By Amit Rana
A common theme emerging from the B N Srikrishna Committee report on data protection, the draft e-commerce policy and the Reserve Bank of India mandate on local storage of payment data is a definite stand on data localisation. This mandate is expected to affect almost the entire cross-section of e-commerce and many traditional players. However, the impact is immediate for payment companies, since the RBI mandate required them to comply by October 15, 2018, and players are gearing up for it.
Many of these e-commerce players and others, such as payment companies, are non-Indian companies that operate in India ‘remotely’ through the internet without having physical touchpoints in India. As part of most tax treaties, such remote operations are not taxed in India. This principle has been upheld by various Indian courts in the context of websites. But can the storage of data in India, without any other India touchpoint, trigger taxation in India for these overseas enterprises? Data storage could be undertaken either by owned or leased infrastructure, or by using cloud service providers, the latter being a common model, given cost and technological benefits.
While other cloud services can be provided in different configurations, data storage is usually provided as ‘Infrastructure as a Service’ (IaaS) involving infrastructure (servers, networking, etc) packaged and operated by the cloud provider and offered as a service.
Typically, the cloud provider doesn’t dedicate physical infrastructure or lease servers or physical space. It is a standardised service where the cloud provider operates the infrastructure to provide virtual storage. In fact, data of multiple customers will usually be stored on the same server. This is akin to a warehousing service provided by a logistics company. The client’s mandate is to store a specified quantity of goods at specified conditions and for a specified period. They never control the space.
Storing the New Oil
The taxation of digital models — characterised by wide reach, without physical presence, and the use of sophisticated technology — is being debated around the world. However, most of the discussion is focused on the nexus of these digital companies in different countries, and whether such a nexus should trigger tax. There is not much deliberation yet on taxation, which could arise because of a‘footprint’ created by data storage. Under treaty law, taxation could arise if data storage creates a fixed place permanent establishment (Fixed PE) for the overseas enterprise.
Such a Fixed PE can arise if there is a fixed place (including equipment) at the disposal of the overseas enterprise through which its business is conducted. In the instant model, since the physical infrastructure is not at the disposal of the overseas enterprise, the disposal test may not be satisfied. The fact that the cloud provider is likely to have multiple customers storing data on the same (set of) servers supports this argument.
The OECD (Organisation for Economic Cooperation and Development) Model Tax Commentary 2017 deals with this issue. It provides that data does not constitute tangible property and, hence, does not have a physical location that could be regarded as a ‘place of business’. However, servers on which the data reside do have a physical location. And if they are owned or leased and controlled by the overseas enterprise, they could constitute a Fixed PE.
It is worthwhile to note that tax regulators in India have reservations to the OECD view. They believe that depending on facts, a website — even though it does not have a tangible form — can create a PE. The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) has held this as being vague, since the circumstances under which a website can create a PE is not described and, therefore, can’t have any impact.
Even though the ITAT Kolkata view is based on an earlier version of this reservation, the ambiguity continues, since India does not clearly state the facts under which a website can create a PE. Furthermore, even if India’s reservation is accepted, it is possible to argue that the reservation may not extend to mere data storage, which is different from an active website.
Multiple decisions of Authority for Advance Rulings (AARs) have held that in case of contracts — where the predominant purpose is provision of service — an equipment used by the service provider should not be construed as being in control of the service recipient. While the underlying facts and issues under consideration in these cases were different, the principle enunciated can be applied to the current analysis as well.
Under treaty law, it can be contended that mere storage of data by overseas enterprises, using cloud providers, should not trigger a Fixed PE in India. We have not discussed the analysis under the Income Tax Act, because a treaty will prevail in cases where overseas enterprises are from ‘treaty countries’ that will cover almost all such enterprises.
However, India has a stated intent to revisit many of its tax treaties to widen the scope of PE to address new digital businesses. It will be interesting to see the extent of such changes.
The writer is partner, tax & regulatory, PwC India