Newsletter for IT/ITES, Hardware & E-Commerce

YES – Information Technology Communiqué

September 2015

Highlights

Taxation Challenges in the e-Commerce Regime

Government of India to spend $6.88 billion on IT in

2015 RBI permits banks to use e-payments for imports FreeCharge Launches its Digital Wallet in partnership

with Yes Bank

OlaCabs Raises $225M in a Fresh Round

Quickheal files for IPO to raise Rs 250 Cr from fresh share sale

Content

Knowledge Update 2 New Developments 4 Deal Dynamics 5

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Knowledge Update

Taxation Challenges in the eCommerce Regime

E-commerce is the ‘new normal’ with goods and services having moved from a physical platform to a digital one i.e. goods and services being transacted online or being themselves digital. The current tax laws could pose significant challenges in e-commerce, especially international transactions, and this calls for a new tax system which specifically recognizes and deals with e-commerce. The Indian Revenue, having been aware of the unique challenges posed by e-commerce, constituted a High Powered Committee (‘HPC’) on “Electronic Commerce and Taxation” in 2001 to examine the then current as well as proposed tax treatment of e-commerce. More recently, in 2013, OECD and the G20 countries adopted a 15-point action plan to address Base Erosion and Profit Shifting (‘BEPS’) strategies adopted by companies to minimise their tax cost through artificial structures; Action 1 of BEPS deals specifically with tax challenges in e-commerce. Unique tax challenges presently posed by e-commerce Generally, income of a company is taxed in the country of incorporation. However, a company with global operations is also taxed in countries in which it carries on business (‘source country’) in case a physical presence i.e. a permanent establishment (‘PE’) is created in that country. Profits attributable to the business activities carried out by the PE in such source country may be taxed. The physical presence could be in the form of a place at the disposal of the company or presence of employee / dependent agent. The inherent nature of e-commerce permits companies to do away with the need to have a physical presence to carry out business operations in a source country and this gives rise to tax challenges for the source country. For instance, a challenge arises when a company carries out its business through websites, for example, providing services online, sale of music, etc. As per the Organization for Economic Cooperation and Development’s (‘OECD’) 2014 commentary on its model tax treaty, merely having a website does not lead to a PE; the website must be hosted on the company’s server in the source country to create a PE. The servers of e-commerce companies may be located outside the source country, which may lead to the source country being unable to tax the income in the absence of a PE. This challenge has also been recognized by the HPC in its report. One of the most challenging supply types identified by OECD is growth of cross-border digital supplies to end customers, where it is difficult for countries to tax supplies made by non-residents. The option for addressing the challenge includes requiring vendors to register and account for taxes in the country of importation. The non-resident suppliers of B2C supplies can register and account for taxes in the customer jurisdiction as implemented by the European Union in 2015. Another unique challenge arises in case of e-tailers. While maintaining facilities in a source country and making deliveries therefrom may not create a PE under the existing OECD model tax treaty, the same may lead to non-taxation in an e-commerce scenario, where maintaining a warehouse in the market country is a critical activity for an e-tailer which conducts all other activities through automated processes. Also, the e-commerce scenario makes it easier to fragment critical functions of a business and locate the same in different countries owing to increased communication. For example, the intellectual property rights may be situated in a low-tax country and profits in source countries could be reduced due to royalty payments for such rights. Such practices may result in avoidance of PE or low attribution of profits to the PE from a transfer pricing perspective. The retailers would pay appropriate taxes in B2B or B2C online sale transactions. Where the online portal provides platform for C2C transaction, who has the onus to discharge tax? Already, some

