Written by Adv.  Ashish Panday 
Supreme Court of India


The 1990s Economic reform was made by India in the economic patterns and led to the growth of transitional economic activity in India and other countries. The challenges arising after the digitalization of commercial activities before tax authorities and nations is an area of my research paper. The paper also highlights the various jurisdictional issues arising out of the economic activities over cyberspace.

There are various unilateral, bilateral and multilateral tax treaties to tackle the challenges arising from the digitalization of economic activity and in the International Tax domain. The OECD is one of them, OECD has been working relentlessly since 2015 (when it first released Action Plan 1 to address the challenges of the digital economy) with the intention of developing a consensus-based long-term solution by 2020.

Inequality at the time of treaties negotiation between the Developed and Developing nations. Digitalization surely is bringing about paradigm changes in the ways businesses function today.

India also has signed tax treaties under the head of DTAAs with more than 90 countries and limited agreements with a few countries. Also made certain amendments in Income Tax Act, to counter tax evasion.

This paper also tries to analyse the role of ITAT and the Higher Judiciary, to settle the disputes arising out of the digitalization of the economy and the International Tax Domain.

Keywords:- Digitalisation, Jurisdiction, DTAA, OECD, International Tax



The digital transformation, rapid technology development and commercial activities in the last two decades. The new economic modal has known as Digital Economy. The term “Digital Economy” was first coined by Don Tapscott in the book in 1995 “The Digital Economy: Promise and Peril in the Age of Networked Intelligence”. Consequently, technology has rise various new economic models, where there is economic activity on the Internet. Technology and internet facilities have led to a drastic change in the consumer behaviour and marketing arena globally.

Taxation is not a new phenomenon in human society, it is a mechanism through which the state collects revenue from people or business activities. At present time generally, two types of tax are there namely Direct and Indirect tax. In direct we have to pay taxes to the government directly namely income tax, wealth tax etc. and in indirect taxes, a tax levied on goods and services, these taxes are summating with the price of the goods and services such as GST, VAT, Customs Duty etc.

The digital transformation changed the business pattern in the market, now anyone can do any business activities throughout the world while using the internet without establishing an office, shop etc. in a particular place. These modes of commercial activities are known as E-commerce. The digital economy also creates various tax jurisdictions issues before nations, to tackle the tax issue in the digital era government had started modifying the exiting norms, new tax treaties among the various nations.

E-Commerce models

  1. Business to Business

This is an economic transaction between a B2B, in which electronic exchange of goods and services among business entities, rather than the consumer. Also, known as a Horizontal Market site like Alibaba, Amazon Business, AliExpress etc.

According to Forrester Research, the B2B e-commerce market will be $1.8T by 2023 in the USA.1

2).  Business to Consumer

This is the most frequent use of commercial activities on the internet, in which goods and services are directly sold and bought. These transactions happened on the 3rd party online services providers like Amazon, Flipkart etc.

The commercial activities due to the Covid-19 lockdown, and B2C growth during this period, many businesses adopted the virtual mode for their economic activity.


In the traditional business model, physical presence is required it is easy to identify the Permanent establishment but in the digital economy, there is no physical presence, and in this model very difficult to identify the Permanent Establishment. E-commerce, online gaming, online financial services, OTT services etc now are

working entirely on the Internet. Section 9 of IT Act, 1961 deals with the changeability of non-resident persons and business, India follow the source principle.

In view, thereof international taxation has also assumed great importance in recent years. The OECD has term the digital economy as an economy having “ unparalleled reliance on intangible assets, the massive use of data (notably personal data), widespread adoption of multisided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs.”

Benchmarking reports suggest India’s Payment Systems, “India has a leading in terms of several parameters pertaining to a digital transaction, technology infrastructure, and payment and settlement laws and regulation.”2

Digital India Initiative was introduced by the MeitY, of GOI. After the emergence of Reliance Jio. The internet become more accessible and e-commerce activity now happening in every part of the country.

The Finance Act, 2016 mentions that

“With the expansion of information and communication technology, the supply and procurement of digital goods and services have undergone exponential expansion everywhere, including India. The digital economy is growing at ten per cent per year, significantly faster than the global economy as a whole”.3

However, one of the biggest issues around the digital economy is whether the existing tax laws are able to tax the current digital economy. With the transformation of the economy to the digital economy, the current tax regime does not cater to the taxability of digital transactions. Hence, is a global need to devise and modify their domestic and international tax laws for the digital economy.

Tax Treaties and Interplay with Digital Economy

The Increase in FDI and the emergence of the digital economy have forced to make international tax and legal arrangements among nations to resolve the tax dispute and identify tax evasion.

Double taxation avoidance agreements (DTAAs) or Bilateral tax treaties are made among the various sovereign to assign taxing rights related to cross-border transactions and avoid double taxation. The tax treaties provide rights to contracting

countries on the basis of income source or residency-based rules while recognizing the rights of both countries to levy tax on such income.

