5

EQUALISATION LEVY
LEARNING OUTCOMES

After studying this chapter, you would be able to -

 appreciate the issues in taxing e-commerce transactions;
 comprehend the OECD recommendations for taxing e-commerce
transactions under Action Plan 1 of Base Erosion and Profit Shifting
(BEPS) project;
 appreciate the need for equalization levy;
 comprehend and apply the provisions of equalisation levy contained in
Chapter VIII of the Finance Act, 2016 and the relevant Rules in problem
solving and addressing related issues.

© The Institute of Chartered Accountants of India

 5.2 INTERNATIONAL TAXATION

5.1 GROWTH OF E-COMMERCE AND CONCERNS

EMERGING THEREFROM
(1) The rapid growth of information and communication technology has resulted in substantial
expansion of the supply and procurement of digital goods and services globally, including
India. The digital economy is growing at approximately 10% per annum, significantly faster
than the global economy as a whole.
(2) At present, in the digital domain, business may be conducted without regard to national
boundaries and may dissolve the link between an income-producing activity and a specific
location. Hence, business in digital domain doesn’t actually occur in any physical location
but instead takes place in "cyberspace." Persons carrying business in digital domain could
be located anywhere in the world. Entrepreneurs across the world have been quick to
evolve their business to take advantage of these changes. It has also made it possible for
the businesses to conduct themselves in ways that did not exist earlier, and given rise to
new business models that rely more on digital and telecommunication network, do not
require physical presence, and derives substantial value from data collected and
transmitted from such networks.
(3) The growth of e-commerce economy has revolutionised the concept of brick and mortar to
click and order. The need for physical presence in a jurisdiction is consequently getting
diminished. Therefore, due to transformed business models, communication with suppliers
and customers take place virtually and digitally. Emergence of new age technologies such
as 3D printing, sharing economy, internet of things etc. has revolutionised new business
models in line with the digital epoch making it difficult to identify the location of source or
origin point of a business transaction

5.2 TAXATION ISSUES RELATING TO E-COMMERCE

These new business models have created new tax challenges. The typical taxation issues relating to
e-commerce are:
(i) the difficulty in characterizing the nature of payment and establishing a nexus or link between
taxable transaction, activity and a taxing jurisdiction,
(ii) the difficulty of locating the transaction, activity and identifying the taxpayer for income tax
purposes.
The digital business, thus, challenges physical presence-based permanent establishment rules. If
permanent establishment principles are to remain effective in the new economy, the fundamental PE
components developed for the old economy i.e. place of business, location, and permanency must
be reconciled with the new digital reality. Further, characterizing the income as technical services
becomes difficult since the technical services rendered digitally does not involve human intervention,

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.3

as the digital platforms operate on sophisticated artificial intelligence mechanism. Hence the new
digital business models gives rise to ‘stateless income’ and thereby going completely tax free.

5.3 OECD RECOMMENDATIONS UNDER ACTION PLAN 1

OF THE BEPS PROJECT
Due to the tax challenges arising from digitalization, the G20-OECD BEPS Action Plan Committee
as part of its 2015 Action 1 Report identified a number of broader tax challenges raised by
digitalisation, notably in relation to nexus, data and characterisation.
The Action Report 1 analysed the following three options, namely -
(i) a new nexus rule in the form of a “significant economic presence” test,
(ii) a withholding tax which could be applied to certain types of digital transactions, and
(iii) an equalisation levy, intended to address a disparity in tax treatment between foreign and
domestic businesses where the foreign business had a sufficient economic presence in the
jurisdiction

The OECD has recommended several options to tackle the direct tax challenges which include:
(1) Modifying the existing definition of permanent establishment to provide for whether an
enterprise engaged in fully de-materialized digital activities would constitute a PE, if it
maintained a significant digital presence in another country's economy.
(2) Introducing the concept of a virtual fixed place of business in the concept of permanent
establishments i.e., creation of a permanent establishments when the enterprise maintains
a website on a server of another enterprise located in a jurisdiction and carries on business
through that website.
(3) Imposition of a final withholding tax on gross basis in case of certain payments made for digital
goods or services provided by a foreign e-commerce provider or imposition of a equalisation
levy on consideration for certain digital transactions received by a non-resident from a resident
or from a non-resident having permanent establishment in other contracting state.
It was concluded that countries could introduce any of these options in their domestic laws as
additional safeguards against BEPS, provided they respect existing treaty obligations, or in their
bilateral tax treaties. The above options can be resorted to as an interim measure until a clear
solution emerges on taxing digital economy.
Taking into consideration the potential of new digital economy and the rapidly evolving nature of
business operations, it becomes necessary to address the challenges in terms of taxation of such
digital transactions. In order to arrive at a long term solution, the OECD along with the BEPS
Inclusive Framework is working on arriving at a consensus based solution to tackle the tax
challenges arising out of the digital economy as part of a ‘Unified Approach’ under Pillar One.

© The Institute of Chartered Accountants of India

 5.4 INTERNATIONAL TAXATION

5.4 EQUALISATION LEVY - CHAPTER VIII IN THE

FINANCE ACT, 2016
Consequent to the BEPS Action Report 1, a committee was constituted by the CBDT to evaluate
the alternatives suggested in the BEPS Action Report 1 for addressing the challenges arising on
taxing the digital economy. Pursuant to the recommendations of the Committee, Chapter VIII of the
Finance Act, 2016, titled "Equalisation Levy" was introduced. It provides for an equalisation levy
@6% of the amount of consideration for specified services received or receivable by a non-
resident not having PE in India, from a resident in India who carries out business or profession, or
from a non-resident having PE in India. The Finance Minister, in his Speech while introducing the
Finance Bill, 2016 stated as follows:
“151. In order to tap tax on income accruing to foreign e-commerce companies from India, it is
proposed that a person making payment to a non-resident, who does not have a permanent
establishment, exceeding in aggregate ` 1 lakh in a year, as consideration for online
advertisement, will withhold tax at 6 of gross amount paid, as EL. The levy will only apply to B2B
transactions.”
One of the primary reasons for introducing the Equalisation Levy through the Finance Act is to
deny tax treaty benefits, as otherwise it may defeat the entire purpose of introducing the
Equalisation Levy. The CBDT constituted Committee specifically addresses this aspect in their
report and clarifies that tax credit under the relevant tax treaties would not be available, since
Equalisation Levy is not in the nature of income tax.
The CBDT issued a notification dated 27th May, 2016, stating that the provisions of Chapter VIII
relating to the equalisation levy would come into effect from 1st June 2016. This Chapter extends
to the whole of India except Jammu and Kashmir. It applies in respect of consideration received or
receivable for specified services provided on or after 1.6.2016.
In order to widen and deepen the equalisation levy net beyond online advertisement, its scope had
been extended by the Finance Act, 2020 to consideration received or receivable for e-commerce
supply or services made or provided or facilitated on or after 1.4.2020.
However, the consideration received or receivable for specified services and for e-
commerce supply or services would not include the consideration, which are taxable as
royalty or fees for technical services in India under the Income-tax Act, read with the DTAA
notified by the Central Government under section 90 or section 90A.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.5

