Business Model Case Study - Fintech Part I

M U M BA I S I L I C O N VA L L E Y BA N G A LO RE S I N G A P O RE M U M BA I B KC NEW DELHI MUNICH N E W YO RK
Business Model Case

Study – Fintech: Part I
Payment Aggregators and Pre-Paid
Instruments
August 2020
© Copyright 2020 Nishith Desai Associates www.nishithdesai.com

Business Model Case Study – Fintech: Part I
Payment Aggregators and Pre-Paid Instruments
August 2020
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© Nishith Desai Associates 2020

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Acknowledgements
Afaan Arshad
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N. Meyyappan
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Parul Jain
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7
Contents
1. INTRODUCTION 01
2. LEGAL PROVISIONS 02
I. Indian laws applicable to Payment Services 02

II. General taxation framework under Income-tax Act, 1961 03
III. International Developments – Pillar One 06
IV. Equalisation levy framework under Finance Act, 2016 09
V. GST framework 09
3. CASE STUDY 11
9
1. Introduction
FinTech is an abbreviation for ‘financial technology’. array of technological enhancements such as mobile
The term is used to describe innovations in technology and web-based payment services, digital currencies
related to financial services, with increasing reliance (cyprocurrencies), blockchain technology, peer to
on the information technology.1 At the time of its peer lending, crowd funding, smart contracts, cloud
inception, FinTech referred to the back-end technology computing, big data, Artificial Intelligence etc.5
used by financial institutions. However, over time, its
In the global landscape, India has been a frontrunner
scope has expanded to consumer-oriented (front-end)
in the FinTech space. As per the EY FinTech Adoption
services within the financial sector.2
Index 2019, India ranks second (after China) in
The FinTech movement has the potential to terms of adoption of FinTech with an adoption rate
revolutionize the financial landscape, both in terms of 87 percent (increased from 52 percent in the 2017
of increasing business efficiency and transforming index).6 The efforts of the incumbent government and
consumer experience in respect of financial activities.3 the RBI in terms of bringing about legal and policy
Further, as a result of the FinTech developments changes to foster a conducive climate for FinTech has
in the recent past, financial services is no longer a been crucial in India achieving this feat.
monopoly of the banks. Non-banking entities are
Some of the most noteworthy achievements of
supplementing, complementing and competing with
India in FinTech has been in the payments sector.
banks, either in the form of being technology service
Development of payments services such as Immediate
providers to banks or directly providing financial
Payments Service (IMPS), Unified Payments Interface
services to customers.4
(UPI), Bharat Interface for Money (BHIM), Bharat Bill
There is no concrete definition of FinTech yet. Pay System (BBPS) etc. by the Government has formed
However, as per the Financial Stability Board, an the bedrock for developing a state-of-the-art national
international body that monitors and makes payments infrastructure in India.
recommendations about the global financial system,
In this edition of our Technology and Tax Series, we
“FinTech is technologically enabled financial innovation
will be dealing with one of the subsets of FinTech, i.e.
that could result in new business models, applications,
payment aggregators and prepaid instrument issuers.
processes, or products with an associated material effect
Specifically, the focus will be on tax issues pertaining to
on financial markets and institutions and the provision of
foreign service providers entering the Indian market.
financial services.” As is indicative from the definition,
the scope of FinTech is very wide and includes an
1. https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/WG-
FR68AA1890D7334D8F8F72CC2399A27F4A.PDF - page 1
2. https://www.investopedia.com/terms/f/fintech.asp 5. http://www3.weforum.org/docs/WEF_The_future__of_finan-
3. Supra note 1, page 6 cial_services.pdf; Ibid, page 7 onwards
4. https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/GSF- 6. file:///C:/Users/afaan.arshad/Downloads/ey-global-fintech-
NA250319AD0EE1F30EB746028A177251138EC297.PDF – page 2 adoption-index-2019.pdf
1
2. Legal Provisions
These regulations deal with issuance and operation
I. Indian laws applicable to of prepaid instruments;
Payment Services The PPI Master Directions defines PPIs as:
Payment systems in India are regulated by the Payment

and Settlement Systems Act, 2007 (“PSS Act”) and the
“PPIs are payment instruments that facilitate
Payment and Settlement Systems Regulations, 2008
purchase of goods and services, including financial
(“Regulations”) issued thereunder. Under the PSS services, remittance facilities, etc., against the value
Act, any ‘payment system’ which “enables payment to stored on such instruments. PPIs that can be issued
be effected between a payer and a beneficiary, involving in the country are classified under three types viz.
clearing, payment or settlement service or all of them, but (i) Closed System PPIs, (ii) Semi-closed System PPIs,
and (iii) Open System PPIs.”
does not include a stock exchange” requires authorization
from the Reserve Bank of India. There are however
certain exceptions to this requirement such as in the
case of an agency model, or accepting payments from Prior RBI approval is required for operating open and
group companies. Under the PSS Act, the Reserve Bank semi-closed system PPIs, however no such approval is
of India has wide discretion to issue directions and required for closed systems PPIs.
guidelines for regulating payments.
Open system PPIs are those which may be used at any
Some of the important RBI regulations dealing with merchant for purchase of goods and services and
payment services are: can also be used for cash withdrawals. Importantly
only banks can issue open system PPIs. Semi-closed
i. Opening and Operation of Accounts and
system PPIs are those which can be used for purchase
Settlement of Payments for Electronic Payment
of goods and services from designated third parties
Transactions involving Intermediaries, 2009,
which have a specific contract with the issuer to
as amended from time to time (“Payment
accept the PPIs as payment instruments. Closed
Intermediary Directions”). These Regulations
system PPIs are issued by an entity for facilitating the
provide the legal framework within which the
purchase of goods and services from that entity only
payment intermediaries in India must operate. As
(and not from third parties). Semi -closed and closed
an update to the Payment Intermediary Directions,
system PPIs can be issued by non-bank entities as well
the RBI came out with Guidelines on Regulation
of Payment Aggregators and Payment Gateways Further, over the last few years, the legal landscape
dated March 17, 2020; pertaining to the payments sector has been constantly
evolving. India has been proactive in dynamically
ii. Master Circular on Credit Card, Debit Card and
developing regulations to deal with innovations in
Rupee Denominated Pre-paid Card Operations
the payments space. For example, India has been
of Banks and Credit Card Issuing NBFCs, 2015, as
working on developing a framework for regulatory
amended from time to time, (“Master Circular
sandbox – ‘an environment for developing FinTech
on Cards”). These regulations provide the legal
innovations and testing applications / APIs developed
framework and issuance and operation of credit,
by banks and FinTech companies - since 2017.’7
debit and prepaid cards in India;
Vide circular dated May 20, 2019, the Securities and
Exchange Board of India (“SEBI”) stipulated the
iii. Master Direction on Issuance and Operation
of Prepaid Instruments 2017, as amended
from time to time (“PPI Master Directions”). 7. https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/
WGFR68AA1890D7334D8F8F72CC2399A27F4A.PDF
2
framework for Innovation Sandbox for offline testing § Explanation 2A to section 9 provides that
of proposed FinTech solutions for non-SEBI regulated significant economic presence (“SEP”) of a
entities. Further, vide circular dated June 05, 2020, non-resident in India shall constitute business
the SEBI introduced a framework for a Regulatory connection in India. Explanation 2A8 to section
Sandbox to SEBI regulated entities, with facilities and 9(1)(i) of the ITA defines SEP to mean:
flexibilities to experiment FinTech solutions in a live
and controlled environment on a limited set of real
§ Transaction in respect of any goods, services
or property carried out by a non-resident with
customers for a limited time frame.
any person in India including provision of
download of data or software in India, is taxable
II. General taxation in India if the aggregate of payments exceeds
framework under thresholds, which are yet to be notified.
Income-tax Act, 1961 § Any systematic and continuous soliciting of

