation’s most
manual, mundane, repetitive or hazardous tasks
across multiple locations. Design Integration
AI is a blanket term which includes deep learning, provider service
robotics, machine learning, speech recognition provider
and cognitive computing. There has been Outside India
increasing interest in AI across all industries in
India
India, including the IT/ITeS sector.
We have covered the key Indian tax and regulatory
aspects for select India business models.
I Co. Customer
Availing services
Payment of fees
Direct model • Furthermore, in the case of supply of products from
• A robotic/AI developer, a foreign company (F Co.), outside India, the taxability of such offshore supply
is engaged in the development of robots and/or would depend on various factors – terms of sale,
AI solutions in-house – which are customised for transfer of ownership, link of such supply with onshore
customers in India/outside India. implementation/customisation, etc. Also, it is important
to analyse whether the payment made by F Co. to an
• F Co. may also have a separate arrangement with an overseas designer/software company for obtaining
overseas software company/robot designer/assembling any customised design/software is taxable in India as
and integration service providers. royalty/FTS by virtue of the second source rule under
• F Co. enters into an agreement directly with Indian the domestic income tax law and certain Indian tax
customers for supply of robotic devices or integration treaties (e.g. the India–USA Tax Treaty).
of AI software in their application or product. • As regards AI software, F Co. needs to determine
• The Indian subsidiary of the robotic/AI developer (I Co.) whether income earned as a developer/programmer
may provide marketing and sales support services to from sale/licensing of AI software could be taxable as
F Co. royalty under the provisions of the domestic income
tax law as well as the applicable Indian tax treaty.
• F Co. may raise separate invoices for sale of robots.
Also, another important aspect to be decided by F Co.
Customers directly pay the consideration to F Co. in
would be whether sale of self-developed software (i.e.
the case of AI solutions.
standard software) could be treated as sale of a shrink-
• I Co. may charge fees/remuneration for its services. wrapped software. Taxability of payments received
for providing standard/off-the-shelf software has also
Distributor model been a subject matter of extensive income tax litigation
• F Co. appoints its wholly owned subsidiary (I Co). as a in India, with the Supreme Court in the process of
reseller/distributor for supply of robots or AI solutions deciding this issue.
in India.
• Effective 1 April 2020, a new 2% equalisation
• I Co. will enter into an agreement with customers in levy (hereinafter referred to ‘ECom EL’) has been
India to sell robotic devices or for integration of AI introduced and will apply to consideration for specified
software in the application or product of the customer. ‘e-commerce supply or services’ provided or facilitated
• I Co. will pay the purchase price to F Co. and earn a by a non-resident who qualifies as an e-commerce
reseller margin (agreed or otherwise). I Co. will also operator as defined – including revenue from sale
provide technical support services, including repairs of data to non-resident collected from either Indian
and maintenance. I Co. will be paid a separate service residents or person who uses Indian IP addresses,
charge for these services. subject to fulfilment of specified conditions. Such
ECom EL is applicable if receipts from specified
e-commerce supply or services exceed INR 20 million
per annum. Thus, one will also need to evaluate the
Key direct tax aspects applicability of ECom EL on income earned by F
• Business profits earned by an overseas entity are Co. or sale of data by F Co., even if to another non-
generally not chargeable to income tax in India in the resident, subject to fulfilment of specified conditions.
absence of a PE/business connection, unless the Key aspects in this evaluation could be whether F Co.
profits qualify as royalties or FTS. Thus, it needs to be qualifies as an ‘e-commerce operator’, whether sale
evaluated whether the payment received by F Co. for of robots or subsequent software upgrades and AI
sale of robots is taxable as royalty, FTS or business solutions should be considered as online sale of goods
income considering the provisions of the domestic or provision of services or facilitation of both, relevance
income tax law and the relevant Indian tax treaty. of an online or offline contract, whether right to access
data could be considered as sale of data, etc.
• Since robots comprise hardware with embedded
software, the aspects of whether the software • Both income tax and ECom EL may cover such income
embedded in the hardware is taxable as royalty within the tax net of F Co. for FY 2020–21. However,
(software partaking the character of hardware) or effective FY 2021–22, if ECom EL is applicable to such
business income (considering the fact that such income, then income tax will not be applicable, subject
software cannot be used independently and the sale to satisfaction of specified conditions.
is essentially of the product) has seen its share of • Depending upon the business model through which F
protracted litigation in India. If the robots are separately Co. is operating in India and the activities carried on in
upgraded online, the aspects of whether consideration India, one needs to be mindful of any PE exposure for F
for such online software upgrade can be taxable as Co. in India:
software royalty or process royalty, especially in view of
retrospective amendments under the domestic income
tax law and implications under the Indian tax treaties
has also witnessed protracted litigation.
– whether marketing or on-site support services, Approach and suggesting that a mixed/balanced
technical services, consultancy services, etc., approach be followed, which allocates profits by giving
provided by employees of F Co. travelling to India appropriate weightage to both demand- and supply-
qualify as FTS, fees for included services or create side factors. Further, the OECD’s proposal to allocate
service PE exposure due to the presence of the more taxing rights to overseas markets/consumer
employees/personnel of F Co. in India jurisdictions under the Pillar One Unified Approach
needs to be kept in perspective.
– any storage of warranty parts (in warranty vs
out warranty) by I Co. for providing repairs and Additionally, the Finance Act, 2020, has expanded
maintenance services could lead to questions the scope of operations in India for the purpose of
around fixed place PE exposure, if the contractual attribution of income to a business connection in India,
terms are not clear. by including certain activities such as advertisements
• It is also important to ensure that the on-ground
activities of I Co. reflect the exact terms of written
using such data.
contracts/arrangements and adequate documentation
is maintained to demonstrate the same and address These developments should be kept in perspective
any PE-related aspects which the Indian tax authorities while computing profit attributable to a PE and
might want to test. related exposure.
• Further, the implications of the SEP concept under • India compliance requirement for F Co.: Since
the domestic income tax law will need to be kept in F Co. shall earn income from Indian customers under
perspective. The Finance Act, 2020, has deferred both the models, it may be required to file Indian ITR
the SEP provisions to FY 2021–22 and amended the disclosing such income, especially considering the
existing provisions in relation to SEP by removing the expansive penal proceedings prescribed under the
reference to digital means in case of soliciting business domestic income tax law. However, the Finance Act,
with users in India. However, the existing Indian tax 2020, has provided exemption from filing of ITR to
treaties provide for a conventional definition of PE non-residents earning income only from royalty or
for taxing the business profits of a non-resident, and FTS (provided taxes have been withheld as per the
inclusion of SEP under the domestic income tax law rate prescribed under the domestic income tax law).
may therefore not be extended to the tax treaty unless Thus, in cases where F Co. claims nil taxation or
the tax treaties are amended. applicability of treaty rates, it may have to continue
filing ITR in India.
• PE exposure in India for F Co. can lead to its profits
attributable to the Indian PE being subject to tax in • In case ECom EL is applicable to F Co., it shall be
India at the rate of 40% (plus applicable surcharge required to carry out quarterly payment compliances
and cess) on a net basis. Last year, the CBDT released and also file an annual statement in a prescribed form
a draft amendment of rules for profit attribution to disclosing specified e-commerce supply or services
PE (Draft Rules), disregarding the Authorised OECD provided or facilitated by F Co.
• The Finance Act, 2020, has introduced an obligation on • E-invoicing is set to go live from 1 October 2020. In
an e-commerce operator to withhold taxes while making the initial implementation phase, the GoI has decided
payments to an e-commerce participant (one whose to make e-invoicing mandatory for companies with a
specified sale of goods or provision of services are turnover of INR 5 billion. If applicable to I Co., all B2B
facilitated through a digital platform of the e-commerce invoices need to be first uploaded on the Government
operator). It will be important to evaluate the implications portal (i.e. the NIC portal) and must have their Invoice
of the same on F Co. as well as I Co. – specifically Reference Number (IRN) generated from the portal.
whether F Co. shall qualify as an e-commerce operator Further, B2C invoices of such companies must have
under any of the business models. a payment QR code printed on them. The GoI is
expected to bring down the e-invoicing threshold to
• F Co. should also consider the requirements to withhold
INR 1 billion. Hence, if I Co. has a turnover between
tax on payments to I Co./Indian residents and to carry
INR 1 billion and INR 5 billion, it should start planning
out related compliances. Non-compliance with the
system changes soon.
prescribed requirement may trigger interest and penal
and prosecution risk in the hands of F Co.
Key TP aspects
Key indirect tax aspects Direct model
F Co.: • Depending upon the key functions performed by I Co.
• F Co. (AI developer) needs to determine if the services and their bearing on risks and assets, I Co. could either
would be in the nature of OIDAR or IT/IT-enabled be compensated on a cost-plus basis or commission
services (ITeS). If F Co. supplies to an unregistered basis. The evaluation between a cost-plus model and
customer, the services provided by it with respect to a commission model will primarily depend upon the
licensing of AI software may be classified as OIDAR intensity of the sales function/ activity undertaken by
services. If the services qualify as OIDAR, F Co. needs I Co. and its impact on the risks (such as bad debts)
to obtain GST registration in India and deposit tax. In arising from the performance of such functions.
case of business-to-business (B2B) supplies made by F Distributor model
Co., the recipient of services may be liable to pay GST
• Based on the roles and responsibilities of I Co.
on a reverse-charge basis.
employees and the intensity of marketing functions, it
• If the services are classified as IT/ITeS, then the needs to be evaluated whether I Co. is an LRD, an NRD
business customers in India may be liable to or a full-fledged distributor (i.e. akin to an entrepreneur
pay GST under reverse charge and the overseas [FRD]), depending upon the key functions performed
AI developer may not be required to undertake any by it and their influence on the economically significant
GST-related compliances. risks associated with Indian operations.
I Co.: • If I Co. is characterised as an LRD/NRD, it may be

