In a first of its kind, a US-based tech company has moved the Delhi High Court challenging the applicability of income-tax at 10 per cent rate against an equalisation levy (EL) of 2 per cent. The court has issued notice to the Centre.

Sumo Logic provides subscription-based interactive website access for online data analytics to Indian customers. It calls itself an ‘e-commerce operator’, defined under the provisions of EL and, therefore, the payments received from Indian customers will be subject to EL. It does not have a permanent establishment in India.

The company applied for a certificate for deduction at ‘Nil’ tax rate under Section 197 (related with certificate for deduction at a lower rate) of the Income-Tax Act. However, the tax authorities directed the customers to deduct tax at 10 per cent (excluding applicable surcharge and cess). Subsequently, the company filed for a revision of the order under Section 264, which was also rejected. Following this, the company moved the High Court and also prayed for refund of taxes. However, the court has not granted an interim stay.

The Finance Act, 2021 amended the Act of 2016 to include a proviso that consideration received or receivable for specified services and for e-commerce supply or services will not include the amount taxable as royalty or fee for technical services in India under the Income-Tax Act.

Tax officials say a section of non-resident e-commerce companies, which are receiving royalty or Fee for Technical Services (FTS), are required to pay the tax at 10 per cent rate. But they switched to this levy as the tax rate is just 2 per cent. Now, with the proposed change, they will be required to pay income-tax, as defined under the treaty which could be 10 per cent.

Complicated procedure

According to Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, while the Supreme Court’s decision in Engineering Analysis seemed to have assuaged taxpayers by holding that payment towards imported computer software is not royalty, there is some doubt if it can be equally applied to the new era SaaS-based payments. Classification of such subscription-based automated services as fees for technical services, which is the subject matter of Sumo Logic’s writ petition, is a new row.

He added that it will be worthwhile to note that recently the Bangalore Tribunal (in the case of Urban Ladder) held that mere usage of a facility neither gives rise to provision of a technical service nor renders the payment as royalty. Hence, while the tussle around characterisation of payments as royalty/fees for technical services awaits to be resolved, the introduction of EL 2.0 and the amendment vide the Finance Act, 2021 may set off tax litigation of a different hue.

“Until the ambiguity around the interplay between EL2.0 and royalty/fees for technical services is cleared, taxpayers will have to make a Hobson’s choice between applying a 10 per cent TDS or a 2 per cent EL,” he said.

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