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States are treating e-tailers as ‘agents’ of the sellers and therefore directing them to obtain VAT registration and discharge taxes on behalf of the sellers. When the goods are shipped by the retailer and delivered by the e-tailers, there arises a challenge when the destination State demands VAT treating such sale as a local sale in their State. Aggregators were under the scanner of service tax authorities for rendering cab hiring services to customers. The Union budget 2015-16 has brought in clarity on this aspect. Aggregator or any of his representative office located in India is being made liable to Service Tax if the service is provided using the brand name of the aggregator in any manner. Characterisation of income is another key tax challenge in e-commerce and allied activities like connectivity or software payments. Broadly speaking, a payment could be characterised as business income, royalties or fees for technical services (‘FTS’) and the tax treatment is dependent on such characterisation – business income is not taxed unless there is a PE in the source country whereas generally, royalties and FTS are subject to withholding tax in the source country, irrespective of PE creation. Royalties broadly refer to any payment made for the use of commercial rights (e.g. copyright, trademark, patent), for information about industrial / commercial / scientific experience, for use of industrial / commercial / scientific equipment, etc. FTS broadly refers to payments for technical / managerial / consultancy services. Conclusion E-commerce is dynamic and is throwing up new business models at a fast pace. It is imperative that tax laws / administration keep pace meeting the challenges posed by such models to ensure appropriate taxation. Suggestions by the HPC report to deal with tax challenges of a digital economy include re-look at the current PE concept and replacing it with a ‘base erosion’ approach involving a low withholding tax on turnover. The OECD’s 2014 deliverable on ‘BEPS Action 1: Address the tax challenges of the digital economy’ suggests some measures such as modification of PE concept, progressive tax on the bandwidth usage of websites, withholding tax by financial institutions while making payments for digital goods / services. E-commerce transactions (such as airlines business) are subject to multi-layered taxes today. The Indian Government has proposed to introduce Goods and Service Tax (‘GST’) by April 2016. It is a destination based consumption tax. Under GST, there is shift of focus from manufacture/provision of service/sale to supply. Hence, GST should be a modern tax to cover additive manufacturing (3D printing), eliminate the anomaly of double taxation on software; address issues faced by e-commerce companies. It is pertinent to note that the OECD has concluded that it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. It is necessary to adopt global taxation principles for e-commerce which would form the cornerstone of a country’s national tax regime to deal with e-commerce scenarios. A guiding light could be the tax principles presented in the 1998 Ottawa Ministerial Conference on Electronic Commerce and accepted by OECD’s BEPS Action 1 - uniform taxation between conventional and electronic forms of commerce, minimum compliance and administrative costs, clear and simple tax rules, and fairness in taxation. The borderless nature of e-commerce calls for a coordinated effort at the international level to result in a level-playing field for multi-national companies in all countries.

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New Developments Government of India to spend $6.88 billion on IT in 2015

According to a Gartner forecast report, “Enterprise IT Spending for the Government and Education Markets, Worldwide, 2013-2019, 2Q15 Update”, led by the Digital India Programme Government of India will be spending USD 6.88 billion on IT products and services in 2015, an increase of 5.2 percent over 2014. Government spending on software will total 869 million USD in 2015, a 10.6 percent increase from 2014. As per the report, IT services, including consulting, implementation, IT outsourcing and business process outsourcing, is expected to grow 10 percent in 2015 to reach $1.6 billion with the BPO sub-segment growing by 21 percent. The report also forecasts that telecom services will be a USD 1.6 billion market, with the mobile network services sub-segment recording fastest growth of 3 percent in 2015 to reach USD 787 million. Impact: Investments in “Digital India” initiative, with a focus to allow access of government services on mobile, expansion broadband network, the “smart city” programme, and government’s spending on IT software and services for the implementation of these programmes, will be a stimulus for Indian IT sector. Most importantly, these investments will give the necessary fillip to India’s efforts in increasing domestic IT consumption on a large scale.

RBI permits banks to use e-payments for imports

The Reserve Bank of India has taken a decision to allow banks to process and settle import related payments facilitated by online payment gateway service providers (OPGSPs). RBI had earlier permitted banks to offer the facility to repatriate export related remittances by entering standing arrangements with OPGSPs in respect of export of goods and services. The limit has been fixed at fixed at USD 2,000 on import and USD 10,000 on export of goods and software as allowed under the foreign trade policy.