• Based on the nature and extent of the marketing compensated on the basis of an arm’s-length net
support service agreement, services provided by I operating margin/gross operating margin on its sales.
Co. could either qualify as export services (and hence • If I Co. is an FRD (i.e. akin to an entrepreneur), it may
not taxable) or intermediary services in case the pay an arm’s-length compensation to F Co. for the
services are in the nature of facilitation services (with intangibles owned by F Co. The compensation could
GST exposure). Further, import of robots by Indian be linked to the sales in such a manner that the residual
customers will also attract applicable custom duties. In profits derived from Indian operations reside in I Co.
cases where software is embedded over hardware, the
valuation of imported goods will have to be determined
in terms of the Customs Valuation Rules which (in
certain circumstances) provide inclusion of software Key regulatory aspects (related to FEMA)
value in the value of hardware. • The permissibility of payments made by I Co. or Indian
• Under the distributor model, Special Valuation Branch customers to F Co. will need to be analysed in light
proceedings may apply to inter-company imports of of import regulations read with the Current Account
robots, which determine the correctness of arm’s- Transaction Rules. The remitter will need to have in
length pricing between related parties, including value place the required approvals/documentation (approvals
of software being included in value of hardware for to act as a collection agent or fulfil contractual
customs duty. Also, all other transactions between obligations, invoices, etc.) for submission to Indian
F Co. and I Co. (being related in nature) will be subject bankers for remittance of fees to F Co. It is important
to GST valuation provisions. that contractual documents are drafted appropriately
to avoid unnecessary queries from bankers or the RBI.
Further, I Co. as well as Indian customers should be
mindful of adhering to the import timelines for payment.
4. Online gaming
With major sporting events either cancelled or

