International Taxation

Presented By

CA Swatantra Singh, B.Com , FCA, MBA

Email ID: [email protected]

New Delhi , 9811322785, www.caindelhiindia.com,

www.carajput.com

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mailto:[email protected]

Issues on International Taxation

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What we Discuss To-day

Why

What

How

International Taxation

is

to understand/ practice

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Why International Taxation Globe is called as Global Village Globalization Movement of People – Concurrent Earnings Borderless Global Economy - Internet Resource of Competent and Enterprising Tax

Professionals Movement of Cross Border M & A close to

consumers and Virgin Untapped Markets Double Taxation Conflicts

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What is Globalization ?

Globalization is the phenomenon of Sourcing Capital from where it is cheapest, Sourcing People from where it is best available, Producing where it is most Cost Effective and Selling where there is Market for. Back

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Double Taxation Conflicts Residence rule due to personal attachment –

protection to person etc Source rule due to economic attachment –

economic activities with in that country Primary right should be on the activity –if

all states practice territorial tax no issue- many states follow right to tax worldwide income of their residents

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Double Taxation Conflicts Double Tax is built in the system as part of

the Classical tax system of respective country

Double Tax is harmful for international trade

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Double Taxation Conflicts Types of Conflicts -

* Source-Source conflicts* Residence-Residence conflicts* Residence – Source conflicts* Income characterization conflict* Entity conflicts* Mismatching Tax systems (taxable

income and computation of taxes)

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Double Taxation Conflicts Resolution

Bilateral Relief- Negotiated sharing of the tax revenues by two countries

sought• Developed countries usually have balanced sharing of

tax revenues• Developing countries may have unbalanced sharing as

they are governed by economic, social as well as revenue considerations

Unilateral Relief- Section 91 of the Act

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What is International Taxation

Purpose of International Taxation

Objectives of International Taxation

Legislation of International Taxation

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Purpose of International Taxation

Taxing Residents World-Wide Income

Taxing Non-Residents National Income

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India

Mr. Patel - Indian Resident.Indian Income

Rs. 1,000.

Mr. Smith -Indian Interest Income Rs. 200.

Germany

Mr. Patel -German Interest Income Rs.100.

Mr. Smith -German Resident.German Income

Rs. 2,000.

INDIA would want to tax Mr. PatelINDIA would want to tax Mr. Patel Amount Amount (in Rs.)(in Rs.)

On his Indian Income – On Source + Residence BasisOn his Indian Income – On Source + Residence Basis 1,0001,000 German Income - On Residence Basis German Income - On Residence Basis 100100

Sub TotalSub Total 1,1001,100India would also tax Mr. Smith India would also tax Mr. Smith

on his Indian Interest income on Source Basison his Indian Interest income on Source Basis 200200TotalTotal 1,3001,300

Purpose of International TaxationPurpose of International Taxation

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Germany would tax Mr. SmithGermany would tax Mr. Smith Amount Amount (in Rs.)(in Rs.)

On his German Income on Source + Residence Basis On his German Income on Source + Residence Basis 2,0002,000

On his Indian Income on Residence BasisOn his Indian Income on Residence Basis 200200

Total Total 2,2002,200

Germany would tax Mr. PatelGermany would tax Mr. Patel

On his German Income on Source Basis On his German Income on Source Basis 100100

Total Total 2,3002,300

Thus – Domestic Income by a resident causes no problems Thus – Domestic Income by a resident causes no problems of Double tax.of Double tax. Rs. [3,000]Rs. [3,000]

Only when a resident of one country gets income from Only when a resident of one country gets income from another country, Double tax issues ariseanother country, Double tax issues arise Rs. [300]Rs. [300]

Purpose of International TaxationPurpose of International Taxation

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Objectives of International Tax

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Legislation of International Taxation Global tax rules for cross border transactions No separate Codified law – No separate tax - no

separate court Provisions of Domestic law to handle Cross Border -

Direct & Indirect Taxes International Tax Principles Accepted Convention - Can not enforce tax on

territory of another country EU Directives / Model Commentaries

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Legislation of International Taxation

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How to Understand International Taxation

Models Tax Treaties

- Meaning- Objectives- Formation- Types- Coverage- Treaty Position in India- Structure- Discussion of the Articles

Limitation of Benefits Interpretation of Treaties

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MODELS Are we talking about Role Models

Mahathma Swami Atal Bihari Gandhi Vivekananda Vajpayee

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MODELS Are we talking about Super Models

Aishwarya Katrina Priyanka Rai Kaif Chopra

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MODELS We are talking about Model Conventions

OECD Model Convention

UN Model Convention

US Model Convention

Indian Model Convention

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Model Conventions Tax Treaties are based on Model Conventions Why do we need a Model Tax Convention? What is a Model Tax Convention? What is the legal value of a Model Tax Convention? Model Conventions

- OECD Model - UN Model- US Model

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Model Conventions Rules for interpretation of Tax Treaties –

Vienna Convention on the Law of Treaties, 1969 (VCLT)- codifies customary international law,

hence, the rules contained in it also apply to the interpretation of treaties between states which are not parties to the VCLT

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Model Conventions OECD Model

- Emphasis on residency based taxation- Usually adopted by developed countries in case of treaties with

other developed countries- Regularly updated / amended - latest version is July 2008

UN Model- Emphasis on source based taxation- Used by developed countries for treaties with developing

countries or between two developing nations US Model

- Used by USA for all treaty negotiationsMost Indian Treaties are based on UN Model

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Tax Treaties - Meaning Meaning of Tax Treaty (DTA) - A tax treaty is

a formally concluded and ratified agreement between two independent nations (bilateral treaty) or more than two nations (multilateral treaty) on matters concerning taxation normally in written form.

Doctrine of Incorporation – Direct effect-US & France

Doctrine of Transformation – Indirect effect- Germany, India

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Tax Treaties - Objectives

Limit tax

Prevent Tax Discrimination

Certainty of Tax Treatment to

Investors

Exchange of Information

Ease in Recovery

of Tax Dues

Promote Investment &

Mutual Relation

AllocatingTaxing

Jurisdiction

Prevent Fiscal Evasion

Avoid Double Taxation

OBJECTIVES

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Tax Treaties - Formation Formation of Tax Treaties –

A DTA develops in six stages, which follow a fairly well established procedure(1) Negotiation(2) Initialling(3) Signature(4) Ratification(5) Entry into force(6) Effective Date

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Tax Treaties - Types Types of Tax Treaties –

Comprehensive Agreements – This is wider in scope addressing all sources of income.

Limited Agreements – which has limited scope and covers a) income from operation of aircrafts and

ships, b) estates, c) inheritance and d) gifts.

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Tax Treaties - Coverage Coverage of Tax Treaties –

Bilateral Treaties – The treaty is entered into between two countries

Multilateral Treaties – The treaty is entered into between two or three countries.

