In a recent decision¹, the Division Bench of Bombay High Court (“HC”) upholding the decision of the Income Tax Appellate Tribunal, Mumbai (“Tribunal”) dismissed the appeal filed the tax department. The tax department had alleged that the taxpayer was a conduit and acted solely on the basis of its indirect parent and therefore was denied to take benefit of the Double Taxation Avoidance Agreement between India and Singapore (“DTAA”). It had also alleged that the taxpayer had a ‘business connection’ in India and the monies received by it from the Indian service recipient was in the nature of Fees for Technical Services (“FTS”) and hence subject to withholding tax.

Background

The taxpayer, Alibaba.com Singapore E-Commerce Private Ltd. is a non-resident company incorporated in Singapore (“Taxpayer”). The Taxpayer holds a valid TRC issued by the tax authorities in Singapore. It is important to note that all significant activities, including overall control and management, are conducted outside India, in Singapore.

The Taxpayer operates within the Alibaba Group’s framework, utilizing the Alibaba website (www.alibaba.com) as a global trade marketplace for suppliers worldwide, excluding China, Hong Kong, and Macau. Indian suppliers can conduct online business through this platform. ‘Alibaba.com Ltd.’, Cayman Islands, is the owner of IPR and has the copyright with respect to the trademarks and brand name “Alibaba” and Alibaba logo. It is also the owner of the domain name of Alibaba.com. Only the website is operated by a Group Company, ‘Alibaba.com Hong Kong Ltd.’ (“Alibaba Hong Kong”). During years under consideration, the Taxpayer has transacted with Alibaba Hong Kong by way of availing of web hosting and related services.

The Taxpayer offers business-to-business (B2B) services through the website. Indian subscribers have the option to subscribe to the Taxpayer’s services such as International Trust Pass and Gold Suppliers Services Arrangement, which involves a service fee. Subscribers can establish their own storefronts and list products on the website, making them easily searchable by visitors. The Taxpayer receives subscription revenue from customers worldwide, including Indian subscribers, and it is the sole legal and beneficial owner of this revenue. The Taxpayer pays taxes on the collected revenue in Singapore.

For the year in question, the Taxpayer filed its return of income in India showing income as exempt as it took benefit of the DTAA. While the case was chosen for scrutiny assessment, the Assessing Officer (“AO”) denied the benefit of the DTAA on the ground that Taxpayer is merely an intermediary between the Indian subscribers and Alibaba.com Hong Kong. The AO based its decision on following reasons:

1. Lack of presence in Singapore and management based in Hong Kong: The Taxpayer does not have a presence in Singapore and that its entire management operates from Hong Kong.
2. Services provided by Alibaba Hong Kong: It was contended that Alibaba Hong Kong, being the owner of the website, is the entity responsible for providing services to the Indian Subscribers.
3. Ownership of the website trademark: The AO emphasized that the website itself is a trademark owned by Alibaba Hong Kong and the Taxpayer does not have any ownership over such trademark.

The AO further held that the Taxpayer had a ‘business connection’ in India through its agreement and transactions with Infomedia 18 Pvt. Ltd. (“Infomedia”), an Indian company, making the Taxpayer’s income taxable in India under the provisions² of the Income Tax Act, 1961 (“Act”). The AO also held that the payments made by Indian subscribers to the Taxpayer should be taxable in India as FTS on the basis that the scope of term FTS is very wide and needs to be interpreted very broadly. The AO determined that the Taxpayer’s revenue was partly taxable as royalty, partly as FTS and partly as business receipts.

Furthermore, the Dispute Resolution Panel (“DRP”) upheld the conclusions and contentions of the AO on all aspects, except for the issue of royalty. It was also upheld by the DRP that the taxpayer is not eligible for the benefits of the DTAA. This determination was based on the understanding that the Taxpayer acts merely as an intermediary between Indian subscribers and Alibaba Hong Kong. The relationship between Infomedia and Alibaba Hong Kong, as per DRP, was found to be interconnected and interdependent, thereby disqualifying it from being considered an independent agent. Therefore, Infomedia is a dependent agent permanent establishment of Taxpayer. Consequently, the Taxpayer was recognized as having a business connection and permanent establishment in India in the form of Infomedia.