postponed indefinitely, e-sports or online gaming India inbound model
formats are expected to grow multifold as social
games become a way to keep in touch with friends
and stay connected. Owns platform
The total revenue from video games and e-sports and server
Platform F Co.
in India crossed the billion-dollar threshold in 2018,
with a revenue of USD 1.1 billion – up from USD 350
Licenses Licence
million in 2014. It is forecast to grow very strongly platform fees
at a CAGR of 18.9%, reaching USD 2.6 billion in Outside India
2023 and moving the country into the top ten global India
Platform housed on
gaming markets by consumer revenue.1 The increase the Indian server
in affordable smartphones, combined with an
expanding internet user base and reduced data prices
are considered to be the growth drivers for online
gaming. The huge potential market size of online
gaming in India has led to a surge in the number Platform
of online gaming platforms over the last few years. on Indian
Many foreign players have already started game server
development centres in India to tap into the huge I Co.
business potential. Online gaming can be divided
into two types: (a) skill-based games and (b) non-skill Plays
games
based (i.e. luck-based) games.
Different types of revenue models are followed in Subscription
online gaming segments – subscription, freemium fees/bets
Transaction flow
subscription, in-game advertising, etc. Cash flow
Prize money
We have covered the key Indian tax and regulatory Players
aspects for select India business models.
1 PwC’s Global Entertainment & Media Outlook 2019–2023. Retrieved from https://www.pwc.com/gx/en/entertainment-media/outlook-2019/
entertainment-and-media-outlook-perspectives-2019-2023.pdf
India inbound model • F Co. needs to determine whether income earned
An overseas gaming company (F Co.) develops and/ from subscription and in-app purchases is taxable
or maintains the platform/app where games can be as business income, royalty or FTS under the
played online/on mobile and registers the IP in its name. domestic income tax law and/or under the relevant
The platform is hosted on servers outside India. On Indian tax treaty.
the operational aspect, two illustrative business models
• In case the income of F Co. includes income from
are discussed:
in-game advertisements and advertisements on the
(a) Licence for Indian business given to the Indian platform, it is important to consider applicability of
company (I Co.). equalisation levy at 6% (hereinafter referred to as
• F Co. grants an annual licence (or transfer for a ‘Advertising EL’) if the consideration exceeds INR
lumpsum consideration) for a fee to its Indian group 100,000 per annum from every advertiser. In case
company/subsidiary (I Co.) to use the platform/app for Advertising EL is applicable on the India advertisement
India business. income of F Co., it will not be subject to income tax in
India provided certain conditions are met (e.g. F Co. not
• I Co. shall organise games on the platform for Indian
having a PE in India).
players and earn income by way of participation fees,
commission, rack fee or charge a subscription fee for • Effective 1 April 2020, a new 2% equalisation levy
providing access to specific games on the platform. (hereinafter referred to as ‘ECom EL’) has been
introduced and will apply to consideration for specified
• I Co. could also earn income from in-game/app
‘e-commerce supply or services’ provided or facilitated
purchases (lives, power-ups, level ups, merchandise,
by a non-resident who qualifies as an ‘e-commerce
etc.), in-game advertisements or advertisements on
operator’ as defined – including revenue from sale of
other spaces on its platform.
advertisements to non-residents targeting customers
• For app/play store arrangements with technology either resident in India or using Indian IP addresses,
companies, consideration from customers is first and sale of data to non-residents collected from
collected by app/play stores and then remitted to I Co. either Indian residents or persons who use Indian IP
after deducting their fees. addresses. Such ECom EL is applicable if receipts
from specified e-commerce supply or services exceed
(b) I Co. to act as distributor/reseller INR 20 million per annum. Thus, one will also need to
evaluate applicability of ECom EL on various streams of
• F Co. appoints I Co. as a reseller/distributor for online
income from online gaming, particularly categorisation
games (including in-game sales) and advertisements
of each stream of income as goods or services, or on
to be placed on the platform/app. I Co. will enter into
sale of data by F Co., even if to another non-resident,
agreements with customers, advertisers, etc. in India.
subject to fulfilment of specified conditions. Both
• I Co. will pay the purchase price to F Co. and earn a income tax and ECom EL may cover such income
reseller margin (agreed or otherwise). within the tax net of F Co. for FY 2020–21. However,
effective FY 2021–22, if ECom EL is applicable to such
India outbound model
income, then income tax will not be applicable, subject
• I Co. develops and/or maintains the game platform/ to fulfilment of certain conditions.
app and the IP is registered in its name. I Co. retains
Indian rights and may grant an annual licence for a • Further, the implications of the SEP concept under
lumpsum licence fee to its foreign subsidiary for use of the domestic income tax law will need to be kept in
the platform/app for business outside India. perspective. The Finance Act, 2020, has deferred the
applicability of SEP provisions to FY 2021–22 and
amended the existing provisions in relation to SEP
by removing the reference to digital means in case of
Key direct tax aspects soliciting business with users in India. However, the
India inbound model existing Indian tax treaties provide for a conventional
definition of PE for taxing business profits of a non-
F Co.:
resident, and the inclusion of SEP under the domestic
• Business profits earned by an overseas entity are
income tax law may therefore not be extended to the
generally not chargeable to income tax in India in the
tax treaties unless they are amended.
absence of a PE/business connection, unless the
profits qualify as royalties or FTS. Thus, it needs to be
evaluated whether the payment received by F Co. is
taxable as royalty, FTS or business income, considering
the provisions of the domestic income tax law and the
relevant Indian tax treaty.
facilitated through a digital platform of the e-commerce
operator). It will be important to evaluate the implications
of the same on F Co. as well as I Co. and evaluate
specifically whether F Co. shall qualify as an e-commerce
operator under any of the business models.
• In case ECom EL is applicable for F Co., it shall be
required to carry out quarterly payment compliances
and also file an annual statement in a prescribed form
provided or facilitated by F Co.
I Co.:
• It is important to evaluate withholding tax and Advertising
EL-related obligations/compliances (including filings) for
I Co. while making payments to F Co.
I Co.:
• PE exposure in India for F Co. can lead to its profits • I Co. will need to evaluate whether the business activity
attributable to the Indian PE being subject to tax in of development (and continuous updation) of the game
India at the rate of 40% (plus applicable surcharge software/platform could be considered as manufacturing