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Tax Treaties – Position in India Treaty Position in India -

* Section 90 of the Act empowers the Central government to enter into tax treaties with the government of any foreign country* India has entered into tax treaties with more than 90 countries* Place of treaties in the legal system depends on the country’s view on international law / constitutional arrangements- Most countries: treaty prevails over domestic law- Some countries (eg US): treaty equals domestic law

* The tax payer may opt to be governed by the Act or the tax treaty, whichever is more beneficial but cannot pick and choose the provisions- Circular No 333 of 1982;- Azadi Bachao Andolan 263 ITR 706 (SC); - Vishakapatnam Port Trust 144 ITR 146 (AP)

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Tax Treaty - Structure

•Art. 1 – PersonsCovered

• Art. 2 – Taxes Covered

• Art. 3 – General Definitions

• Art. 4 – Resident

• Art. 5 – Permanent Establishment

• Art. 30 – Entry into Force

• Art. 31 – Termination

Application Articles

Distributive Rules

Anti-AvoidanceProvisions

MiscellaneousProvisions

• Active Income :

Art. 7, 8, 14, 15, 16, 17,19 and 20

• Passive Income :

Art. 6, 10, 11,12, 13, 18 and 21

•Art. 9 – AssociatedEnterprises

• Art. 23 – Elimination ofDouble Taxation

• Art. 26 – Exchange Of Information

• Art. 27 –AssistanceIn Collection of Taxes

•Art. 24 –Non Discrimination

• Art. 25 – Mutual Agreement Procedure

• Art. 28 – Members of DiplomaticMissions and Consularposts

• Art. 29 –TerritorialExtension

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Tax Treaty - StructureActive Incomes Passive Incomes

Art. 7 - Business Profits Art. 6 - Immovable PropertyArt. 8 - Shipping, etc. Art. 10 - DividendsArt. 14 - Independent Personal Services Art. 11 - InterestArt. 15 - Dependent Personal Services Art. 12 - Royalties & FTSArt. 16 - Directors Art. 13 - Capital GainsArt. 17 - Artistes & Sports persons Art. 18 - PensionsArt. 19 - Government ServicesArt. 20 – StudentsArt. 21 - Other Income

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Tax Treaty – Definition of ArticlesScope -Article 1- Applicability -Applies to a person who is a resident of one

or both the countries.

Article 2- Taxes covered- Taxes on income and capital Indian taxes covered are income tax, surcharge and cess FBT or DDT? Interest / Penalty?

Article 30-Entry into force This article tells when and how a DTA becomes operative

Article 31-Termination This article tells when and how a DTA can be terminated

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Tax Treaty – Definition of Articles

Article 3-General Definitions1. Person –Individual, Company, taxable unit (Partnership?)2. Company-Body corporate or entity treated as company or body

corporate for tax purposes3. Contracting State – India or the other country4. Enterprise of a Contracting State4. Competent Authority –Ministry of Finance (Dept. of Revenue)6. National

Undefined Terms-meaning to be as defined under the domestic tax laws applicable to the taxes covered in the treaty –

Static or DynamicDifferent views by 2 countries

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Tax Treaty – Definition of ArticlesArticle 4 - ResidenceA person is a resident of a country if he is liable to tax in the country

by virtue of:- Domicile- Residence- Place of Incorporation- Place of management- Any other criterion of a similar nature

Tie-Breaker Rules- In the case of a dual resident, the tie-breaker rules shall apply to determine the residential status

a) In the case of an individual his personal and economic ties determine his residential status

b) In the case of others it is the place of effective management

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Tax Treaty – Definition of ArticlesArticle 5 - Permanent Establishment (PE) Means a fixed place from where the business of the

enterprise is carried on

PE includes place of management, branch, office, factory, workshop, mine, quarry, an oil or gas well, a construction site for long duration, a services location for long duration and a dependent agency with power to conclude contracts

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Passive Income-refers to income derived from investment in tangible / intangible assets.

Active Income is the income derived from carrying on active cross border business operations or by personal effort and exertion as in case of employment.

Assignment Rules & Source Rules

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Equity Investment

Yields

Dividend

DebtRight/Permission to use

assetsDisposal of capital assets owned

InterestRent /

RoyaltiesCapital Gain

Tax Treaty – Definition of ArticlesTax Treaty – Definition of Articles

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Exclusive right to tax is with country of source of object

Source country reserves limited right or shared taxation of the object

Source country can tax fully but does not have exclusive right (Business profits)

Exclusive right to tax with country of residence of subject (Mauritius-Capital gain)

Tax Treaty – Definition of ArticlesType of Distributive Rules - Type of Distributive Rules -

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Passive Income Distributive Rights -

Article Article Ref.Ref.

Nature of IncomeNature of Income Taxing Right Taxing Right of Source of Source

StateState

Taxing Right Taxing Right of State of of State of ResidenceResidence

RemarksRemarks

66 Income from Immovable Income from Immovable PropertyProperty

Has the first right to Has the first right to taxtax

Reserves Reserves the right to the right to

taxtax

1010 Dividend IncomeDividend Income Has the right Has the right to tax to tax

provided rate provided rate does not does not

exceed the exceed the agreed rate of agreed rate of

tax as per tax as per DTAADTAA

Dividend is not Dividend is not taxable in India. taxable in India. DDT is levied upon DDT is levied upon the company the company declaring dividendsdeclaring dividends

1111 Interest IncomeInterest Income

1212 Royalties and Fees for Royalties and Fees for Technical ServicesTechnical Services

1313 Capital GainsCapital Gains Has the first right to Has the first right to taxtax

Tax can be Tax can be determined as per determined as per the domestic laxthe domestic lax

1818 PensionsPensions Cannot tax pensionCannot tax pension Can tax PensionCan tax Pension


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Active Income Distributive Rights -


Nature of Nature of IncomeIncome

Taxing Right of Taxing Right of Source StateSource State

Taxing Taxing Right of Right of State of State of

ResidenceResidence

RemarksRemarks

77 Business ProfitsBusiness Profits Yes, if PE exists in the Yes, if PE exists in the source statesource state

Reserves Reserves the right the right

to taxto tax

Income attributable to Income attributable to PE alone can be taxed PE alone can be taxed in source statein source state

88 Shipping & Air Shipping & Air TransportTransport

Cannot tax this incomeCannot tax this income

1414 Independent Independent Personal Personal ServicesServices

Yes, if the person has a Yes, if the person has a fixed base or his stay fixed base or his stay extends beyond 90 extends beyond 90 daysdays

Income attributable to Income attributable to Fixed Base alone can Fixed Base alone can be taxed in source be taxed in source statestate

1515 Dependent Dependent Personal Personal Services Services (Employment)(Employment)

Yes, if employment is Yes, if employment is exercised in the source exercised in the source state. Cannot tax if stay state. Cannot tax if stay is less than 183 daysis less than 183 days

If salary is paid on If salary is paid on behalf of foreign behalf of foreign employer and is not employer and is not borne by PE, then borne by PE, then source state cannot tax source state cannot tax the salarythe salary


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Nature of Nature of IncomeIncome

Taxing Right of Taxing Right of Source StateSource State

Taxing Taxing Right of Right of State of State of

ResidenceResidence

RemarksRemarks

1616 Directors’ FeesDirectors’ Fees Yes, the source state Yes, the source state can tax the samecan tax the same

Reserves Reserves the right the right

to taxto tax

1717 Artiste & AthletesArtiste & Athletes Yes, the source state Yes, the source state can tax the samecan tax the same

DTA may specify the DTA may specify the extent to which the extent to which the income may be exemptincome may be exempt

1919 Govt. Service Govt. Service RemunerationRemuneration

No, unless the person No, unless the person rendering service rendering service happens to be a happens to be a resident of and national resident of and national of the source stateof the source state

