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E-commerce or electronic commerce, in its widest sense, means consumer and business transactions conducted over a network, using computers and telecommunications. In other words, e-commerce refers to the exchange of goods or services for value on the internet. It includes, inter alia, on-line shopping, on-line trading of goods and services, electronic fund transfers, electronic data exchanges and on-line trading of financial instruments.


The OECD defines e-commerce in a somewhat more restricted manner as commercial transactions between individuals and organisations, based on the processing or transmission of digitised data units, sound, and visual images, which are carried out over open networks (like internet) or over closed networks (like minitel) with a gateway to open networks. This more specific definition would therefore exclude electronic data interchange (EDI), carried out over closed networks, if such EDIs are being used by themselves, without access to an open network (e.g. credit cards used over a closed network, connecting specified merchants with a card organisation).


Whatever be the definition, this method of carrying on a business is widely different from the traditional practice of business.

Firstly, whereas traditional businesses have rested squarely on the physical presence and delivery of goods, in doing business via the internet, as is the case in e-commerce transactions, physical presence of goods is not required at all. Consequently, geographical boundaries between nations hold no significance.

Secondly, in such type of transactions, physical delivery of goods is not necessary. Where the goods and services are available in digital form, e.g. computer software, music, magazines, drawings etc. physical transactions are replaced by transfer of bytes.

Thirdly, e-commerce transactions can be completed almost instantaneously across the world and irrespective of the time of the day.




Due to absence of national boundaries, physical presence of goods and non-requirement of physical delivery, taxation of e-commerce transactions raises several issues. They have to be understood in the light of international taxation.


International taxation arises from cross border transactions for the reason that the author of the transactions arises in one country (called the Home State) and the sites of the transactions is in the other country (Host State).


Income arising out of such transaction is subject to tax in both countries by virtue of personal attachment to the transfer (in the Home State) and again by virtue of economic attachment to the income itself (in the Host State). Thus, this gives rise to double taxation of the same income. This problem is generally solved by a Double Taxation Avoidance Agreement (DTAA) between the two countries concerned.



The problematic issues arising in respect of e-commerce transactions are as follows:


How to determine economic attachment?

In order to determine economic attachment, the situs of the transactions should be clearly determined. In a traditional commerce transaction, the situs of the transaction is clearly known, because of the physical presence and the physical delivery. Therefore the Source Rule as laid down in section 9 of the Income-tax Act, 1961 can be clearly applied to effect Host State taxation.


Section 9 provides that income is deemed to accrue or arise in Indian taxable territory if there is a business connection. In E-commerce situations, with transactions being completed in cyberspace, it is often not clear as to the place where the transaction is effected, giving rise thereby to difficulties in implementing Source Rule taxation.


How to determine existence of a permanent establishment?

Under most bilateral double tax treaties, a country will seek to tax corporate business profits if they can be applied to a permanent establishment in that country. The basic requirement is, therefore, that there must be a place of business and it must have some permanence.


The major taxation problem of e-commerce is that no establishment is necessary across the border to carry on business. With regard to tangible property, the source can be traced, as the delivery has to cross the other territory through the customs or postal barrier. The destination also will be known from the shipping address. Where the seller is located in a tax-haven country, it becomes difficult to enforce tax laws on the non-resident business. In such cases, the natural option should be to tax the resident as the agent, especially where the non-resident cannot be reached. The difficulty is not so much in taxing those who are assessed and who maintain accounts but in taxing others who do business and there is no record of their transactions, like the persons liable to pay the use tax in US. With the development of WAP (Wireless Application Protocol) which integrates mobile telephony with the Internet, e-commerce will be taken over by Mcommerce (Mobile Commerce). This makes the place of origin of business invisible thus adding complication to the existing scenario and is a real challenge to domestic jurisprudence.


Further, how such income is to be attributed to the permanent establishment is also a significant matter. This is relevant to determine whether income from sales can be taxed on host country soil. For instance, if a particular income is classified as royalties or fees for technical services, or dividends or interests, then irrespective of the existence of a permanent establishment, the income will be liable to host country taxation under section 115A of the Income-tax Act. On the other hand, if the income is classified as income from sales, then unless there is a permanent establishment, there can be no taxation in the host country. And if there is a permanent establishment, how much income is to be taxable will be determined by how much of the income is to be attributed to the permanent establishment.


