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FREELANCING THE DIGITAL TRANSFER OF JOB WORKS RELEVANT STATUTORY PROVISIONS (INDIA)

Ranjith Xavier Attokaran Advocate, High Court of Kerala

CAVEAT & DISCLAIMER This article pertains to the Indian statutory provisions that may be applicable to the freelance jobs, pertaining to software/literary/artistic domains, procured by freelancers in India from abroad, and transmission of the finished/performed work, in digital format via internet, to the client abroad, for a consideration. Take note that this article is not an exhaustive commentary on the statutes discussed hereunder. The statutes discussed hereunder may not be an exhaustive list of statutes applicable. The article is prepared in academic interest, and gives only a general overview of the highlights of the statutes which may be applicable. While the author has yearned to be as accurate as possible, the same may not be fully correct or may not reflect the latest position of the statutes discussed. Note that the views expressed in the article are purely the personal views of the author. This article is never a substitute to professional advice and is not intended to be acted upon. The author will not be liable, responsible or answerable under any circumstances in any manner, for any claims on account of the views expressed in the article. The reader is advised to consult his/her lawyer, chartered accountant or such other professional consultant as she/he deems fit, to discuss her/his particular issues at hand. This article is free for unlimited copying, printing and distribution without any consideration, provided the each copy or print contains this Caveat & Disclaimer and the whole of the article, in its original form; and credits the author of this article as Adv. Ranjith Xavier Attokaran. 20th day of January, 2009.

reelancing is the present day’s buzzword. Wikipedia defines a freelancer or freelance worker as a person who pursues a profession without a long-term commitment to any particular employer. The term "freelance" was first

coined by Sir Walter Scott (1771–1832) in his well-known historical romance Ivanhoe to describe a "medieval mercenary warrior" (or "free-lance"). These days, most of the freelance jobs are procured and transmitted via internet. In India, currently there is no law specific to the domain of freelancing. There are several statues that may be applicable to the freelancing jobs performed here and transmitted outside India, via internet. This article will attempt to examine the various legal provisions applicable from the perspective of different statutes.

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PERSPECTIVE OF TAX LAWS INCOME TAX ACT. 1961.

Any income derived by way of freelancing job is taxable under the provisions of Income Tax Act. 1961. If your annual income derived out of freelancing job alone; or if added to your other income(s), adds up to exceed the annual limit mentioned in the Income Tax Act, you are duty bound to apply for and obtain a Permanent Account Number (PAN). Obtaining PAN is mandatory also if the total receipts for a year exceeds the limit for the turn-over mentioned in the Income Tax Act, though the whole of the receipts may not be “income”. Consult your chartered accountant for more accurate and updated information on this regard. SERVICE TAX Service Tax was introduced by Finance Act, 1994. Sections 64 to 96 of the Finance Act, 1994 deals with Service Tax. Service Tax Rules, 1994 are the rules which are applicable to the collection of Service Tax. Service tax is levied on specified taxable services and the responsibility of payment of the tax is cast on the service provider. System of self-assessment of Service Tax Returns by service tax assessees has been introduced with effect from 01.04.2001. The jurisdictional Superintendent of Central Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are expected to be filed half yearly. Central Excise officers are authorized to conduct surveys to bring the prospective service tax assessees under the tax net. Directorate of Service Tax at Mumbai over sees the activities at the field level for technical and policy level coordination. From the long list of services on which Service Tax is payable, the list of a few which may have special relevance to freelancing jobs are given below.

Code Clause Service Taxed Date

029 65(105)(zh) Online Information & Data Base Access or retrieval 16-07-2001

071 65(105)(zzz) Transport of goods other than water through pipeline or other conduit 16-06-2005

088 65(105)(zzzq) Support services of business or commerce 01-05-2006

101 65(105)(zzzze) Information Technology Software Services 16-05-2008

Consult your chartered accountant for more accurate and updated information on this regard.

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PERSPECTIVE OF FOREX LAWS FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA) Definition of Export Section 2 (i):

"Export", with its grammatical variations and cognate expressions, means – (i) the taking out of India to a place outside India any goods, (ii) provision of services from India to any person outside India; Definition of Import Section 2(p):

"Import", with its grammatical variations and cognate expressions, means bringing into India any goods or services; Definition of Service Section 2(zb): "Service" means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service;” Definition of Foreign Exchange Section 2(n): "Foreign exchange" means foreign currency and includes,-

(i) deposits, credits and balances payable in any foreign currency,

(ii) drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency,

(iii) drafts, travelers cheques, letters of credit or bills of exchange drawn

by banks, institutions or persons outside India, but payable in Indian currency;