• Specified Services@6%
Equalisation Levy • E-Commerce Supply or Services @ 2%

The key aspects related to Equalisation Levy have been discussed below.
(1) Meaning of “Equalisation Levy” [Section 164(d) of the Finance Act, 2016]:
Equalisation levy means the tax leviable on consideration received or receivable for any
specified service or e-commerce supply or services.
(2) Charge of Equalisation Levy on ‘Specified Services’ [Section 165 of Finance Act,
2016]:
(i) Equalisation levy @6% is leviable on the amount of consideration for specified
service received or receivable by a person, being a non-resident from -
(a) a person resident in India and carrying on business or profession; or
(b) a non-resident having a PE in India.
(ii) Equalisation levy is not chargeable, where –
(a) the non-resident providing the specified service has a PE in India and the
specified service is effectively connected with such PE;
(b) the aggregate amount of consideration for specified service received or
receivable in a previous year by the non-resident from a person resident in
India and carrying on business or profession, or from a non-resident having a
PE in India, does not exceed ` 1 lakh; or
(c) where the payment for the specified service by the person resident in India, or
the PE in India is not for the purposes of carrying out business or profession.
(3) Charge of Equalization levy on E-commerce supply or services [Section 165A of the
Finance Act, 2016]
(i) Chargeability of Equalization levy on E-commerce supply or services:
Equalization levy@2% would be chargeable on the amount of consideration received
or receivable by an e-commerce operator from e-commerce supply or services made
or provided or facilitated by it—
(1) to a person resident in India; or
(2) to a non-resident in the specified circumstances as provided below; or

© The Institute of Chartered Accountants of India

 5.6 INTERNATIONAL TAXATION

(3) to a person who buys such goods or services or both using internet protocol
address located in India.
(ii) Non-chargeability of equalization levy: The equalization levy shall not be
charged—
(1) where the e-commerce operator making or providing or facilitating e-commerce
supply or services has a permanent establishment in India and such e-
commerce supply or services is effectively connected with such PE;
(2) where the equalization levy is leviable under section 165; or
(3) sales, turnover or gross receipts, as the case may be, of the e-commerce
operator from the e-commerce supply or services made or provided or
facilitated is less than ` 2 crore during the previous year.
(iii) Meaning of "specified circumstances":
(1) sale of advertisement, which targets a customer, who is resident in India or a
customer who accesses the advertisement though internet protocol address
located in India; and
(2) sale of data, collected from a person who is resident in India or from a person
who uses internet protocol address located in India.
(iv) “Consideration received or receivable from e-commerce supply or services”
would include:
(1) consideration for sale of goods irrespective of whether the e-commerce
operator owns the goods. However, it shall not include consideration for sale
of such goods which are owned by a person resident in India or by a
permanent establishment in India of a person non-resident in India, if sale of
such goods is effectively connected with such permanent establishment;
(2) consideration for provision of services irrespective of whether service is
provided or facilitated by the e-commerce operator. However, it shall not
include consideration for provision of services which are provided by a person
resident in India or by permanent establishment in India of a person non-
resident in India, if provision of such services is effectively connected with
such permanent establishment.
(d) Definition of “Specified Service”, “E-Commerce Operator” and “E-Commerce Supply
or Services” [Section 164 of the Finance Act, 2016]:
Term Meaning
(i) Specified (i) Online advertisement;
Services (ii) Any provision for digital advertising space or any other

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.7

facility or service for the purpose of online

advertisement;
(iii) Any other service as may be notified by the Central
Government.
Note – ‘Online’ means a facility or service or right or benefit
or access that is obtained through the internet or any other
form of digital or telecommunication network.
(ii) E-Commerce A non-resident who owns, operates or manages digital or
Operator electronic facility or platform for online sale of goods or
online provision of services or both
(iii) E-Commerce (i) online sale of goods owned by the e-commerce
Supply or operator; or
Services (ii) online provision of services provided by the e-
commerce operator; or
(iii) online sale of goods or provision of services or both,
facilitated by the e-commerce operator; or
(iv) any combination of activities listed in (i), (ii) or (iii)
above.
“Online sale of goods” and “online provision of
services” would include one or more of the following
online activities
(a) acceptance of offer for sale; or
(b) placing of purchase order; or
(c) acceptance of the purchase order; or
(d) payment of consideration; or
(e) supply of goods or provision of services, partly or
wholly.
(4) Provisions of Chapter on Equalisation Levy:
Section Subject Provisions
166 Collection &
Recovery of
Equalisation Levy
on Specified
Services
Person responsible Every person, being a resident and carrying on business
for deduction of or profession or a non-resident having a permanent
equalisation levy establishment in India shall deduct equalisation levy
referred to in section 165(1) from the amount paid or
payable to a non-resident in respect of the specified
service.

© The Institute of Chartered Accountants of India

 5.8 INTERNATIONAL TAXATION

Rate of equalisation 6% of the amount of consideration for specified service

levy paid or payable to a non-resident in respect of specified
service by a person resident in India and carrying on
business or profession or a non-resident having a PE in
India.
The amount of consideration, the amount of equalisation
levy, interest and penalty payable and refund shall be
rounded off to the nearest multiple of ten rupees.
For this purpose, any part of a rupee consisting of paise
shall be ignored and, thereafter, if such amount is not a
multiple of ten, then, if the last figure in that amount is
five or more, the amount shall be increased to the next
higher amount which is a multiple of ten and if the last
figure is less than five, the amount shall be reduced to
the next lower amount which is a multiple of ten [Rule 3
of Equalisation Levy Rules, 2016].
Threshold limit Equalisation levy is deductible if the aggregate amount
of consideration for specified service in a previous year
exceeds one lakh rupees.
Time period for The equalisation levy so deducted during any calendar
remittance of month shall be paid by every assessee to the credit of
equalisation levy the Central Government by the 7th of the month
immediately following the said calendar month.
The assessee who is required to deduct and pay
equalisation levy, shall pay the amount of such levy, by
remitting it into the Reserve Bank of India or in any
branch of the State Bank of India or of any authorised
Bank accompanied by an equalisation levy challan.
[Rule 4 of Equalisation Levy Rules, 2016]
Consequence of Any assessee who fails to deduct equalisation levy
failure to deduct shall, notwithstanding such failure, be liable to pay the
equalisation levy levy to the credit of the Central Government by the 7th of
the month immediately following the said calendar
month.
Thus, if the assessee responsible for deducting
equalisation levy, fails to so deduct, he has, in any case,
to pay such levy to the credit of the Central Government
by the 7th of the month immediately following the said
calendar month.
166A Collection and
recovery of
equalisation levy

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.9

on e-commerce
supply or services
The equalisation levy referred to in section 165A(1),
has to be paid by every e-commerce operator to the
credit of the Central Government for the quarter of the
financial year ending with the date specified in column
(2) of the Table below by the due date specified in the
corresponding entry in column (3) of the said Table:
S. No. Date of ending of the Due date of the
quarter of the F.Y. F.Y.
(1) 30th June 7th July
(2) 30th September 7th October
(3) 31st December 7th January
(4) 31st March 31st March
The amount of consideration, the amount of equalisation
levy, interest and penalty payable and refund shall be
rounded off to the nearest multiple of ten rupees.
For this purpose, any part of a rupee consisting of paise
shall be ignored and, thereafter, if such amount is not a
multiple of ten, then, if the last figure in that amount is
five or more, the amount shall be increased to the next
higher amount which is a multiple of ten and if the last
figure is less than five, the amount shall be reduced to
the next lower amount which is a multiple of ten [Rule 3
of Equalisation Levy Rules, 2016 as amended by the
Equalisation Levy (Amendment) Rules, 2020].
The e-commerce operator who is required to pay
equalisation levy, shall pay the amount of such levy, by
remitting it into the Reserve Bank of India or in any
branch of the State Bank of India or of any authorised
Bank accompanied by an equalisation levy challan [Rule
4 of Equalisation Levy Rules, 2016, as amended by the
Equalisation Levy (Amendment) Rules, 2020].
Points of difference between Section 166 and 166A
• As per section 166 – Equalisation Levy on Specified Services, the person
responsible for collecting the levy is the service recipient availing the specified
service(s), who has to deduct Equalisation Levy from the amount paid or
payable to a non-resident in respect of such service(s). The service recipient
responsible for deduction and remittance is a resident or a non-resident
having PE in India.

