Taxation of income derived from electronic commerce
The paper was contributed by Mr. Rashmin Sanghvi for the IFA Congress 2001 held at San Francisco.
This report is divided into two parts :
Rashmin C. Sanghvi.
1.1 For the purposes of this cahier, Electronic - Commerce or E-Commerce has been defined to cover - “commercial transactions in which the order is placed electronically and the goods or services are delivered in tangible or electronic (digitised) form”.
1.2 In India, Income-tax Act and Rules make no specific provision for electronic commerce. All transactions are taxed or not taxed irrespective of how the order is placed and how the goods are delivered. All authorities - Tax Officers, Courts and Authority for Advance Rulings determine the taxability of any transaction independently of whether the same will be covered by any known definition of electronic commerce or not.
1.3 As can be seen later in this report, India has a very fair and practical tax system for non-residents.
1.4 Government of India has appointed a “High Powered Committee” to consider the issues arising because of Electronic Commerce. The committee is to consider all issues and recommend if necessary, modifications in the existing Income-tax Act (I.T. Act), rules, and Double Tax Avoidance Conventions (DTCs). It is not known when the committee will submit its report. Any action may be taken by the Government only after the presentation of the report.
2. Scope of Discussion
1.1 Part I of this report is strictly within the scope prescribed by IFA. This part only discusses transactions that would be covered under the definition of electronic commerce as given above. Within this scope, there is further limitation of discussion to the following area:
1.2 The report only discusses income of the supplier of goods or services and no other intermediaries in the electronic commerce transactions - like internet service providers, web site hosts etc. Further, the report only considers issues arising from “source of income” and not from “residential status” of the assessee.
1.3 In India Income-tax is levied only by the Central Government and not by any other State Government or Municipalities. Hence the discussion concentrates only on national level taxation.
1.4 This part of the report does not cover issues arising because of permanent establishment and discussion on Characterisation of Income is kept to the minimum.
1.5 For the purpose of this discussion, reliance is placed on the Indian Income-tax Act, rules, Double Tax Avoidance Treaties signed by Government of India, and the Indian case law.
3. Electronic Commerce and Source-Based Taxation under Income-tax Act.
3.1 There can be several grounds based on which a Government can assert its right to tax (Tax Jurisdiction). And there can be several grounds based on which the tax payor can dispute Government’s right to tax. Electronic commerce raises a whole range of points of disputes / differences of opinion. For the purpose of this report however, we are restricting ourselves to issues related to “source”.
Paragraph 3 discusses the provisions under the Act.
3.2 Under the Indian Income-tax Act & Rules there is no specific provision described as “source rules”. In this report, the provisions that have the effect of “source rules” are treated as “source rules”.
3.3 Section 5 of the Income-tax Act prescribes the ‘Scope of Total Income’ or, in other words, Government’s Jurisdiction to tax.
The section provides that in case of an Indian resident, his world income is taxable in India. In case of a non-resident, the section does not use the word ‘Source of Income’. Instead, it uses the following language :
“… the total income of a non-resident includes all income from whatever source derived which -
a. is received or is deemed to be received in India in such year by or on behalf of such person; or
b. accrues or arises or is deemed to accrue or arise to him in India during such year.”
3.4 The above definition means that if any income is received in India, irrespective of the residential status and source of income, the same will be taxable in India. Also, an income which is accruing or arising in India (may be considered as “sourced in India” and hence) is taxable in India. The section empowers the Government to make deeming provisions in the law and extend the scope of “source”.
3.5 It may be noted that while the section extends the scope of source to ‘receipts in India’; it does not extend the scope to ‘payments from India’.
3.6 Section 9 of the Income-tax Act makes necessary provisions to determine which incomes shall be deemed to have accrued or arisen in India. The relevant provisions are briefly stated below.
3.7 Section 9(1)(i) provides that all income accruing or arising to a non-resident from a “business connection” in India shall be deemed to have accrued or arisen in India. In other words, such income shall be covered within the scope of taxable income. Any person from whom the non-resident is in receipt of income in India becomes the business connection - section 163(1)(c). Please also see section 160(1)(i) and section 161. The Indian person who becomes the business connection is treated as an agent of the non-resident. The agent is responsible to deduct tax at source and pay the same to the Government of India. (Chapter XV - “liability in special cases”.)