The need for tax treaties in the global economy is now an economic connection with each other. The need for tax treaties for DTAAs arises because of conflicting domestic tax laws in two different countries regarding chargeability of income on commercial activities on the Non-Resident. As there is a uniform norm on income and taxability thereof, which is accepted internationally, an income may become liable to tax in two countries according to tax treaties. The DTAAs is helpful to tackle these issues:-

1.. The earning is taxed only in one country.

  • The earning is exempt in both countries.
  • The consideration is taxed in both countries, but tax paid in one country is given against tax payable in the other country.

There are two major types of DTAAs Model

    • UN MODEL

The OECD Models are mainly followed by developed nations, they adopted the resident-based tax system. The UN Model talk about source-based taxation and generally this system is adopted by developing nations. The US model conventions & the Indian Model Convention is also there. Still, no model is sufficient to cover the digital economy entirely but some countries try to include the digital economy with respect of the International Tax Domain in domestic, in violation of international norms.

Interdependence Economy, these Model helps countries for linking their economy to the rest of the world. The OECD and UN Models are working on a uniform model of International Tax treaties, even Non-OECD and UN Model members are using their provisions.

OECD Response

The OECD Model Convention is primarily used by the OECD countries but OECD commentaries are used by the Non-OECD while interpreting DTAAs. In the last decade, OECD provide the Nexus-based taxation salutation to some extent they work but after the growth of the digital economy, the Nexus-based rule also failed to cover current digital e-commerce.

OECD BEPS Action Plan 1 provided the three-way to the digital economy:-

  • Ability to conduct business activities without any physical presence or permanent establishment which is mentioned in Article 5 of the DTAA, called cross-jurisdictional scale without mass.
    • The IP assets
    • The virtual details of the customers and their data.

Recently   OECD/G20    Inclusive   Framework   on   BEPS4   (the   Inclusive

Framework) announced a “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”. They reached an agreement on an international tax system that will impose a 15% minimum tax rate on multinational enterprises (MNEs) by 2023.

India’s path to Adopting a ‘Significant Economic Presence’ in the domestic tax regime

The CBCD (Central Board of Direct Taxes) a committee on taxation of e-commerce headed by Akhilesh in 2016 examines tax issues arising out of digitalization, especially considering the OECD BEPS Action Plan 1. Three major suggestions were submitted by the committee members:

The Nexus based rule Significant Economic Presence (SEP) Withholding tax on Digital Transactions

Equalisation Levy ON E-Commerce

Indian Digital economy follows the SEP model without any assets located in India and this has considerably abjured the traditional ‘brick & mortar’ definition of Permanent Establishment.

Section 90 of the Income Tact Act, Empowers the central government to enter into a DTAA for the avoidance of double taxation and also Under Section 90A an empowered the central government to enter into an agreement between any particular associations in India and specified associations in India. The DTAA will override the Income Tax Act, of 1961.

Currently, India has 96 Comprehensive Agreements & 14 Limited Agreements in India.

In U.O.I v. Azadi Bachao Andolan5, exhaustively considered0 section 90 of IT Act, and has made, inter alia, the following observations:

For the fiscal statute, delegated power is with the central government

  • The validity can be challenged only on parameters of legislative provision

Equalization Levy

The Finance Act 2016 introduced the concept of an Equalization Levy on digital advertisement and any provision of digital advertising space, imposing the tax at the rate of 6% on non-residents. On:-

  1. “A person resident in India and carrying on business or profession;
  2. A non-resident having a permanent establishment in India.”

The Finance Act6 has increased the scope or ambit of equalization levy to cover

non-resident e-commerce operators through EL – under section 165(1)7:-

  • Tax levied rate of 2% of the amount of particular consideration
    • received by a Non-Resident e-commerce operator
    • made or provided or facilitated by:-
      • “to a person resident in India; or
      • Non-resident e-commerce services provider
      • to a person who buys such goods or services or both using an internet protocol address located in India.”

The ambiguities found and criticism by the various attorney in respect of EL, the Finance Act 2021 provided a definition to the term “online sale of goods” and “online provision of services” include the order or payment wholly or partly, but not provided any an exception to the intra-company transaction.

The Commissioner Of Income Tax vs M/S Wipro Ltd8

  • The consideration received or receivable is taxable as royalty or fees for technical services in India; and
  • Such taxability arises under the Income-tax Act read with the agreement notified by the Central Government under Section 90 or Section 90A of the said Act.

8 (2011) 203 Taxman 621 / (2013] 355 ITR 284 (Karnataka HC)

“The payments made to a non-resident for using the license of the database amounts to granting of a right to access the database or a transfer of right to use the copyright and thus, would be taxable as royalty and not business income”.