2020 Students & Students & ApprenticesApprentices

No taxing rightsNo taxing rights

2121 Other IncomeOther Income Yes, the source state Yes, the source state can tax the samecan tax the same

Active Income Distributive Rights -Active Income Distributive Rights -


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Anti-Avoidance Provisions -

Article Ref.Article Ref. TitleTitle CommentsComments

99 Associated Associated EnterprisesEnterprises

Adoption of Adoption of Arms Length Arms Length Price Price in transactions between in transactions between Associated EnterprisesAssociated Enterprises

2626 Exchange Exchange of of InformationInformation

2727 Assistance Assistance in in collection collection of taxesof taxes

Both the contracting states Both the contracting states shall assist each other in shall assist each other in collection of revenue claimscollection of revenue claims


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Elimination of Double Taxation -

Article 23 –Alternate methods are as below: The Exemption Method - Full Exemption - Exemption with progression

Foreign Tax Credit Method - Full Credit - Ordinary Credit

Deduction Method

Tax Sparing Method


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Miscellaneous Provisions -

Article Ref.Article Ref. TitleTitle

2424 Non-DiscriminationNon-Discrimination

2525 Mutual Agreement ProcedureMutual Agreement Procedure

2828 Diplomatic Missions & Consular PostsDiplomatic Missions & Consular Posts

2929 Territorial ExtensionTerritorial Extension


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Limitation of Benefits A limitation clause which permits only

certain entities to enjoy treaty benefits Could be imposed by

- Minimum expenditure requirement- Requirement that the entity is regulated, to be

considered resident –such as stock exchange etc

Netherland LOB, Singapore LOB, US LOB

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Interpretation of Treaties MoU to an existing treaty can be considered for

interpreting such treaty or an earlier treaty or another identically worded treaty enacted subsequently

Protocol- A protocol is an indispensable and integral part of the treaty with the same binding

force as the main clauses therein and can be relied upon- A protocol to a later treaty between two countries could apply while interpreting the

predecessor treaty between the same countries

The preamble to a treaty could be used for interpretation Case laws under other Indian treaties

- It is permissible to rely upon decisions rendered in respect of corresponding treaties

Model Commentaries

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How to Practice International Taxation

Concepts of International Taxation Applying Tax Treaties Domestic Law Regulations International Tax Planning Role of CA’s Reference

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Concepts of International Taxation State V/s. Other Contracting State Source Country V/s. Residence Country Taxable Subject V/s. Taxable Object Capital Importing Country V/s. Capital Exporting Country Juridical Double Taxation V/s. Economic Double Taxation Active Income V/s. Passive Income

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Concepts of International Taxation

Tie-Breaker rule for Residential Status Permanent Establishment Force of Attraction Associated Enterprises Transactions Beneficial Ownership Make Available Tax Relief

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Most Favored Nation Clause Non-Discrimination Clause Mutual Agreement Procedure Exchange of Information Controlled Foreign Companies Treaty Shopping Thin Capitalisation

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Concepts of International Taxation State V/s. Other Contracting State - In bilateral agreements between two countries one

country is referred to as “State” and the other country as “Other Contracting State”.

Source Country V/s. Residence Country – Source Country – Country in which income arises

Residence Country – Country in which the assesssee is Residing

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Concepts of International Taxation Taxable Subject V/s. Taxable Object – Taxable Subject refers to assessee Taxable Object refers to income or capital

Capital Importing Country V/s Capital Exporting Country- Capital Importing Country – More capital is invested into the

country by foreigners than locals are investing overseas – Developing Country

Capital Exporting Country – More capital is invested overseas by locals than foreigners are investing in the country – Developed Country

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Concepts of International Taxation Juridical Double Taxation V/s. Economic Double Taxation -

Economic Double Taxation – Same Income Taxed in the hands of Different Persons viz., Dividend Income.

Juridical Double Taxation - Concept

- Double taxation of a taxable subject - person liable to tax (dual residence)

- Double taxation of an economic event which produces taxable object (Royalties / Fees for Technical Services – payment / source basis)

- Double taxation due to differing tax base - world wide basis vs territorial basis

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Concepts of International TaxationConnecting Factors - For taxing jurisdiction, there are two Connecting Factors internationally accepted.

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India Can not tax US residents for income earned in US

A country can tax- activities of resident even outside country- activities of non-resident in that country

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AssesseeTax Subject

IncomeTax Object

India

Indian ResidentWorld Income

Taxable

For Non-resident & NORs

Only Income Sourced In India is taxable

Indian Sourced Income,Taxable in India.

Irrespective of Status of Assessee.

Foreign Sourced IncomeTaxable ONLY IF

Earned by Indian Resident

Foreign Sourced Income earned by Non-Residents

Not Taxable in India.

There is no nexus with India.

Concepts of International TaxationConcepts of International Taxation

World

India

India

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Tax Subject

Tax CountryTax Object

Connecting Factors


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Concepts of International Taxation Active Income V/s. Passive Income – Active income means income derived from business or

employment activities. Passive income (and gains) is income (and gains) from

investment in tangible and intangible (including financial) asset.

Tie-breaker rule for Residential Status –For Individuals – Five Level Tie-breaker Test (Permanent Home, Centre of Vital

Interests, Habitual Abode, Nationality and Mutual Agreement)

For Others - POEM (Place Of Effective Management)

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Concepts of International Taxation Permanent Establishment { PE } –

Permanent Establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Force of Attraction –It is a concept wherein PE is taxed on the income derived not only by PE but also by the H.O. in the country where PE is located.

Associated Enterprise Transactions –Transactions between associated enterprises attracts transfer pricing provisions and it should be at Arms’ Length Pricing

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Concepts of International Taxation Beneficial Owner -

Beneficial owner’ receives concessional tax treatment

Legally, ‘beneficiary’ or ‘beneficial owner’ is a person who benefits financially from property held by another (‘trust’)

No benefit to intermediary between beneficiary and payer

Conduit company not beneficial owner (benefits of DTAA with conduit’s state not available)

‘Real’ title vs ‘Formal’ title

‘Substance’ vs ‘Form’

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Make Available –Technology should be transferred to another person

Tax Relief –The methods of tax relief available from juridical double taxation are

a. Exemption Method b. Tax Credit Methodc. Deduction Methodd. Tax Sparing Method


Full Exemption Exemption with Progression

Full Credit

Ordinary Credit

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Most Favored Nation Clause -Normally benefit under this clause is restricted to a specific group like OECD countries, developing countries

Nature of benefit - lower tax rate - limited scope of income liable to tax

MFN clause is usually found in Protocols and Exchange of Notes- Eg - treaties with Netherlands, Belgium, France, Norway, Switzerland,

etc

Generally Notification is issued to give effect to MFN clause – However, such notifications are mere clarificatory


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Non-Discrimination Clause -This clause prohibits a country from discriminating in its tax treatment between its own nationals and nationals of other contracting state.

Mutual Agreement Procedure -Where there is a dispute between the two contracting states wrt. any of the provisions of DTA, then they have to resolve the same by mutual agreement.

Exchange of Information -This clause allows the tax administrations in the contracting states to exchange information with each other.


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Concepts of International Taxation Controlled Foreign Companies { CFC } –

This is a legislation to tax foreign sourced income on an accrual basis, instead of on a receipt basis To explain – for eg. Company P (Parent Co.) a resident in Country R incorporates a subsidiary (Company S) in a tax heaven country. Income is diverted to Co., S. To avoid this circumstances, Country R may tax Co., P for income earned by Company S.

