SIGNIFICANCE OF HUMAN INTERVENTION IN OIDAR UNDER GST

[Siddeshwar Yelamali]

CA Siddeshwar Yelamali, Partner, Singhvi Dev & Unni LLP

CA Dilip M Gokhale, Assistant Manager, Singhvi Dev & Unni LLP

Human Intervention and OIDAR- Two sides of the same coin:

A time travel indicates that the catchy terminologies such as ‘Machines’, ‘Computers’, ‘Smartphones’, ‘E-commerce’, ‘Robotics’, ‘AI’ so on and so forth ruling the modern world- are nothing but the result of the 2 giant leaps in the field of technology which the world has witnessed since 18^th century- first being shift from MAN to MACHINE technology in the form of industrial revolution; second being shift from MECHANICAL AND ANALOGUE technology to DIGITAL technology in the form of digital revolution- termed as a game changer in carrying out commercial activities in modern world. These revolutions triggered as a result of human intelligence or one can say, human intervention.

Amidst experiencing the humongous impact of these revolution from past so many decades, the role of human intelligence / intervention though reduced, has not lost its significance.

The human intelligence/ intervention acts like a trigger to entire evolution of technology. In other words, a machine cannot start/ digital transactions cannot start/ complete without human effort. Both technology and human effort has to go hand in hand. In simpler words, just as a man cannot be replaced by a machine fully, the offline mode cannot be replaced entirely by online mode. The digital technology can only complement the human efforts saving considerable amount of time. However, the human intervention is still a need of the hour in order to manage the technology as a whole.

Nowadays, the digital revolution is vastly dependent on the ‘information and database’- which is nothing but a universal bread and butter to carry out commercial activities across globe.

In the current times, the businesses pounces on the information and database for analysis and decision making and commercial activities. On exploring the commercial opportunity, various businesses have engaged themselves in gathering relevant information and converting it into various forms and facets of database which are being given access and retrieved by end users which has led to conceptualisation of Online Information database access and retrieval (OIDAR) services. This has curiously caught the eye of the taxation world, globally.

In India, especially, the Income tax laws and GST laws have consciously taken into account the need for bringing the same into tax net and accordingly defined the scope and boundaries of OIDAR and tax treatment for the same. The definition of OIDAR services under GST laws has been borrowed from erstwhile service tax provisions. The definition of OIDAR services under Section 2(17) of IGST Act, 2017 has been reproduced below:

“online information and database access or retrieval services” means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as, ––

(i) advertising on the internet;

(ii) providing cloud services;

(iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;

(iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;

  (v) online supplies of digital content (movies, television shows, music and the like);

  (vi) digital data storage; and

 (vii) online gaming;

Measuring Human intervention - A pandora box

Perspectives under Indian tax laws:

As far as GST laws in India is concerned, the services to be qualified as ‘OIDAR services’ has to fulfil various criteria mentioned in the definition itself.

• The first being the delivery of online services which is mediated by information technology over the internet or an electronic network;
• The nature of supply is automated; and
• Involving minimal human intervention where the supply cannot be ensured without information technology.

What is measure for determining ‘minimal human intervention’ is not provided in the GST laws.

One of the deciding factors to determine a service is OIDAR or not, is the level of human intervention indicated by the phrase ‘minimal human intervention’. This phrase has caught an eye of various stakeholders across India; it seems the law maker has failed to present a yardstick to measure the same i.e. to what extent a human intervention can be measured as minimal or beyond, except providing indicators by way of illustrations for the services which qualifies as OIDAR- termed as a positive list of services. This has led to opening up of pandora box - resulting in various ongoing litigations across Courts in India posing up a greater challenge in identifying OIDAR services and subjecting them to GST.

Even though the lawmaker has not provided clarity on the quantum of human intervention to determine whether services can be classified as OIDAR or not, assuming the other conditions are being fulfilled, we can take a cue based on the insights of the decisions taken by advance ruling authorities.