Note - Under section 163, it is not important whether the income is received in India or outside India. The fact that the non-resident has received income from a person in India is sufficient to make him liable to tax in India provided that it is attributable to operations carried out in India. Consider an illustration, A non-resident Mr. N provides services in India to an Indian resident Mr. I. Mr. I pays to Mr. N from his bank account in Jersey. Still, the payment would be covered under S.163(1)(c).
3.8 This provision is circumscribed by a proviso that the scope of the total income shall extend only to income reasonably attributable to the operations carried out in India. [Section 9(1)(i)(a)] Thus, income attributable to operations carried on outside India are not covered within the scope of taxable income. This is a broad principle for attribution of income.
3.9 Central Board of Direct Taxes has issued a circular (Number 23 dated 23rd July, 1969) clarifying that non-resident exporters of goods shall not be liable to tax in India just because they have exported goods to India and received export proceeds from India. This circular is based on Supreme Court decision in R. D. Agarwal 56 ITR 20 and other decisions. Unfortunately, the circular covers only export of goods and not export of services. However, reliance may be placed on the relevant court decisions to draw an inference that even in case of services, non-resident exporters of services shall not be liable to tax in India except where a specific deeming provision covers their income.
3.10 In most cases of electronic commerce transactions, the non-resident supplier of the goods & services may not carry out any transactions in India. In such cases, if his income is covered only by the category “business income” then he may not be taxable in India.
3.11 However, section 9 and section 5 are two different provisions. If an income is covered under section 5 (the income is received by the non-resident or his agent in India), then the same will be taxable in India irrespective of where the business operations are carried on - Circular 23 will not apply. Hence non-residents plan their affairs to receive their amounts directly outside India.
3.12 Summary of the Indian I.T. Act. Provisions :
Non-Resident is liable to tax in India if the income is covered in any of the following categories:
3.12.1 Section 9 - (1)(i) He has carried out operations in India; and He has earned net profits out of revenues that can be attributable to the above referred operations;
3.12.2 Section 9(1)(vi) He has received royalties or technical know-how fees & (vii) from an Indian resident; or a non-resident in prescribed circumstances.
3.12.3 Section 5 - (2) The income is received in India irrespective of the source;
The income is accruing or arising in India.
In all the above referred cases, a permanent establishment in India is not necessary for taxability in India.
3.12.4 For non-business incomes like salaries, interest, etc. section 9 makes specific provisions. However, the same are not relevant to electronic commerce and hence not discussed in this report.
The above discussion is on some of the provisions of Indian Income-tax Act. In the following paragraphs position under DTC is discussed.
4. Some Case Law -narrated very briefly without comments.
4.1 Credit Card Company.
Brief Facts - Assume a bank (say, American Express Bank) has a subsidiary in India providing credit card facilities. The American Express Bank - (AEB) provides computer (hardware and software) located in U.S.A. for collection & analysis of credit card related data. Its subsidiary in India (AEB India) can access this information through internet for a charge.
Issue - Is the amount paid by AEB India to AEB - a business income or royalty? Is it taxable in India?
Ruling - The amount is royalty income and hence taxable in India on the gross amount at a flat rate as per Indo-U.S. treaty.
4.2 Computerised Reservation System (CRS) for airline bookings.
(Since it is a department level decision, it has not been reported.)
Facts - A CRS Company maintains computer hardware and software in country ‘A’ outside India. Several airline companies associate with the CRS company for selling their tickets through the system. The CRS company provides booking services throughout the world to travel agents. It has a subsidiary in India which provides local hardware - ‘routers’ and software to the travel agents.
The travel agents use the computerised reservation system and book tickets.
Air line companies make payments to the CRS company based on tickets booked through the system.
Issue - Can the amounts paid outside India by non-resident air lines, to the non-resident CRS company - be taxed in India! Decision by the department.
The Income-tax officer and the Commissioner Appeals have decided that this amount is taxable in India.