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What does it Mean?

Tax Evasion Vs Tax Avoidance“There are many principles in fiscal economy which,

though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development.”

Foreign Investor

Invests in

Co. incorporated in Mauritius (Shell Co.) which in

turn

Invests in

Indian Compan

y

•Treaty Shopping -Treaty Shopping -

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Interest on loan is a tax deductible expenditure, while dividend on shares is not

High debt, low equity preferred

Thin capitalization rules provide normative debt to equity ratio

In case of excess debt, interest re-characterized as dividend and tax deduction not available

90%

Russia

Australia

60%

Interest Cyprus Loan

•Thin Capitalization -Thin Capitalization -


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Applying Tax TreatiesStep 1 What is the nature of the income ?

Step 2 Does the treaty apply?

Step 3 Determine which Article applies?

Step 4 How are taxation rights assigned?

Step 5 How is the income calculated?

Step 6 Give Tax Credit or Tax Relief

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Domestic Tax Systems To have knowledge of Domestic Tax

Systems of various countries Incentives provided in various countries Anti Avoidance Measures of various

countries

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International Tax Planning Exemption from Tax- 10A, R&D Reduction in tax rate- FTS Reduction in tax base-PE, Transfer Price Deferral of the tax payment –Royalty, Div Credit or exemption of foreign tax paid Treaty Shopping

Draft Direct Taxes Code Bill Draft Direct Taxes Code Bill

Taxation of House Property for Individuals

(Self Occupied)

Shift from EEE to EET system

for savings and investments

Revised draft of DTC Bill delayed!Nine Critical Areas on which Position Papers are expected to be released

Tax on Gross Assets

Deductions for Retirement

Benefits

Capital Gains Tax

Taxation of Charitable Organizations

Management and Control of Foreign Cos.

Tax Treaty OverrideGeneral

Anti- Avoidance Rule

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Section 206AA - Compulsory furnishing of PAN by Recipient

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From 1.4.2010, absence of PAN of Payee results in higher Withholding Tax (WHT) by Payer at 20 percent as compared to applicable rate (even Tax Treaty Rate)

Key issues for Non-residents

Whether PAN mandatory where no income is taxable in India?

Whether provision results in Treaty Override?

Whether refund of excess WHT can be claimed by filing tax return in India?

Whether credit for excess WHT available in Home Country?

Whether PAN required even for ‘net of tax’ contracts?

Whether applies to TDS on or before 31 March 2010 but deposited after 1 April 2010?

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Withdrawal of Circulars 23/ 1969 and 786/2000

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Withdrawal of Circular Nos. 23/1969 and 786/2000• Circulars withdrawn w.e.f. 22-10-2009

– Circular 23/1969 : Clarification on taxability of income of non-resident -• Non resident exporter selling goods from abroad to Importer• Non Resident Company selling goods from abroad to Indian subsidiary• Foreign Agents of Indian exporters• Non Resident persons purchasing goods in India• Sale by Non residents either directly or indirectly through agents

– Circular 786/2000 : Further clarification in case of export commission

– Objective of withdrawal (as claimed by CBDT): • Circular was being interpreted by some taxpayers to claim relief which was not in accordance with

the provisions of Section 9 of the Income Tax Act

– Extensive use of Circular by assessee & reliance by judiciary in case of Dependent Agent Permanent Establishment (DAPE) to claim no tax liability of Non-resident seem to have triggered withdrawal

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Effect of Withdrawal– On positions taken before withdrawal (i.e. 22/10/2009)

• Withdrawal is prospective [DDIT v. Siemens Aktiengesellschaft (Mum ITAT)]

• Later withdrawal cannot be the ground to read down the circular in earlier years when it was operational

– On earlier decisions of court

• A circular which is contrary to the statutory provisions of the law has no existence in law [CCE vs. M/s Ratan Melting and Wires Industries 220 CTR 98]

• A circular is binding upon the revenue authorities. It is not binding on the courts.

• The court decisions represent court’s interpretations of provisions of the statute

– Withdrawal would not render court decisions ineffective

• Unless they are solely based on circular without independent interpretation of law

– Withdrawal does not mean that the positions were incorrect

• Principles applied in the Circular may still remain valid

– The only difference is that now they need to be argued

– Same conclusions may still be drawn 73

Impact of withdrawal of Circular 23 on Foreign commission Agents • Prior to withdrawal foreign agents not liable to tax in India

• Post withdrawal

– Indian exporter may be regarded as business connection

– Only income attributable to operations carried out in India to be taxable in India [Explanation 1(a) to Section 9(1)(i).]

– If all the activities by the agent are performed outside India – No profits accrue in India

– Whether services of foreign agent be termed as technical services?

• Expression ‘technical’ not defined under the Act

• As per dictionary meaning ‘Technical’ includes services rendered by expert of respective field.

• If the services include expert services of any field, it may be treated as technical services

– Consequently may be treated as deemed accrued in India

• Question to be answered based on facts & circumstances of each case.

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Retrospective Amendment to Explanation to Section 9(1)

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Judicial Position on Section 9(1)(vii)

Judicial opinion before Amendment by Finance

Act, 2007

Judicial Opinion after Amendment by Finance

Act, 2007

Judicial Opinion after Amendment by Finance

Act, 2010In absence of explanation to Section 9(1), it was held in Ishikawajima-Harima Heavy Industries Ltd. 288 ITR 408 in order to be taxable in india, the technical services must be utilized in India as well as rendered in India.

The Explanation inserted by Finance Act, 2007 to Section 9(1) does not eliminate the requirement of rendering services in India and hence the law laid down in Ishikawajima’s case prevails even after the said retrospective amendment. (Jindal Thermal power co.)

It has been held in Ashapura Minechem Ltd. v. ACIT (Int. tax) that it is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction.

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Applicability of Tax Treaty

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Jurisdiction– Apply treaty of correct jurisdiction and cannot apply treaty if the specific

territory is not covered

– Generally DTAA excludes territories which have special status / not recognized as part of the country

• Peurto Rico, Virgin Island, Guam not included in USA • Hong Kong & Macau not included in China• Bermuda, BV Island, Cayman Island, Isle of Man, Gibralter, Jersy not

included in UK• Denmark does not include Faroe Island & Greenland• Netherland Antilles not included in Netherlands

– Northern Ireland included in DTAA with UK– Southern Ireland included in DTAA with Ireland

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Resident– Person must be resident of a country in order to apply tax treaty with

such country– Resident is generally a person who is liable to tax on global income in

such country

– Significant issues arise in respect of tax transparent entities• Partnerships in many countries are tax transparent / pass-through• LLCs have option to be treated as pass-through

– India has given its view that treaty does not apply to pass-through entities as these entities fail the test of ‘liable to test’

• Unless specifically agreed in the treaty

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India – USA Tax Treaty• Article 4(1): For the purposes of this Convention, the term “resident of a Contracting State” means any person

who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that

(a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and

(b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.

• India – USA makes specific provision to this effect – Treaty benefit available to partnership to the extent it is subject to tax in US as resident in hands

of its partners

• Provision is only in respect of partnership and not LLC– Benefit not available to LLC

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India – USA Tax Treaty• Article 4(3): Where, by reason of paragraph 1, a company is a resident of both

Contracting States, such company shall be considered to be outside the scope of this Convention except for purposes of paragraph 2 of Article 10 (Dividends), Article 26 (Non-Discrimination), Article 27 (Mutual Agreement Procedure), Article 28 (Exchange of Information and Administrative Assistance) and Article 30 (Entry into Force).