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General prohibition in dealing with foreign exchange Section 4 provides that no person resident in India shall acquire, hold, own, possess or transfer, any foreign exchange, unless as prescribed under FEMA. Duty to furnish declaration by exporter of Service Section 7(3): Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services The method and manner in which the declaration is to be furnished is prescribed in the Foreign Exchange Management (Export of goods and services) Regulations, 2000 discussed later. Realisation and repatriation of foreign exchange Section 8: “Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. “ Section 9 prescribes certain exceptions to Section 8. Consult your chartered accountant to know your individual case comes under the exceptions. THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT,1992 Under the provisions of the Act, anyone doing import or export is expected to apply for and obtain an Importer-Exporter Code Number (IEC Number). Section 7 of the Foreign Trade (Development and Regulation) Act, 1992 reads like this: “No person shall make any import or export except under an Importer-Exporter Code Number granted by the Director General or the officer authorised by the Director General in this behalf, in accordance with the procedure specified in this behalf by the Director General.” Definition of Import and Export

"Import” and "export" means respectively bringing into, or taking out of, India any goods by land, sea or air;” Note that the Foreign Trade (Development and Regulation) Act, 1992 does not define “Goods”.

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Section 22 of the Imports and Exports (Control) Act, 1947 which is the predecessor of the Foreign Trade (Development and Regulation) Act, 1992 defines goods as follows:

“Goods" includes any article, animal, substance or property whatsoever;” The Foreign Exchange Management Act, 1999 does not define the term “Goods”. The General Clauses Act, 1897 does not define the term “Goods”. Section 7 of the Sale of Goods Act, 1930 defines goods as:

“Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares growing, crops, grass and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale;” The online version of the Oxford Advanced Learner’s Dictionary defines the term “goods” as:

goods noun [pl.] things that are produced to be sold: cheap / expensive goods

�

leather / cotton / paper goods � electrical / sports goods

� perishable

/ durable goods � increased tax on goods and services

See also CONSUMER GOODS possessions that can be moved: stolen goods

� The plastic bag

contained all his worldly goods (= everything he owned). (BrE) things (not people) that are transported by rail or road: a

goods train � a heavy goods vehicle

Compare: FREIGHT Idioms: be the goods (BrE, spoken) to be very good or impressive deliver the goods come up with the goods (informal) to do what you have promised to do or what people expect or want you to do: We expected great things of the England team, but on the day they simply failed to deliver the goods.

None of the above definitions would indicate that electronic files would come under the definition of “Goods”. In common parlance, “Goods” means merchandise or movable property in physical form. Now the question to be considered is whether a person who transmits digital files over internet is exporting “goods” from India to abroad. Even considering that software programmes or other digital files are goods, their electronic transmission via internet would not amount to import or export since they are not brought into India, or taken out of India, by “by land, sea or air” (By

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road, ship or aircraft) as envisaged in the definition (of import and export). Therefore, it can also be assumed that transmission of electronic files via internet will not amount to import or export. The term “goods” cannot bring within its ambit “services”. So, it can be safely assumed that “services” does not come under the definition of “goods” and an exporter of services need not apply and obtain IEC Number, as per the requirement of Section 7 of the Foreign Trade (Development and Regulation) Act, 1992. Therefore, the requirement to apply for and obtain IEC Number is not applicable to import and export of services or to electronic files transmitted from India to abroad via internet, as per the requirement of Section 7 of the Foreign Trade (Development and Regulation) Act, 1992. But, there is a recommendation to include “services” too into the ambit of the said Act. The proposed amendment is kept in abeyance due to the objections from Finance Ministry. Once “services” too are brought into the ambit of the said Act, every freelancer perform services to a foreign client would be exporting it and thus attracting the provisions of the said Act. In such a case, he/she should apply for and obtain the IEC Number. FOREIGN EXCHANGE MANAGEMENT (EXPORT OF GOODS AND SERVICES) REGULATIONS, 2000 Hereafter, the word “Regulation” would mean Foreign Exchange Management (Export of goods and services) Regulations, 2000. The terms “Goods” and “Service” are not defined in the Regulation. The term “service” is defined in FEMA and the same will be applicable here too. Under this regulations; Definition of “Export” in the Regulation

'Export' includes the taking or sending out of goods by land, sea or air, on consignment or by way of sale, lease, hire-purchase, or under any other arrangement by whatever name called, and in the case of software, also includes transmission through any electronic media. Definition of “Software” in the Regulation

'Software' means any computer programme, database, drawing, design, audio/video signals, any information by whatever name called in or on any medium other than in or on any physical medium. Note that the definition of the term “Software” is much wider than the normal meaning we give to it, in common parlance. COMPUTER PROGRAMME (including source codes, scripts etc.); DATABASE (all kinds of databases); DRAWING, DESIGN (all kinds of artworks including cartoons, sketches, webpage designs, logo designs, image edit works etc.); AUDIO / VIDEO SIGNALS (including editing works done to audio

