Other distinctions however come into the limelight. For instance, both digitised services and digitised goods can be delivered electronically, but whether an income is from sales or service, will make quite a difference under Subpart F of the US Internal Revenue Code. Therefore in characterising incomes arising from digitised transfers, some distinctions lose all significance, while others are thrown sharply in focus.

According to the traditional principles, if all rights are transferred, then this is a sale consideration. If only some rights are transferred (eg, through licensing), then this would constitute only a royalty income. When transferring digitised information, these traditional principles can lead to very confused situations. Therefore both the US Treasury, and the OECD, use an intermediate concept for the purposes of adopting and adapting the traditional taxation principles to the transfer of digitised information: this concept is the distinction drawn between a copyrighted article and the underlying copyright right.

Dealing in particular with software, the OECD in its 1992 Commentary, sought to first make a distinction between partial transfer and total transfer of the right: if there was a total transfer, then this was a sale. In the case of partial transfer, if the transaction was for commercial exploitation, the payments received would be royalty; if the transfer was for personal use, then this would be a sale.

As it was not rational to make a distinction based on commercial exploitation and personal use, the OECD in its 1998 Approach has adopted more rational criteria.Instead of first distinguishing between partial and total transfer as in the 1992 Commentary, the 1998 Approach first distinguishes between a software product transaction and a software copyright transaction.A software product transaction, ie, a programme copy, is considered to be one of an outright sale. It is only in software copyright transactions, that a further distinction between transfer of complete rights and transfer of partial rights is made. Consideration for transfer of complete rights is a sales income, whereas receipts from transfer of partial rights is a royalty income.

The US Revenue Regulations adopt a slightly different though parallel approach. First, a distinction is sought to be made as to whether the transfer is of a copyright right or of a copyright article. In the transfer of a copyright right, if the transfer is of "all substantial rights", the income is sales income.If the transfer is not of "all substantial rights", the income is a royalty income.

Next, in transfer of a copyright article, the intermediate concept pressed into service is of "significant benefits and burdens of ownership". If the transaction involves transfer of "significant benefits and burdens of ownership", then the consideration is taken as sales income. If "insignificant benefits and burdens of ownership" are transferred, then the income is classified as rental income.

To conclude, while dealing with specific issues on taxation of e-commerce, the principles of "adopting and adapting" the existing methods of international taxation have resulted in the development of some well articulated rules. But some areas are still hazy. While there are reasonably well established rules for characterisation of income based on newer concepts of copyright, other areas like attributing income to a permanent establishment on the basis of transfer pricing are still not settled.

The author, a retired commissioner of income-tax and a former visiting scholar at Harvard Law School, is presently a practising advocate