and cess) on a net basis. Last year, the CBDT released activities and associated tax benefits (additional
a draft amendment of rules for profit attribution to depreciation, optional lower corporate tax rate of 15%,
PE (Draft Rules), disregarding the Authorised OECD etc.) could be availed.
Approach and suggesting that a mixed/balanced
• I Co. needs to analyse the withholding tax obligations
approach be followed, which allocates profits by giving
while making payment of game winnings to the players,
appropriate weightage to both demand- and supply-
particularly when tax has to be withheld and on the
side factors.
computation of the amount that incurs withholding
Further, the OECD’s proposal to allocate more taxing tax. The withholding tax obligations also need to be
rights to overseas markets/consumer jurisdictions evaluated while making remittances to F Co. for use of
under the Pillar One Unified Approach needs to be kept the gaming platform.
in perspective.
• If I Co. has a game development centre, it can evaluate
Additionally, the Finance Act, 2020, has expanded the eligibility of expenses on research and development
the scope of operations in India for the purpose of (R&D) and, the possibility of registering under a patent
attribution of income to business connections in India, box regime.
by including certain activities such as advertisements
Key indirect tax aspects
using such data.
India inbound model
These developments should be kept in perspective
while computing profit attributable to a PE and • Annual licence fees earned by F Co.: The annual licence
related exposure. fees payable by I Co. can be considered as consideration
for the app/platform provided. As this provision of an app/
• India compliance requirement for F Co.: Since F platform is in the nature of a service, the consideration can
Co. shall earn income from I Co., it may be required be subject to GST under the reverse charge mechanism.
to file Indian ITR disclosing such income, especially It can be claimed as input credit by I Co., subject to input
considering the expansive penal proceedings credit restrictions.
prescribed under the domestic income tax law.
• Participation fees, commission, rack fee, or charge-a-
However, the Finance Act, 2020, has provided subscription fee, income from in-game/app purchases,
exemption from filing of ITR to non-residents earning income from advertisements: Income from such services
income only from royalty or FTS (provided taxes have earned by I Co., being in the nature of consideration for
been withheld as per the rate prescribed under the services provided to customers in India, should be subject
domestic income-tax law). Thus, in cases where F Co. to GST. GST paid on procurements by I Co. can be
claims nil taxation or applicability of treaty rates, it may availed as input tax credit by I Co., subject to input credit
have to continue filing ITR in India. restrictions.
The Finance Act, 2020, has made it mandatory for an • E-invoicing is set to go live from 1 October 2020. In the
e-commerce operator to withhold taxes while making initial implementation phase, the GoI has decided to make
payment to an e-commerce participant (one whose e-invoicing mandatory for companies with a turnover
specified sale of goods or provision of services are
of INR 5 billion. If applicable to I Co., all B2B invoices Key regulatory aspects (FEMA)
need to be first uploaded on the Government portal (i.e.
the NIC portal) and must have their Invoice Reference • If third-party payment aggregators are involved in
Number (IRN) generated from the portal. Further, B2C collecting funds from individual subscribers (using
invoices of such companies must have a payment QR payment modes such as net banking and debit cards) for
code printed on them. The GoI is expected to bring remittance to F Co., it is imperative to ensure compliance
down the e-invoicing threshold to INR 1 billion. Hence, with the Payments and Settlements Act and relevant RBI
if I Co. has a turnover between INR 1 billion and INR 5 guidelines.
billion, it should start planning system changes soon. • The permissibility of cross-border trade payments
• If the platform is operated by F Co. and not I Co., the between I Co. and F Co. needs to be analysed in light of
concept of OIDAR services needs to be analysed, the export and import regulations read with the Current
wherein the F Co. may be required to get registered Account Transaction Rules. The required documentation
in India for specified digital services provided for (fulfilment of contractual obligations, invoices, etc.) for
business-to-consumer (B2C) transactions. This has submission to Indian bankers for remittance of purchase
separate compliance-related obligations for overseas price to F Co. towards imports should be in place. It
marketplaces and the impact needs to be analysed, is important that contractual documents are drafted
based on facts and the nature of services provided. appropriately to avoid unnecessary queries from bankers
or the RBI. Further, I Co. should be mindful of adhering
• For the distributor/reseller model, I Co. has to analyse to the timelines for settlement of import and export
the functions that will be performed for F Co. and then transactions.
determine whether the services would qualify as export
of services, or would I Co. qualify as intermediary and • It is critical to evaluate the permissibility of foreign
hence liable to GST. investment in online gaming business activities in India
considering that there are overarching restrictions on
India outbound model investments in lottery or gambling business activities
• Annual licence fees earned by I Co.: The annual under the FDI policy.
licence fees payable by F Co. can be considered as
consideration for the app/platform provided. In the
given case, as the services are provided by a service
protecting the data privacy of individuals. The provisions
provider in India to a service recipient outside India, the
of the PDP bill are applicable to personal data collected,
same can be considered as export of services, subject
disclosed, shared or otherwise processed within India,
to fulfilment of all conditions related to exports.
inter-alia by an Indian or foreign company. Further, the bill
also proposes the restriction on transfer of data outside
Key TP aspects India and storage of personal data on a server in India.
India inbound model • Separate e-commerce rules have been notified under the
• Based on the roles and responsibilities of I Co. Consumer Protection Act, 2019, that separately lay down
employees and the intensity of marketing functions, the responsibility of e-commerce platforms and sellers
one needs to evaluate whether I Co. is an LRD, an NRD towards the consumers. F Co. and I Co. would need to
or a full-fledged distributor (i.e. akin to an entrepreneur analyse the applicability of the aforesaid rules, as well as
[FRD]), depending upon the key functions performed by the compliance requirements under them.
I Co. and their influence on the economically significant
risks associated with its Indian operations.
• If I Co. is characterised as an LRD/NRD, it may be
compensated on the basis of an arm’s-length net-
operating margin/gross-operating margin on its sales.
• If I Co. is an FRD (akin to an entrepreneur), it may pay an
arm’s-length compensation to F Co. for the intangibles
owned by the F Co. The compensation could be linked
to the sales in such a manner that the residual profits
derived from India operations reside in I Co.