© The Institute of Chartered Accountants of India

 5.10 INTERNATIONAL TAXATION

• As per section 166A – Equalisation Levy on e-commerce supply or services,

the person responsible for collecting the levy is the recipient of the amount, in
case of an e-commerce operator effecting online sale of goods owned by him
or online provision of services. There is no deduction obligation on the part of
the service recipient/ buyer, in this case. Therefore, in this case, the
responsibility for payment of equalisation levy is vested on the non-resident e-
commerce operator who does not have a PE in India.
167 Furnishing of
statement
Statement in Every assessee or e-commerce operator shall, within
prescribed form the prescribed time after the end of each financial year,
within time prepare and deliver or cause to be delivered to the
Assessing Officer or to any other authority or agency
authorised by the Board in this behalf, a statement in
the prescribed form, verified in the prescribed manner
and setting forth the prescribed particulars in respect of
all specified services or e-commerce supply or services,
as the case may be, during such financial year.
The statement in respect of all specified services/ e-
commerce supply or services, as the case may be,
chargeable to equalisation levy during any financial year is
required to be furnished electronically under digital
signature or electronically through electronic verification
code in Form No. 1, duly verified, on or before 30th June
immediately following that financial year [Rule 5 of
Equalisation Levy Rules, 2016 as amended by the
Equalisation Levy (Amendment) Rules, 2020]
Time limit for filing a An assessee or e-commerce operator who has not
revised statement furnished the statement on or before 30th June
immediately following the financial year or having
furnished a statement within that time, notices any
omission or wrong particulars therein, may furnish a
statement or a revised statement, as the case may be.
Such statement or revised statement has to be filed at
any time before the expiry of two years from the end
of the financial year in which the specified service was
provided, or e-commerce supply or services was made
or provided or facilitated.
Time limit for filing a Where any assessee or e-commerce operator fails to
statement in furnish the statement within the prescribed time, the
response to notice Assessing Officer may serve a notice upon such
issued by the assessee or e-commerce operator requiring him to
Assessing Officer furnish the statement in the prescribed form, verified in

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.11

the prescribed manner and setting forth the prescribed

particulars, within such time, as may be prescribed.
The Assessing Officer has been empowered to issue
notice for furnishing such statement, which then has to
be furnished, within 30 days from date of serving of
such notice [Rule 6 of Equalisation Levy Rules, 2016]
168 Processing of
statement
Manner of Where a statement has been made under section 167
processing of by the assessee or e-commerce operator, such
statement statement shall be processed in the following manner,
namely:—
(a) the equalisation levy shall be computed after
making the adjustment for any arithmetical error
in the statement;
(b) the interest, if any shall be computed on the basis
of sum deductible or payable, as the case may
be, as computed in the statement;
(c) the sum payable by, or the amount of refund due
to, the assessee or e-commerce operator, shall be
determined after adjustment of interest computed
against the equalisation levy paid under section
166(2) or section 166A or interest paid section 170
and any amount paid otherwise by way of tax or
interest;
(d) an intimation shall be prepared or generated and
sent to the assessee or e-commerce operator,
specifying the sum determined to be payable by, or
the amount of refund due to him; and
(e) the amount of refund due to the assessee or e-
commerce operator in pursuance of such
determination shall be granted to him.
However, no such intimation shall be sent after the
expiry of one year from the end of the financial year
in which the statement or revised statement is
furnished.
Prescribed form for Where any levy, interest or penalty is payable under the
service of notice of equalisation levy provisions, a notice of demand in Form
demand on the No. 2 specifying the sum so payable shall be served upon
assessee /e- the assessee or e-commerce operator, as the case may
commerce operator be.

© The Institute of Chartered Accountants of India

 5.12 INTERNATIONAL TAXATION

Further, intimation issued upon processing of the

statement or revised statement shall also be deemed
to be a notice of demand [Rule 7 of Equalisation Levy
Rules, 2016]
Scheme for For the purposes of processing of statements, the CBDT
centralised may make a scheme for centralised processing of such
processing of statements to expeditiously determine the tax payable
statements by, or the refund due to, the assessee or e-commerce
operator as required thereunder.
169 Rectification of
mistake
Time limit for With a view to rectifying any mistake apparent from the
amending an record, the Assessing Officer may amend any intimation
intimation issued under section 168.
Such intimation can be amended within one year from
the end of the financial year in which the intimation
sought to be amended was issued.
Amendment can be The Assessing Officer may make an amendment to any
made suo motu or intimation, either suo motu or on any mistake brought to
brought to notice by his notice by the assessee or e-commerce operator.
the assessee/e-
commerce operator
Opportunity of being An amendment to any intimation, which has the effect of
heard to be given by increasing the liability of the assessee or e-commerce
the Assessing operator or reducing a refund, shall not be made unless
Officer before the Assessing Officer has given notice to the assessee
amending an or e-commerce operator of his intention so to do and
intimation has given the assessee or e-commerce operator a
reasonable opportunity of being heard.
Where any such amendment to any intimation has the
effect of enhancing the sum payable or reducing the
refund already made, the Assessing Officer shall make
an order specifying the sum payable by the assessee or
e-commerce operator and the provisions of this Chapter
shall apply accordingly.
170 Interest on delayed An assessee or e-commerce operator who fails to credit
payment of the equalisation levy or any part thereof within the
equalisation levy period specified u/s 166 or 166A, to the account of the
Central Government, has to pay simple interest at the
rate of 1% of such levy for every month or part of a
month by which such crediting of the tax or any part
thereof is delayed.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.13

171 Penalty for failure Nature of Penalty

to deduct or pay default
equalisation levy. Failure to deduct In addition to payment of
whole or part of equalisation levy u/s 166(3) and
equalisation levy interest u/s 170, penalty equal to
u/s 166 the amount of equalisation levy
that he failed to deduct would be
leviable
Failure to pay In addition to equalisation levy
whole or part of u/s 166A and interest u/s 170,
Equalisation levy penalty equal to the amount of
as required u/s equalisation levy that he failed to
166A pay is leviable.
Failure to remit In addition to paying the
equalisation levy equalisation levy on specified
to the Central services u/s 166(2) and interest
Government on u/s 170, a penalty of
or before 7th of ` 1,000 for every day during
the following which the failure continues is
month, after leviable.
deduction of However, such penalty shall not
the same u/s exceed the amount of
165(1) equalisation levy that he failed to
pay.
172 Penalty for failure For failure to furnish the statement within 30th June of the
to furnish immediately following year or within 30 days from the date
statement of service of notice by the Assessing Officer, penalty of
` 100 for each day during which the failure continues
is leviable.
173 Circumstances No penalty for failure to deduct or pay equalisation levy
when penalty or failure to furnish statement shall be imposable, if the
cannot be imposed assessee or e-commerce operator proves to the
under section 171 satisfaction of the Assessing Officer that there was
and 172 reasonable cause for the said failure.
Further, no order imposing a penalty under this Chapter
shall be made unless the assessee or e-commerce
operator has been given a reasonable opportunity of being
heard.
174 Appeal to
Commissioner of
Income-tax
(Appeals).