business activities or engaging in interaction
with such number of users in India, which are
A. Charging Provisions yet to be notified, would also make income
from such transactions taxable in India.
§ Section 5 of the Income-tax Act, 1961 (“ITA”)
which deals with the scope of total income, has
In case a non-resident has a SEP in India, so much of
been divided into two sub-sections. Section 5(1)
the income of the non-resident attributable to such
lays down that income of a resident, derived from
SEP will be taxable in India.
whatever source, would be chargeable to tax in
India. Section 5(2) of the ITA defines the scope § The SEP provisions come into effect from April 1,
of total income chargeable to tax in India in the 2021. While currently the thresholds on number of
hands of a non-resident. As per provisions of users or transaction value to trigger SEP as stated
section 5(2) a non-resident is liable to tax in India above, has not been notified, should such thresholds
in respect of the following incomes: be satisfied there could be SEP after March 31, 2021
resulting in a business connection in India.
§ Income received / deemed to be received in India;
§ Explanation 3 to section 9(1)(i) of the ITA
§ Income accruing or arising in India; and provide that in case a non-resident has a business
connection in India, so much of the income as
§ Income deemed to accrue or arise in India
is attributable to such business connection is
§ Section 9(1) of the ITA explains the scope of the taxable in India.
phrase ‘income deemed to accrue or arise in India’.
In this regard, ‘all income accruing or arising,
whether directly or indirectly, through or from 8. “Explanation 2A.—For the removal of doubts, it is hereby declared
that the significant economic presence of a non-resident in India
any business connection in India, or through or shall constitute “business connection” in India and “significant
economic presence” for this purpose, shall mean—
from any property in India, or through or from
(a) transaction in respect of any goods, services or property carried out
any asset or source of income in India, or through by a non-resident with any person in India including provision
of download of data or software in India, if the aggregate of
the transfer of a capital asset situate in India’, shall payments arising from such transaction or transactions during
be deemed to accrue or arise in India. By virtue the previous year exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or
of section 5(2), as aforesaid, such income of non- engaging in interaction with such number of users in India, as
may be prescribed:
resident will be taxable in India.
Provided that the 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; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
Provided further that only so much of income as is attributable to
the transactions or activities referred to in clause (a) or clause (b)
shall be deemed to accrue or arise in India.”
3
§ The Finance Act, 2020 (“FA, 2020”) expanded the § Similarly, section 9(1)(vii) provides that ‘fees
attribution rules by inserting Explanation 3A9 to for technical services’ (“FTS”) earned by a non-
section 9(1)(i) of the ITA (“Expanded attribution resident shall be deemed to be sourced in India if
rules”). Explanation 3A provides that the income it is paid by a resident (except if the FTS is payable
attributable to the operations carried out in India in respect of any right, property or information
shall include income inter-alia from: used outside India or any services utilised for
business purposes outside India or for the purposes
§ advertisement that targets Indian customers or of earning any income outside India) or non-
residents where the FTS is payable in respect of any
§ sale of goods or services using data collected
right, property or information used in India or any
from India.
services utilised for business purposes in India or
The Expanded attribution rules apply to all business for the purposes of earning any income in India.
connection situations.
§ Under the ITA, FTS is defined as any consideration
(including any lump sum consideration) for
B. Royalty and FTS the rendering of any managerial, technical or
consultancy services (including the provision of
§ Section 9(1)(vi) of the ITA provides that ‘royalty’ services of technical or other personnel) but does
earned by a non-resident shall be deemed to be
not include consideration for any construction,
sourced in India (and hence taxable in India) if it is
assembly, mining or like projects.
paid by a resident (except if the royalty is payable
in respect of any right, property or information § The term ‘technical services’ in the definition
used outside India or any services utilised for of FTS was interpreted by the Supreme Court in
business purposes outside India or for the purposes CIT v. Kotak Securities Ltd.11 It was held that the
of earning any income outside India) or non- term has to be interpreted applying the principle
residents where the royalty is payable in respect of of ‘noscitur a sociis’ as per which the meaning of
any right, property or information used in India or doubtful words may be ascertained by reference
any services utilised for business purposes in India to words associated with it. The term ‘technical
or for the purposes of earning any income in India. services’ comes in between the terms ‘managerial’
and consultancy services’ – both of which require
§ As per Explanation 2 to Section 9(1)(vi) of the human intervention. Applying the principle of
ITA, ‘royalty’ is defined as the consideration
‘noscitur a sociis’ the term ‘technical services’, placed
(including lump sum payment) for, amongst other
between the terms ‘managerial and consultancy
things, the transfer of all or any rights (including
services,’ shall be interpreted to mean services
the granting of a license) in respect of a patent,
which involve human intervention.
invention, model, design, secret formula, process,
trademark, copyright, literary, artistic or scientific
work. The WHT tax rate for payment of ‘royalty’
C. Tax Treaty Relief
under the ITA is 10%.10
§ Section 90(2) of the ITA provides that a non-
resident in a country with which India has a tax
9. “Explanation 3A.––For the removal of doubts, it is hereby declared treaty, shall be taxed as per the provisions of the
that the income attributable to the operations carried out in India,
as referred to in Explanation 1, shall include income from–
tax treaty or the ITA, whichever is more beneficial.
(i) such advertisement which targets a customer who resides in India
or a customer who accesses the advertisement through internet § In order to obtain treaty relief, the non-resident
protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a entity must be a resident liable to tax in its
person who uses internet protocol address located in India; and
country of residence.
(iii) sale of goods or services using data collected from a person who re-
sides in India or from a person who uses internet protocol address
located in India.”
10. All the tax rates mentioned in this memorandum are exclusive of
applicable surcharge and cess. 11. [2016] 383 ITR 1 (SC)
4
§ With the ultimate objective of preventing Card global network for payment processing
double taxation by allocating taxing rights constituted a PE in India.
between the resident and source countries, tax
treaties provide relief in various ways such as a § In the case of ITO v. Rights Florists,14 the Kolkata
tribunal while relying on the OECD commentary
narrower definition of terms such as FTS, royalty,
in this regard observed that while a website
Permanent Establishment (“PE”) (which is the
by itself cannot constitute a fixed place PE, the
tax treaty equivalent of the test of ‘business
server from where the website functions could
connection) etc., lower rates of withholding in
constitute a PE. Recently in the case of Union
case of dividends, interest, royalty etc.
of India v. UAE Exchange Centre,15 the Supreme
§ Under some of India’s tax treaties’, for the FTS Court held that the Indian liaison office of a UAE
clause to be triggered, the provision of services entity involved in downloading of relevant data
must qualify the ‘make available’ provision, i.e. for the business while connected to a server in the
the services must be provided in such a manner UAE did not constitute a PE.
that it enables the service recipient to re-apply the
technology provided as part of the service. § Further, recently in the case of Volkswagen Finance
Pvt. Ltd.,16 the Mumbai Tribunal introduced the
§ The concept of PE is the tax treaty equivalent of concept of intangible business connection. It
the concept of business connection under the ITA. held that payment made by an Indian entity to
There are several types of PE. Essentially, PE is a an American actor for making an appearance in
fixed place of business through which business a product launch in Dubai constituted a business
is carried out. The components for satisfaction of connection in India on the basis that the product
fixed place PE are as follows: (i) the physical test i.e. launch, though conducted in Dubai, was intended
the foreign enterprise has at its disposal a physical for the Indian market.
premise in India, (ii) the temporal test i.e. there is a
degree of permanence or the physical presence in § Regardless of the judicial developments discussed
above which indicate a transformation of the
India is of an enduring nature and not temporary,
concept of PE to bring within its ambit digital
(iii) the functionality test i.e. the foreign enterprise
presence, the PE test is not sufficient to capture
must conduct its own business through such fixed
digital presence. It is for this reason that newer
base or premise.
and more innovative regime such as ‘Unified
§ Since the inception of digitalization, the judiciary Approach’ etc. (discussed later) are being curated
has had the occasion to consider the applicability at the global level to effectively tax digital
of PE in respect of digital presence. In Amadeus businesses.
Global Travel Distribution S.A.,12 the Delhi
tribunal held computers (including software § Apart from a fixed place of business, several other
modes of PE are also contemplated in tax treaties’.
and hardware) installed in premises of the India
Agency PE is concept under which a foreign
travel agents for facilitating the business of a
entity might form a PE in India if its dependent
non-resident entity engaged in the business of
Indian agent habitually concludes or exercises an
customer reservation system (CRS) constituted a
authority to conclude contracts, maintains a stock
PE in India. Further, in MasterCard Asia Pacific Pte.
of goods or secures orders on behalf of the non-
Ltd., In re.13, the Authority for Advance Rulings
resident enterprise in India. Service PE is concept
held that the MasterCard Interface Processor (MIP)
under which a foreign entity shall constitute PE
an electronic device (similar to a computer) placed
in India if it furnishes services in India through its
in the premises of the Indian financial institutions
which connected such institutions to the Master
14. I.T.A. No.: 1336/ Kol. / 2011