• Generally, where a company is tax resident of both the countries, it is treated as resident of the country in which effective control and management is situated.

• However, where a company is resident of India as well as USA, it cannot claim benefit of India – USA DTAA.

81

Meaning of Royalty

82

Special provisions in the treaty regarding Royalty

83

Definition of royalties specifically includes consideration for use of computer software / computer programs

Malaysia, Morocco, Namibia, Russia, Trinidad and Tobago, Turkmenistan, Kazakhstan and Kyrgyz Republic

Rentals and other income from cinematographic films are considered as business profits and not as royalties

Libya

Features Treaties covered

India – USA Tax Treaty• Article 12(3): The term “royalties” as used in this Article means : (a) payments of any kind received as a consideration for the use

of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and

• If the property transferred with payment contingent with productivity,

it is to be treated as royalty and not Capital Gains

84

India – Australia Tax Treaty• Article XII(3): The term “royalties” in this Article means payments or credits,

whether periodical or not, and however described or computed, to the extent to which they are made as consideration for :

(a)… … … … … … (g) the rendering of any services (including those of

technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design;

• Royalty includes fees for technical services• Article XII to be applied and not Article VII

85

India – Brazil Tax Treaty• Article 12(3): The term “royalties” as used in this Article means payments of any kind received as

a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematography films, films or tapes for television or radio broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the light to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

• Protocol – Para 2: With reference to Article 12, paragraph 3 - It is understood that the provisions of

paragraph 3 of Article 12 shall apply to payments of any kind to any person, other than payments to an employee of a person making such payments, in consideration for the rendering of assistance or services of a managerial, administrative, scientific, technical or consultancy nature.

Royalty covers FTS by through Protocol

86

Meaning of Fees for Technical Services

87

FTS under the Treaty regarding FTS• Most Indian treaties have a separate article for FTS though it is absent in some treaties (for

example: India Mauritius)• If beneficial owner of the FTS carries on business in the other contracting state in which the FTS

arises through a PE, such fees would form part of the business profits under the Article

88

No separate article for FTS Australia, Bangladesh, Brazil, Greece, Indonesia, Libya, Mauritius, Nepal,

Philippines, Sri Lanka, Syria, Thailand, UAE and UAR

Covered only if it make available technology USA, UK, Australia, Canada, Cyprus, Finland, Malta, Netherlands, Portugal, and Singapore

Payments for teaching in or by educational institutions excluded in treaties with

USA, UK and Switzerland

India – Norway Tax Treaty• Article 13(2):

However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State. But insofar as fees for technical services are considered, to the extent such fees are paid in respect of a contract which is signed after the date of entry into force of this Convention, the tax so charged shall not exceed 10 per cent of such fees.

• Rate limitation applicable only in respect of contract signed after date of entry into force of DTAA

89

India – China Tax Treaty• Article 12(4):

The term “fees for technical services” as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement.

• Treaty wordings suggests that it is treated as FTS only if rendered in India for inbound services

• However, in a recent judgement in case of Ashapura Minechem, Mumbai ITAT held that these words are in contrast to provisions of Article 12(6). It further held that in order to avoid absurdity and keeping in mind the amendment by Finance Act, 2010 such narrow meaning should not be taken.

90

Most favored Nation Clause (MFN)

91

MFN Principle• Binds the contracting country (‘A’) to offer to the other contracting country

(‘B’) the same benefits which A may offer to a third country

• MFN is actually result of compromise made by one of the party while signing DTAA and then seeks favourable treatment if treaty partner offers such treatment to other countries

• India has MFN clauses in tax treaties with Netherlands, Belgium, France, Sweden, Norway, Switzerland, Spain, Kazakhstan, Philippines and Hungary

• MFN may –– Directly amend the treaty or may trigger re-negotiation for the amendment– With respect to scope or rate or both– May cover taxation of some of the items of income

92

India - Netherlands Tax Treaty• Protocol IV:

“If after signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.”

• MFN triggered only if other OECD country favoured• Applied immediately• MFN for scope as well as rate of taxation

• Changes later on incorporated in the DTAA through amendment in DTAA notified vide SO 693(E) dated 30-8-1991

93

India - Israel Tax Treaty• Protocol – Para 2:

“The competent authorities of the Contracting States shall initiate the proper procedure to review the provisions of Articles 12 and 13 (Royalties and fees for technical services, respectively) after a period of five years from the date of entry into force of this Convention. However, if under any Convention or Agreement between India and any third State which enters into force after 1-1-1995, India limits its taxation at source or Royalties or Fees for Technical Services or Interest or Dividends to a rate lower or a scope more restricted than the rate or scope provided for in this Convention, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later.

• MFN triggered only if any other country favoured after 1-1-1995• Applied immediately– Based on DTAA with Finland, Malta, Portugal, restricted scope applies – taxable only if it make

available technology• MFN for scope as well as rate of taxation• No notification but still valid to claim benefit as Protocol automatically provides the same

94

India – Swiss Confederation Tax Treaty• Protocol – Para 4:

If after the signature of the Protocol of 16th February, 2000 under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Agreement on the said items of income, then, Switzerland and India shall enter into negotiations without undue delay in order to provide the same treatment to Switzerland as that provided to the third State.

• MFN triggered only for re-negotiation• Cannot be applied without formal amendment to DTAA and notification thereof• No notification yet

• Similar provision in case of India - Philippines DTAA as well

95

India – Norway Tax Treaty• Article 13(2):

However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State. But insofar as fees for technical services are considered, to the extent such fees are paid in respect of a contract which is signed after the date of entry into force of this Convention, the tax so charged shall not exceed 10 per cent of such fees. For the purposes of this paragraph, if a lower rate of Indian tax is agreed upon with any other State than Norway after the entry into force of this Convention, such rate shall be applied.

• Clause in DTAA itself (not in protocol)• Applicable only for lower rate (not for scope) – Lower rate yet not agreed by India with any country• Immediately applied

96

India - Netherlands Tax Treaty• Protocol V: It is understood that in case India applies a levy, not being a levy covered by Article 2, such as

the Research and Development Cess, on payments meant in Article 12, and if after the signature of this Convention under any Convention or Agreement between India and a third State which is a member of the OECD India should give relief from such levy, directly, by reducing the rate or the scope of the levy, either in full or in part, or, indirectly, by reducing the rate of the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in article 12 of this Convention with the levy, either in full or in part, then, as from the date on which the relevant Indian Convention or Agreement enters into force, such relief as provided for in that Convention or agreement shall also apply under this Convention.