In the case of the outbound model, the same analogy
discussed above can be applied in reverse, wherein F
Co. can be compensated based on the net margin/gross
margin or by payment of royalty to I Co. depending on the
key functions performed by it to manage the economically
significant risks faced by its Indian operations.
5. Online education
Online education utilising education

technology (EdTech) has witnessed Distributor model
large-scale adoption as the COVID-19
pandemic has affected campus-based Content licence fee
programmes/courses temporarily. In
Acquisition of content
recent times, the best of global courses
have become easily and conveniently
available to even those residing in
remote locations through education
App/platform Content
apps, thereby transforming the entire providers
owner
ecosystem. The National Education
Policy (NEP), 2020, is expected to Reseller Reseller
revamp the Indian education sector Fees of online of online
post implementation. Apart from a content Outside
content India
number of Indian EdTech start-ups, a
considerable number of foreign EdTech India
companies are also investing in India
to explore EdTech’s untapped potential
in the country. Travel restrictions due
to the COVID-19 pandemic have Tie-ups for I Co.
led to foreign universities providing conducting
live as well as recorded classroom courses/ Recorded
sessions. The various components exams videos/live
of the sector are technology-based sessions/
Fees course
solutions, tutoring, vocational training/ material
courses and classroom education.
EdTech players (international and
domestic) have been following varied
business models in India – such as Content
provision of services directly to Indian providers
Indian Students/ Trainers
customers, sub-licensing EdTech
universities/ professionals/
platforms to Indian subsidiaries or other users
corporates Transaction flow
Cash flow
distribution/monetisation of EdTech services through Indian of the domestic income tax law as well as applicable
subsidiaries. These players also have different monetisation Indian tax treaty. Many Indian tax treaties exempt fees
strategies, ranging from monetisation through subscription paid to educational institutions and such tax treaties
revenue, franchisee income, advertisement revenue, also need to be taken into consideration.
joint tie-ups, collaborations with Indian universities or
• For advertisement revenue from advertisers/
educational institutes, or a combination of all these
I Co.: F Co. will need to examine any equalisation levy
strategies. Apart from developing online content, foreign
exposure @6% (hereinafter referred to as ‘Advertising
EdTech players may send trainers to India for the purpose
EL’) in case the consideration exceeds INR 100,000
of limited training as a part of online platform services.
per annum per advertiser. In case Advertising EL is
We have covered the key Indian tax and regulatory aspects applicable on the advertisement income of F Co.
for select India business models. derived from India, it will not be subject to income tax
in India, provided certain conditions such as F Co. not
having a PE in India are met.
Distributor model
• Overseas EdTech Co. (F Co.) operates a platform • Effective 1 April 2020, a new 2% equalisation levy
or runs an app hosted on a server outside India. It (hereinafter referred to as ‘ECom EL’) has been
procures content or hires professionals or knowledge introduced and will apply to consideration for specified
drivers (content providers) to run the online content on ‘e-commerce supply or services’ provided or facilitated
its app/platform. by a non-resident who qualifies as ‘e-commerce
operator’ as defined – including revenue from sale
• F Co. appoints an Indian subsidiary/group company/
of subscriptions to Indian users or using Indian IP
third party (I Co.) to distribute subscriptions and/or
addresses, and sale of data to non-residents collected
advertisements for the India market.
from either Indian residents or person who uses Indian
• In addition, F Co./I Co. has business arrangements/ IP addresses. Such ECom EL is applicable if receipts
collaborations with educational institutes or local from specified e-commerce supply or services exceed
universities (partners) for content sharing, faculty INR 20 million per annum.
travelling to India for training sessions, etc. In many
• Thus, one will also need to consider applicability of
cases, partners may collect subscription fees from the
ECom EL aspects like whether content viewing is
subscribers and then remit the amount to I Co. after
provision of know-how or licensing of a copyrighted
deducting their commission or retaining their share of
article or a service. Due consideration would also be
revenue/fees.
needed to be given to whether services rendered by
• F Co. obtains the licence from content providers faculties travelling to India would qualify as online
located outside India and in India on an ongoing provision of services, the implications on on-campus
basis. In some cases, I Co. also provides local content course fees for courses conducted on campus as
sourcing/moderation services while the content rights well as online, etc., while evaluating the applicability
are directly obtained by F Co. of ECom EL. Both income tax and ECom EL may
cover such income within the tax net of F Co. for FY
• User data and content may be maintained on the server
2020–21. However, effective FY 2021–22, if ECom EL is
outside India.
applicable on such income, then income tax will not be
Direct model applicable, subject to satisfaction of certain conditions.
Under the direct model, F Co. will sell subscription/ • Depending upon the nature of India business models,
advertisements directly to Indian customers. It may have the nature/extent of collaborations with Indian
its Indian subsidiary/group company provide marketing universities or corporates with whom there is a tie-up
support services, content sourcing/moderating services, for running F Co. courses in India, the role of the Indian
collection agent services, etc. subsidiary and/or its employees vis-à-vis contracts with
Indian arrangements, and stay of the faculty/trainers
travelling to India vis-à-vis purpose of such stay in
Key direct tax aspects India, one needs to be bear in mind any PE-related
exposure (like an Agency PE or a Service PE, etc).
F Co.:
• Further, the implications of SEP under the domestic
• For subscription revenue: F Co. will need to consider
income tax law will need to be kept in perspective. The
whether the sale of subscription to Indian users
Finance Act, 2020, has deferred the applicability of SEP
qualifies as royalty (e.g. copyright royalty, information
provisions to FY 2021–22 and amended the existing
or equipment royalty) or FTS considering the provisions
provisions related to SEP by removing the reference to
of the domestic income tax law and the applicable
digital means in case of soliciting business with users in
Indian tax treaty. Considering that F Co. only provides
India. However, the existing Indian tax treaties provide
viewing rights and that neither is such content generally
for a conventional definition of PE for taxing business
downloadable nor are any modification rights given to
profits of a non-resident, and inclusion of SEP under
users, it would be important to decide whether such
the domestic income tax law may therefore not be
income can be taxed as royalty under the provisions
extended to the tax treaties unless they are amended.
• Also, with the Personal Data Protection Bill, 2019, and withholding tax provisions applicable to a variety
the draft national e-commerce policy mandating the of payments made to overseas or Indian parties for
maintenance of a copy of data/compulsory processing carrying out Indian operations. F Co. will need to keep
of certain data on a server located in India and the in perspective the requirement to comply with Indian
requirement of setting up a registered business entity withholding tax provisions, wherever applicable, on the
in India for all e-commerce apps/sites, etc., TMT consideration paid to acquire content from overseas
companies may be required to revisit existing India (under second source rule) or Indian content providers
business models and to bear in mind the income tax or payment gateways, play stores, etc., especially in
implications, including any PE exposure. light of extensive penal consequences. The withholding
tax rate can vary from nil to 10%, depending on
• PE exposure in India for F Co. can lead to its profits
applicable withholding tax provisions, the nature of
attributable to the Indian PE being subject to tax in
the contract (e.g. service vs work for hire vs licence
India at the rate of 40% (plus applicable surcharge
contract), etc.
and cess) on a net basis. Last year, the CBDT released
a draft amendment of rules for profit attribution to • In case ECom EL is applicable to F Co., it shall be
PE (Draft Rules), disregarding the Authorised OECD required to carry out quarterly payment compliances
Approach and suggesting that a mixed/balanced and also file an annual statement in a prescribed form,