The most significant being ruling by Karnataka Appellate Authority for Advance rulings in the case of IN RE: M/S. NCS PEARSON INC, [2020 (11) TMI 956 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA]. The applicant was engaged in the provision of computer-based test (“exams”) administration solutions to its clients (“test sponsors”) like educational institutes, professional licensing organizations, etc.. On the question of applicability of OIDAR services in case of human scorer involved for validation of automatic scores generated from the system, it was held by Karnataka AAR that the scoring done by the human scorer to validate the automatic scoring systems is to be regarded as being within the realm of minimum human intervention and accordingly the said type of tests and scoring system to be classified as ‘OIDAR services’ and thereby liable to GST.

Further, CBIC has released e-flyer on OIDAR services wherein it has considered various scenarios to determine whether services as OIDAR or not i.e., emailing of document/ live classes by tutor cannot be classified as OIDAR services whereas automatic delivery of documents through electronic network and virtual pre-recorded classes are within the threshold of ‘minimal human intervention’ and comes within the ambit of OIDAR services.

Even though CBIC/ Courts in India have given key indicators in measuring the human intervention, the threshold limit- between minimum and reasonable/ maximum- assessing level of human intervention apparently is a very thin line.

As a reference, considering Income tax laws in India, there are plethora of rulings on taxability of services referring to the aspect of human intervention, the most significant of which are as follows:

1. The human intervention is necessary for a technical service to qualify as Fees for Technical Services and liable for TDS under Section 194J of Income tax Act, 1961- Ruling by Apex court dated 12.08.2010 in the case of COMMISSIONER OF INCOME-TAX VERSUS BHARTI CELLULAR LTD. & HUTCHISON ESSAR TELECOM LTD. [2010 (8) TMI 332 - SUPREME COURT]. The said ruling has been referred by the Apex Court while pronouncing its ruling dated 29.03.2016 in the case of C.I.T. -4, MUMBAI VERSUS M/S KOTAK SECURITIES LTD. [2016 (3) TMI 1026 - SUPREME COURT]
2. Referring to the above ruling, ITAT (Kolkata) dated 12.04.2013, in the case of INCOME-TAX OFFICER, WARD 12 (2) , KOLKATA VERSUS RIGHT FLORISTS (P.) LTD. [2013 (4) TMI 338 - ITAT KOLKATA], has held that the whole process of actual advertising service provided by Google & Yahoo, even if it be a technical service, is not covered by the limited scope of Section 9(1)(vii) of Income Tax Act, 1961. Consequently, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Act or the India US and India Ireland tax treaty. As part of speaking order, ITAT has categorically put forth the analysis of presence of human intervention in managerial, technical and consultancy services, the extract of which are as follows:

1. The lowest common factor in ‘managerial, technical and consultancy services’ seems to be the human intervention, because while these three words are of wide scope and are in varied field, the only common thread in these words seems to be that the services, which are essentially professional services in nature, can be rendered with human interface. A managerial or consultancy service can only be rendered with human interface, while a technical service can be rendered with human interface as also without human interface.

Further, quoting the definition of the words ‘managerial’ and ‘consultancy’, as per the Shorter Oxford English Dictionary, Fifth Edition, the ITAT has categorically mentioned that a managerial service/ consultancy service having a characteristic of manager/ consultant definitely carries a human element to it. In other words, a machine cannot be a manager/ consultant- thereby applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to Section 9 (1) (vii) of Income Tax Act, 1961 would also have to be construed as involving a human element.

The Indian tax authorities have referred and addressed the aspect of human intervention, time and again in its rulings/judgements as referred above.

Perspectives under Global tax laws:

At this juncture, there are also different perspectives and reference on this aspect under the taxation models which exists in global countries such as:

Malaysia Service Tax Act, 2018: In terms of the definition under Section 2 of the Service Tax Act, 2018, the features of digital services are as follows:

1. Delivered or subscribed through internet or other electronic network.
2. Cannot be obtained without the use of information technology and
3. The delivery of the service is essentially automated i.e., minimal or no human intervention.[1]

Singapore GST: The definition of ‘Digital services’ under Seventh Schedule of the Goods and Services Tax Act[2] is in similar lines and consistent with the features mentioned in terms of the corresponding definition under Malaysia Service Tax Act,2018, as mentioned supra.

The model of GST implemented in India has taken a leaf out of Malaysian tax laws and have incorporated the taxation treatment on OIDAR services.