• MFN covers R&D Cess also• If India agrees with another OECD country, similar position would be applied to Netherlands– Exemption / Reduction of R&D Cess– Reduction of Income-tax to the extent of R&D Cess (something which is presently done in

case of Service tax)

97

Force of Attraction Rule

98

Force of Attraction Principle• Generally, in case of PE only profits attributable to the activities

of PE are taxable in India

• However, even other activities of the assessee can be taxed in India because of existence of PE in India– Even if such activities are carried out by the Head Office and PE

does not perform any activity in such event

– This Principle is referred as ‘Force of Attraction’• Additional tax liability is attracted once you have significant presence (PE)• Need to read each PE article closely to apply DTAA

– Presently, internationally this issue is subject matter of debate as application of force of attraction principle

99

India – Germany Tax Treaty• Protocol to Article 7(1): (c) In respect of paragraph 1 of Article 7, profits derived from the

sale of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that permanent establishment, may be considered attributable to that permanent establishment

if it is proved that : (i) this transaction has been resorted to in order to avoid

taxation in the Contracting State where the permanent establishment is situated, and

(ii) the permanent establishment in any way was involved in this transaction.

• The protocol gives reason why force of attraction rule is required

• Germany DTAA provides this for clarification.

100

India – USA Tax Treaty• Article 7(1):

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment ; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.

• Goods sold / services provided by HO which is similar to PE then profits of such activities are taxable in India

101

India – Belgium Tax Treaty• Article 7(1):

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment ; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.

• Goods sold / services provided by HO which is similar to PE then profits of such activities are taxable in India

102

Limitation of Benefit

103

Limitation of Benefit• To avoid treaty shopping, DTAA may include

Limitation of Benefit (LoB) clause

• USA invariably includes such provisions in DTAA

• India now includes LoB clause in most of its DTAA signed / renegotiated

• LoB restricts applicability of DTAA to certain persons / payments

104

India – Singapore Tax Treaty• Article 24(1):

Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.

• Treaty benefit in case of India – Singapore DTAA is applicable only to the extent such income is remitted to Singapore as foreign sourced income is taxable in Singapore only on remittance basis

105

106

Overview of Transfer Pricing Regulation

107

PRESENTATION OUTLINE Introduction

Indian transfer pricing regulation – A bird’s eye view

Key issues – A macro perspective

108

INTRODUCTION

CONCEPT : Enterprise choose to deal with its group

entities in preference to a non group entity for gaining the benefit of group synergy

Pricing between associated enterprise(AEs) with respect to transfer of goods, services, know how

Transfer Pricing Transfer pricing is an economic term, which

refers to the valuation process for transactions between related entities.

Defined as “the amount charged by one segment of an organisation for product or service that it supplies to another segment of the same or related organisation”

109

Transfer pricing …

“transfer pricing” generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises.

110

111

Transfer Pricing Transfer pricing issues affect situations when goods and services are provided, knowingly or otherwise, on non-arm’s length basis by related entities. The situations are

• Transfer of Tangible Property• Transfer of In-tangible Property• Provision of Services• Provision of Finance

112

INTRODUCTIONRELAVANCE : Revenue Authorities : Obtain fair share of revenue in respect of

economic activities carried within its jurisdiction Management: Decision making, group’s performance

evaluation, fair profit of an enterprise, etc

113

114

INDIAN TRANSFER PRICING REGULATION : A BIRD’S EYE VIEW Chapter X –Special provision relating to avoidance of tax (prior

to 1.4.2002 – section 92)

Pre TPR provisions – Section 40A(2), Section 10A/B , Section 80 IA

Based on Raj Narain committee – Finance Act 2001 incorporated detailed TP provisions in INCOME TAX ACT,1961

CBDT has set up new post of Director General , International Tax

115

Indian situations & TP regulation Increasing MNC activity – Inbound & sourcing

Inbound – key sectors : IT, Pharma, chemicals, services, telecom , etc

Sourcing – illustrative applicability : BPO activity , global sourcing base for various products

Accelerating trend of Indian companies setting up bases abroad

116

TPR – Developments since Finance Act , 2001

1st APRIL 2001 Section 92 to 92F introduced

21st AUGUST 2001

Rules 10A to 10E notified – Documents prescribed

23rd AUGUST2001 Circular No 12 issued

Section 40A(2)(b) vs TPRSection 40A(2)(b) of IT Act

• Payment to relative/person having substantial interest in taxpayer’s business

• Applicable irrespective of residential status

• Only Expenditure• No specific documentation

prescribed• Burden of proof on the

Assessing officer• No specific report format

Transfer Pricing Regulation Section 92 to 92 F of the IT Act.• Payment to associated

enterprise • Either one or both should be

non-residents• Both Income & Expenditure • Specific set of

documentation prescribed• Burden of proof on the

taxpayer• Form 3 CEB

117

SC Decision of CIT v. GlaxoSmithKline Asia Private Limited

118

TPR – Developments since Finance Act , 2001

December 2001 Circular No 14 issued ( Explanatory nature)

April 2002Guidance note issued by

ICAI

May 2002 Finance Act 2002 notified

119

Key Operative Provisions :Section 92 Income arising from an

international transaction to be computed with regard to ALP

Section 92A/B/F r/w Rule 10A

Meaning & Definition

Section 92C r/w Rules 10B/C

Computation of ALP

Section 92CA Reference to Transfer pricing officer (TPO)

Section 92D/E r/w Rules 10D/E

Maintenance & keeping of information & documents , Accountant's Report

120

Applicability of TPR : 2 Basic Conditions

There should be an international transaction

Such a transaction should be between two or more associated enterprises (AEs) of which at least one should be a non resident

2 BASIC CONDITIONS

121

IMPORTANT MEANINGS & DEFINITIONS :

Section 92A Associated Enterprise

Section 92B International Transaction

Section 92C Computation of Arm’s length price

Section 92F ( i ) Accountant

Section 92F (ii) Arm’s length price ( ALP)

122

IMPORTANT MEANINGS & DEFINITIONS :

Section 92F (iii) Enterprise

Section 92F ( iiia) Permanent establishment

Section 92F ( iv) Specified date

Section 92F (v) Transaction

123

Section 92: Charging Section

Any income arising from an international transaction shall be computed having regard to ALP

In computing such income , any allowance for expense or interest shall be determined having regard to ALP

ARRANGEMENT FOR ALLOCATION OR CONTRIBUTION FOR COST OR EXPENSES

NON APPLICABILTY OF SECTION - when ALP has the effect of reducing income or increasing loss on the basis of entries made in books of accounts

Associated Enterprise

• In order to be AEs the entities must be “Enterprises” as defined in S.92F(iii)

• 92A (1) (a) Direct participation .

Management,Capital, etcA B

124

Associated Enterprise

• Indirect Participation

A I Management,Management, Capital, etc.Capital, etc.

BB

IntermediaryIntermediary

125

Associated Enterprise…

A LtdNot less

than 26% B Ltd

A Ltd C LtdB Ltd

126


B Ltd C Ltd

A Ltd

127


A Ltd

A Ltd given loan of INR 75 lakhs to B Ltd.

Book value of total assets of B Ltd is INR 100 lakhs

B Ltd

128


A Ltd

A Ltd received loan worth INR 100 lakhs from Indian

banks on the basis of guarantees given by B Ltd to

the extent of 50 lakhs.

B Ltd

129


A Ltd

Appoints more than half of the

Board of Directors or

one or more Executive Director of the Governing

Board

B Ltd

130


A Ltd B Ltd

Mr. X

131


A Ltd

A Ltd provides B Ltd with technical know-

how for the manufacture of

goods.