Impact: Prior to this decision, ecommerce companies were not specifically permitted by the RBI

to remit sales proceeds directly to the bank account of the overseas merchant for import of

goods made by such merchants. The decision is a significant step towards rationalizing the

regulatory framework pertaining to processing and remittance of import related payments to

the overseas merchants, and appointment of OPGSPs to facilitate the import related payment to

the overseas bank account of such merchants. Government of Odisha to invest Rs 4,000 crore on IT-ITeS sector in the next 5 years

Government of Odisha will invest Rs 4,000 crore from its budget in next five years towards IT, ITES and ESDM sector. The Odisha government has decided that every department would spend two per cent of planned budget or one per cent of total budget for electronic enabled service delivery to citizens as enacted under Right to Public Service Delivery Act. The state government is also setting up a Green Field Electronics Manufacturing Cluster in the state. Impact: The investment is an effort towards making Odisha the preferred destination for IT/ITES/ESDM companies. Further, the investment is expected to create more than one lakh jobs in the state.

India slips in ITU’s broadband penetration rankings

According to a recently released International Telecommunication Union (ITU) report "The State of Broadband", India's mobile and fixed-line broadband subscriptions in 2014 lagged behind as compared to other countries. The annual report placed India 131st in fixed broadband coverage, down from the 125th spot in 2013. While India's household internet access improved to 15.3% in

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2014, it earned India the 80th rank, five notches down from the previous year. However, the country's rank in internet access for individuals moved up six places to 135, out of 191 countries.

Google to bring free high-speed Wi-Fi to 400 railway stations in India

During PM Narendra Modi’s recent visit to Google’s headquarters, Google CEO Sundar Pichai announced a new project to provide free high-speed public Wi-Fi in 400 train stations across India. Google will team up with Indian Railways, and RailTel, making it the largest public Wi-Fi project in India, and amongst the largest in the world. The project, which will be adopted as a self-sustainable model, aims to cover 100 of the busiest stations in India before the end of 2016, and the remaining stations soon after. Impact: This project will help significantly in getting nearly one billion Indians who are not yet connected to the internet, online. Even with just the first 100 stations online (by the end of 2016), this project will make Wi-Fi available for more than 10 million people who pass through these stations every day.

Industry Results No Results declared in the month of September’15

Deal Dynamics

IT/ITeS Quickheal files for IPO to raise Rs 250 Cr from fresh share sale

Antivirus software maker Quickheal Technology has filed the Draft Red Herring Prospectus with the Securities and Exchange Board of India (SEBI) seeking permission for its initial public offering (IPO). The Pune-based company intends to raise Rs 250 crore by issuing fresh shares. It will also offer to sell 6.8 million shares held by promoters’ family and venture capital firm Sequoia Capital India Investment Holdings which had acquired a 10% stake in 2010.

Infogain acquires Blue Star Infotech for Rs 180 Cr

San Francisco-based IT services company Infogain will be acquiring BlueStar Infotech, the information technology (IT) arm of air conditioning major Blue Star for Rs 180.80 crore. As part of the deal, Blue Star Infotech will retain its real estate and other assets, valued at around Rs. 96.7 crore, after the sale of its IT business. Infogain, which has offices in the US, Pune and Noida, is backed by India-based private equity firm ChrysCapital, which infused $63 million (Rs 403 crore) in August 2015.

E-Commerce FreeCharge Launches its Digital Wallet in partnership with Yes Bank Ltd

To take on rivals Paytm and Flipkart in the mobile payments battle, Snapdeal owned online recharge and utility payments unit FreeCharge has launched a digital wallet in partnership with Yes Bank and payment bank licensee Fino PayTech.The new wallet will allow consumers to make payments for transactions on both Freecharge and Snapdeal. Snapdeal will spend Rs.1,000 crore towards cash-back offers and other discounts as festive shopping picks up during October-December, to attract consumers to start using FreeChrage digital wallet. Freecharge already has a wallet-like ‘FreeCharge Credits’ feature in its app, and by partnering with payment bank licensee, it can integrate it with savings bank accounts via IMPS and NEFT transfers and issue ATM and debit cards.