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and video files); ANY INFORMATION by whatever name called (other than, in or on any physical medium – includes any kind of information). Declaration

Under this Regulation, every exporter of GOODS or SOFTWARE (either in physical form or through any other form), (directly or indirectly), to any place outside India, (other than Nepal and Bhutan), shall furnish to the specified authority, a declaration in the prescribed form annexed to the Regulation. In that declaration, the following details are to be furnished, as prescribed, along with evidences:

(i) The full export value of the goods or software In case, the full export value is not ascertainable at the time of export,

(ii) The value which the exporter expects to receive on the sale of the goods or the software in overseas market (Having regard to the prevailing market conditions).

He/she shall affirm in the said declaration that the full export value of goods or the software has been/will be, paid in the specified manner, within the specified period. The form in which the declaration is to be submitted in each case is specified in the Schedule of the Regulations. If there is no such form prescribed, in respect of export of any services, the exporter may export such services without furnishing any declaration, but shall be liable to realise the amount of foreign exchange (payment in foreign currency for the work done) which becomes due or accrues on account of such export, and to repatriate the same to India in accordance with the provisions of the Act, and these Regulations, as also other rules and regulations made under the Act (Foreign Exchange Management Act, 1999). The authority to which the Declaration is to be furnished and the manner in which it is to be furnished are narrated in the Regulation. Exceptions (from the necessity to submit declarations)

The Regulation narrates several exceptions where such a declaration is not necessary. (Hereafter referred as “Exception”) One such exception is that: Export of goods or services can be made without furnishing the declaration if the goods or software is accompanied by a declaration by the exporter that such goods or software are not more than twenty five thousand rupees in value.” This exception may be particularly applicable to the domain of freelancing jobs.

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Importer-Exporter Code Number

The Regulation mandates that each declaration (and its copies) submitted by the Exporter, shall indicate on it the IMPORTER-EXPORTER CODE NUMBER (IEC Number). The Regulation also mandates that the IEC Number is to be indicated on all the correspondence of the Exporter with the Authorised Dealer or the Reserve Bank. IMPORTER-EXPORTER CODE NUMBER (IEC Number) is allotted by the Director General of Foreign Trade under Section 7 of the Foreign Trade (Development & Regulation) Act, 1992 (22 of 1992) Note that, if an exporter comes under any of the exceptions listed in the Regulations, he/she need not file a declaration. If he/she need not file a declaration, he/she need not obtain the IEC Number. Such a person needs an IEC Number only if he/she needs to have any correspondence with the Authorised Dealer or Reserve Bank. Consult your chartered accountant for more accurate and updated information on this regard. EXPORT IMPORT POLICY (INDIAN FOREIGN TRADE POLICY 2004 - 09) / (EXIM POLICY) This Policy came into force on 1st September, 2004 and shall remain in force upto 31st March, 2009, unless as otherwise specified. This policy was framed under the provisions of the Foreign Trade (Development and Regulation) Act,1992. This Policy would be applicable if the Definition of Exporter

3.22 "Exporter" means a person who exports or intends to export and holds an Importer-Exporter Code number. Definition of Services

3.47 "Services" include all the tradable services covered under General Agreement on Trade in Services and earning free foreign exchange.

Definition of Service Provider

3.48 "Service Provider" means a person providing

(i) supply of a "service" from India to any other country;

(ii) supply of a "service" from India to the service consumer of any other country in India; and

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(iii) supply of a "service" from India through commercial or physical presence in the territory of any other country.

The applicability of the provisions of the EXIM Policy depends on the facts and circumstances of each particular case. Consult your consultant/chartered accountant for more information on this regard.

PERSPECTIVE OF CONTRACT LAW Indian Contract Act, 1872, statutes pertaining to contract, of the of the client’s nation, international treaties and conventions etc., will be applicable, depending on the facts and circumstances. Consult your lawyer to know more, based on your individual case.

PERSPECTIVE OF CRIMINAL LAWS Indian Penal Code, 1860, Information Technology Act, 2000, other relevant penal statutes in India, the penal statutes of the client’s nation, international treaties and conventions etc., will be applicable, depending on the facts and circumstances. Consult your lawyer to know more, based on your individual case. LINKS EXIM Policy Income Tax Act, 1961 , Information Technology Act, 2000 Imports and Exports (Control) Act , 1947 The Foreign Exchange Management Act, 1999 The Foreign Trade (Development and Regulation) Act,1992 Foreign Exchange Management (Export of goods and services) Regulations, 2000