Unit 3

Chap 1

1. Concept of ‘Permanent Establishment’ (PE)

The concept of Permanent Establishment (PE) is central to international taxation as it
determines when a foreign enterprise becomes liable to pay taxes in another country.
• Two Principles of Taxation:
1. Resident-based taxation: The resident country taxes a person’s global income,
regardless of where it is earned.
2. Source-based taxation: The country where income originates has the right to
tax that income.
• When a resident of one country earns income from another country, double taxation
can occur because one country taxes it based on residence and the other based on
source.
• To prevent this, Double Taxation Avoidance Agreements (DTAAs) have been created,
which rely on the concept of PE.
• Definition of PE:
o A PE is generally a fixed place of business through which the enterprise carries
out all or part of its business in another country.
o Examples include: a place of management, branch, office, factory, workshop,
warehouse, or construction site (if it lasts for a specified period, usually 6–12
months).
o In certain cases, even a dependent agent or representative may constitute a PE.
• Significance: A foreign enterprise can be taxed on business profits in another country
only if it has a PE there.

2. Finding the PE in Cross-Border E-Commerce

The digital economy has made the concept of PE more complex.
• Traditionally, PE required physical presence such as an office or branch.
• In e-commerce, a company may operate completely online, with no physical office in
the country where its customers are located.
• Tax authorities examine:
o Server locations: If a company’s server is in the country, it could be treated as a
PE.
o Local agents or subsidiaries: If they play a key role in concluding contracts, they
may create a PE.
o Significant Economic Presence (SEP): India introduced SEP rules, where even
digital transactions and user base can create a taxable presence.
• Finding PE in e-commerce ensures that foreign companies like Amazon, Google, etc.,
pay their fair share of tax for income earned from Indian users.
3. The United Nations Model Tax Treaty
• The UN Model Double Taxation Convention is designed to guide countries in creating
DTAAs.
• It gives more taxing rights to the source country than the OECD Model Convention,
which is better for developing countries.
• Key features:
o Broader definition of PE to include construction sites, installation projects, and
service PEs (providing services in another country for more than a specified
period).
o Allows withholding taxes on certain payments like royalties, technical fees, and
interest.
o Encourages fair distribution of tax revenue between developing (source) and
developed (residence) countries.
• Relevance to E-Commerce: It allows developing countries like India to tax foreign digital
companies more effectively.

4. Double Taxation Avoidance Agreements (DTAA) and Taxable Jurisdiction

• DTAA is a bilateral agreement between two countries to avoid taxing the same income
twice.
• Objectives:
o Prevent double taxation.
o Promote international trade and investment.
o Provide certainty and clarity to taxpayers.
• Tax Relief Methods:
o Exemption Method: Income taxed in the source country is exempted in the
residence country.
o Credit Method: Tax paid in the source country is given as credit in the residence
country.
• Under Indian Income Tax Act (Section 5):
o Residents are taxed on global income.
o Non-residents are taxed only on income that is received, accrues, or is deemed
to accrue in India.

5. Tax Agents of Non-Residents & Relevance to E-Commerce

• A Representative Assessee (Section 160–161) is someone who pays tax on behalf of a
non-resident.
• This may include:
o Agents, trustees, or guardians managing the non-resident’s income in India.
o Indian subsidiaries of foreign companies.
o E-commerce intermediaries, payment processors, or logistics partners.
• Responsibilities:
o File returns and pay taxes on behalf of the non-resident.
o Ensure compliance with Indian tax laws.
• Importance for E-Commerce: Ensures that foreign e-commerce players pay taxes on
income earned from Indian customers, even if they have no direct office in India.

6. Source vs Residence & Classification of Business Income and Royalty

 • Source vs Residence:
o Source-based taxation – Tax is levied where income is generated.
o Residence-based taxation – Tax is levied where the taxpayer resides.
• Business Income:
o Profits from day-to-day business operations.
o Taxable in the source country only if there is a PE.
• Royalty:
o Payments made for the use of intellectual property, software, or technical know-
how.
o Usually taxable in the source country even if there is no PE (under DTAA rules).
o Royalty income is taxed at a concessional rate (typically 10–15%) as per DTAAs.