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Kalaari Capital Launches its Third $290M India Fund Vani Kola led venture capital firm Kalaari Capital has launched a new India fund of $290 million (Rs. 2000 crore). It’s the company’s third firm in nine years. The company has fully deployed its previous fund ($160 million) and invested in more than 60 startups in the country such as Snapdeal, Urban Ladder, Myntra, Zivame, Bluestone, etc. With its third fund, the company has already made a few investments. The investments from its first fund ranged between $1 million and $2 million.

OlaCabs Raises $225M in a Fresh Round; Will Invest Over $750M in Cab Leasing Business Ola Cabs has raised $225 million in a fresh round of funding. The new funding is led by existing investor Falcon Edge Capital with participation from New York-based hedge fund and its existing investors Tiger Global Management LLC and Softbank Corp. and six other investors, as per documents filed by the company with the Registrar of Companies (RoC). The firm has raised a total funding of more than $900 million till now. According to the RoC filling, Falcon Edge has invested around $78 million, and Tiger Global and Soft Bank have pumped in $60 million and $58 million, respectively. Other existing investors, Steadview Capital, the Hong Kong-based hedge fund, Pittsburgh based technology firm ABG Capital and Mauritius-registered FII LTR Focus Fund have contributed $3.1 million, $2.7 million and $1.8 million respectively. New investors in the round include JS Capital (M) Ltd and Parkwood Bespin, both Mauritius-registered entities, and Singapore-based high net-worth individual Daniel E. Neary, and the three together contributed $20 million. Apart from this, Ola will invest over $750 million in the coming year to expand its newly formed cab leasing business, that will enable flexibility for drivers to lease a car for a minimal initial deposit and monthly lease payments with an option to own the vehicle after a period of 3 years.

China's Didi Kuaidi firms up anti-Uber alliance, invests in Ola China's most popular ride-hailing app Didi Kuaidi has invested around $ 30 million in Indian peer Ola, forging a new alliance within a network of companies challenging US rival Uber Technologies Inc . Didi joins existing investors including SoftBank Corp, Falcon Edge, Singapore sovereign wealth fund GIC and Tiger Global Management.

Chip maker Qualcomm Incorporated announces $150 million fund to invest in Indian

startups Qualcom will raise a fund that will invest in Indian startups that are focused on contributing to the mobile and 'internet of everything' ecosystem. A Qualcomm Innovation Lab will be set up in Bangalore to provide technical and engineering support to Indian companies; the company will begin 'Design in India' initiative which will encourage creation of a local product design ecosystem.

Mobile adtech company InMobi has raised $100 million in new debt Mobile adtech company InMobi has raised $100 million in new debt from a consortium of lenders led by US-based Tennenbaum Capital Partners. InMobi has received nearly $60 million, of which $40 million has been used to pay off the debt raised last year from Hercules Technology Growth Capital (HTGC).

Snapdeal to Invest $100M in its Mobile-Only Zero Commission Marketplace Shopo

Snapdeal had acquired Shopo.in a couple of year back, and now the eCommerce firm will invest $100 million to enhance technology and expand the Shopo brand. Shopo is a mobile-only marketplace that works on on a zero commission model for vendors. It aims to bring small and medium businesses (SMBs) online, and already have 20,000 shops on the platform. It targets of getting one million such shops on Shopo in the next one year. Its app which is available for Android and iOS users, allows entrepreneurs and small shops to go online without

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submitting any documents and avoids long verification procedures. Also, they don’t have to pay any commission for the sale. Shopo has a chat-based model that allows sellers to connect with buyers, and individual selling can click a photo of their products and list on Shopo. Also, it is looking at offering SMBs help with logistics and payment gateways.

YepMe to Close $75M from Khazanah Nasional and its Existing Investors

Online fashion retailer, Yepme.com that is backed by Gurgaon-headquartered Vas Data Services, is in final stages to raise $75 million from a new investor Khazanah Nasional, Malaysia’s sovereign wealth fund along with existing investors. The company had already raised $13 million in series A round from TCS Capital and JS Capital, with participation from existing investors Helion Venture Partners and Capricorn Investment Group, earlier this year. Helion and Capricorn together hold around 60% stake in YepMe, while Morpheus holds around 8% and the founders hold close to 20% of the company.