B Ltd

132


A Ltd (Manufact

urer)

B Ltd supplies more than 90% of

the raw material

required for A Ltd

B LtdSupplier

133

C LtdSupplies to A Ltd.,


A Ltd (Manufact

urer)

A Ltd sells goods

to B Ltd

B Ltd(Buye

r)

C Ltd(Buyer specified by B Ltd)

134


Mr.P Mr.R

A Ltd B Ltd

135


HUF - P

Mr.R, a member of HUF P or relative of Mr.R.

A Ltd B Ltd

136


A - Firm

Not less than 10%

B Firm

137

138

Section 92A : Associated Enterprise An Enterprise

which directly or indirectly participate in Management or Control or Capital (M C C) of the other Enterprise

( Section 92A (1)(a) )

DIRECT INDIRECT

A

B

MCC

AMCC

IMCC

B

139

Section 92A : Associated Enterprise

AEs in which one or more persons participate, directly or indirectly,

in M C C of more than one Enterprise

(section 92A( 1 )(b) )

COMMON M C C

A

B C

140

Section 92A (2) : Deemed Associated Enterprise

1. Holding of shares carrying 26% or more voting powers

2. Common ownership- Holding of shares carrying 26% or more voting powers in more than one enterprises

3. Advance of loan not less than 51% of the total assets of the borrowing company

4. Guarantees not less than10% of the total borrowings on behalf of the borrower

141

Section 92A (2) : Deemed Associated Enterprise ……...

5 Appointment of more than half of the BOD or members of the governing board or appointment of one or more executive directors or members

6 Common appointments

7 Total dependence on an enterprise possessing exclusive rights for manufacturing or processing of goods or articles or carrying on business using know how, patents, copyrights, trade marks, licenses, franchise , etc

142


8 Dependence , up to 90% or more for the raw materials & consumables , on another enterprise

9 Influence on prices for goods or articles manufactured or processed & sold to an enterprise

10 One individual ( or his/ her relative jointly or separately) controlling two different enterprises

143


11.One HUF (or member or relative of member jointly or separately) controlling different enterprises

12. Enterprise holding not less than 10% interest in firm / AOP / BOI

13. Relationship of mutual interest as may be prescribed

144

Section 92B:International Transaction

Means transaction between two or more AE , either or both of whom are non residents, in the nature of :

1. Sale of products2. Purchase of products3. Provision of services4. Lending or borrowing5. Cost sharing arrangements6. Leasing & hiring of assets,etc

Transaction… Transaction:

– Defined in 92F(v)– Includes – arrangement – understanding – action in concert– Whether formal or in writing– Whether intended to be enforceable by legal

proceedings Definition

– Is in addition to normal ordinary meaning

145

146

Other Definitions u/s 92F :92F( i ) Accountant As per sec 288(2)

92F( ii ) ALP Price in uncontrolled condition other than for AE

92F( iii ) Enterprise Person (including PE of such person)

92F( iiia ) Permanent establishment

Fixed place of business through which business is wholly or partly carried on

92F( iv ) Specified date Due date as per section 139(1) explanation 2

92F( v ) Transaction Arrangement,understanding or action in concert

147

Other Definition in Rule 10A :

10A (a) Uncontrolled transaction

Transaction between enterprises other than AE, whether resident or non resident

10A (b) Property Includes goods,articles or things & intangible property

10A (c) Services Includes financial services

10A (d) transaction Includes a number of closely linked transaction

148

Section 92C :Computation of ALP

ALP shall be determined having regard to :

1. Nature of transaction or class of transaction

2. Class of associated enterprise3. Functions performed4. Other relevant factors as may be

prescribed by CBDT

149

Methods for Computation of ALP

1. Comparable uncontrolled price (CUP)2. Resale price method (RPM)3. Cost plus method (CPM)4. Profit split method (PSM)5. Transactional net margin method (TNMM)6. Such other method as may be prescribed by the

Board ALP shall be most appropriate method (MAP)

out of the above

150

Division of ALP based on : Transaction methods Other methods /

transactional profit methods :

CUP RPM CPM

PSM TNMM

INTERNAL

EXTERNAL

151

Comparable Uncontrolled Price : CUP Method …Rule 10B(a)

Where the price charged for goods, services or property transferred in a controlled transaction is compared to a CUT ( comparable uncontrolled transaction )

CUT isidentified

CUT is adjusted to a/c For differences in

IT & CUT

Adjusted Price of

CUT is ALP

152

Types of transactions considered appropriate for adoption of CUP method

Transfer of goods Provision for services Intangibles Loans,provision of finance

This method is particularly good where an independent Enterprise Sells the same product or service as sold

between two Associated enterprises

153

Resale Price Method : RPMRule 10B(b)

Where price @ which goods/property purchased or services obtained from AE is resold to unrelated party is identified.

GP margin of CUT is reduced from such resale price toarrived at ALP

10 A 12 AE

NORMAL GPas per CUT is 10%

15 (-) 10%=13.50

13.50 (-)EXPS ALP

15 xyz

154

Types of transactions considered appropriate for adoption of RPM method

Distribution of finished products or other goods involving no or little value addition

Where the entity performs basic sales , marketing & distribution functions

Where goods are further processed or incorporated into other products

155

Cost Plus Method : CPM (C+)Rule 10B( c )

(To consider fn & other diff. )

Direct & indirect cost of production in respect of goods/services sold to AE is identified , to which normal GP mark up in CUT is added to arrive @ ALP

DC 10ID 05 ---TC 15 ==

STRUCTURE

A

AE

GP10%CUT ALP

156

Types of transactions considered appropriate for adoption of CPM method

Provision of services Contract manufacturing Joint facility arrangement Transfer of semi finished goods Long term buying & selling arrangements

Subsidiary orperipheral

157

Profit Split Method : PSMRule 10B (d)

1. PSM applied when there is transfer of unique intangibles2. Multiple IT so interrelated that they can not be evaluated separately for the purpose of determining ALP

A9

AE6

Combined NP of AEs

15

Relative contribution of each AE to be identified based on:Functions performed

Assets employed or to be employedRisk assumed

Reliable external market data

158

Types of transactions considered appropriate for adoption of PSM Integrated services provided by more than

one enterprise Transfer of unique intangibles Multiple inter related transactions , which

cannot be separately evaluated

The profit should be split on an economically valid basisThat reflects the functions & risks of each of the parties

159

Transaction Net Margin Method : TNMMRule 10B (e)

•NP margin in IT with AE established based on cost incurred sales effected, assets employed, etc• NP margin in CUT is calculated based on the same criteria• NP margin in CUT situations is adjusted to factor open market issues• NP margin of AE transaction established/ compared with CUT NP

A 10% AE

X Y8%

ALP shall be based on 8%margin

160

Types of transactions considered appropriate for adoption of TNMM

Provision of services Distribution of finished products where

resale price method cannot be adequately applied

Transfer of semi finished goods

In India,in majority cases, method selection process would lead to selection of TNMM as MAM, due to Non Availability of requisite data for other methods.

161

Computation Related Documents

Degree of Similarity Required Under Various Methods:

Methods to be used

PRODUCT FUNCTIONS RESOURCES RISKS COMPLEXITY

CUP

CPLM/RPM

TNMM

PSM

162

Computation Related Documents

Degree of Similarity Required Under Various Methods (Contd.):

• CUP - High comparability of Products and Risks.

• CPLM and RPM – High comparability of Functions and Risks.

• TNMM – High Comparability of Risk and Resources. Functions also important.

• PSM – Exceptionally used in complex cases, such as presence of intangibles.

