Tax Twist To Twitter’s Non-Compliance With New IT Rules
On more than one occasion now, the Delhi High Court has reprimanded social media platform Twitter Inc. for failing to comply with the new intermediary guidelines. Last week, a visibly upset high court bench of Justice Rekha Palli reportedly warned the company - "I am giving you a long rope, but the court won't do it forever."
Notified in February, the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, or intermediary rules in short, lay down additional compliances and due diligence norms for significant social media intermediaries—platforms with over 50 lakh users. This includes appointing a local chief compliance officer, resident grievance officer and a nodal contact person.
First it was that the international social media giant hadn't made the appointments. Now Twitter has made two of these appointments and is in the process of appointing the third. But its terminology used to designate these executives has drawn the ire of court.
High Court Says No To Interim Appointments
In June, a citizen filed a petition in the Delhi High Court against Twitter seeking its compliance with the IT Rules. The central government said Twitter was non-compliant as it had failed to make appointments in the manner specified in these rules.
On its part, the company told the high court bench that it had appointed an interim chief compliance officer and an interim resident grievance.
The government argued that there's no provision of an interim appointment under the rules. And that the individuals appointed for these positions must be employees of the company.
In the hearing of July 6, the company's lawyer Sajan Poovayya said an interim officer was appointed as a permanent appointment may lead to tax issues. And that Twitter doesn't have an incorporated office in India.
He also said the company was in the process of establishing a liaison office in the country and permanent appointments will be made after that.
Later, Twitter filed another affidavit informing the court that it has appointed the chief compliance officer and a resident grievance officer on contractual basis. The process of appointment of the nodal contact officer was underway, he said.
The high court once again expressed unhappiness regarding the appointment of a contractual employee and asked the company to file a more detailed affidavit.
So, why is Twitter hesitant to make the permanent appointments needed to abide by the rules?
As the company's lawyer Sajan Poovayya acknowledged, tax is one key reason.
Twitter's Tax Concerns
Facebook, WhatsApp and Google have already made the appointments and started generating user grievance reports as required by the new rules.
So it's unclear why the tax issue is specific to Twitter.
But broadly speaking, a non-resident foreign company having any employees and in some cases even a consultant in India is viewed as having a taxable presence in India, experts pointed out.
The taxable presence can be either by way of business connection under domestic law or a permanent establishment under the relevant treaty. In either of the situations, the income attributable to the presence of such employee/ consultant is taxable in India.Mukesh Butani, Managing Partner at BMR Advisors
For most digital companies without a presence in India, compliance with IT Rules may require them to revalidate their current tax position, Meyappan N, digital tax leader at Nishit Desai Associates, said. It all depends on the facts and potential exposure of each company to make an assessment whether they could face any tax consequences, he said.
As a general rule of thumb, there are strong arguments to state that activities by these officers are only incidental or auxiliary to the main business. Even if one presumes that there is a taxable presence the income which will be attributable in this case would be negligible.Meyappan N, Nishit Desai Associates
One way to view it is that opening a liaison office could just be an additional safeguard that Twitter wants to put in place before any permanent appointments are made.
In case of a liaison office, by virtue of the RBI approval, such employees are not permitted to undertake any commercial or revenue generation activity and hence such liaison office typically falls under the "preparatory and auxiliary" activity of permanent establishment and hence, not liable to tax.Mukesh Butani,Managing Partner at BMR Advisors
Twitter is likely to explain its position in detail to the high court this week.