Reasoning: In electronic communication system, speeds are so high that ‘space collapses’ and ‘time stops’. The CRS company is deemed to have a “virtual” presence in India. It has a permanent establishment in India. It is liable to tax on the amounts received from airline companies as business income.
Note: These are two extreme illustrations of the kind of problems created in an attempt to apply existing law to E-Commerce.
5. Double Tax Avoidance Conventions & Source
5.1 India has a special clause in its treaties for technical service fees. The definition under the treaties varies from country to country. This report considers as an illustration, a normal treaty like Indo-U.K. treaty. Article 13 provides for both - royalties and fees for technical services (R & T).
5.2 Extracts of the relevant clauses within the article are reproduced below :
13(3) Definition of Royalty.
(3)(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
(3)(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
13(4) Definition of fees for technical services.
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 to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which:
13(5) The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid:
5(d) for services for the private use of the individual or individuals making the payment;
13(7) Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borne by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
5.3 A provision similar to section 9 under the I.T. Act is made in article 13(7). However, this article simply makes a deeming provision that a R & T payment will be deemed to arise in India if the payor is an Indian resident. The concept of utilisation in India is absent in the treaty. This works both ways.
i. Once an Indian resident makes a payment, it is liable to tax in India under the treaty. Even if it is not used in India, still the receiver remains liable to tax.
ii. If a non-resident makes payment to another non-resident for R & T where the “utilisation” is in India, it may escape the tax under the Indo-U.K. treaty.
(Note - In a similar situation under Indo-U.S. treaty, the amount would be taxable in India. Article 12(7)(b) provides for tax based on “utilisation”. Such a provision is not made in Indo-U.K. treaty.)
6. Having considered the broad principles, let us consider specifically - royalties & technical service fees. Now the Income-tax Act, the DTCs and their interaction is discussed.
6.1 Royalty Section 9(1)(vi) of the Indian Income-tax Act - following incomes are deemed to accrue or arise in India - royalties payable by -
a. The Government of India; or
b. Any resident of India. However, royalties paid for business etc. outside India is not deemed to be taxable in India.
c. Any non-resident of India - provided that the payment is made for business etc. in India.
6.2 Note - In case of payment by Government of India, royalties are always taxable in India. In case of a resident, the same are taxable if the source of royalty (any trade mark, patent etc.) is utilised in India. Even if a non-resident makes payment to another non-resident, outside India, the same can be taxable in India if the source of royalty is utilised in India. Thus, the concept of “utilisation in India” has been brought in to extend the definition of “source”.
6.3 The term royalty has been defined under section 9(1)(vi) explanation 2 - to include consideration paid for-
a. The transfer of all or any rights including licence in respect of a patent, model design etc;
b. The use of any patent, … , model , design, etc.
… … …
c. The transfer of all or any rights including licence in respect of copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or radio broadcasting but not including consideration for the sale, distribution, or exhibition of cinematographic films;
d. The rendering of any services in connection with the above referred activities.
Note - Normal definition of royalties is thus extended.
6.4 Section 9(1)(vii) - Technical Service fees.
OECD Model Tax Convention on Income & Capital does not provide for a separate category of technical service fees. Similarly, the U.N. Model also does not provide for a category of technical service fees. However, India insists on having a specific clause in DTCs for technical service fees. Similarly, within the Income-tax Act, a deeming provision is made for extending the scope of taxable income to cover technical service fees. The deeming provisions extending the scope of source are similar to the royalties. The definition of technical service fees is briefly as under:
“… any consideration for the rendering of managerial, technical, or consultancy services including the provision of services of technical or other personnel. “
6.5 Thus, the Parliament has extended the definitions of royalties and technical service fees; and extended the scope of “source” to “utilisation”. Wherever a receipt by a non-resident can be covered under these extended definitions, the same becomes taxable in India. Once taxable, the payor is responsible for withholding tax at source and paying the same to the Government of India.
7. EXISTING SOURCE RULES :
Let us consider the above existing tax provisions and how they apply to electronic commerce.
7.1 As yet, no specific provision is made for the determination of source of income from electronic commerce. We have to apply the existing source rules to the transactions that we consider as electronic commerce.