12. [2011] 11 taxmann.com 153 (Delhi) 15. Civil Appeal No. 9775 of 2011
13. AAR 1573 of 2014 16. ITA No. 2195/ Mum/ 2017
5
employees / personnel through their presence in is established due to SEP in India. The Report
India for a specified duration. Other forms of PE provides for addition of a fourth factor of
include construction PE, installation PE etc. apportionment i.e. ‘users’ for businesses in which
users contribute significantly to the profits of an
§ Further, in the aftermath of the ruling by the enterprise. The degree of apportionment on basis
Supreme Court confirming the fundamental
of ‘users’ differs according to ‘user intensity’ in a
right to privacy, the Government is in the process
business. For businesses with low and medium
of developing laws to safeguard privacy. It is
user intensity, users have been assigned a weight
anticipated that such laws would require storage
of 10% while other three factors have been
of different types of customer data on servers
assigned 30% weight each. For businesses with
located in India. In the payment space, the RBI
high user intensity, users have been assigned
introduced the Storage of Payment Systems Data
a weight of 20% while the share of assets and
Directive on April 06, 2018 (“Payments Data
employees is reduced to 25% each and sales have
Storage Directive”). The directive directs all digital
been assigned 30% weight.
payment system providers to ensure that the entire
data relating to payment systems operated by
them is stored in a system only in India. III. International Develop-
ments – Pillar One
D. Profit Attribution
§ The digitization of the economy has strained the
§ Collection of tax revenue depends on quantum
existing international tax rules, which has led
of income attributable to India. India has made
to a number of countries imposing unilateral
reservations against the revised Article 717 of the
measures or departing from previously agreed
OECD Model Tax Convention and has taken a
standards. In an attempt to resolve this issue, the
stand that the process of attribution of profits by
Organization for Economic Co-operation and
using functions performed, assets used and risks
Development (“OECD”) in association with the
assumed (“FAR”) analysis, negates role of ‘demand
G20 developed a two-pillar approach for taxation
side factors’ in the profitability of an enterprise.
of the digital economy. Pillar One provides for
§ Instead, the Central Board of Direct Taxes allocation of taxing rights through new nexus and
(“CBDT”) in its report on profit attribution to new profit attribution rules. Pillar Two seeks to
PE (“Report”) has considered options based on introduce measures to ensure a minimum level
mixed approach which allocates profits between of tax. The OECD member countries came up
jurisdictions based on both demand and supply with three diverging proposals under Pillar One,
factors. Consequently, a ‘fractional apportionment i.e. the User Participation Proposal, the Marketing
approach’ based on apportionment of profits Intangibles Proposal and the Significant Economic
derived from India has been considered as the best Presence Proposal. The OECD proposed a
option under the Report. A three-factor method Unified Approach bringing together the common
based on one-third weight each accorded to sales elements of all three proposals.
(representing demand), manpower and assets
(representing supply) has been proposed. § In January 2020, the OECD released a statement
(“OECD Statement”) outlining the architecture
Importantly, the Report also dealt with profit of the Unified Approach under Pillar One and
attribution in case where business connection welcoming the progress made on Pillar Two.18 The
17. Under the Article 7 as modified by OECD in 2010, the OECD 18. OECD (2020), Statement by the OECD/G20 Inclusive Framework
mandated the Authorized OECD Approach (“AOA”) as the on BEPS on the Two-Pillar Approach to Address the Tax Challeng-
preferred approach for attribution of profits to a PE. The AOA es Arising from the Digitalisation of the Economy – January 2020,
requires attribution of profits to the PE on the basis of functions OECD/G20 Inclusive Framework on BEPS, OECD, Paris, available
performed, assets used and risks assumed (“FAR”) analysis per at www.oecd.org/tax/beps/statement-by-the-oecd-g20-inclusive-
prescribed OECD’s Transfer Pricing guidelines. framework-on-beps-january-2020.pdf
6
OECD Statement endorses the Unified approach other words, this only covers B2C transactions
encompassing three types of taxable profits and not B2B transactions. This also includes
that may be allocated to a market jurisdiction goods and services sold to customers indirectly
i.e. Amount A, Amount B and Amount C. The through third party resellers and intermediaries.
OECD Statement provides that the Unified Importantly, there is a carve out for activities
Approach is designed to adapt taxing rights by within the financial services sector on the
taking into account new business models and basis that they take place with commercial
thereby expanding the taxing rights of market customers, i.e. they are B2B. Even consumer
jurisdictions (which, for some business models, is facing businesses in the financial services sector
the jurisdiction where the user is located). such as retail banks and insurance should be
excluded from the scope on the basis that the
A. Amount A – New taxing right heavy regulation of such activities typically