Factors to keep in mind around human intervention:

The challenge to determine the human involvement is that it cannot be proven by a document trail, instead with a detailed analysis and demonstration of process of an entire activity/ chain of events in rendering the services through a digital medium, will surely unveil the level of human involvement.

In order to overcome this challenge, it is important to expose - myth which persists among us on the functions of a software which is the face of the digital business model and what the reality actually is- from the point of view of human intervention:

Myth	Reality
Digital business model- a replacement to offline utility	Digital business model- Not a replacement but a complement to offline model
Embedded software: Is automated to address all the issues. Is fully self-sufficient and accurate Comprehensive to address all situations	Embedded software: Is automated . Addresses only  repetitive/used cases and not isolated/non-repetitive cases. Prone to frequent updates/validations with human effort. Is a manmade product (built on coding) and does not act as a universal solution for each and every situation without human involvement

So, there will be a presence of human intervention in each and every digital software/ business model – the intention is to determine the levels of it.

At this juncture, we can consider the following key indicators/ guiding principles/ factors to measure to assess human intervention in a digital model which is based on understanding the features of such model:

• Background, the design and architecture of the model: Whether the model is designed for repetitive transactions OR customised transactions. The human involvement will be negligible in the case of former than the latter. If the model itself is prone to dynamic information fed into it, it will require increased human involvement.

• Level of Artificial intelligence: AI is a simulation of human intelligence inscribed in a digital model. Ideally, a model equipped with AI does not require/ requires negligible human involvement over the life-time of the model.

The above factors can help us to atleast arrive at a logical conclusion on this aspect.

The following table provides a fair awareness of the level of human involvement in the digital business models which are ruling the modern world:

1. Range of human intervention (Low to Minimal):

• Where the content is pre-loaded the platform and users can access the customised content accordingly. Eg., OTT (Over- the top) model, Online pre-recorded classes, Cloud services.

• Where the tasks performed by robots are automated except some updations/ customisations done with human involvement. For eg., Robotics

2. Range of human intervention (Beyond minimal):

• Where the human intervention/efforts are considerably involved, despite the automation Eg., Online shopping websites/ Information based websites (News websites); Trading apps; Banking websites, Online live classes/ Online meetings

It is amply clear from the above that the level of human intervention in a digital model has to be determined on a case-to-case basis. There cannot be a standardised yardstick or straight jacket answer to measure the level of human intervention involved- since it is prone to subjectivity.

Erstwhile service tax provision:

A que can be taken from the Circular No. 202/12/2016-Service Tax dated 09.11.2016 which provided some clarification on human intervention and OIDAR which has categorically drawn a line giving a path to decide whether services can qualify/ does not qualify as ‘OIDAR services’ considering the factor of human intervention, by drilling down the indicative list of services.

The essence of the said circular is that the existence of automation with minimal or no human intervention are the dual features which act as a pre-condition to qualify as ‘OIDAR services’. Further, the said circular states that the communication/ facilitation of outcome of service, using the internet does not always mean to qualify as OIDAR services.

Conclusion:

At this juncture, the best way to deal with this issue will be maintaining a database of the digital business model which will demonstrate the presence of human efforts adopting logical approach.

However, the newer and future business models like Cryptocurrency exchanges surely going to pose a different challenge for Indian judiciary to determine the aspects of measuring human intervention. It seems that there is a considerable ground to cover in order to catch up with the growth of digital world and there is a need to pro-actively act on the same.

With a newer digital business models coming up in near future, there is an increased need to provide clarity by the Government on the aspect of measuring the human intervention to cover under the ambit of OIDAR services in order to avoid future litigations- since the presence of human element will surely not face extinction in the times to come.

This article is written with a view to incite the thoughts of a reader who could have different views of interpretation. Disparity in views, would only result in better understanding of the underlying principles of law and lead to a healthy debate or discussion. 

[1] (Source: Laws of Malaysia- Service Tax Amendment Act, 2019 read with Guide on Digital services by Foreign Service Provider (FSP) published by Royal Malaysian Customs Department, Internal Tax Division, Putrajaya dated 01^st February 2021)

[2] The Statutes Of The Republic Of Singapore -Goods and Services Tax Act