7.2 There are no specific rules for treating income attributable to functions performed, in whole or in part, by equipment (as opposed to human beings). Hence the questions pertaining to the use of server / website cannot be determined by any existing legal provisions.
7.3 In the present situation, it would not make any difference whether a business is done as electronic commerce or otherwise. In other words, following transactions would not make any difference in taxation:
a. Whether the communication is made through internet or through the conventional means like telephone / fax / letters etc.
b. Whether a software programme is delivered over the internet or on a floppy or C.D. at “off the shelf” software store.
c. Whether a book or a recording is delivered in physical form or is downloaded on computer. This is in keeping with the principle that there should be neutrality between electronic commerce & regular / conventional commerce. (This is not a result of a deliberate policy decision. It is merely a consequence of the fact that as yet, no rules are made for electronic commerce.)
7.4 India has not made any special - source of income - rules for globally integrated electronic commerce businesses.
7.5 The existing source rules as discussed under section 9 above, will not make any difference whether a service is delivered within India or from outside India.
7.6 There is no specific source rule for electronic commerce. However, existing rules can be applied to determine the taxability of electronic commerce. If an activity is considered as royalty or technical service, payments made for the same would become liable for withholding tax. For example - an Indian resident accesses a non-resident’s website outside India. He watches a feature film or he listens to some music on the computer for one hour. For this service, he pays U.S. $ 10. Prima facie, this can be considered as royalty under section 9(1)(vi). It would be taxable in India.
Under the Indo-U.K. treaty, an individual taking a technical service for his own use, is not taxable in the country of source [Article 13(5)(d)]. However, if it is treated as royalty, it would be taxable.
In short, the taxability would depend upon Characterisation of income.
7.7 Indian companies have started a vigorous drive for internet business. Many companies are developing own websites and providing electronic commerce services. When they get income from abroad, as Indian residents, they will be liable to full tax in India. If any tax is payable abroad, they will get the credit for the same against Indian tax liability.
8. Whichever is more Beneficial.
8.1 The provisions of the Indian Income-tax Act and DTCs may be different in several cases. The Indian law provides that in case of difference in provisions, whichever is more beneficial to the assessee shall be applicable to the assessee.
Such a benevolent relief is available only to non-residents.
This provision is made under:
i. Section 90(2) and
ii. Circular No. 333 dated 2nd April, 1982 issued by the Central Board of Direct Taxes.
9. Opportunities for avoiding tax.
Such a provision (whichever is more beneficial to the assessee) provides good opportunities to avoid Indian Income-tax. Consider an illustration.
The definition of “royalty” under section 9(1)(vi) does not cover equipment leasing.
Some DTCs executed by India include lease charges under the definition of royalty.
An assessee earning lease rentals from India can claim that for him, the Income-tax Act provision is more beneficial, hence he chooses to be governed by the Act. Hence his lease income would not be taxable in India.
10. Withholding of tax - Finality.
Under sections 44AC & 206C, Government of India had made special provisions for collection of tax. Some specific traders were covered under this scheme. Once the tax was collected & paid to the Government, it was final. Assessee had no option to claim that he had lower income, or losses.
This decision was challenged in a Court of law. Ultimately the Supreme Court “read down” the provisions and held that the assessee always had an option to file his return of income. If he had lower income or losses, he could claim appropriate refund.
(Sanyasi Rao; 219 ITR 330; Supreme Court).
In several other sections, covering receipt of income by non-residents, tax withholding provisions are made. In some cases, the tax withheld is final. It is submitted that the above referred decision of the Honourable Supreme Court will not apply to these cases.
11. Policy Issues Regarding Electronic Commerce.
As reported above, the Electronic Commerce Committee may provide many suggestions for changes in policies. The report is yet to be finalised.
Independent of the committee’s proceedings it may be reported that several persons have expressed following view :
Current balance between “Source based taxation” and “residence based taxation” is more in favour of “developed” countries and against the “developing” countries. Current balance needs a thorough re-examination.
Whether and how the re-examination may take place will be known only later.
12. Administrative Issues.
India has elaborately developed, fair rules for compliance. While there is no specific provision for electronic commerce, the normal procedure would apply.