Aggrieved by the order of the AO, the Taxpayer filed an appeal before the Tribunal. In its ruling, the Tribunal, overturning all the findings of the AO and DRP, ruled that the Taxpayer was eligible to avail the benefits conferred by DTAA.

Aggrieved by the order of the Tribunal, the tax department filed an appeal before the High Court.

Ruling

On appeal, the HC dismissing the appeal stated that no significant or substantial questions of law were

raised in the case resulting in the order of the Tribunal to become final. The decision of the HC is based

on the following reasons:

1. Dismissal of the AO’s approach: The AO focused solely on the fact that the website www.alibaba.com is registered in Hong Kong and is the trademark of Alibaba Hong Kong. The AO completely disregarded the existence of the Taxpayer as an independent entity and treated it as a mere front or shadow entity of Alibaba Hong Kong. The Court held that if the AO was convinced that all activities in India were carried out by Alibaba Hong Kong and not the Taxpayer, appropriate action should have been taken against Alibaba Hong Kong rather than the Taxpayer.
2. Taxpayer as an independent entity and not a conduit of Alibaba Hongkong: The Court supported the conclusion that the Taxpayer is not a non-existing entity or a conduit for Alibaba Hong Kong. This conclusion was based on the following factors, in addition to the provided group structure:
   1. Tax Residency Certificate (TRC): The TRC, issued by the Singapore government, serves as proof of residency. The income tax authorities cannot disregard a valid TRC when determining residency.
   2. Audited financial statements and tax returns: The Taxpayer’s audited financial statements and filed tax returns with the Singapore authorities demonstrate that the subscription fees received from subscribers worldwide, including India, are recognized as the Taxpayer’s own income. This establishes the Taxpayer as the sole economic owner of the subscriptions, receiving revenue independently rather than on behalf of Alibaba Hong Kong.
   3. Assessment by Singapore Tax Authorities: The notice of assessment issued by the Singapore Tax Authorities indicates that the Taxpayer is assessed in Singapore and that its control and management are also based there.
   4. Board of Directors meetings and web-based agreement: The consideration of the Taxpayer’s board of directors meetings and the web-based agreement between Alibaba Hong Kong and the Taxpayer led to the conclusion that Alibaba Hong Kong has no connection or contract with Indian subscribers or the Taxpayer’s customers in India. The contractual rights, privileges, and liabilities of the Taxpayer with Indian subscribers solely belong to the Taxpayer.
   5. Ownership of Alibaba.com logo: Only the registration of the Alibaba.com logo is in Hong Kong and the Taxpayer’s use of the website demonstrate that the Taxpayer solely utilizes the Alibaba.com platform.
   6. Rejection of revenue’s submissions based on Vodafone case: The revenue’s reliance on the Vodafone International Holdings B.V. case³, arguing that tax authorities have blanket powers to ignore the TRC, was dismissed. The Tribunal held that the Supreme Court, in this case, only observed that the TRC does not prevent tax authorities from investigating potential tax fraud, which is not applicable in the current matter.
3. Business connection through Infomedia: While delving into whether the Taxpayer has a business connection in India through Infomedia and whether Infomedia constitutes a dependent agency permanent establishment for the Taxpayer in India. The following points were highlighted:
   1. Limited role of the Taxpayer: The Taxpayer’s role is primarily focused on facilitating the posting of advertisements and displaying information on the web portal. The subscribers and buyers communicate independently without the Taxpayer’s involvement, and the Taxpayer does not maintain stock or handle product delivery.
   2. Non-involvement in supply of goods or services: The Taxpayer is not directly involved in the supply of goods or provision of services, nor does it engage in financial transactions such as the transfer of sale prices between purchasers and sellers.
   3. Services provided by Infomedia: Infomedia, specializing in directories, magazine publishing, and direct marketing, permitted the Taxpayer’s website usage and provided customer support, after-sales support, and payment collection services from Indian subscribers. Infomedia received remuneration from the Taxpayer based on a cooperation agreement.