© The Institute of Chartered Accountants of India

 5.14 INTERNATIONAL TAXATION

Time limit for filing of An assessee or e-commerce operator aggrieved by an

appeal against an order imposing penalty under this Chapter, may appeal
order imposing to the Commissioner of Income-tax (Appeals) within a
penalty period of 30 days from the date of receipt of the
order of the Assessing Officer
Fee for filing appeal An appeal shall be in the prescribed form [Form 3] and
verified in the prescribed manner. It shall be
accompanied by a fee of ` 1,000.
It may be filed electronically under digital signature or
electronically through EVC. Any document accompanying
Form No.3 has to be furnished in the manner in which Form
No.3 is furnished [Rule 8 of Equalisation Levy Rules, 2016]
Provisions of the Where an appeal has been filed, the provisions of
Income-tax Act, sections 249 to 251 of the Income-tax Act, 1961 would,
1961 applicable in as far as may be, apply to such appeal. Section 250
case of such specifies the procedure in appeal and section 251
appeals enlists the powers of the Commissioner (Appeals).
175 Appeal to Appellate
Tribunal
Assessee/ e- An assessee or e-commerce operator aggrieved by an
commerce operator/ order made by the Commissioner of Income-tax (Appeals)
CIT may file appeal under section 174 may appeal to the Appellate Tribunal
to Appellate Tribunal against such order.
against an order The Commissioner of Income-tax may, if he objects to any
passed by order passed by the Commissioner of Income-tax
Commissioner (Appeals) under section 174, direct the Assessing Officer
(Appeals) u/s 174 to appeal to the Appellate Tribunal against such order.
Time limit for filing An appeal shall be filed within 60 days from the date on
appeal which the order sought to be appealed against is
received by the assessee or e-commerce operator or by
the Commissioner of Income-tax, as the case may be.
Fee for filing appeal The appeal shall be in the prescribed form [Form No.4]
and verified in the prescribed manner.
In the case of an appeal filed by an assessee or e-
commerce operator, it shall be accompanied by a fee of
`1,000. Also, the form of appeal, the grounds of appeal
and the form of verification appended thereto shall be
signed by the person specified in Form No.4, as
applicable to the assessee or e-commerce operator,
as the case may be [Rule 9 of Equalisation Levy Rules,
2016]

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.15

Provisions of the Where an appeal has been filed before the Appellate
Income-tax Act, Tribunal under sub-section (1) or sub-section (2), the
1961 applicable in provisions of sections 253 to 255 of the Income-tax Act,
case of such 1961 would, as far as may be, apply to such appeal.
appeals
176 Punishment for If a person -
false statement (a) makes a false statement in any verification
under this Chapter or any rule made thereunder; or
(b) delivers an account or statement, which is
false, and which he either knows or believes to be
false, or does not believe to be true,
he shall be punishable with imprisonment for a term
which may extend to three years and with fine.
An offence so punishable shall be deemed to be non-
cognizable within the meaning of the Code of Criminal
Procedure. This is irrespective of anything contained in
the Code of Criminal Procedure, 1973.
177. Institution of Prior sanction of the Chief Commissioner of Income-tax
prosecution is required for instituting prosecution against any person
for any offence under section 176.
178. Application of The following provisions of the Income-tax Act, 1961
certain provisions shall so far as may be, apply in relation to equalisation
of Income-tax Act, levy, as they apply in relation to income-tax.
1961 Section Content
119 Instruction to subordinate authorities
120 Jurisdiction of income-tax authorities
131 Power regarding discovery,
production of evidence, etc.
133A Power of survey
138 Disclosure of information respecting
assesses
156 Notice of demand
Chapter XV Liability in special cases

© The Institute of Chartered Accountants of India

 5.16 INTERNATIONAL TAXATION

220-227 - When tax payable and when

assessee deemed in default,
- Penalty payable when tax in
default,
- Certificate to Tax Recovery
Officer,
- Tax Recovery Officer by whom
recovery is to be effected,
- Validity of certificate and
cancellation or amendment
thereof,
- Stay of proceedings in pursuance
of certificate and amendment or
cancellation thereof,
- Other modes of recovery,
- Recovery through State
Government.
229 Recovery of penalties, fine, interest
and other sums
232 Recovery by suit or under other law
not affected.
260A Appeal to High Court
261 Appeal to Supreme Court
262 Hearing before Supreme Court
265 to 269 - Tax to be paid notwithstanding
reference etc.,
- Execution for costs awarded by
Supreme Court,
- Amendment of assessment on
appeal
- Exclusion of time taken for copy,
- Filing of appeal or application for
reference by income-tax authority,
- Definition of “High Court”
278B Offences by companies
280A Special Courts
280B Offences triable by Special Court
280C Trial of offences as summons case
280D Application of Code of Criminal
Procedure, 1973 to proceedings
before Special Court

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.17

282 Service of notice generally

288 to 293 - Appearance by authroised
representative,
- Rounding off of income,
- Rounding off of amount payable
and refund due,
- Receipt to be given,
- Indemnity,
- Power to tender immunity from
prosecution,
- Cognizance of offences,
- Section 360 of the Code of
Criminal Procedure, 1973 and
the Probation of Offenders Act,
1958, not to apply,
- Return of income, etc., not to
be invalid on certain grounds,
- Notice deemed to be valid in
certain circumstances,
- Presumption as to assets,
books of account etc.,
- Authorisation and assessment
in case of search or requisition,
- Bar of suits in civil courts
179 Power to make The Central Government is empowered to make rules
rules for the purposes of carrying out the provisions of this
Chapter.
In particular, such rules may also provide for all or any
of the following matters, namely:—
(a) the time within which and the form and the manner
in which the statement shall be delivered or caused
to be delivered or furnished under section 167;
(b) the form in which an appeal may be filed and the
manner in which it may be verified under sections
174 and 175;
(c) any other matter which is to be, or may be,
prescribed.
Every rule made under this Chapter shall be laid, as
soon as may be after it is made, before each House of
Parliament, while it is in session, for a total period of 30
days.

© The Institute of Chartered Accountants of India

 5.18 INTERNATIONAL TAXATION

This period of 30 days may be comprised in one session

or in two or more successive sessions, and if, before the
expiry of the session immediately following the session
or the successive sessions aforesaid, both Houses
agree:
(i) in making any modification in the rule, then, the
rule shall thereafter have effect only in such
modified form;
(ii) that the rule should not be made, then, the rule
would be of no effect.
However, any such modification or annulment would be
without prejudice to the validity of anything previously
done under that rule.
180 Power to remove The Central Government is empowered to remove any
difficulties difficulty which arises in giving effect to the provisions of
this Chapter. It may, by order published in the Official
Gazette, not inconsistent with the provisions of this
Chapter, remove the difficulty.
However, no such order shall be made after 31.3.2022.
Every order made under this section shall be laid, as
soon as may be after it is made, before each House of
Parliament.

(5) Relevant provisions in the Income-tax Act, 1961:

Section Provision
(i) 9(1)(i) As per section 9(1)(i), all income accruing or arising, whether directly or
indirectly, through or from any business connection in India is deemed
to accrue or arise in India.
Explanation 2A provides that “significant economic presence of a non-
resident in India” would also constitute "business connection" in India.
Significant economic presence means
Nature of transaction Condition
(a) in respect of any goods, services or Aggregate of payments
property carried out by a non- arising from such
resident with any person in India transaction or
including provision of download of transactions during the
data or software in India previous year should
exceed ` 2 crores.
(b) systematic and continuous soliciting The number of users
of business activities or engaging in should be atleast 3
interaction with users in India lakhs.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.19