12.1 Income-tax Returns.
Every person who is liable to tax in India (irrespective of whether he is a resident or not.) has to file his own tax returns with the Income-tax department. The return has to be filed suo-moto and no notices are required to be served by the department. (Section 139.)
Where the department considers that a person is liable to file return & has not filed returns, the department may serve a notice on him to file the return. (Section 142)
If a person does not file the return, the Income-tax officer can, based on available information, estimate his income and issue notice of demand for collection of tax (Sections 148 to 153).
12.2 Tax Recovery.
The recovery of tax has been ensured in three different manners:
12.2.1 Receiver’s duty to pay (Sections 209 to 211 & section 140A);
12.2.2 Payor’s duty to withhold (section 195); and
12.2.3 Foreign Remittance restrictions (FEMA).
12.2.4 The non-resident person receiving income from India - which is liable to Indian tax on source-basis (Receiver), is liable to pay advance income-tax during the previous year in which the transaction takes place. At the time of filing the income-tax return, shortfall, if any has to be paid-up. This is called tax on self-assessment. Non-payment of tax can attract interest, penalty and prosecution.
12.2.5 Similarly, the payor of the income is liable to withhold tax at source and pay to the Government. Non-payment can attract interest, penalty, prosecution and disallowance of expenses. This liability to withhold and pay tax applies irrespective of whether the payor is a corporate business or an individual; and whether the utilization of product / service is for business or for personal purposes.
There would be no ‘double-payment’ of tax. Once the payor has withheld tax at source, the receiver shall take credit for the same while making final payment.
12.2.6 Under Foreign Exchange Management Act (FEMA), instructions have been issued that no bank shall permit a foreign remittance unless the tax deductible thereon has been deducted and paid to the Government.
If excess tax has been withheld or paid; the receiver or the payor can file return and claim refund.
12.3 While these elaborate provisions for collection of tax are made, significant reliefs are also granted where the receiver considers that he is not liable to tax.
12.3.1 The receiver, or on his behalf the payor can file an application with the Income-tax officer. [Section 195(2)] The applicant can claim that - either the whole amount is exempt or that a lower tax is applicable. If the officer is satisfied about the claim, he can issue a certificate for non-payment or lower payment of tax.
12.3.2 The receiver can also file an application for a blanket certificate. If the officer is convinced of the validity of such a claim, he can give a certificate to the receiver valid for one year. This certificate will be valid and applicable to all the Indian residents who might make payments to the receiver. All those payors can, based on the certificate, withhold an amount lower than the rate prescribed by the I.T. Act or the treaty; or not withhold any tax at all - as may be provided in the certificate.
12.3.3 The tax payors have one more option. Instead of applying to the Income-tax officer for the certificate, they can also ask for a similar certificate from a chartered accountant. It is the duty of the concerned chartered accountant to study the relevant law and decide taxability. In his certificate, he will certify whether any tax is payable at all. If any tax is payable, he can certify the applicable rate. If no tax is payable, he may give appropriate certificate.
The payor has to execute an undertaking that if later on, it is found that more tax was payable, he shall pay the same.
Based on this certificate from the chartered accountant, the payor can make requisite payment and remit the funds to the foreign supplier of services / goods. This payment could be without any deduction of tax or by deducting lower tax - depending upon the certificate. The bank will also permit foreign remittance based on the chartered accountant’s certificate.
It is the duty of the payor to file undertaking with the bank. Bank will inform the RBI and the Income-tax officer that payment has been remitted abroad after deducting lower tax or no tax.
The payor is required to make declaration to the income-tax officer. The receiver has to file income-tax return at the end of the year. On assessment, if the income-tax officer finds that the tax withheld at source is less than the required tax, he can serve notice of demand on both the payor as well as the receiver.
This system places confidence in the tax payor and his chartered accountant. If there is any error, it can be rectified at the time of assessment. If there is any willful misconduct; penalty, interest and prosecution can be imposed.
13. Attribution and Allocation of Income From Electronic Commerce.
As discussed earlier, India has not yet made any special rules for electronic commerce. There are some broad rules for attribution and allocation of income.
While the Income-tax Act provides for very few rules for source of income or for attribution of income, several decisions by courts have made source rules. Some relevant judge-made source rules are given below. It may be noted that most of these decisions pertain to an era before Independence. They are special to the Indian legislation - Section 5 defining the scope of total income.