7. Impact of the Internet on Customs Duties

• Traditionally, customs duties applied to physical goods crossing borders.
• With the rise of the internet, digital products (software, e-books, online media,
streaming services) cross borders without any customs checks.
• This leads to revenue loss for governments.
• Global Response:
o Introduction of Equalization Levy and Digital Services Tax on online advertising
and e-commerce transactions.
o Discussions at the WTO level on whether to impose customs duties on electronic
transmissions.

8. Taxation Policies in India – At a Glance

• Direct Taxes:
o Income Tax (individuals, firms, HUFs)
o Corporate Tax (domestic & foreign companies)
o Minimum Alternate Tax (MAT)
• Indirect Taxes:
o Goods and Services Tax (GST) – single tax replacing VAT, excise, service tax.
o Customs Duties – on imports/exports.
o Excise Duty (limited to certain products like alcohol, petroleum).
• Recent Developments:
o Reduction in corporate tax rates to attract investment.
o Introduction of Equalization Levy and Significant Economic Presence rules for
taxing digital economy.
o Focus on digitization of tax filing and widening the tax base.
Unit 3

chap 2

Here’s a detailed explanation of the topics you asked for from your Cyber Law PDF:

1. Digital Signatures
A digital signature is a mathematical technique used to validate the authenticity and
integrity of a message, software, or digital document.
• It is the digital equivalent of a handwritten signature or a stamped seal.
• Working Process:
1. Creation: The sender uses a private key to create a signature (encrypting a
hash of the message).
2. Transmission: The signed document is sent along with the digital signature.
3. Verification: The recipient uses the sender’s public key to decrypt the hash
and verify if it matches the received document.
• Importance:
o Ensures authentication (sender is genuine).
o Provides data integrity (message is not altered).
o Guarantees non-repudiation (sender cannot deny sending it).
• Widely used in e-filing of taxes, e-contracts, online transactions, and e-
Governance systems.

2. Digital Signature Certificate (DSC)

A Digital Signature Certificate is an electronic credential that establishes the identity of
the person holding it.
• Issued By: A Certifying Authority (CA), which is licensed under the IT Act, 2000.
• Contents of a DSC:
o Owner’s name
o Owner’s public key
o Expiration date of the key
o Name of the issuing CA
o Certificate’s serial number
o Digital signature of the CA
• Types of DSCs:
o Class 1: For personal use (low level of security).
o Class 2: For business use (verifies identity against a pre-verified database).
o Class 3: High-security certificates used for e-tendering and online
transactions requiring strong authentication.
• Usage: Filing income tax returns, e-procurement, e-tenders, MCA (Ministry of
Corporate Affairs) filings, GST filing, etc.

3. Certifying Authorities (CAs) and Liability in Case of Digital Signature Compromise

• Certifying Authorities:
o Entities authorized under the IT Act, 2000 to issue DSCs.
o Must follow strict security protocols to maintain trust and confidentiality.
o Examples in India: NIC, IDRBT, SafeScrypt, e-Mudhra, CDAC.
• Liability in Case of Compromise:
 o If a DSC is compromised (hacked, misused, or fraudulently used), the CA
can be held responsible if it is proven that compromise occurred due to
their negligence.
o Under the IT Act, 2000, a CA must:
▪ Maintain a secure database of issued certificates.
▪ Revoke compromised certificates immediately.
▪ Notify users and authorities about breaches.
o Users also have a duty to keep their private keys safe. Failure to do so can
transfer liability to them.

4. E-Governance in India
E-Governance refers to the use of ICT (Information and Communication Technology) for
delivering government services to citizens, businesses, and other arms of the government.
• Objectives:
o Enhance transparency and accountability.
o Reduce corruption and inefficiencies.
o Improve service delivery and citizen participation.
• Initiatives in India:
o Digital India Mission: Making government services available electronically
and improving internet connectivity.
o e-Seva / MeeSeva: Single-window service delivery for government
certificates and applications.
o MCA21 Project: Online filing for companies with the Ministry of Corporate
Affairs.
o Income Tax e-Filing: For online tax return submission.
o e-Courts: Digitization of court case records and online filing.
• Benefits:
o Saves time and cost for citizens.
o Minimizes human intervention (reducing corruption).
o Makes governance more citizen-centric.
• Challenges:
o Digital literacy gaps.
o Cybersecurity risks.
o Infrastructure limitations in rural areas.