Further, the above transactions or activities shall constitute significant

economic presence in India, whether or not,—
(i) the agreement for such transactions or activities is entered in
India;
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
However, where a business connection is established by reason of
significant economic presence in India, only so much of income as is
attributable to the transactions or activities referred to in (a) or (b)
above shall be deemed to accrue or arise in India.
Clause (a) of Explanation 1 to section 9(1)(i) provides that in case of a
business, other than the business having business connection in
India on account of significant economic presence, of which all the
operations are not carried out in India, the income deemed to accrue or
arise in India would only be such part of the income as is reasonably
attributable to the operations carried out in India.
Explanation 3A provides that income attributable to the operations
carried out in India would include income from –
(i) such advertisement which targets a customer who resides in
India or who accesses the advertisement through internet
protocol address (IPA) located in India;
(ii) sale of data collected from a person who resides in India or
from a person who uses IPA located in India; and
(iii) sale of goods or services using data collected from a person
who resides in India or from a person who uses IPA located
in India.
Accordingly, such income would be deemed to accrue or arise in India
in the hands of a non-resident and be subject to income-tax in his
hands.
The above provisions contained in this Explanation shall also apply to
the income attributable to the transactions or activities referred to in
Explanation 2A which constitute “Significant economic presence”.
Note: The above provision broadens the scope of ‘income attributable
to the operations carried out in India” and brings within the tax net, the
above specified incomes. This impact will also enable taxation of “non-
resident to non-resident” transactions pertaining to above mentioned
activities.
Section 295 empowers CBDT to make rules for carrying out the
purposes of the Act. Also, section 295(2) enlists the specific matters in
respect of which the CBDT may make rules. Through amendment
made in section 295(2)(b), it is expected that the CBDT will issue rules
to determine the profits taxable in India by virtue of Explanation 3A.

© The Institute of Chartered Accountants of India

 5.20 INTERNATIONAL TAXATION

Section 9(1)(i) requires existence of business connection for deeming

business income to accrue or arise in India. DTAAs, however, provide
that business income is taxable only if there is a permanent
establishment in India. As per section 90(2), the provisions of the
Income-tax Act, 1961 or the DTAA, whichever is beneficial, shall apply.
The PE concept is narrower than the business connection concept.
Therefore, in a case where the Indian Government has entered into
DTAA with a country, unless and until the PE test is satisfied,
significant economic presence provisions would not be applicable.
However, in cases not covered by DTAAs, business income attributable to
business connection (significant economic presence) is taxable.
(ii) 10(50) In order to avoid double taxation on account of Equalisation Levy and
income-tax liability under the provisions of the Income-tax Act, 1961,
section 10(50) exempts any income arising from providing any specified
service on or after the date on which the provisions of Chapter VIII of the
Finance Act, 2016 comes into force, or arising from any e-commerce
supply or services made or provided or facilitated on or after 1.4.2020 and
chargeable to equalisation levy under that Chapter.
However, the income arising from providing specified services
and the income arising from any e-commerce supply or services
would not include any income which is taxable as royalty or fees
for technical services in India under the Income-tax Act, read with
the DTAA notified by the Central Government under section 90 or
section 90A.
Exemption under section 10(50) is available in respect of amounts
which have been subjected Equalisation Levy. However, in case of
transactions in respect of which equalisation levy is not attracted, the
provisions of the Income-tax Act, 1961, as applicable, will apply.
(iii) 40(a)(ib) In order to ensure compliance with the provisions this Chapter, section
40(a)(ib) provides that if any consideration is paid or payable to a non-
resident for a specified service on which equalisation levy is deductible,
and such levy has not been deducted or after deduction, has not been
paid on or before the due date under section 139(1), then, such
expenses incurred by the assessee towards consideration for specified
service shall not be allowed as deduction.
However, where in respect of such consideration, if the equalisation
levy has been deducted in any subsequent year or has been deducted
during the previous year but paid after the due date specified under
section 139(1), such sum shall be allowed as deduction in computing
the income of the previous year in which such levy has been paid.
Note: The disallowance would be attracted only in the case of
equalization levy on specified services, where the onus is on the
service recipient to deduct the equalization levy.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.21

(iv) 194-O Section 194-O provides that where sale of goods or provision of services
of an e-commerce participant is facilitated by an e-commerce operator
through its digital or electronic facility or platform, such e-commerce
operator is liable to deduct tax at source @1% of the gross amount of
such sales or services or both, at the time of credit of amount of such
sale or services or both to the account an e-commerce participant or at
the time of payment thereof to such e-commerce participant by any
mode, whichever is earlier.
However, no tax is required to be deducted under section 194-O in case
of any sum credited or paid to an e-commerce participant, being an
individual or HUF, where the gross amount of such sale or services or
both during the previous year does not exceed ` 5 lakh and such e-
commerce participant has furnished his PAN/ Aadhaar number to e-
commerce operator.
[Discussed in detail in Chapter 15: Deduction, Collection and Recovery
of tax of Module 3 of the Study Material].
Summary of provisions relating to Equalisation Levy and TDS on
E-commerce Transactions
Particulars Section 165 of the Section 165A of the Section 194-O of
Finance Act, 2016 Finance Act, 2016 the Income-tax
Act, 1961
Nature of levy/ Equalisation Levy Equalisation Levy TDS under the
deduction Income-tax Act,
1961
Chargeability On consideration On consideration Where sale of
of EL/ received or received or receivable goods or
Deductibility receivable by an by an E-commerce provision of
of income-tax assessee, being a Operator, being a non- services of an e-
non-resident (NR), resident owning, commerce
for specified operating or managing participant (being
services digital or electronic a person resident
facility or platform for in India selling
online sale of goods or goods or providing
online provision of services or both,
services or both, for e- including digital
commerce supply or products) is
services made or facilitated by an e-
provided or facilitated. commerce
Consideration received operator through
or receivable from e- its digital or
commerce supply or electronic facility
services” would or platform, such
include - e-commerce

© The Institute of Chartered Accountants of India

 5.22 INTERNATIONAL TAXATION

(1) consideration for operator is liable to

sale of goods deduct tax at
irrespective of source at the time
whether the e- of credit or
commerce operator payment,
owns the goods. whichever is
However, it shall not earlier.
include consideration
for sale of such
goods which are
owned by a person
resident in India or
by a PE in India of a
person non-resident
in India, if sale of
such goods is
effectively connected
with such PE;
(2) consideration for
provision of services
irrespective of
whether service is
provided or facilitated
by the e-commerce
operator. However, it
shall not include
consideration for
provision of services
provided by a person
resident in India or by
PE in India of a
person non-resident
in India, if provision
of such services is
effectively connected
with such PE.
Note - The consideration received or
receivable for specified services and for e-
commerce supply or services would,
however, not include the consideration, which
are taxable as royalty or fees for technical
services in India under the Income-tax Act,
read with the DTAA notified by the Central
Government under section 90 or section 90A.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.23

Rate 6% 2% 1%
Person Every person, being An e-commerce An e-commerce
responsible a resident and operator, being a non- operator shall be
for paying/ carrying on business resident who owns, the person
deducting or profession or a operates or manages responsible for
non-resident having a digital or electronic paying to the
PE in India facility or platform for resident e-
online sale of goods or commerce
online provision of participant.
services or both
Further, wherever
the purchaser of
goods or service
recipient (eg. end
customer) directly
makes any
payment to the e-
commerce
participant, then, in
such cases, such
payments shall be
deemed to have
been made by the
e-commerce
operator to the
resident e-
commerce
participant and
accordingly,
deduction has to be
made by the e-
commerce
operator.
Consideration The amount of The amount of Gross amount of
on which EL is consideration for consideration received or sale or services or
chargeable / specified service receivable by an e- both.
income-tax is received or commerce operator from
deductible receivable by a e-commerce supply or
person, being a NR services made or provided
from - or facilitated by it—
(a) a person resident (1) to a person
in India and resident in India; or
carrying on

