Primarily, a PE requires a fixed place of business within the geographical boundaries of the country of sales. Modern technology has made it possible for many companies to do business in several countries without PE. Phrases like “Borderless world” and “Modern technology defies Geography” have become reality for E-Commerce. But governments do want to collect income tax based on geography. Several Governments are now claiming a right to tax a NR’s income based on sale of goods & services within their countries. They need a concept of a PE without fixed place of business. An SEP would be a PE not requiring the fixed place of business.
If there is no fixed place of business, then on what grounds (nexus) a non-resident may be taxed for its business income? Which other nexus may be used to bring the NR in tax net? This is the crucial matter of definition of SEP. BEPS Action 1 Report gives several different criteria which may be considered for considering an SEP.
The criteria adopted by Indian Government under SEP definition are discussed below: S.9 (1) (i) Explanation 2A:
2. i) If the non-resident systematically and continuously solicits business in India through digital means
ii) If the non-resident engages in interaction with users in India through digital means. The minimum number of users that would attract the provision of SEP will be prescribed by notification.
This provision is specifically for covering any business transacted through digital means. Hence first proviso to Explanation 2A makes it clear that the concept of SEP will be applicable whether the non-resident has a fixed place of business in India or not; and whether the non-resident renders any services in India or not. Indian Government has asserted its right to tax when income is associated with services consumed by Indian Resident Consumer irrespective of whether the services are rendered by the service provider in India or not. Section 9 (1) (v) (vi) & (vii) read with explanation at the end of Section 9. Consumption of a service should be by an Indian resident. The non-resident service provider may provide services within India or outside India. The place of provision of service is not relevant
Once an SEP is treated as a BC and the non-resident is liable to tax in India under the deeming provision of Section 9(1)(i), it is not that the whole of its net profit is taxable in India. Only that portion of its net profit which is attributed to the Indian SEP will be taxable in India. Thus, the system of SEP will be normal system of taxation of a foreign assessee’s branch /PE in India. It will not be like Equalisation Levy where a flat rate of tax is levied on gross revenue.
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