ensures that residual profits are realised in local
§ Determination of residual profit: The primary customer markets.
response of the OECD Statement to tax challenges
of the digitalisation of the economy is a new § Establishing nexus with market jurisdiction: The
OECD Statement provides for a new nexus rule
taxing right called ‘Amount A’ by which a country
based on ‘significant and sustained’ engagement
will be able to tax profit earned by a multinational
with market jurisdictions for in-scope businesses.
without regard to whether the multinational has
The new nexus rule will be contained in a
a physical presence in the country. Under Amount
standalone rule to limit any unintended spill-
A, a share of the deemed residual profit will be
over effects on other existing tax or non-tax rules.
allocated based on a formulaic approach to market
For ADS, the revenue threshold will be the only
jurisdictions using the new nexus standard
relevant test required to create nexus. For other
that is not dependent on physical presence. The
in-scope activities, sustained interaction with
OECD Statement provides that the calculation
market is also necessary for creation of nexus.
of Amount A will be based on a measure of profit
derived from the consolidated group financial
§ Elimination of double taxation: The OECD
accounts and suggests ‘profit before tax’ as the
Statement recognises that it will be essential
preferred profit measure to compute Amount A.
to have appropriate mechanisms to eliminate
double taxation as Amount A is an overlay to the
§ In scope businesses: The OECD Statement provides
existing method of allocation of profits on basis
two categories of businesses that will fall within
of arms-length principle. In this regard, the OECD
the scope of Amount A namely:
Statement states that mechanisms to eliminate
i. Automated Digital services (“ADS”) – These double taxation in relevant tax treaties like
services will cover businesses that generate Article 9(2) may not be useful given that Amount
revenue from the provision of ADS that are A is not premised on identifiable transactions
provided on a standardised basis to a large between group entities. Further, in case where
population of customers or users across jurisdictions want to eliminate double taxation
multiple jurisdictions and includes online by way of providing credits, it will be necessary
search engines, social media platforms, online to determine which jurisdiction will have an
gaming, cloud computing services etc. obligation to eliminate tax and whether there can
be any adjustments made to Amount A to avoid
ii. Consumer facing business - This would cover
situations of double taxation.
businesses that generate revenue from the
sale of goods and services of a type commonly § Interactions and potential of double counting: The OECD
sold to consumers, i.e. individuals that are Statement states that there should be no significant
purchasing items for personal use and not interaction between Amount A and Amount B. In
for commercial or professional purposes. In relation to interaction between Amount A and
7
Amount C, the OECD Statement provides that § Further, as per the OECD Statement it is expected
there may be a case where both Amount A and that treaty changes will not be required to
Amount C are allocated to market jurisdiction like implement the Amount B regime. Allocation
India as multinational enterprise (“MNE”) has a of taxable profits to market jurisdictions under
taxable presence in such jurisdiction. There exists Amount B is based on the existing profit allocation
a risk of double taxation due to double counting rules (including reliance on physical presence).
of profits in Amount A and Amount C. While the
OECD Statement currently does not provide any
C. Amount C – Allocation of
mechanism to resolve double taxation in such cases,
it may be useful for MNEs to re-visit their structures
additional profit
and agreements to obtain more clarity with respect
§ The return under Amount C covers any
to arms-length principle and distribution of profits
additional profit where in-country functions
within separate entities.
exceed the baseline activity compensated under
Amount B. A further aspect of Amount C is
B. Amount B – Fixed the emphasis it gives to the need for improved
Remuneration based on dispute resolution processes. Amount C does not
arm’s length price create a new taxing right.
§ Allocation of taxable profits to market

§ Amount B is a fixed remuneration based on jurisdictions under Amount C is based on the
the arms’ length price for defined baseline
existing profit allocation rules (including reliance
distribution and marketing functions that take
on physical presence).
place between related parties in the market
jurisdiction. Amount B does not create a new
taxing right.
D. Transfer Pricing
§ Transfer pricing rules are anti-avoidance
§ Amount B aims to simplify administration in
rules under the ITA which seek to ensure that
transfer pricing rules for tax administrations,
international transactions19 between associated
lower compliance costs for taxpayers and enhance
enterprises20 are conducted at arm’s length.
certainty about pricing of transactions.
§ Based on the definition, inter alia, a parent and

§ The OECD Statement acknowledges that the
its wholly owned subsidiary as well as its sister
design of Amount B will need to ensure that the
concerns (which are controlled by the same
baseline distribution and marketing activities
shareholder, directly or indirectly) should be
are only remunerated in Amount B and not
considered as ‘associated enterprises’ and be
(again) in Amount C.
subject to transfer pricing provisions.
§ While the OECD Statement does not provide
a clear definition of baseline distribution and
marketing activities, the OECD Statement
provides that definition of baseline distribution 19. A transaction between two or more associated enterprises, either
or both of whom are non-residents, in the nature of purchase, sale
activities will include distribution arrangements or lease of tangible or intangible property, or provision of services,
with routine levels of functionality, no ownership or lending or borrowing money, or any other transaction having a
bearing on profits, income, losses or assets of such enterprises, and
of intangibles and no or limited risks. shall include a mutual agreement or arrangement between two or
more associated enterprises for the allocation or apportionment of,
or any contribution to, any cost or expense incurred or to be incurred
or to be incurred in connection with a benefit, service or facility
provided or to be provided to any one or more of such enterprises.
20. An “associated enterprise” has been defined under s. 92A of the
ITA to include, inter alia, an enterprise “which participates, directly
or indirectly, or through one or more intermediaries, in the management
or control or capital of the other enterprise.”
8
IV. Equalisation levy Further, the term ‘e-commerce operators’ has been
defined to mean an NR who owns, operates or
framework under manages digital or electronic facility or platform for
Finance Act, 2016 online sale of goods or online provision of services or