© The Institute of Chartered Accountants of India

 5.24 INTERNATIONAL TAXATION

business or (2) to a NR in the

profession; or specified circum-
stances, namely –
(b) a NR having a
PE in India. (i) sale of
advertise-
ment (advt),
which targets
a customer,
who is
resident in
India or a
customer who
accesses the
advt through
internet
protocol
address (IPA)
located in
India; and
(ii) sale of data,
collected from
a person who
is resident in
India or from a
person who
uses IPA
located in
India; or
(3) to a person who
buys such goods or
services or both
using IPA located
in India.
Meaning of “Specified Services” “E-Commerce Supply “Services” include
certain terms means- or Services” mean – fees for technical
and fees for
(i) Online advt; (i) online sale of
professional
goods owned by
(ii) Any provision services as defined
the e-commerce
for digital u/s 194J of the
operator; or
advertising Income-tax Act,
space or any (ii) online provision of 1961.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.25

other facility or services provided

service for the by the e-commerce
purpose of operator; or
online advt;
(iii) online sale of
(iii) Any other goods or provision
service as may of services or both,
be notified by facilitated by the e-
the Central commerce
Government. operator; or
Note – ‘Online’ (iv) any combination of
means a facility or activities listed in
service or right or clause (i), (ii) or
benefit or access that clause (iii).
is obtained through
Note - “Online sale of
the internet or any
goods” and “online
other form of digital
provision of services”
or tele-
would include one or
communication
more of the following
network.
online activities
(a) acceptance of
offer for sale; or
(b) placing of
purchase order; or
(c) acceptance of the
purchase order; or
(d) payment of
consideration; or
(e) supply of goods
or provision of
services, partly or
wholly.
Non- EL is not charge- EL is not chargeable No tax is required
chargeability able, where – where – to be deducted u/s
of EL / Non- 194-O in case of
a. the NR providing (a) where the e-
deduction of any sum credited or
the specified commerce
tax at source paid to an e-
service has a PE operator making or
commerce
in India and the providing or
participant, being
specified service facilitating e-
an individual or
is effectively commerce supply
HUF, where the

© The Institute of Chartered Accountants of India

 5.26 INTERNATIONAL TAXATION

connected with or services has a gross amount of

such PE; PE in India and such sale or
such e-commerce services or both
b. the aggregate
supply or services during the
amount of
is effectively previous year
consideration for
connected with does not exceed
specified service
such PE; ` 5 lakh and such
received or
e-commerce
receivable in a PY (b) where the EL is
participant has
by the NR from a leviable u/s 165; or
furnished his PAN/
person resident in
(c) sales, turnover or Aadhaar number
India and carrying
gross receipts, as to e-commerce
on business or
the case may be, of operator.
profession, or
the e-commerce
from a NR having
operator from the
a PE in India,
e-commerce supply
does not exceed
or services made or
` 1 lakh; or
provided or
(c) where the facilitated is less
payment for the than ` 2 crore
specified service during the PY.
by the person
resident in India,
or the PE in India
is not for the
purposes of
carrying out
business or
profession.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.27

Equalisation Levy (EL) on

Specified Services

6% of amount of consideration
received or receivable

For Specified Meaning of Specified Services:

Services (i) Online advertisement
(ii) Prov. for digital advertisement
space or any other facility or
service for online advertisement
(iii) Any other service notified by the
Government
By a NR not having PE
in India or providing
services not effectively
connected with his PE
in India

From a resident in India (or) From a NR having

carrying on business or PE in India
profession

Does the aggregate amount of such consideration received or receivable for

specified services by a NR exceed ` 1 lakh in the relevant PY?
Yes No

EL is attracted EL is not attracted

Deduction of EL The person liable to deduct EL has to, in any

EL@6% is deductible from consideration case, pay the EL to the credit of the Central
paid or payable for specified services by a – Government by the 7th of the next month.
- resident carrying on business or
profession; or Simple interest@1% p.m. or part of a
- NR having PE in India month is attracted for the period of
delay in remittance.
Remittance of EL
EL deducted during any month to be paid to the Penalty = the amount of EL
credit of the Central Government by the 7th of the deductible.
next month
For delayed remittance, penalty@
` 1,000 per day of failure attracted, not
Consequences of failure to deduct EL
exceeding the amount of EL not paid.

© The Institute of Chartered Accountants of India

 5.28 INTERNATIONAL TAXATION

Equalisation Levy (EL) on e-commerce supply or services

2% of amount of consideration received or receivable

By an E-Commerce Operator i.e., a Meaning of E-Commerce Supply or

non-resident who owns, operates Services:
or manages digital or electronic (i) Online sale of goods owned by the e-
facility or platform for online sale commerce operator
(ii) Online provision of services provided
of goods or online provision of
by the E-Commerce Operator
services or both (iii) Online sale of goods or provision of
services or both facilitated by the E-
From E-Commerce Supply or Commerce Operator
Services made or provided or (iv) Any combination of activities listed in (i),
facilitated by it (ii) or (iii) above

To a NR in the foll specified To a person resident To a person who buys

circumstances: (or) in India such goods or
(i) sale of advt. targeting a (or) services or both using
customer resident in India or IPA located in India
who accesses the advt. thro
IPA located in India; and
(ii) sale of data collected from a
person resident in India or who
uses IPA located in India.

Does the E-commerce operator EL is not attracted

have a PE in India? Yes
Yes
Is the E-Commerce supply or services
No effectively connected with such PE? Consequences of failure to pay EL
No
EL is attracted if sales, turnover or
gross receipts of the E-Commerce
Operator from the e-commerce supply or Equalisation Levy u/s 166A
services made/provided/facilitated is
Rs.2 crore or more during the PY (+)
Simple interest@1% p.m. or part of a
month is attracted for the period of
delay in remittance u/s 170
Payment of EL : EL to be paid by every (+)
e-commerce operator to the credit of Penalty = the amount of EL that he
Central Govt for the quarter of F.Y. has failed to pay
ending 30th June, 30th Sep, 31st Dec and
31st March by 7th July, 7th Oct, 7th Jan
and 31st March, respectively.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.29

TEST YOUR KNOWLEDGE

Question 1
Explain the core reasons for difference between the e-commerce transactions and the traditional
business transactions causing difficulty to tax the income of e-commerce transactions.
Answer
The core reasons for difference between e-commerce transactions and traditional business
transactions causing difficulty to tax the income from e-commerce transactions under the Income-
tax Act, 1961 are absence of national boundaries, no requirement of physical presence of goods
and no requirement of physical delivery (in certain cases). Since e-commerce transactions are
completed in cyberspace, it is often not clear as to the place where the transaction is effected,
thereby causing difficulty in implementing source rule taxation.
Question 2
E-commerce transactions have replaced concepts generally associated with international
transactions traditionally. Discuss briefly the issues involving such transactions.
Answer
The typical taxation issues relating to e-commerce are:
(1) the difficulty in characterizing the nature of payment and establishing a nexus or link
between taxable transaction, activity and a taxing jurisdiction,
(2) the difficulty of locating the transaction, activity and identifying the taxpayer for income tax
purposes.
Question 3

ABC Ltd., an Indian company, is carrying on the business of manufacture and sale of teakwood
furniture under the brand name “PUREWOOD”. In order to expand its overseas sales/exports, it
launched a massive advertisement campaign of its products. For the purpose of online
advertisement, it utilized the services of PQR Inc., a London based company. During the previous
year 2021-22, ABC Ltd. paid ` 5 lakhs to PQR Inc. for such services. Discuss the tax
implications/TDS implications of such payment and receipt in the hands of ABC Ltd. and PQR Inc.,
respectively, if –
(i) PQR Inc. has no permanent establishment in India
(ii) PQR Inc. has a permanent establishment in India, and the service is effectively connected
to the permanent establishment in India