13.1 Place of accrual of profits -“It would be nearly impossible and wholly unwise to lay down any general test to determine the place where profits or gains of business or employment accrue. In some cases it may be the place of the formation of the contract, but other factors, e.g. the place where the contract is carried out or acts are done under the contract, may be decisive in certain circumstances. The question should be decided on the facts of each case in the light of common sense and plain thinking, and too much importance should not be attached to, or emphasis laid upon, the niceties of verbal definitions.” (Page 225 of Kanga & Palkhivala’s commentary.) (Several case laws including Performing Rights Society V. CIT, 106 ITR 11, Supreme Court.)
13.2 Sale of goods.
13.2.1 “As a general rule, the place where the contracts of sale are made or sales are effected can be considered as the place where profits arise.” (66 ITR 159 - Supreme Court.)
13.2.2 “A contract is made at the place where the offer is accepted.” (28 ITR 184 - Supreme Court.)
13.2.3 “In the case of sale of unascertained goods, the sale takes place where property in the goods passes to the purchaser.” (66 ITR 159 - Supreme Court.)
13.2.4 “If the right of disposal is reserved till the payment is made, the property passes and sale is effected at the place where the payment is made against delivery of goods or documents of title.” (47 ITR 841.)
13.3 “Profits accrue at the place where the business transactions are actually effected and not at the place from which the business is controlled or directed.“ (1 ITC 37.)
13.4 “If contracts are made abroad, the fact that knowledge, skill & judgement are exercised in India, is not important. The profits accrue where the contracts are made - i.e. abroad.” (6 ITR 521.)
Note - Based on this ratio, most cases of technical know-how fees and royalties where held to be not taxable in India. Tax payors planned their affairs in such a way that contracts were executed abroad.
In the year 1976, sections 9(1)(vi) & (vii) were introduced in the law making deeming provisions which have been discussed earlier in paragraph six. These provisions have nullified the impact of the above case law to the extent of royalties & technical service fees.
These deeming provisions apply only in the cases of royalties & technical services. They would not apply to business income.
13.5 India the place where profits accrue or arise or are received is important. Under section 5, control & management of the enterprise is not important. [Under proviso to section 5(1), control & management are important in the case of a person not - ordinarily - resident. However, this proviso is not relevant to our discussion & hence not elaborated here.]
13.6 The principle of apportionment applies in cases where the question is how much of the income may be regarded as accruing in India and be charged accordingly under section 5(1)(b) or 5(2)(b). No question of apportionment arises in cases where the income is received in India and is consequently chargeable under section 5(1)(a) or 5(2)(a).
13.7 Section 5 - explanation 1. If an income accrues or arises outside India, just because it is taken into account in a balance sheet prepared in India; it shall not be deemed to have accrued or arisen in India.
13.8 The normal system is for the assessee to voluntarily file income-tax return. He has to determine the income taxable in India or outside India based on standard accounting norms. The income-tax officer will apply his best judgement at the time of assessment of income-tax return. If the attribution and allocation made by the tax payor is reasonable, the officer may not disturb it.
13.9 There is no specific rule regarding the attribution of income derived from functions performed with the assistance of equipment rather than solely by human beings.
13.10 For allocating income over various units of a globally integrated business, following rules are available.
Under section 9(1)(a) only that income is taxable in India which can be attributable to operations carried on in India.
Rule 10 provides alternative methods for allocation of income to Indian business. The choice of the applicable method is to be made by the Income-tax officer.
i. If the accounts maintained by the assessee are good enough to definitely ascertain the income taxable in India, the same shall be accepted.
ii. If the Income-tax officer considers that the income cannot be definitely ascertained, he can adopt any of the following three modes:
a. He may apply a reasonable percentage to the turnover.
b. He may consider the global and Indian turnover; and the global profits. Indian profits can be deemed to be in the same proportion of Indian turnover as the global profits bear to the global turnover.
c. Any other manner that the officer considers suitable.
Note : Instead of prescribing specific guidelines in the law; the tax payor and the tax officer are granted considerable freedom.