Lingerie Portal Zivame Raises Rs. 250Cr from Zodius Technology Fund, Others

Zivame, Indian online lingerie retailer has announced that it has raised Series C round of Rs 250 crore from Zodius Technology Fund and Khazanah National Berhad, the strategic investment fund of the Government of Malaysia. Existing investors Unilazer, IDG Ventures and Kalaari Capital also participated in the round. The company plans to use the funds to continue dominating the category and provide a world class lingerie shopping experience to Indian women. The company also announced the launch of its app, the lingerie app for women in India.

Portea Medical Raises $37.5M in Series B Funding Led by Accel

Portea Medical, an Indian home healthcare platform has received $37.5 million in Series B funding led by Accel Partners. International Finance Corporation (IFC), a member of the World Bank Group, Qualcomm Ventures and Ventureast also participated in the round. The company will use the latest investment to fuel the company’s expansion in India where it currently operates across 24 cities and handles 60,000 visits in a month to patients’ homes. It will also utilize the funding to grow in other markets, including Malaysia where it already provides services in four cities.

PepperTap Raises $36M in Series B Funding from Snapdeal, Sequoia, SAIF and Others

PepperTap, Gurgaon-based an on-demand hyperlocal grocery delivery service, has closed a Series B funding round of $36 million, led by Snapdeal along with existing investors Sequoia India and SAIF Partners. The funding also saw participation from new investors like Ru-net, JAFCO, and BeeNext. In June, company officials had confirmed that they were soon closing a $60 million round in Series B. But it appears that they managed to raise only a part of it. The company is still looking to raise another $20 million now.

CredR Raises $15M in Series A from Eight Roads Ventures Used vehicles marketplace, CredR has raised an amount of $15M in Series A round of funding from Fidelity’s proprietary investment arm, Eight Roads Ventures. Raised funds will be used to scale up its product engineering & marketing and further to build its market product platform across 20 Indian cities. As per the deal Kabir Narang, Managing Director at Fidelity’s investment arm will join the board of CredR. The company raised seed funding earlier this year from investors including K. Ganesh, Kunal Bahl & Rohit Bansal of Snapdeal, and Amit Agarwal of Amazon. CredR is an online platform for buying and selling verified, pre-owned two-wheeler vehicles at a fair value. It connects buyers and sellers to ensure transparent and convenient transactions. CredR stands for Credible Resale.

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Practo Acquires Insta Health for $12M Healthcare platform Practo has acquired hospital information management solution provider, Insta Health Solutions for $12 million. Insta Health Solutions provides an end to end cloud based hospital information management solution (HIMS) that powers hospitals across 15 countries in India, South East Asia, Middle East and Africa. Some of Insta’s customers are Cloudnine, Deepam Hospitals, MyDentist in India, DaVita in India and Malaysia, Skyline Hospital in Manila, NMC Group of hospitals in UAE, Karen Hospital in Kenya and many more.

Practo acquires Qikwell to go deeper into hospital segment Bengaluru-based healthcare platform Practo has acquired smaller cross-town rival Qikwell for an undisclosed amount, as it aims to go deeper into the enterprise segment, especially hospitals. This acquisition, which is a mixture of cash and stock, makes them the world's largest heathcare appointment booking platform that manages nearly 40 million appointments every year. This includes appointments from Practo Search, Practo Ray, Insta and Qikwell. The acquisition will enable Practo to provide services like appointment booking and contactless payments, besides reduced waiting time for consumers at hospitals and clinics. Qikwell claims to currently offer appointment scheduling across 250 hospitals in 19 cities including Manipal Hospital, Fortis, Cloudnine, Narayana Hrudayala and many more.

Paytm to invest $10 mn in logistics data firm LogiNext Mobile commerce platform Paytm is investing $10 million in logistics data start-up company, LogiNext. The move is in line with Paytm's strategic plan to invest $150 million in a dozen Indian tech start-ups over the next few months. LogiNext is a privately held big data analytics start-up backed by Indian Angel Network. At present, LogiNext serves customers in the medium and large enterprise bracket.