Legal difficulty:

Till now all cross-border commercial transactions have to cross the customs barrier or the postal barrier. All trade and commerce are operated in a physical world and in terms of tangible goods. Hence, there is a check on these transactions, though smuggling remains outside the scope of any control. Even in the present situation, the tax authorities are unable to fully grapple with the problem of myriad ways of tax evasion. In e-commerce transactions, the contracting parties are in two different states and, therefore, the question would arise as to which state law would be applied.


Nature of contract:

A contract need not necessarily be in writing unless, the statute requires it to be so. It can be oral. This will create problems relating to the law that will be applicable in case of dispute. In a contract, generally the parties are free of choose the law applicable to the contract and the same can be expressed or implied in the terms of the contract. In some cases, the principal place of business is relevant in deciding the law applicable. In some other case, the place where the buyer normally resides decides the law to be applied. Where there is a clause for retention of title until the buyer performs some act, then the matter of which lex situs will govern the validity clause is open to question. In answering this, the Rome Convention says that if the contract accords with the rules of anyone of the States, its validity cannot be questioned.


This would be the most satisfactory solution and can be followed. All these problems arise mostly regarding transactions relating to movables and those relating to immovable properties are less difficult. There are many areas where the present domestic laws including international laws would be inadequate to deal with the emerging new field of ecommerce.


Taxable jurisdiction:

The taxable jurisdiction of any country covers its national boundary. Besides this the territorial jurisdiction includes territorial sea and airspace above as per the territorial waters, continental shelf, exclusive economic zone and other Maritime Zones Act, 1976. Each one extends to specified nautical miles from the base line.


But electronic commerce takes place through satellite and the server can be in any part of the globe. It can in all probability be in a tax-haven country. Another condition for taxing the income arising or accruing beyond the taxable territories is the physical residence of the taxpayer for 182 days or more. This becomes meaningless with the Internet access.




E-commerce is but a method of conducting business transactions and not a business transaction by itself. Therefore, the contents of a business transaction done through ecommerce are no different from that of a business transaction carried out through traditional means.


Divergence however arises in two dimensions - the business methods and the business concepts. The first area, which is very different, viz. the means of doing business, is analysed.


In e-commerce there are three distinct means of doing business :

°      electronic advertising,

°      electronic sales and

°      electronic delivery.

The presence of anyone or more of these is sufficient to characterise the business as e-commerce.


One way of classifying E-commerce is based on parties involved in transactions. Major types are mentioned below:

1. Business to Customers (B2C)

2. Business to Business (B2B)

3. Government to Customers (G2C)

4. Government to Business (G2B)

5. Customer to Customer (C2C)

The name of a type indicates the parties involved in that type of E-commerce transaction.


The Committee of Fiscal Affairs of the OECD has been actively working on taxation issues relating to e-commerce. The committee has developed the taxation framework conditions setting forth the governing principles in relation to e-commerce.


The key conclusion was that the taxation principles that guide Governments in relation to conventional commerce, should also guide them in relation to e-commerce. It was postulated that this would be possible only by adapting and adopting the existing principles to e-commerce situations.


For adapting and adopting the existing principles, the following key areas in the context of international tax were identified:


1.    the extent to which a website or a server can constitute a permanent establishment and how income may be attributed to it; and

2.    the manner in which payments for digitised products are to be characterised.




Despite the divergence of method between traditional commercial transaction and ecommerce transactions, it is essential to conform to the tenets of neutrality of taxation.


On account of the characteristics of e-commerce namely that transactions are completed in cyberspace, thereby making national boundaries meaningless, and considering the level of dis-intermediation and untraceablity of the path of the transactions, traditional Source Rules of taxation become increasingly difficult to apply.


As techniques of e-commerce progress, the situations become more complex with increasing dis-intermediation. Instances of these could be where traditional transfer pricing rules cannot be applied to multiple servers which switch signals depending on their work loads. This could give rise to increasing emphasis on Residence Rule taxation whenever Source Rule taxation becomes difficult to apply. Such a situation could spell diminishing revenues for developing countries, particularly in situations of technology transfers, where Host States are generally developing countries.

Published by

Manmohan ACA, CS
(Chartered Accountant )
Category Income Tax   Report

2 Likes   113 Shares   39834 Views


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