approach that allocates profits by giving appropriate disclosing specified e-commerce supply or services
weightage to both demand- and supply-side factors provided or facilitated by F Co.
be followed. Further, the OECD’s proposal to allocate
I Co.:
more taxing rights to overseas markets/consumer
jurisdictions under the Pillar One Unified Approach • It is important to evaluate withholding tax and
needs to be kept in perspective. Advertising EL related obligations/compliances
(including filings) for I Co. while making payments to
Additionally, the Finance Act, 2020, has expanded F Co., overseas content providers, other overseas
the scope of operations in India for the purpose of advertising agencies, Indian content providers,
attribution of income to business connections in India, payment gateways, play stores, partners, etc.
by including certain activities such as advertisement
using such data.
Key indirect tax aspects
These developments should be kept in perspective F Co.:
while computing profit attributable to a PE and • Considering that the users in a majority of cases could
related exposure. be individuals and if the online content viewing services
are to be classified as OIDAR services, F Co. would be
• The Finance Act, 2020, has made it mandatory for an required to take registration and pay GST in the case
e-commerce operator to withhold taxes while paying an of a direct model. In the case of a distributor model
e-commerce participant (one whose specified sale of or sale of subscriptions under a B2B model, I Co./the
goods or provision of services are facilitated through a Indian customer would be required to pay GST under
digital platform of the e-commerce operator). It will the reverse charge mechanism. GST thus paid under
be important to evaluate the implications of the same the reverse charge mechanism can be eligible for credit
on F Co. as well as I Co., specifically whether F Co. subject to credit restrictions.
shall qualify as an e-commerce operator under any of
the business models, considering the content belongs • Similarly, in the case of receipt of advertisement
to Indian content providers and how the business revenue from advertisers/I Co., the applicability of
model operates. OIDAR provisions needs to be evaluated, depending on
the nature of advertisement activity.
• India compliance requirement for F Co.: Since F
Co. shall earn income from Indian customers under I Co.
both the models, it may be required to file Indian ITR • Fees earned by I Co. from subscribers in India: In
disclosing such income, especially considering the case I Co. earns fees from subscribers in India, the
expansive penal proceedings prescribed under the services will be liable to applicable GST.
domestic income tax law. However, the Finance Act,
• However, if I Co. provides marketing and other local
2020, has provided exemption from filing of ITR to
support services to F Co., the applicability of GST in
non-residents earning income only from royalty or
light of intermediary provisions needs to be analysed.
FTS (provided taxes have been withheld as per the
Thus, it needs to be assessed whether the services
rate prescribed under the domestic income tax law).
provided by I Co. are merely in the nature of marketing
Thus, in cases where F Co. claims nil taxation or
support or in the nature of facilitating the overseas entity
applicability of treaty rates, it may have to continue
to provide subscriptions in India. In case it is the former,
filing ITR in India.
the services could be considered as export of services
• For payments to content providers, play stores, and outside the purview of GST. However, in case it is
payment gateway service providers, trainers etc.: the latter, the services may be subject to GST.
A non-resident (like F Co.) is required to comply with
• If any services are provided by I Co. to F Co., the two • If I Co. is also engaged in procuring Indian content for F
being related parties, I Co. should be valued as per Co., one will need to evaluate whether I Co. is entitled
GST valuation provisions. In case there is no separate to a facilitation fee or alternatively, a trading return (if
charge for any of the inter-company services, such the FAR of I Co. is akin to that of a trader), depending
services may be subject to GST under transfer without on the value-added functions performed by I Co. to
consideration provisions. procure the content. Such facilitation fee could be
computed either on a cost-plus basis or a commission
• Import of any goods in relation to the abovementioned
basis. However, if I Co. is not actually assisting in
services may be subject to customs duty at the time
procuring the content and merely monitoring the
of import.
content to ensure that it adheres to the censorship
• E-invoicing is set to go live from 1 October 2020. In guidelines issued by the industry /regulatory bodies,
the initial implementation phase, the GoI has decided such monitoring activities can be viewed as being
to make e-invoicing mandatory for companies with a incidental to the main activity of distribution and could
turnover of INR 5 billion. If applicable to I Co., all B2B be aggregated and benchmarked with the overall
invoices need to be first uploaded on the Government distribution activity.
portal (i.e. the NIC portal) and must have their Invoice
Reference Number (IRN) generated from the portal.
Further, B2C invoices of such companies must have
a payment QR code printed on them. The GoI is
Key regulatory aspects (related to FEMA
expected to bring down the e-invoicing threshold to and other regulations)
INR 1 billion. Hence, if I Co. has a turnover between
• The permissibility of cross-border trade payments
INR 1 billion and INR 5 billion, it should start planning
between I Co. or its Indian subscribers and F Co. needs
system changes soon.
to be analysed in light of export and import regulations
as read with the Current Account Transaction Rules.
The required approvals/documentation (approvals to
Key TP aspects act as a collection agent or fulfilment of contractual
obligations, invoice, etc.) for submission to Indian bankers
Direct model for remittance of fees to F Co. should be in place. It
• Depending upon the key functions performed by I is important that contractual documents are drafted
Co. and their bearing on risks and assets, I Co. could appropriately to avoid unnecessary queries from bankers
either be compensated on a cost-plus basis or on a or the RBI. Further, I Co. as well as Indian subscribers/
commission basis. The evaluation between a cost- universities should be mindful of adhering to the timelines
plus model and a commission model will primarily for settlement of import and export transactions.
hinge upon the intensity of the sales function/ activity
undertaken by I Co. and its impact on the risks (such as • If third-party payment aggregators are involved in
bad debts) arising from performance of such functions. collecting funds from individual subscribers (using
payment modes such as net banking and debit cards)
Distributor model for remittance to F Co., it is imperative to ensure
• Based on the roles and responsibilities of the compliance with the Payments and Settlements Act and
employees of I Co. and intensity of the marketing relevant RBI guidelines.
functions, one needs to evaluate whether I Co. is an
• Separate e-commerce rules have been notified under
LRD, an NRD or a full-fledged distributor (i.e. akin to an
the Consumer Protection Act, 2019, that separately lay
FRD), depending upon the key functions performed by
down the responsibility of e-commerce platforms and the
I Co. and their influence on the economically significant
sellers towards the consumers. F Co. and I Co. would
risks associated with the Indian operations.
need to analyse the applicability of the aforesaid rules, as
• If I Co. is characterised as an LRD/NRD, it may be well as the compliance requirements under them.
compensated on the basis of an arm’s-length net
operating margin/gross operating margin on its sales.
• If I Co. takes independent business decisions, drives/ protecting the data privacy of individuals. The provisions
decides the content available to be viewed in India of the PDP bill are applicable to personal data collected,
and undertakes significant advertising and marketing disclosed, shared or otherwise processed within India,
functions, it may be characterised as an FRD (akin inter-alia by an Indian or foreign company. Further, the
to an entrepreneur). In such cases, I Co. may pay an bill also proposes the restriction on transfer of data
arm’s-length compensation to F Co. for the technology/ outside India and storage of personal data on a server
platform owned by it and a separate compensation in India.
for the international content acquired by it for viewing
• Other regulatory aspects would cover various agencies
in India.
such as the University Grants Commission (UGC), the All
India Council for Technical Education and other statutory
professional councils.
6. Cloud
The impact of COVID-19 has accelerated the adoption Software development