Industrybuying Raises $9M from Kalaari Capital, SAIF Partners and Beenext Online marketplace for industrial goods, owned and operated by Delhi based MTech Engineering Pvt Ltd, industrybuying.com has raised an amount of $9 million (Rs.60 crore) in Series B round of funding from Kalaari Capital, Teruhide Sato’s Beenext and its existing investor SAIF Partners. Raised amount will be used to build on its eCommerce platform, establish a nationwide sales force, increase its vendor base and develop a full suite of digital offerings for B2B brands.

PE Firm TVS Capital Looking to Invest Rs. 25Cr in Beauty eCommerce Startup Nykaa

Private equity and venture capital firm, TVS Capital Funds Ltd is acquiring a minority stake in Mumbai based eCommerce portal, Nykaa that deals with wellness and beauty products. The PE firm will also participate in Rs. 60 crore series C funding round of the company and will invest about Rs. 25 crore. Previously, Nykaa has raised Rs. 20 crore from several investors by selling about 20% stake.

Bestdealfinance Raises Over Rs.20Cr from Kalaari Capital, Globevestor and Dexter Capital

Mumbai-based Bestdealfinance, which visions to be a financial supermarket and is currently growing with a focus on loans for retail and SME customers, has raised over Rs.20 crore from Kalaari Capital, YourNest Angel Fund, Globevestor and Dexter Capital. With the online financial market heating up, the company plans to use the raised amount in building on its technology automation in the financial processes. Currently its online presence is merely a lead generation platform to service over phone.

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Rocket Internet plans to sell its top companies in India Rocket Internet is considering a plan to sell its top companies in India, marking a big shift in strategy for the German firm. Instead of incubating startups, the founders of Rocket Internet will now invest directly in companies through a venture capital fund. Fashion retailer Jabong, food services aggregator Foodpanda and furniture retailer FabFurnish are on the block, with these once-dominant Rocket Internet ventures losing significant ground to a rush of nimbler rivals amid an unceasing churn in their operations.

Flipkart Buys Back its Logistics Arm From WS Retail Through its Subsidiary Instakart

Flipkart has bought back its logistics arm from WS Retail Services Pvt. Ltd, the largest seller on its platform to simplify its business structure ahead of an initial public offering that the company is looking forward to, a couple of years hence. The value of the deal has not been disclosed yet. The acquisition has been made by Instakart Services which is a new subsidiary of Flipkart. In July, Instakart had raised Rs.127 crore from Klick2shop Logistics Services International Pte, a company registered in Singapore. Klick2shop was incorporated in February and is registered under the same address as Flipkart Ltd, the group’s holding company, in Singapore.

Federal Bank starts corpus for startups Federal Bank has created a fund exclusively for investment in startups. The aim is to provide long term capital to startup companies with innovative ideas, potential for high growth and ability to bring socio-economic impact. The fund will be used for supporting small ticket projects in diverse sectors like digital financial services, biotechnology, high-tech farming, healthcare, logistics, e-commerce/e markets etc. The initial corpus is Rs 25 crore, which is scalable, according to a press release of the bank. To start with the bank will focus on projects in Kerala and Gujarat. In March this year, Federal Bank had joined hands with Startup Village in Kerala and MobME wireless to launch India's first focused FinTech Accelerator Programme, which aimed at speeding up technological innovations in the financial sector space.

Mahindra & Mahindra in talks with startups in agricultural sector to reach customers

directly India's largest tractor maker Mahindra & Mahindra has begun discussions for investing in and collaborating with startups in the agricultural sector to eliminate traders and have direct access to customers and farmers as the company looks to multiply its revenue ten times to Rs 10,000 crore in five to seven years. Mahindra Agri has recently added new business verticals such as dairy, pulses and edible oil as it repositions itself as an input and food company primarily from an input and crop care company. The group has earmarked Rs 1,000-1,500 crore to build infrastructure and acquire technology to scale up new businesses.

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