both.25 The term ‘e-commerce supply or services’ is
defined to mean i) online sale of goods owned by the
§ Equalisation levy (“EL”) was introduced in India
e-commerce operator; ii) online provision of services
with effect from June 1, 2016 under Chapter VIII
provided by the e-commerce operator; iii) online sale
of the Finance Act, 2016 (“FA, 2016”), as a separate,
of goods or provision of services or both, facilitated by
self-contained code, not forming part of the ITA.
the e-commerce operator; or iv) any combination of
The EL as introduced by the FA, 2016 (“2016 EL”)
the above.26
was levied at rate of 6% on the amount of gross
consideration received by non-residents for online
§ While the Expanded EL has been applicable
advertisement and related services provided
from April 1, 2020; a corresponding exemption
to i) a person resident in India and carrying on
from income tax has been provided in the ITA for
business or profession; or ii) an NR having a PE in
income arising from any e-commerce supply or
India.21 Income arising from provision of online
services made or provided or facilitated on or after
advertisement services which is subject to 2016 EL
April 1, 2021.27
is exempt from income-tax under the ITA.22
§ The Finance Act, 2020 (“FA, 2020”) expanded the V. GST framework
scope of EL to apply EL at rate of 2 percent (“2020
EL”) on the amount of consideration received
§ GST is an indirect tax levied on supply of goods
or receivable by ‘e-commerce operators’ from
or services. Section 7 the Central GST Act, 2017
‘e-commerce supply or services’ made or provided
(“CGST Act”) provides the scope of supply to
or facilitated by it to:
include inter-alia all forms of supply of goods
or services or both made or agreed to be made
i. person resident in India; or
for a consideration by a person in the course
ii. an non-resident under specified circumstances; or furtherance of business. Under the GST
or regime, Central GST and State GST is levied on
all intra-state supplies of goods and/or services,
iii. a person who buys such goods or services or
and Integrated GST is levied on imports and all
both using an internet protocol (“IP”) address
supplies of goods and / or services undertaken in
located in India.23
the course of inter-State trade or commerce. The
slab rates for the levy of GST on the supply of
‘Specified circumstances’24 in case of a non-resident
goods/ services are fixed at 5%, 12%, 18% or 28%.
have been defined as:
a. Sale of advertisement, which targets a customer, § Specifically, issues can arise due to classification
disputes where license of technology or software
who is resident in India or a customer who
or trademarks are involved since the rates
accesses the advertisement through IP address
can either be 12% or 18% depending on the
located in India; and
classification.
b. Sale of data, collected from a person who is
resident in India or uses IP address located in India.
21. Section 165(1) of Finance Act, 2016.

22. Section 10(50) of ITA. 25. Section 164(ca) of Finance Act, 2016.
23. Section 165A(1) of Finance Act, 2016. 26. Section 164(cb) of Finance Act, 2016.
24. Section 165A(3) of Finance Act, 2016. 27. Section 10(50) of ITA.
9
§ Section 7(3) of the Integrated Goods and Services provider is required to obtain a registration in
Act (“IGST”) provides that supply of services India and discharge any applicable taxes directly.
imported into the territory of India shall be treated
to be a supply of services in the course of inter- § Export of services is treated as a zero-rated supply
and should be exempt from GST subject to
State trade or commerce. Further, if it qualifies
satisfaction of prescribed conditions.
as an Online Information Database Access or
Retrieval (“OIDAR”)28 service the foreign service
28. If a service if delivered primarily over the internet without signif-

icant human intervention then such a service is considered to be
an OIDAR service.
10
3. Case Study
In the following case studies, we have analysed § Payments for goods and services purchased from
the business models by which foreign payment the Merchant is made through the payment
providers can do business in India. The business gateway.
models discussed have been arrived at based on the
limitations under Indian exchange control laws. § India Co deducts its commission (service fee) for
providing the payment gateway services to the
Model 1 deals with services of a Payment Gateway,
Merchants.
whereas models 2 and 3 deal with payment services in
the form of Prepaid Instruments (“PPI”).
§ Foreign Co provides the brand and software § Payment Gateways do not process the transaction
license to the India Co. but instead tie-up with banks that actually
process the transactions. In that sense, it is
§ India Co operates the payment gateway. At the merely a technology service provider providing
back -end, India Co has tie ups with banks to
the technology link between the Merchant and
provide the payment gateway services.
the Customers. No RBI license / authorization is
required to operate Payment Gateways.
11
Tax Analysis
S. No. Considerations Analysis
1. Brand & Income Tax implications
Software Income Tax Act (ITA) Tax Treaty
License
§ The license fee paid by the India Co to the Foreign § Provided the Foreign Co is
Co for brand licensing should constitute ‘royalty’ eligible to avail the treaty, a
under the ITA and be subject to tax at the rate of beneficial rate of witholding
10% (exclusive of applicable surcharge and cess). tax on ‘royalty’ may be availed.
However, in most of India’s tax
§ India Co should withhold tax at the applicable treaties’ , the witholding rate for
rate under section 195 of the ITA on payment of ‘royalty’ is 10%, which is same as
license fee to the Foreign Co. under the ITA.
§ If the India Co is a subsidiary of the Foreign Co, § Provided the tax treaty provides
then the payment of license fee to the Foreign for it, the Foreign Co may avail
Co should be considered to be an international foreign tax credit in its country
transaction between related parties, requiring it of residence against the taxes
to be paid on an arm’s length basis in accordance withheld in India.
with transfer pricing laws.
Pillar One Implications
§ While the OECD Statement currently does not provide a definition of baseline
distribution and marketing activities, arms-length pricing for license fees between
Foreign Co and India Co should constitute Amount B under Pillar One calculations.
Equalisation Levy Implications
§ While the 2016 EL should not apply in this case, as there are no advertising services
involved, the question as to whether the 2020 EL may apply arises considering the wide
language referring to ‘online services’.
§ A license fee should not normally be construed to be an an online service. However, tax
department may argue that it is a service considering it is taxed as a service under GST.
Nevertheless, despite the wide definition of the term ‘online’ which includes any right
or benefit obtained through a telecommunication network, such a license should not
qualify as an ‘online’ service.
§ It is pertinent to note that some companies have been reported to have paid the 10%
royalty tax and the 2% 2020 EL on the same transaction taking a conservative view on
this issue.
§ Further, while 2020 EL is not applicable if Foreign Co has a PE in India, no similar

exclusion has been made for payments where royalty tax has been withheld. Therefore,
while the 2020 EL may be payable, in such a situation an exemption from payment of
royalty taxes under the ITA should be available. This has raised questions of arbitrage,
where companies could possibly claim that service or license is subject to 2020 EL at
2% and thereby claim exemption from royalty taxes at 10% under the ITA.
§ Some companies on the other hand have not paid the 2020 EL on the ground that it is
vague.
12
GST Implications
§ licensing of brand and software should constitute import of service by the India Co
under GST laws.
§ As a result, the India Co should be required to discharge GST obligations on a reverse

charge basis at the rate of 18% on the software license and 12% on the trademark or
brand license.
§ India Co should be required to obtain a GST registration.
§ India Co should be able to avail input tax credit on the GST paid against its outward supplies.
§ Foreign Co is a company engaged in the issuance § The Foreign Co charges the India Co for the brand
of PPIs. India Co is a licensed PPI issuer. licensing and providing the technology services.
§ India Co is the issuer of the PPIs in India through § The Customers redeem the PPIs with the
retail outlets or though the India Co’s mobile Merchant.
application.
§ The Merchant has a tie-up with the India Co for
§ The Foreign Co licenses its brand to the India Co. accepting payments.
§ The Foreign Co also provides technology services § India Co deducts its commission (service fee) for
to the India Co in the form of creating the codes, providing PPI payment services to the Merchants.
PIN etc. for the PPIs.
13
Tax Analysis
1. Brand Licensing Income Tax implications
Income Tax Act (ITA) Tax Treaty
§ The license fee paid by the India Co to the § Provided the Foreign Co is eligible to avail
Foreign Co for brand and software license the treaty, a beneficial rate of witholding
should constitute ‘royalty’ under the ITA tax on ‘royalty’ may be availed. However,
and be subject to tax at the rate of 10% in most of India’s tax treaties’ , the
(exclusive of applicable surcharge and witholding rate for ‘royalty’ is 10%, which
cess). is same as under the ITA.
§ India Co should withhold tax at the § Provided the tax treaty provides for it, the
applicable rate under section 195 of Foreign Co may avail foreign tax credit in
the ITA on payment of license fee to the its country of residence against the taxes
Foreign Co. withheld in India.
§ If the India Co is a subsidiary of the