of cloud. Enterprises are increasingly preferring cloud
technologies due to their agility, cost-effectiveness and
Fees
scalability. With increased focus on e-governance and Cloud F Co.
digitisation, the adoption of cloud services in the public
sector is also growing.
Cloud has been a major catalyst for significant shifts Sale of licence
in business models, talent priorities and IT expenditure to use software
from capex to opex. The cloud model enables increased
efficiency and is expected to partially mitigate some of the
Software
demand-related tailwinds from substantial growth of data
company
and virtualisation of workload.
Outside India
Cloud players (international and domestic players) have
India
been following varied operational models in India –
including the provision of cloud services directly to Indian
customers and distribution of cloud services through
Indian subsidiaries. We have covered the key Indian tax
and regulatory aspects for select India business models. Customers/end
Prevalent operating models
users/advertisers
• Infrastructure as a service (IaaS): Users can rent
Payment of fees
IT infrastructure such as data centres and network
infrastructure equipment to deploy and run applications Availing services
or store data.
Thus, as one would expect, a cloud ecosystem witnesses
• Software as a service (SaaS): Users do not need a variety of operating models that bring in a host of direct
to install or maintain software applications on their tax, indirect tax and TP implications depending on the
computers. Software runs on the provider’s cloud selected model. One needs to be mindful of tax issues that
infrastructure and a user can access it on the web. need to be addressed, depending upon the arrangement/
• Platform as a service (PaaS) PaaS enables companies business model. In this part of the discussion, we have
to develop applications by using programming considered the SaaS operational model with a direct
languages and tools. The provider is responsible for business model and highlighted key tax and regulatory
maintaining and managing the IaaS platform on which aspects that can have larger implications on the way
the PaaS tools are hosted. business is conducted through this operating model.
Direct model even if to another non-resident, subject to fulfilment
• An overseas entity (F Co.) is engaged in the business of specified conditions. Aspects like whether F Co. (or
of providing SaaS through the cloud infrastructure that I Co. in the case of the distributor) could be regarded
is hosted on servers outside India. F Co. may have as an e-commerce operator and whether SaaS can
a separate arrangement with an overseas software be treated as online sale of goods or supply of service
company to obtain customised software to meet need to be considered while evaluating the applicability
certain customer requirements. of ECom EL. Both income tax and ECom EL may
cover such income within the tax net of F Co. for FY
• F Co. enters into agreement directly with Indian
2020–21. However, effective FY 2021–22, if ECom EL is
customers for providing SaaS through the cloud.
applicable to such income, then income tax will not be
• F Co. can raise invoices for providing SaaS (annual) applicable, subject to fulfilment of specified conditions.
on its customers and customers directly pay the
• Depending upon the business model through which F
consideration to F Co.
Co. is operating in India and the activities carried out in
• F Co. can set up an India company (I Co.), hire a third India, one needs to be mindful of any PE exposure for F
party or send its own employees for providing on-site Co. in India:
support, technical services, consultancy services, etc.
– F Co. should be mindful of whether marketing
or on-site support services, technical services,
consultancy services, etc., provided by employees
Key direct tax aspects of overseas entities travelling to India qualify as FTS
or Fees for Included Services or create Service PE
F Co.:
exposure due to the presence of the employees/
• Business profits earned by an overseas entity are personnel of F Co. in India.
generally not chargeable to income tax in India in the
absence of a PE/business connection, unless the – Any presence of shared servers/other equipment
profits qualify as royalties or FTS. Thus, it needs to be (owned by F Co.) in India can lead to questions around
evaluated whether the payment received by F Co. is PE of equipment or Fixed Place PE exposure.
taxable as royalty, FTS or business income, considering Further, implications of SEP under the domestic income
the provisions of the domestic income tax law and the tax law will need to be considered. The Finance Act,
relevant Indian tax treaty. 2020, has deferred SEP provisions to FY 2021–22 and
• Whether payment received by F Co. from its customers amended the existing SEP provisions by removing
for SaaS is taxable as software royalty or process the reference to digital means in the case of soliciting
royalty, especially in view of retrospective amendments business with users in India. However, the existing
under the domestic income tax law and implications Indian tax treaties provide for a conventional definition
under the Indian tax treaties, has witnessed protracted of PE for taxing business profits of a non-resident
litigation. Taxability of payments received for providing and inclusion of SEP under the domestic income tax
standard/off-the-shelf software has also been a subject law may therefore not be extended to the tax treaties
matter of extensive income tax litigation in India, unless they are amended.
and the Supreme Court is currently in the process of • PE exposure in India for F Co. can lead to its profits
deciding this issue. Also, it is important to analyse attributable to the Indian PE being subject to tax in India
whether the payment made by F Co. to an overseas at the rate of 40% (plus applicable surcharge and cess)
software company for obtaining any customised on a net basis. Last year, the CBDT released the draft
software is taxable in India as royalty by virtue of the amendment of rules for profit attribution to PE (Draft
second source rule under India’s domestic income tax Rules), disregarding the Authorised OECD Approach
law and certain tax treaties entered by India (e.g. the and suggested that a mixed/balanced approach that
India–USA Tax Treaty). allocated profits by giving appropriate weightage to both
• Effective 1 April 2020, a new 2% equalisation levy demand- and supply-side factors be followed. Further,
(hereinafter referred to as ‘ECom EL’) has been the OECD’s proposal to allocate more taxing rights to
introduced and will apply to consideration for specified overseas markets/consumer jurisdictions under the Pillar
‘e-commerce supply or services’ provided or facilitated One Unified Approach needs to be kept in perspective.
by a non-resident who qualifies as ‘e-commerce Additionally, the Finance Act, 2020, has expanded
operator’ as defined – including revenue from sale of the scope of operations in India for the purpose of
advertisements to non-residents targeting customer attribution of income to business connections in India,
either resident in India or using Indian IP addresses, by including certain activities such as advertisements
and sale of data collected from either Indian residents targeting Indian customers, sale of data collected from
or person who uses IP addresses. Such ECom EL a person resident in India and sale of goods or services
is applicable if receipts from specified e-commerce using such data.
supply or services exceed INR 20 million per annum.
These developments should be kept in perspective
• Thus, one will also need to evaluate applicability of while computing profit attributable to a PE and
ECom EL on sale of cloud services or data by F Co., related exposure.
• India compliance requirement for F Co.: Since • If I Co. performs significant functions and faces material
F Co. shall earn income from Indian customers, it may risks associated with software development, there may
be required to file Indian ITR disclosing such income, be a need to look at the eligibility of the share of profits
especially considering the expansive penal proceedings generated by the software developed by it.
prescribed under the domestic income tax law. However,
Selling of server space directly by F Co. – direct model
the Finance Act, 2020, has provided exemption from
filing of ITR to non-residents earning income only from • Depending upon the key functions performed by I Co.
royalty or FTS (provided taxes have been withheld as and its bearing on the risks and assets, I Co. could
per the rate prescribed under the domestic income tax either be compensated on a cost-plus basis or on a
law). Thus, in cases where F Co. claims nil taxation or commission basis. The evaluation between a cost-
applicability of treaty rates, it may have to continue filing plus model and a commission model will primarily
ITR in India. hinge upon the intensity of the sales function/ activity
undertaken by I Co. and its impact on the risks
The Finance Act, 2020, has made it mandatory for an (such as bad debts) emerging from the performance of
e-commerce operator to withhold taxes while paying to such functions.
an e-commerce participant (one whose specified sale
of goods or provision of services are facilitated through TP considerations ought to be similar under different
a digital platform of the e-commerce operator). It will be cloud models.
important to evaluate the implications of the same on
the F Co., (as well as I Co. in the case of the distributor
model) – specifically whether it will qualify as an Key regulatory aspects (FEMA and other
e-commerce operator under any of the business models.
key regulations)
F Co. will need to evaluate the requirement to withhold • There is a need to evaluate the permissibility of
tax on payments to I Co./Indian residents and carry payments made by I Co. or the Indian customers of F
out related compliances. Non-compliance with the Co. in the context of the import regulations in India and
prescribed requirement may trigger interest and penal formulation of the required documentation (fulfilment of
and prosecution risk in the hands of F Co. contractual obligations, invoices, etc.) for submission
to bankers in the country for remittance of funds to
In case ECom EL is applicable to F Co., it shall be
F Co. It is important that contractual documents are
required to carry out quarterly payment compliances
drafted appropriately to avoid unnecessary queries
and also file an annual statement in a prescribed form
from bankers or the RBI. Further, I Co. as well as Indian
customers should be mindful of adhering to the import
provided or facilitated by F Co.
timelines for payment.
• If third-party payment aggregators are involved in
Key indirect tax aspects collecting funds from individual subscribers (using
payment modes such as net banking and debit cards)
F Co.: for remittance to F Co., it is imperative to ensure
• Development of software and transfer of right to use compliance under the Payments and Settlements Act
may be considered as services under GST. As the and relevant RBI guidelines.
service provider is located outside India while the • The Information Technology Act, 2000, is the
recipient is in India, the receiver of services in India may overarching law that governs electronic transactions
be liable to pay GST under reverse charge. in India today. It has provisions for cyber security, data
protection, intermediary liability, takedown, government
interception, etc.
Key TP aspects • The Personal Data Protection Bill (PDPB), 2019,
Provision of software development services by I Co. was introduced in December 2019 with the purpose
• There is a need to evaluate whether I Co. will of protecting the data privacy of individuals. The
be entitled to arm’s-length remuneration for provisions of the PDP bill are applicable to personal
providing software development services to F data collected, disclosed, shared or otherwise
Co. Remuneration to I Co. will depend on its processed within India, inter-alia by an Indian or foreign
characterisation in view of its FAR. company. Further, the bill also proposes the restriction
on transfer of data outside India and storage of
• Typically, if I Co. does not perform significant personal data on a server in India.
activities with respect to software development,
there is a need to evaluate whether all the significant • Separate e-commerce rules have been notified under the
assets are provided by F Co. and I Co. does not Consumer Protection Act, 2019, that separately lay down
incur any significant risks emerging from software the responsibility of e-commerce platforms and the sellers
development. Accordingly, I Co. can be characterised towards the consumers. F Co. and I Co. would need to
as a low- risk bearing entity and can be remunerated analyse the applicability of the aforesaid rules, as well as
on a cost-plus basis. the compliance requirements under them.
7. Digital payments
Digital payments solutions driven by mobile-centric