Based on these facts, it was concluded that the Taxpayer does not have a business connection in India through Infomedia. It also relied on CBDT Circular 7 of 2003, which clarified that business connection does not include cases where business activities are conducted through an independent agent in the ordinary course of its business.

Regarding the independence of Infomedia, the Court highlighted that Infomedia collaborates with various partners, including the Taxpayer, without financial, managerial, or substantial participation from the Taxpayer. Infomedia carries out a range of activities for other clients, establishing its independence. Therefore, the Court agreed with the Tribunal’s conclusion that Infomedia’s activities under the cooperation agreement with the Taxpayer are conducted in the ordinary course of business and are not solely dedicated to the Taxpayer.

4. Technical Services Interpretation: The Taxpayer’s services to Indian customers were limited to displaying and storing data, functioning as an e-commerce platform for advertising products or services in India. The arrangement with subscribers involved the provision of standard facilities and did not constitute the rendering of technical, managerial, or consultancy services as specified in section 9(1)(vii) (Income by way of FTS) read with Explanation 2 of the Act.

Referring to the Supreme Court’s decision in the case of CIT, Mumbai v. Kotak Securities Ltd. ⁴ (wherein the Court while delving into transaction charges paid by stock exchange members to Bombay Stock Exchange held that: technical services like managerial and consultancy service would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider.), which supported the above-stated interpretation, the Court emphasized that ‘technical’ services require constant human endeavour or intervention. If a technology or process operates automatically without significant human interaction, it cannot be categorized as the rendering of technical services. Additionally, when a standard facility is provided to the public without offering special or exclusive services to specific clients or classes of clients, it does not fall within the scope of technical services.

Analysis

This ruling showcases the persistent challenges faced by taxpayers from tax authorities, despite the existence of well-established legal precedents. It, yet again, underscores the need for consistency and adherence to settled law in tax matters.

This judgment presents an in-depth analysis of the Taxpayer’s activities, emphasizing the significance of treating an entity as an independent entity unless substantial evidence suggests otherwise. The Court’s decision serves as a reinforcement of the longstanding principle that a TRC issued by another tax jurisdiction is a valid and sufficient document for claiming DTAA benefits and an entity cannot be considered to be a conduit just because it is transacting with its group company.

It is also important to see how the Court came to the conclusion that the Taxpayer is not a conduit but is an independent entity functioning on its own. While time and again it has been held that the TRC is proof enough for availing treaty benefits, with multi-lateral instruments coming into force it is imperative that entities also follow principles through which they are able to demonstrate that they are independent entities and not shell entities which have been set up solely to take benefit of a tax treaty. The activities of the Taxpayer in this case throw some light as to what factors should be kept in mind to demonstrate substance.

Having said that, tax authorities must also demonstrate respect for established principles and decisions that have been repeatedly reaffirmed by the Courts. Consistently challenging settled matters not only leads to unnecessary disputes but also undermines the confidence of taxpayers who play a crucial role in driving economic development. The ruling serves (yet again) as a reminder to tax authorities to exercise prudence and restraint in questioning taxpayers when there is a clear and settled position in law.

– Krishna Agarwal & Ashish Sodhani

*Special thanks to Manish Nahar for his assistance.

1. The Commissioner of Income International v. Alibaba.Com Singapore E-Commerce Private Ltd., TS-361-HC-2023 (BOM)
2. Section 9(1)(i) of the ITA
3. TS-23-SC-2012.
4. TS-166-SC-2016.