Foreign Co, then the payment of license
fee to the Foreign Co should be considered
to be an international transaction between
related parties, requiring it to be paid on
an arm’s length basis in accordance with
transfer pricing laws.
§ While the OECD Statement currently does not provide a definition of baseline distribution
and marketing activities, arms-length pricing for license fees between India Co and
Foreign Co should constitute Amount B under Pillar One calculations.
§ Same implications as for technology license as pointed out in Model 1.

GST Implications
§ licensing of brand and software should constitute import of service by the India Co under
GST laws.

charge basis at the rate of 12%.
§ India Co should be able to avail input tax credit on the GST paid against its outward
supplies.
2. Technology Income Tax Implications

Services
Income Tax Act (ITA) Tax Treaty
§ The service fee paid by the India Co to § In case the service fee constitutes FTS
the Foreign Co for availing the technology under the ITA, relief may be taken under
services in the form of creation of codes, tax treaties. Some of the reliefs which may
PINs etc. for the PPI should not be subject be availed under tax treaties’ in respect of
to any tax in India unless is constitutes FTS FTS are as follows:
or has a business connection / PE in India.
14
§ If the technology services are fully • a narrower definition of FTS owing to

automated and do not require human the ‘make available’ clause meaning
intervention for their provision, the that fees for technical services cannot
payments made for them should not be taxed unless the knowledge or
constitute FTS. technology is made available to India Co.
This is only there in some tax treaties.
§ However, if the provision of technology
services involves human intervention, • a beneficial rate of witholding tax on
service fee paid for the same should FTS may be availed. However, in most of
constitute FTS and be subject to tax in India’s tax treaties’, the witholding rate
India at the rate of 10% (exclusive of for ‘FTS’ is 10%, which is same as under
applicable surcharge and cess). In this the ITA.
scenario, the India Co should withhold tax
at the rate of 10% under the ITA. • foreign tax credit by the Foreign Co in its
country of residence against the taxes
§ In the event that the service fee does not withheld in India.
constitute FTS, the tax authorities might
argue that the Foreign Co has a business • availing the definition of PE, which is a
connection in India on the basis of the much narrower test for taxing business
SEP test – and should therefore be taxed profits in India as compared to the
on profits attributable to India at the rate business connection test under the ITA.
of 40% (exclusive of applicable surcharge In the present scenario, it should be
and cess). Their argument in this regard possible to argue non-existence of PE as
could be that the Foreign Co is engaged in per below:
‘a transaction in respect of services with
the India Co’ and hence satisfies the SEP i. Fixed place PE: Foreign Co has
test. The constitution of the SEP would no fixed place of business in India
depend upon the transaction value, the through which it carries out business
thresholds for which are yet to be notified. in India. Neither does the Foreign
Co have any server in India for the
§ Alternatively, the tax authorities may argue purposes of providing the technology
that the payment is a royalty payment for services to the India Co.
license of using the underlying software.
However, so long as the copyright is not ii. Agency PE: The Indian Co does
licensed it should not amount to a royalty. not conclude any contracts or plays
a principal role in conclusion of
§ If the India Co is a subsidiary of the contracts in India on behalf of the
Foreign Co, then the payment of service Foreign Co.
fee for the Tech services to the Foreign
Co should be an international transaction iii. Service PE: The Foreign Co does not
between related parties, requiring it furnish any services to any person
to be paid on an arm’s length basis in in India through its employees /
accordance with transfer pricing laws. personnel.
§ If the services are mostly automated and without any human intervention it could fall
under the category of Automated Digital Services and be a target for distribution of
residual profits, applying the Pillar I tests.
§ Assuming they have several such similar operations in different countries with varied
margins of profitability, allocation of incomes could be affected by whether it is done on a
regional or business line basis or based on the number of customers.
§ If it is not an automated service, it may possibly fall within consumer facing businesses for
which the thresholds are different. It would depend on whether India Co which is transacting
in a principal to principal role would be disregarded and whether its customers would be
treated as customers of Foreign Co for the purposes of Pillar I attribution.
15
§ While the 2016 EL should not apply in this case, as there are no advertising services
involved, the 2020 EL may apply considering the wide language referring to ‘online
services’.
§ ‘Online’ is defined to mean any facility or service or right or benefit or access that is
obtained through the internet or any other form of digital or telecommunication network.
§ Therefore, services that are automated and rendered without human intervention over the
internet or through access to a platform should be the main target of the 2020 EL and
therefore a 2% tax is payable on such services.
§ In this case, the generation of the codes for the PPI are typically conducted by the
software in an automated manner without any human intervention and therefore the
2020 EL should apply.
§ Even in cases where there is significant human involvement, the current wordings are
wide enough to capture these technology services transactions within its ambit. For
instance, even if the generation of the PPI involved some element of human verification or
moderation, the 2020 EL should still apply as the service is being accessed online.
§ However, these transactions become taxable only if the de-minimis thresholds are
crossed.
§ Additionally, treaty benefits or credits for such taxes paid may be difficult to obtain in the
foreign jurisdiction as it is unclear whether the EL is a tax on income or an indirect tax.
Therefore, it may not be covered by DTAAs.
GST Implications
§ Availing the technology services should constitute import of service by the India Co under
GST laws.

charge basis at the rate of 18%.
§ India Co should be able to avail input tax credit on the GST paid against its outward
supplies.
§ Further, the GST cost may be increased by the 2020 EL cost as the 2020 EL cost may
form part of the tax base on which the GST is applied.
16
Model 3 - Distribution of PPIs
§ Foreign Co is a company engaged in the issuance of PPIs.
§ Foreign Co contracts with the India Co on a principal to principal basis to distribute the PPIs in India. The
India Co charges service fee for the distribution of the PPIs to customers in India.
§ The Customers redeem the PPIs with the Merchant.
§ The Merchant has a tie-up with the Foreign Co for accepting payments.
§ Foreign Co deducts its commission (service fee) for providing PPI payment services to the Merchant.
Tax Analysis
3. Service Fee Income Tax implications
for distribution Income Tax Act (ITA) Tax Treaty
of PPL’s in
India and on § The service fee paid to the India Co for § The tax authorities might argue that
payments distribution of PPIs in India should constitute the Foreign Co has PE in India in the
from Indian business income and form part of its form of the India Co.
Merchants corporate profits for the purposes of taxation
at the rate of 25-30%.29 § It should be possible to argue that
the Foreign Co does not have a PE in
§ If the India Co is a subsidiary of the Foreign India on the basis of the following:
Co, then the payment of service fee for PPI
distribution to the India Co should be an • Fixed place PE: India Co is not a
international transaction between related parties, place of business at the disposal
requiring it to be paid on an arm’s length basis in of the Foreign Co through which it
accordance with transfer pricing laws. carries out its business in India.
29. Depending on its turnover.