© The Institute of Chartered Accountants of India

 5.30 INTERNATIONAL TAXATION

Answer
Chapter VIII of the Finance Act, 2016, "Equalisation Levy", provides for an equalisation levy of 6%
of the amount of consideration for specified services received or receivable by a non-resident not
having permanent establishment in India, from a resident in India who carries out business or
profession, or from a non-resident having permanent establishment in India.
“Specified Service” means -
(1) online advertisement;
(2) any provision for digital advertising space or any other facility or service for the purpose of
online advertisement; and
(3) any other service as may be notified by the Central Government.
However, equalisation levy shall not be levied-
- where the non-resident providing the specified services has a permanent establishment
in India and the specified service is effectively connected with such permanent
establishment.
- the aggregate amount of consideration for specified service received or receivable during
the previous year does not exceed ` 1 lakh.
- where the payment for specified service is not for the purposes of carrying out business
or profession
(i) Where PQR Inc. has no permanent establishment in India
In the present case, equalisation levy @6% is chargeable on the amount of ` 5,00,000
received by PQR Inc., a non-resident not having a PE in India from ABC Ltd., an Indian
company. Accordingly, ABC Ltd. is required to deduct equalisation levy of ` 30,000 i.e.,
@6% of ` 5 lakhs, being the amount paid towards online advertisement services provided
by PQR Inc., a non-resident having no permanent establishment in India. Non-deduction of
equalisation levy would attract disallowance under section 40(a)(ib) of 100% of the amount
paid while computing business income.
Since, equalisation levy is attracted on the amount of ` 5 lakhs, the said amount is exempt
from income-tax by virtue of section 10(50) of the Income-tax Act, 1961.
(ii) Where PQR Inc. has permanent establishment in India and the service is effectively
connected to the permanent establishment in India
Equalisation levy would not be attracted where the non-resident service provider (PQR Inc.,
in this case) has a permanent establishment in India and the service is effectively
connected to the permanent establishment in India. Therefore, the ABC Ltd. is not required
to deduct equalisation levy on ` 5 lakhs, being the amount paid towards online
advertisement services to PQR Inc, in this case.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.31

Since equalisation levy is not attracted in this case, exemption under section 10(50) of the
Income-tax Act, 1961 would not be available. Therefore, tax has to be deducted by ABC
Ltd. at the rates in force under section 195 in respect of such payment to PQR Inc. Non-
deduction of tax at source under section 195 would attract disallowance under section
40(a)(i) of 100% of the amount paid while computing business income.
Question 4
MNO Inc., a Country A based company, is carrying on the business of manufacture and sale of
furniture under the brand name “PUREWOOD”. In order to increase its share in Indian market, it
launched a massive advertisement campaign of its products. For the purpose of online
advertisement, it utilized the services of PQR Inc., a Country Y based company which also owns
and operates a digital platform. The gross receipt of PQR Inc from provision of such services
during the P.Y.2021-22 is ` 3 crores. During the previous year 2021-22, MNO Inc. paid ` 5 lakhs
to PQR Inc. for such services. Discuss the tax implications of such payment and receipt in the
hands of MNO Inc. and PQR Inc., respectively, if –
(i) both MNO Inc. and PQR Inc. have no permanent establishment in India
(ii) MNO Inc. has a permanent establishment in India but PQR Inc. has no permanent
establishment in India
(iii) PQR Inc. has a permanent establishment in India and the advertisement services are
effectively connected with such PE.
Answer
Chapter VIII of the Finance Act, 2016, "Equalisation Levy", provides for an equalisation levy of 6%
of the amount of consideration for specified services received or receivable by a non-resident not
having permanent establishment in India, from a resident in India who carries out business or
profession, or from a non-resident having permanent establishment in India.
“Specified Service” means
(1) online advertisement;
(2) any provision for digital advertising space or any other facility or service for the purpose of
online advertisement and
(3) any other service as may be notified by the Central Government.
However, equalisation levy shall not be levied-
- where the non-resident providing the specified services has a permanent establishment in
India and the specified service is effectively connected with such permanent establishment.
- the aggregate amount of consideration for specified service received or receivable during
the previous year does not exceed ` 1 lakh.
- where the payment for specified service is not for the purposes of carrying out business
or profession.

© The Institute of Chartered Accountants of India

 5.32 INTERNATIONAL TAXATION

Equalization levy@2% would be chargeable on the amount of consideration received or receivable

by an e-commerce operator from e-commerce supply or services made or provided or facilitated by
it—
(1) to a person resident in India; or
(2) to a non-resident in the specified circumstances as provided below; or
(3) to a person who buys such goods or services or both using internet protocol address
located in India.
The equalization levy shall not be charged—
(1) where the e-commerce operator making or providing or facilitating e-commerce supply or
services has a permanent establishment in India and such e-commerce supply or services
is effectively connected with such PE;;
(2) where the equalization levy is leviable under section 165; or
(3) sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the
e-commerce supply or services made or provided or facilitated is less than ` 2 crore during
the previous year.
Meaning of "specified circumstances":
(1) sale of advertisement, which targets a customer, who is resident in India or a customer who
accesses the advertisement though internet protocol address located in India; and
(2) sale of data, collected from a person who is resident in India or from a person who uses
internet protocol address located in India.
(i) Where MNO Inc. and PQR Inc. have no permanent establishment in India
Equalisation levy would not be attracted in the present case since MNO Inc., a non-resident
service recipient does not have a permanent establishment in India. Therefore, the MNO
Inc. is not required to deduct equalisation levy @ 6% on ` 5 lakhs, being the amount paid
towards online advertisement services to PQR Inc.
However, equalisation levy @2% under section 165A is attracted on ` 5 lakhs, being the
amount of consideration received by PQR Inc, an e-commerce operator from e-commerce
services provided by it to MNO Inc., a non-resident in the specified circumstance, namely,
sale of advertisement, which targets a customer, who is resident in India, since the gross
receipt of PQR Inc. in the P.Y. 2021-22 exceeds ` 2 crores.
(ii) Where MNO Inc. has a permanent establishment in India but PQR Inc. does not have a
permanent establishment in India
In the present case, equalisation levy @6% is chargeable on the amount of ` 5,00,000
received by PQR Inc., a non-resident not having a PE in India from MNO Inc., a non-
resident having a PE in India. Accordingly, MNO Inc. is required to deduct equalisation levy
of ` 30,000 i.e., @6% of ` 5 lakhs, being the amount paid towards online advertisement

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.33

services provided by PQR Inc., a non-resident having no permanent establishment in India.

Non-deduction of equalisation levy would attract disallowance under section 40(a)(ib) of
100% of the amount paid while computing business income.
Since, equalisation levy is attracted on the amount of ` 5 lakhs, the said amount is exempt
from income-tax by virtue of section 10(50) of the Income-tax Act, 1961.
(iii) Where PQR Inc. has a permanent establishment in India and the advertisement
services are effectively connected with such PE
Equalisation levy would not be attracted where the non-resident service provider (PQR Inc.,
in this case) has a permanent establishment in India and the service is effectively
connected to the permanent establishment in India. Therefore, MNO Inc. is not required to
deduct equalisation levy on ` 5 lakhs, being the amount paid towards online advertisement
services to PQR Inc, in this case.
Since equalisation levy is not attracted in this case, exemption under section 10(50) of the
Income-tax Act, 1961 would not be available.
It is immaterial whether MNO Inc. has a PE in India or not for the purpose of equalisation levy
implication of advertisement transaction, as in both the cases, equalisation levy would not be
attracted.
However, since PQR Inc. has a PE in India and advertisement services are effectively
connected with the PE in India, such advertisement income would be deemed to accrue or
arise in India in the hands of PQR Inc. under section 9(1)(i) and be taxable in the hands of
PQR Inc. under the Income-tax Act, 1961.
Question 5
XYZ & Co., a non-resident entity based in Singapore, owns and operates an electronic facility
through which it effects online sale of goods manufactured by it. The following are its receipts from
the P.Y.2021-22 –
Particulars Amount in `
(a) Receipts from sale of goods to persons resident in India 158 lakhs
(b) Receipts from sale of goods to persons not resident in India but resident 96 lakhs
in other parts of South-East Asia
Out of the said sum, ` 57 lakhs relates to receipts from persons using
internet protocol address located in India.