internet penetration are becoming more relevant for the
Indian economy. Digital payments transactions in India
are expected to grow at a compound annual growth rate Seller
(CAGR) of 20.2% until 2023, reaching a value of USD 135.2
billion from USD 64.8 billion in 2019.2 Online shopping,
MSA
payment of utility bills and entertainment are expected to
be the top three user activities. Recent initiatives by the GoI
have triggered a strong drive towards adoption of digital
payments and the rise of new market entrants. Prepaid
payment instrument providers (offering mobile wallets)
have been attracting the growing interest of consumers F Co.
(Global payment
and have motivated banks to invest in their own digital
processing co.)
payments offerings, while mobile wallet transactions have
fast outstripped mobile banking transactions. There has
been a significant growth in digital transactions, use of
mobile wallets by consumers and mobile point of sale (PoS) Outside India
machines by merchants. Mobile wallets are being used for
India
a variety of purposes. The launch of the Unified Payments
Interface (UPI) has made transactions easier and significantly
boosted the overall growth of digital payments.
We have covered key Indian tax and regulatory aspects for
select India business model. I Co.
Mechanics
• A foreign seller is engaged in the business of selling
products online to its customers worldwide (including
Indian customers).
Players
• The foreign seller enters into a master service
agreement (MSA) with a global payment processing Payment of fees
company (F Co.) for providing worldwide payments Availing services
collection services from its customers. Availing services
2 https://www.pwc.in/assets/pdfs/consulting/financial-services/fintech/publications/emerging-technologies-disrupting-the-financial-sector.pdf
• F Co. is supported by its India group company/ – If F Co. controls servers/other equipment that may
subsidiary (I Co.) for collecting payments from the be owned by I Co., then equipment PE exposure
foreign seller’s India customers and remitting the same may arise. Ownership of server/equipment may not
to F Co., pursuant to which F Co. deposits the funds to be a relevant factor to determine such PE.
the foreign seller’s bank account with support from its – Presence of servers/other equipment (owned by
local group company/subsidiary located in the foreign F Co.) in India can also lead to Equipment PE or
seller’s country. Fixed Place PE exposure.
• Foreign sellers will be charged with payment • P
E exposure in India for F Co. can lead to its profits
processing fees by F Co. It will pay payment attributable to the Indian PE being subject to tax in
processing fees to I Co. and the local group company India at the rate of 40% (plus applicable surcharge and
for their payment processing services. cess) on a net basis. Also, the CBDT last year released
the draft amendment of rules for profit attribution to
PE (Draft Rules), disregarding the Authorised OECD
Key direct tax aspects Approach and suggesting that a mixed/balanced
approach be followed, which allocates profits by giving
• Business profits earned by an overseas entity are appropriate weightage to both demand and supply
generally not taxable in India in the absence of a PE/ side factors. Further, the OECD’s proposal to allocate
business connection, unless the profits qualify as more taxing rights to overseas markets/consumer
royalties or FTS. Thus, it needs to be evaluated whether jurisdictions under the Pillar One Unified Approach
the payment received by F Co. is taxable as royalty or needs to be kept in perspective.
FTS or business income, considering the provisions of
the domestic income tax law and the relevant Indian Additionally, the Finance Act, 2020, has expanded
tax treaty. F Co. needs to evaluate whether payment the scope of operations in India for the purpose of
received from its customers for providing payment attribution of income for business connections in India,
processing services is taxable as process royalty or by including certain activities such as advertisement
equipment royalty, especially in view of retrospective targeting Indian customers, sale of data collected from
amendments under the domestic income tax law and a person resident in India and sale of goods or services
their implications under Indian tax treaties. using such data.
• Effective 1 April 2020, a new 2% equalisation levy These developments should be kept in perspective
(hereinafter referred to as ‘ECom EL’) has been while computing profit attributable to a PE and
introduced and will apply to consideration for specified related exposure.
‘e-commerce supply or services’ provided or facilitated • India compliance requirement for F Co.: Since F
by a non-resident who qualifies as ‘e-commerce Co. shall earn income from foreign sellers in relation to
operator’ as defined – including revenue from sale of payment processing services carried out in India, it may
advertisements to non-residents targeting customers be required to file Indian ITR disclosing such income,
either resident in India or using Indian IP addresses, especially considering the expansive penal proceedings
and sale of data collected from either Indian residents prescribed under the domestic income tax law.
or person who uses Indian IP addresses. Such ECom
EL is applicable if receipts from specified e-commerce However, the Finance Act, 2020, has provided
supply or services exceed INR 20 million per annum. exemption from filing of ITR to non-residents earning
Thus, one will also need to evaluate applicability of income only from royalty or FTS (provided taxes have
ECom EL on provision of payment processing services been withheld as per the rate prescribed under the
or sale of data by F Co., even to another non-resident domestic income tax law). Thus, in cases where F Co.
subject (subject to fulfilment of specified conditions). claims nil taxation or applicability of treaty rates, it may
Both income tax and ECom EL may cover such income have to continue filing ITR in India.
within the tax net of F Co. for FY 2020–21. However, In case ECom EL is applicable to F Co., it shall be
effective FY 2021–22, if ECom EL is applicable on such required to carry out quarterly payment compliances
income, then income tax will not be applicable, subject and also file an annual statement in a prescribed form
to satisfaction of specified conditions. disclosing specified e-commerce supply or services
• Depending upon the model through which F Co. is provided or facilitated by F Co.
operating and some of the activities carried out in India, F Co. will need to evaluate the requirement to withhold
one needs to be mindful of any PE exposure that may tax on processing fees paid to I Co. and carry out
get created for F Co. in India. Some of the transactions/ related compliances. Non-compliance with the
arrangements which regulate India PE consideration prescribed requirement may trigger interest and penal
are listed below: and prosecution risk in the hands of F Co.
• I Co. will have to evaluate the liability to withhold • If I Co. performs significant functions in relation to
taxes on payments collected from Indian customers the payment processing activity, an appropriate
of a foreign seller at the time of transferring the same compensation needs to be determined for I Co.,
to F Co. and carry out related compliances. Non- depending upon its influence on the economically
compliance with the prescribed requirement may significant risks associated with the Indian operations
trigger interest and penal and prosecution risk in the and contribution to the development of the intangible.
hands of I Co.
• The Finance Act, 2020, has made it mandatory for
an e-commerce operator to withhold taxes while Key regulatory aspects (related to FEMA
making payments to an e-commerce participant and other key regulations)
(one whose specified sale of goods or provision of
services is facilitated through the digital platform of the • Cross-border payments facilitated by non-bank
e-commerce operator). It will be important to evaluate players are regulated by the RBI and are subject to
the implications of the same on F Co. as well as I Co., conditions, including limits on remittable amounts. In
specifically in terms of whether F Co. shall qualify as an this case, the local payment-processing company will
e-commerce operator. need to ensure its compliance with the prescribed
conditions (opening of regulated accounts, submission
of relevant documentation to Indian bankers, etc.) to
facilitate the collection of funds from local buyers and
Key indirect tax aspects make settlements with F Co./overseas sellers within
• Payment processing fees are paid by F Co. to I Co. In prescribed time limits. On 6 April 2018, the RBI issued
such a case, I Co. can consider such services as export a circular on ‘Storage of Payment Systems Data’,
under GST, subject to fulfilment of specified conditions advising all payment system operators in the country to
of export of services. Further, the place where such store payments data within India. The RBI also issued
services are deemed to be performed will have to a clarification on the data localisation circular covering
be analysed. aspects such as nature of the data to be stored in India
and processing of payment transactions outside India.
• In such cases, I Co. can also consider claiming refund
of input credit which is incurred in relation to export
of services.
Key TP aspects
• Typically, if I Co. does not perform significant activities
with respect to payment processing, there is a need to
evaluate whether all the significant assets are provided
by F Co. and I Co. does not incur any significant
risks arising from the payment processing activity.
Accordingly, I Co. can be characterised as a low-
risk bearing entity and remunerated on a cost-plus
basis. In case F Co. is providing the assets to I Co. for
performing payment processing services, it needs to
be evaluated whether such assets can be construed as
free of cost under GST and whether I Co. is required to
adjust its cost base for the notional cost (depreciation)
on asset, and charge a markup on such notional cost.
How PwC can help
Globally, PwC follows a ‘whole of business’ approach to envisioned to be one of the key drivers of India’s economy
address tax and regulatory-related issues faced by any in the future, we can help you comply with the ever-
business, wherein our Corporate and International Tax, changing reforms in the tax and regulatory ecosystem by
Indirect Tax, Transfer Pricing and Regulatory Services providing guidance on how to effectively adopt a proactive
teams work in conjunction to provide solutions to problems approach in implementing such changes and continue to
arising from the functioning of businesses. We can help maintain a future-ready and regulatory-compliant business
you address all present and possible business issues that in India.
may affect your organisation and offer a wide range of
We will be happy to help an industry driver in the TMT
advisory and compliance services in this sector.
sector (and its subsectors), such as your organisation, by
With newly introduced regulations such as EL and providing well-thought-out and informed recommendations
withholding tax on e-commerce transactions, MLI in on a relevant future course of action, thereby enabling you
relation to Indian tax treaties and SEP under domestic to effectively address specific needs of your business.
tax law, India is making dynamic changes to its tax
laws. Considering that the players in the TMT sector are
Contact us Acknowledgment
Gautam Mehra We would like to thank Sandeep Ladda,
Partner and Leader, Tax and Regulatory Services Chartered Accountant, and Milan Shah,
PricewaterhouseCoopers Private Limited Chartered Accountant, for providing their
Mobile: +91 98670 33822 technical inputs to this thought leadership.
Email: [email protected]
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with
over 276,000 people who are committed to delivering quality in advisory, assurance and tax services. PwC refers to the PwC
network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure
for further details.
For more information about PwC India visit us at www.pwc.in
pwc.in
Data Classification: DC0 (Public)
In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity
Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each
member firm of which is a separate legal entity.
This document does not constitute professional advice. The information in this document has been obtained or derived from sources
believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate
or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change
without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision,
for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or
liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to
or fail to take.
© 2020 PricewaterhouseCoopers Private Limited. All rights reserved.
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Technology, Media

and Telecom (TMT)

Segment-wise perspectives on key direct tax, indirect tax and regulatory

Online advertising.... 04 OTT.......................... 09 Robotics and artificial

Online gaming......... 18 Online education..... 22 Cloud....................... 26

How PwC can help..........................................................................................32

Post the COVID-19 crisis, new opportunities in digital

There have been significant changes in the domestic

The new ‘at home’ environment has led to a significant

Today, robots find usage beyond manufacturing

Marketing and sales support services

which is an emerging form of BPA technology and integration

volume, repeatable tasks that previously had to

a huge capital investment which has given rise to

I Co.: • If I Co. is characterised as an LRD/NRD, it may be

With major sporting events either cancelled or

India outbound model

India outbound model

Online education utilising education

The impact of COVID-19 has accelerated the adoption Software development

Digital payments solutions driven by mobile-centric

For more information about PwC India visit us at www.pwc.in

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