17
§ The tax authorities might argue that the • Agency PE: The India Co is
Foreign Co carries on its business in India contracted on a principal to principal
through the India Co. Accordingly, the India basis to provide distribution services.
Co should form a business connection of the It is not an agent of the Foreign Co.
Foreign Co in India resulting in the Foreign The Indian Co does not conclude any
Co being taxed in India on profits attributable contracts or plays a principal role
to India at the rate of 40% (exclusive of in conclusion of contracts in India
applicable surcharge and cess). It should be on behalf of the Foreign Co such as
possible to negate this argument of the tax negotiating terms with customers.
authorities on the basis that India Co has It merely has the commercial right
been contracted on a principal to principal to distribute the codes or the PPI
basis and hence should not form a business on behalf of the Foreign Co. Once
connection of the Foreign Co in India. the distribution is completed, the
customer enters into a contract
§ In the current structure, since India Co is directly with the Foreign Co, through
only distributing the PPI, the contracts with the terms and conditions on the
customers are being directly entered into with platform. Therefore, the India Co is
Foreign Co. Therefore, all the PPI users are not involved in contract negotiation
customers of the Foreign Co. Similarly, all the or conclusion. India Co is also not
merchants should also be seen as clients of involved in onboarding or contracting
the Foreign Co since its revenue is derived from with the merchants in India from
charges made to the merchants. Hence, the whom Foreign Co earns commission
tax authorities might also argue formation of payment.
business connection on the basis of the SEP
test by alleging that the Foreign Co is engaged • However, tax authorities may
in a ‘transaction in respect of services’ with challenge this position and claim
the India Co or merchants or since it has that India Co constitutes an Agency
the required number of customers in India. PE since it is distributing PPI on
These thresholds are yet to be notified. behalf of Foreign Co.
§ Further, the question of whether Foreign • India Co can in defence

Co is covered by Section 194 – O (in force demonstrate that they are
from October 2020) may also arise. Under independent agents servicing other
Section 194-O an e-commerce operator that clients as well or that a majority of
facilitates the supply of goods or services by their income does not come from
an Indian merchant are required to deduct Foreign Co. If India Co is able to
1% of the gross value of supply and pay it to establish that is an independent
the government as tax deducted at source. agent then the Agency PE should
not be created.
§ In the present case, since Foreign Co is
enabling the supplies of Indian merchants, • Service PE: The Foreign Co
the applicability of this obligation may arise. does not furnish any services to
However, while the technical reading of the any person in India through its
provisions may appear wide enough to cover employees / personnel hence
such situations, ideally only the platform there should be no Service PE risk’.
through which sales of goods are made or
provision of services are rendered should be § Considering that the Foreign Co
covered. directly provides the payment services
to Merchants in India, it should be
§ Foreign Co is merely assisting in the making required under the Payment Data
of payments and not directly involved in the Storage Directive to store the entire
supply of goods or services. data relating to provision of the
payment services in servers located
in India. This might result in creation
of a PE of the Foreign Co in India.
18
§ The business conducted by the Foreign Co should fall outside the scope of Amount A due
to the following reasons:
i. ADS covers businesses that generate revenue from the provision of ADS that are
provided on a standardized basis to a large population of customers or users across
multiple jurisdictions. In the present case, the Foreign Co provides payment service
(in the form of PPIs) to Merchants in India and not a large population of customers or
users. However, in the same transaction since customers are involved, it is unclear
whether such involvement of users shall mean that such services are covered
under ADS and whether the presence of customers would be taken into account for
deeming income to be sourced from India.
ii. The other leg of Pillar One is consumer facing business. Since the Foreign Co provides
the services to the Merchants and not individual customers, it should fall outside this
leg. Leading credence to this conclusion is the OECD Statement where a carve out
has been created for activities in the financial services sector on the basis that they
take place with businesses and not customers. Further, although this leg of Pillar One
covers provision of services through intermediaries – even that is only to the extent the
ultimate services are being provided to customers. Therefore, if customers in India, who
are not charged for the PPI issuance, are considered to be customers of Foreign Co, it
is possible to argue that Foreign Co is covered under the consumer facing business
definition as well since ultimately Foreign Co is servicing customers in India.
iii. W
hile in ADS, the attribution is primarily based on the number of sales, other
additional factors shall also be taken into account while attributing profits to
consumer facing businesses.
GST Implications
§ The services provided by the India Co in the form of distribution of PPIs in India should
constitute export of service and hence be exempt from GST provided the applicable
conditions are satisfied.
§ However, since it is in contact with ultimate customers, it is possible that the tax
authorities claim that it is performing intermediary services and therefore should be
subject to tax at 18%.
§ The India Co would however need to obtain GST registration and comply with prescribed
conditions for availing the exemption from GST.
Scope and Limitations of the Case Study