The equalization levy is not a solution to tackle the tax avoidance issue is related to e-commerce but it’s against small businesses and start-ups. There are penalty provisions also there for non-compliance with section 165 of the Finance Act, but the authority is currently not imposing them. The equalization levy is known as Google Tax also because Google is the first company in starting paying the tax under the said tax domain.

Unilateral tax treaties adopted by different jurisdictions9

 Count ryDigital TaxDetails
1.ItalyWeb Tax3 per cent has imposed B2B digital transactions is related to servicesThe min number of transactions done by the assessee shall be above 3000.
The definition in                the Permanent Establishmen t     has     been modifiedIntroduced the concept of Significant Economic Presence(SEP)
2.HungaryThe definition in                the Permanent Establishment has     been modifiedTax Levied at the rate of 7.5 on online advertisements
3SpainDigital Service TaxDigital Advertisement Tax
4.Amendment of                the definition    of Permanent EstablishmentAmendment of                the definition    of Permanent Establishmen tIsrael has included economic activities conducted through the Internet under the ambit of PE.
5. FranceDigital Service TaxLevied on the companies who sell digital products through 3rd parties and traffic in user data or sell digital advertising. The revenue of the company in the globe exceeded Euro 750 million and in France exceeded Euro 25 million. Rate 3.5 %
United KingdomDigital Service TaxTax to be levied on certain specific digital namely search engines, social media, e-commerce and tax rate is 2 per cent

In Rio Tinto Technical Services vs. DCIT10 ITAT Delhi held

“The assessee, an Australian company, set up a permanent establishment (PE) and provides consolidated services (including in part, technical services under a contract) in the course of a business carried out through its PE in India, the receipts would not be treated as “fees for technical services” which are subject to tax on a gross basis, but would be taxed based on the profits attributable to the PE as per Article 7 of the DTAA.”

In Besix Kier Dabhol , SA v DDIT11

“Non-resident assessee (Belgium) paid amount for interest on borrowings from shareholders or joint venture partners for purpose of business is deductible in the computation of its profits which are eligible to tax in India.”

In the above-said cases, Income Tax officials try to bring foreign entities into the ambit of the Income Tax Act but the assessee’s argument is assessee has no permanent establishment in India hence not liable under Income Tax Act. The Tribunal agreed and said DTAAs is a special law, Special laws always prevail over General Laws.

The negotiating power during any agreement is important, similar to tax treaties but developing countries have no option because of the economic position of that country. Some tax treaties, like the UK’s treaty with Malawi, Netherlands’ treaty with Uganda are classic examples of abuse of dominant position or inequality during the negotiation of DTAAs. Some countries starting changes in the domestic tax laws, with or without DTAAs. India also has made changes in the IT Act, but USTR (United States Trade Representative) has termed the Equalization Levy on e-commerce is discriminatory.

Findings and Conclusion

Technological developments have changed the traditional way of doing commercial transactions, now the economy become digital. In the traditional tax system, the concept of permanent establishment is there but in the digital economy, there is no need for any office etc. for any type of commercial activities. The nation started making modifications in domestic laws and tax treaties. But every country has certain restrictions creating laws in respect of the International tax domain.

After 2007 the development in e-commerce Flipkart, Amazon, Snapchat etc. changed the traditional PE, during the digital era traditional PE become outdated and Online Gaming, Social Media, online financial services etc have no need to have a permanent establishment.

The equalization levy on e-commerce but the rule is still ambiguous on applicability part and also is inequality, and discriminatory. The first inequality is resident providers who pay only tax IT Act, where non-resident has no permanent establishment has to pay both taxes, furthermore, two foreign companies having no permanent establishment with different income have to pay similar tax.

India has already started taking a unilateral approach in its domestic laws. Indian Equalization levy faced international criticism, by the USTR, the EL on e-commerce is still not applicable as mentioned in the law. The France Digital Tax was also criticised by the USA and later withdrawn by the France government.

The DTAAs played a very important role in settling the tax dispute but the inequality during negotiations, now developing countries decided the minimize the use of DTAAs and adopted the concept of SEP for the digital economy.


  2. Reserve Bank of India, Report on benchmarking India’s Payment Systems, June 4, 2019
  3. Finance Act 2016
  5. (2004) 1 CompLJ 50 SC
  6. 2020
  7. The Finance Bill, 2021 proposes to insert First Proviso to Section 163 of the Finance Act, 2016 to exclude the royalty and fees for technical services from its scope, if the following conditions are satisfied:
  9. ITA Nos. 3399/Del/2002
  10. 8 27
  11. An Evaluation of Efforts by the OECD and India to Address Tax Challenges of the Digital Economy by Kriti Chawla Khanna [2020] 115 25 (Article)
  12. Equalisation levy and its applicability on intra-group transactions by CA Sudeep Dad and CA Ashwasti Pai [2021] 129 326
  13. Taxation in the Information Technology era: The journey from ‘Business Connection’ to ‘Significant Economic Presence’ [2019] 107 274