Discuss the equalisation levy implications of such receipt in the hands of XYZ & Co., if –
(i) XYZ & Co. has no permanent establishment in India
(ii) XYZ & Co. has a permanent establishment in India, and the sale of goods is effectively
connected to the permanent establishment in India

© The Institute of Chartered Accountants of India

 5.34 INTERNATIONAL TAXATION

Would your answer change if out of the receipts in (b) above, only ` 40 lakhs relates to receipts
from persons using internet protocol address located in India?
Answer
Section 165A in the Finance Act, 2016 provides for equalisation levy@2% on the amount of
consideration received or receivable by an e-commerce operator from e-commerce supply or
services made or provided or facilitated by it, inter alia, to a person resident in India and a person
who buys such goods or services or both using internet protocol address located in India.
In the present case, XYZ & Co. is an e-commerce operator since it is a non-resident owning and
operating an electronic facility for online sale of goods and provision of services.
(i) XYZ & Co. has no permanent establishment in India
In this case, the gross receipts of the e-commerce operator from the e-commerce supply
and services facilitated is ` 2.15 crore.

Particulars Amount in `
(a) Receipts from sale of goods to persons resident in India 158 lakhs
(b) Receipts from sale of goods to persons not resident in India 57 lakhs
(using internet protocol address located in India)
Total receipts 215 lakhs

Since total receipts which are chargeable to equalisation levy exceed ` 2 crore,
equalisation levy@2% is attracted on the above sum of ` 215 lakhs, which would amount to
` 4.30 lakhs.
Note – If the receipts in (b) above were only ` 40 lakhs, then equalisation levy would not be
attracted since the gross receipts would be only ` 198 lakhs, which is less than ` 2 crores.
(ii) XYZ & Co. has a permanent establishment in India, and the sale of goods is
effectively connected to the permanent establishment in India
Equalisation levy would not be attracted where the non-resident E-Commerce Operator
(XYZ & Co., in this case) has a permanent establishment in India and the sale of goods is
effectively connected to the permanent establishment in India.
This is irrespective of the quantum of receipts in (b) above i.e., whether ` 57 lakhs or ` 40 lakhs.
Question 6
PQR Ltd., an Indian headquartered multinational company, has entered into a fixed fee agreement
for ` 3 crores with X-Accounting Ltd., UK for the Financial Year 2021-22, which was approved by
the Central Government. As part of the agreement, X-Accounting Ltd., UK maintains an online
web-platform through which it provides IFRS advisory and consultancy services, which also
includes providing response to queries raised by PQR Ltd. The technical staff of X-Accounting

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.35

Ltd., UK provide their expert views virtually over the platform within 24-72 hours. Further,
X- Accounting Ltd. also provides customised training through the embedded online video platform
exclusively for the personnel working with PQR Ltd.
X-Accounting Ltd. does not have any offices outside the UK. Examine the tax implications/TDS
implications of such payment and receipt in the hands of X-Accounting Ltd., UK and PQR Ltd.,
India under Chapter VIII of the Finance Act, 2016 (as amended by the Finance Act, 2021) and
Income-tax Act, 1961.
Extract of Article 13 of India-UK DTAA
1. Royalties and fees for technical services arising in a Contracting State and paid to a
resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services may also be taxed in the
Contracting State in which they arise and according to the law of that State; but if the
beneficial owner of the royalties or fees for technical services is a resident of the other
Contracting State, the tax so charged shall not exceed :
(a) in the case of royalties within paragraph 3(a) of this Articles, and fees for technical
services within paragraphs 4(a) and (c) of this Article,—
(i) during the first five years for which this Convention has effect ;
(aa) 15 per cent of the gross amount of such royalties or fees for technical
services when the payer of the royalties or fees for technical services is the
Government of the first-mentioned Contracting State or a political sub-division
of that State, and
(bb) 20 per cent of the gross amount of such royalties or fees for technical
services in all other cases; and
(ii) during subsequent years, 15 per cent of the gross amount of such royalties or
fees for technical services; and
(b) in the case of royalties within paragraph 3(b) of this Article and fees for technical
services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of
such royalties and fees for technical services.
3. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article,
the term “fees for technical services” means payments of any kind of any person in
consideration for the rendering of any technical or consultancy services (including the
provision of services of a technical or other personnel) which :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or
information for which a payment described in paragraph 3(a) of this article is
received ; or

© The Institute of Chartered Accountants of India

 5.36 INTERNATIONAL TAXATION

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment
described in paragraph 3(b) of this Article is received ; or
(c) make available technical knowledge, experience, skill know-how or processes, or
consist of the development and transfer of a technical plan or technical design.
4. The definition of fees for technical services in paragraph 4 of this Article shall not include
amounts paid:
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially
linked, to the sale of property, other than property described in paragraph 3(a) of this
Article;
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft,
containers or other equipment used in connection with the operation of ships, or
aircraft in international traffic
(c) for teaching in or by educational institutions;
(d) for services for the private use of the individual or individuals making the payment ;
or
(e) to an employee of the person making the payments or to any individual or
partnership for professional services as defined in Article 15 (Independent personal
services) of this Convention.
Answer
Section 165A of the Finance Act, 2016 provides for equalisation levy@2% on the amount of
consideration received or receivable by an e-commerce operator from e-commerce supply or
services made or provided or facilitated by it, inter alia, to a person resident in India and a person
who buys such goods or services or both using internet protocol address located in India.
We need to determine whether X-Accounting Ltd., UK is an e-commerce operator
E-Commerce Operator means a non-resident who owns, operates or manages digital or electronic
facility or platform for online sale of goods or online provision of services or both.
In the given situation, X-Accounting Ltd., UK, a non-resident, maintains a digital platform for online
provision of services. Therefore, X-Accounting Ltd. is an e-commerce operator defined in section
165A.
However, the consideration received or receivable for specified services and for e-commerce
supply or services would not include the consideration, which are taxable as, inter alia, fees for
technical services in India under the Income-tax Act, read with the DTAA notified by the Central
Government under section 90 or section 90A.

© The Institute of Chartered Accountants of India

 EQUALISATION LEVY 5.37

As per Income-tax Act, 1961 and India-UK DTAA, fee for advisory services and training services
by X-Accounting Ltd., UK comes within the scope of “fees for technical services” defined
thereunder.
Any fees for technical services will be deemed to accrue or arise in India if they are payable by,
inter alia, a person who is resident in India except where the fees is payable in respect of technical
services utilised in a business or profession carried on by such person outside India or for the
purpose of making or earning any income from any source outside India.
Hence, such ` 3 crores would be deemed to accrue or arise in India in the hands of X-Accounting
Ltd., UK and would be chargeable to tax in India as per Income-tax Act, 1961.
Hence, equalisation levy would not be attracted in the present case.
Withholding tax provisions under section 195 would be attracted and PQR Ltd, India has to
withhold taxes on the payment made to X-Accounting Ltd., UK. Income-tax at the rate of 10% (plus
surcharge@2% on income-tax and HEC@4% on income-tax plus surcharge) on fees for technical
services under section 115A read with section 195 and section 9(1)(vii).

© The Institute of Chartered Accountants of India