§ The scope of this case study is limited to tax issues pertaining to the business models discussed.
§ While briefly discussed, this case study does not deal with the legal and regulatory implications of the business
models discussed.
§ N
othing mentioned in this shall be construed as tax or legal advice.
19
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Graveyard Shift in India: Employers in Bangalore / Karnataka Permitted to HR December 2019
Engage Women Employees at Night in Factories
India’s Provident Fund law: proposed amendments and new circular helps HR August 2019
employers see light at the tunnel’s end
Crèche Facility By Employers in India: Rules Notified for Bangalore HR August 2019
Pharma Year-End Wrap: Signs of exciting times ahead? Pharma December 2019
Medical Device Revamp: Regulatory Pathway or Regulatory Maze? Pharma November 2019
Prohibition of E-Cigarettes: End of ENDS? Pharma September 2019
20
Research @ NDA
Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering, research
by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him provided the
foundation for our international tax practice. Since then, we have relied upon research to be the cornerstone of our
practice development. Today, research is fully ingrained in the firm’s culture.
Our dedication to research has been instrumental in creating thought leadership in various areas of law and pub-
lic policy. Through research, we develop intellectual capital and leverage it actively for both our clients and the
development of our associates. We use research to discover new thinking, approaches, skills and reflections on ju-
risprudence, and ultimately deliver superior value to our clients. Over time, we have embedded a culture and built
processes of learning through research that give us a robust edge in providing best quality advices and services to
our clients, to our fraternity and to the community at large.
Every member of the firm is required to participate in research activities. The seeds of research are typically sown
in hour-long continuing education sessions conducted every day as the first thing in the morning. Free interac-
tions in these sessions help associates identify new legal, regulatory, technological and business trends that require
intellectual investigation from the legal and tax perspectives. Then, one or few associates take up an emerging
trend or issue under the guidance of seniors and put it through our “Anticipate-Prepare-Deliver” research model.
As the first step, they would conduct a capsule research, which involves a quick analysis of readily available
secondary data. Often such basic research provides valuable insights and creates broader understanding of the
issue for the involved associates, who in turn would disseminate it to other associates through tacit and explicit
knowledge exchange processes. For us, knowledge sharing is as important an attribute as knowledge acquisition.
When the issue requires further investigation, we develop an extensive research paper. Often we collect our own
primary data when we feel the issue demands going deep to the root or when we find gaps in secondary data. In
some cases, we have even taken up multi-year research projects to investigate every aspect of the topic and build
unparallel mastery. Our TMT practice, IP practice, Pharma & Healthcare/Med-Tech and Medical Device, practice
and energy sector practice have emerged from such projects. Research in essence graduates to Knowledge, and
finally to Intellectual Property.
Over the years, we have produced some outstanding research papers, articles, webinars and talks. Almost on daily
basis, we analyze and offer our perspective on latest legal developments through our regular “Hotlines”, which go
out to our clients and fraternity. These Hotlines provide immediate awareness and quick reference, and have been
eagerly received. We also provide expanded commentary on issues through detailed articles for publication in
newspapers and periodicals for dissemination to wider audience. Our Lab Reports dissect and analyze a published,
distinctive legal transaction using multiple lenses and offer various perspectives, including some even overlooked
by the executors of the transaction. We regularly write extensive research articles and disseminate them through
our website. Our research has also contributed to public policy discourse, helped state and central governments in
drafting statutes, and provided regulators with much needed comparative research for rule making. Our discours-
es on Taxation of eCommerce, Arbitration, and Direct Tax Code have been widely acknowledged. Although we
invest heavily in terms of time and expenses in our research activities, we are happy to provide unlimited access to
our research to our clients and the community for greater good.
As we continue to grow through our research-based approach, we now have established an exclusive four-acre,
state-of-the-art research center, just a 45-minute ferry ride from Mumbai but in the middle of verdant hills of reclu-
sive Alibaug-Raigadh district. Imaginarium AliGunjan is a platform for creative thinking; an apolitical eco-sys-
tem that connects multi-disciplinary threads of ideas, innovation and imagination. Designed to inspire ‘blue sky’
thinking, research, exploration and synthesis, reflections and communication, it aims to bring in wholeness – that
leads to answers to the biggest challenges of our time and beyond. It seeks to be a bridge that connects the futuris-
tic advancements of diverse disciplines. It offers a space, both virtually and literally, for integration and synthesis
of knowhow and innovation from various streams and serves as a dais to internationally renowned professionals
to share their expertise and experience with our associates and select clients.
We would love to hear your suggestions on our research reports. Please feel free to contact us at
[email protected]
21
M U M BA I S I L I C O N VA L L E Y BA NG A LO RE
93 B, Mittal Court, Nariman Point 220 California Avenue, Suite 201 Prestige Loka, G01, 7/1 Brunton Rd
Mumbai 400 021, India Palo Alto, CA 94306-1636, USA Bangalore 560 025, India
tel +91 22 6669 5000 tel +1 650 325 7100 tel +91 80 6693 5000
fax +91 22 6669 5001 fax +1 650 325 7300 fax +91 80 6693 5001
S I NG A P O RE M U M BA I B KC N E W DE L HI
Level 30, Six Battery Road 3, North Avenue, Maker Maxity C–5, Defence Colony
Singapore 049 909 Bandra–Kurla Complex New Delhi 110 024, India
Mumbai 400 051, India
tel +65 6550 9856 tel +91 11 4906 5000
tel +91 22 6159 5000 fax +91 11 4906 5001
fax +91 22 6159 5001
MUNICH N E W YO RK
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80539 Munich, Germany Suite 326 New York, NY 10036, USA
tel +49 89 203 006 268
tel +1 212 464 7050
fax +49 89 203 006 450
Business Model Case Study – Fintech: Part I – Payment Aggregators and Pre-Paid Instruments

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M U M BA I S I L I C O N VA L L E Y BA N G A LO RE S I N G A P O RE M U M BA I B KC NEW DELHI MUNICH N E W YO RK

Business Model Case

© Copyright 2020 Nishith Desai Associates www.nishithdesai.com

Payment Aggregators and Pre-Paid Instruments

DMS Code: WORKSITE!565145.1

© Nishith Desai Associates 2020

§ Who’s Who Legal 2019:

§ Merger Market 2018: Fastest growing M&A Law Firm in India

I. Indian laws applicable to Payment Services 02

Payment systems in India are regulated by the Payment

framework under thresholds, which are yet to be notified.

Income-tax Act, 1961 § Any systematic and continuous soliciting of

14. I.T.A. No.: 1336/ Kol. / 2011

A. Amount A – New taxing right heavy regulation of such activities typically

arm’s length price create a new taxing right.

§ Allocation of taxable profits to market

§ Based on the definition, inter alia, a parent and

Finance Act, 2016 online sale of goods or online provision of services or

21. Section 165(1) of Finance Act, 2016.

28. If a service if delivered primarily over the internet without signif-

Pillar One Implications

§ Further, while 2020 EL is not applicable if Foreign Co has a PE in India, no similar

§ As a result, the India Co should be required to discharge GST obligations on a reverse

§ India Co should be required to obtain a GST registration.

§ If the India Co is a subsidiary of the

§ Same implications as for technology license as pointed out in Model 1.

§ As a result, the India Co should be required to discharge GST obligations on a reverse

§ India Co should be required to obtain a GST registration.

2. Technology Income Tax Implications

§ If the technology services are fully • a narrower definition of FTS owing to

Pillar One Implications

Equalisation Levy Implications

§ As a result, the India Co should be required to discharge GST obligations on a reverse

§ India Co should be required to obtain a GST registration.

Model 3 - Distribution of PPIs

§ Foreign Co is a company engaged in the issuance of PPIs.

§ The Customers redeem the PPIs with the Merchant.

29. Depending on its turnover.

§ Further, the question of whether Foreign • India Co can in defence

Pillar One Implications

Scope and Limitations of the Case Study

Technology 5G Technology in Investment in

May 2020 May 2020

© Copyright 2020 Nishith Desai Associates www.nishithdesai.com

Privacy & Data: 3D Printing: Ctrl+P Dispute Resolution

© Copyright 2020 Nishith Desai Associates www.nishithdesai.com

Construction Digital Health Introduction to

© Copyright 2020 Nishith Desai Associates www.nishithdesai.com

Investment Arbitration & India – 2019 Year in review Dispute January2020

Maximilianstraße 13 1185 Avenue of the Americas,

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