In India, in majority cases, method selection process would lead to selection of TNMM as MAM, due to Non Availability of requisite data in other methods.

163

Rule 10C provides for following factors for selecting MAM:

•Nature of International Transaction• Class of Associated Enterprise (e.g. Distributor, Contract Mfgr. Etc.) • Functions Performed, Assets Employed, Risks Assumed.• Availability, Coverage and Reliability of Data• Extent to Which Reliable and Accurate ,Adjustments Can Be Made.• Nature, Extent and Reliability of Assumptions Required.

Most appropriated method ( MAM) for ALP

Factors for Selection of MAM [Rule 10C R.W. S. 92C]:

Most Appropriate Method must be Reliable Measure of ALP

Most appropriate Method - Rule 10CIn selecting the most appropriate method as specified in sub-rule (1) of Rule 10 C,

the following factors shall be taken into account, namely:—• the nature and class of the international transaction;• the class or classes of associated enterprises entering into the transaction and

the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;

• the availability, coverage and reliability of data necessary for application of the method;

• the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;

• the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;

• the nature, extent and reliability of assumptions required to be made in application of a method.

164

165

41

167

Reference to Transfer Pricing Officer ( TPO) (Section 92CA):

AO (with CIT prior approval ) may refer computation to TPO

TPO : Authorized JCIT / DCIT / ACIT

Binding nature of his direction to AO

ALP computed by Assessee (+/-) 5% of price determined by AO – NO adjustment (Circular no 12/2001 dated 23-08-2001)

Power of Board to make safe harbour rules (Section 92CB) The determination of arm’s length price under section 92C

or section 92CA shall be subject to safe harbour rules.

The Board may, for the purposes of sub-section (1), make rules for safe harbour.

Explanation.—For the purposes of this section, “safe harbour” means circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee.

168

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169

Documentation :– Section 92D r.w Rule 10D Every person who has entered into an international transaction shall

keep and maintain prescribed information and documents. (S.92D(1) ).

Prescribed the period for which such information and documents is required to be kept and maintained is 8 years.[S.92D(2), Rule 10D(5)].

The information or documents so maintained can be called for within a period of 30 days from the date of receipt of notice by the assessee. The said period can be further extended by another 30 days. (S. 92D(3)).

Rule 10D(2) provides for exemption from documentation requirements to the assessees, whose aggregate value as recorded in the books of account, of international transactions entered into by him does not exceed Rs. 1 crore.

170

PRESCRIBED DOCUMENTATION

• Principal Documents [Rule 10D(1)]

• Supportive Documents[Rule 10D(3)]

171

Principal Documents

ICAI’s classification of Principal Documents:

• Enterprise-Wise Documents [clauses (a) to (c ) of Rule 10D(1)]

• Transaction-Specific Documents [clauses (d) to (h) of Rule 10D(1)]

• Computation Related Documents [clauses (i) to (m) of Rule 10D(1)]

172

Supportive Documentation [Rule 10D(3)]

The information and records maintained shall be supported, to the extent possible by authentic documents, e.g.:

1. Official publications, reports and studies and databases from the Government of the countries of AEs.

2. Market research studies carried out and technical publications brought out by institutions of national or international repute

Price publications (e.g. stock market / commodity market quotations)

173

Supportive Documentation [Rule 10D(3)]

Published accounts and financial statements of AEs

• Agreements / contracts in respect of transactions with unrelated parties which are comparable with the relevant international transactions

• Letters/other correspondences documenting any terms negotiated with related parties (i.e. Associated Enterprises)

• Documents issued for various transactions under the accounting practices followed

Documentation… o Rule 10D has prescribed 13 different

information and documents that are to be kept and maintained u/s 92D

o These documents can be broadly classified as:o Enterprise – wise documentso Transaction – specific documentso Computation related documents

174

Documentation… Documents containing the following information

should be maintained:Ownership Structure

• Details of shares• Profile of the group• Name, address, legal status, ownership linkages,country of tax residence of the each of the enterprises

Nature of business /industry and market condition• Broad description of the business of the taxpayer,• Industry background• Business of associated enterprises

175

Documentation…

Controlled Transactions• Nature and terms of international transactions,• Details of property transferred /services provided• Quantum and value of international transactions

Background documents• Record of economic and market analysis,• Forecasts, budgets or any other financial estimate

Factors for choosing the method employed to determine ALPDetermination of ALPAssumptionsAdjustments carried out

176

Documentation…

Comparability, functional and risk analysis• Record of uncontrolled transactions along with analysis to evaluate its comparability with international transactions• Record and evaluation of comparability of transactions• Description of functions performed, risks assumed and assets employed

Selection of the transfer pricing method• Description of methods considered for determining ALP• Best method selected, along with reasons for selection


177

Documentation…

Application of the transfer pricing method• Record of actual working of ALP.• Detail of actual working of the comparable data with respect to ALP• Details of differences between comparable data and un-controlled transaction• Mode of adjusting the factors

Assumptions, strategies, policies• Assumption, policies and price negotiations, if any, which have critically affected the determination of ALP


178

Documentation…

Supporting information• Official reports, publications, databases and studies from the government in the country of residence of the AE, or any

other country, as relevant to the international transaction

• Market research studies and technical publications brought out by institutions of national or international repute

• Correspondence documenting the terms negotiated between the Aes.


179

180

ACCOUNTANT’S REPORT : Section 92E (Rule 10E)

Every person who has entered into an international transaction shall obtain a report form an accountant

Report shall be in Form 3CEB ( Rule 10E) Accountant to certify the contents of annexure to Form

3CEB as true &correct

Furnish such report before specified date No requirement to furnish along with return of income

181

Important clauses of 3CEBClause 8 Transaction in respect of tangible

propertyClause 9 Transaction in respect of intangible

propertyClause 10 Particulars in respect of provision of

servicesClause 11 Particulars in respect of lending or

borrowing moneyClause 12 Particulars in respect mutual agreement

or arrangementClause 13 Particulars in respect any other

transaction

Penalties

Section under the Income-Tax Act.

Particulars Penalty

271 AA Failure to maintain documentation

2% of the value of each international transaction

271 G Failure to furnish/submit any information/document to the transfer pricing officer

2% of the value of the international transaction for each such failure.

271 BA Failure to furnish accountant’s report

INR 1,00,000

271(1)(c) read with explanation 7

Transfer pricing adjustment considered as concealed income

100-300% of amount of tax on adjustments

182

183

Penalties for non compliance of TPRSection 271(1)(C) explanation 7

Addition made in computing total income u/s 92C(4) shall be deemed concealed income

100% - 300% of tax sought to be evaded

Section 271AA

Failure to keep & maintain such information & documentation as per section 92D

2% of value of each international transaction

Section 271BA

Failure to furnish accountant’s report as per section 92E

Rs. 1 LAC

Section 271G

Failure to furnish any information or documents as required u/s 92D(3)

2% of the value of transaction for each failure

Reasonable CauseSec 273B

Components of TPR

184

Is there and internationa

l transaction

Transfer Pricing Regulations not applicable to the

transactions. No ALP to be determined

Between the AEs

Components of TPR…

185

At l east 1 AE is Non-

Resident

Transfer Pricing Regulations not applicable to the

transactions. No ALP to be determined

Are International transaction at ALP ?

Adjustments to total income is made

Levy of penalty u/s 271(1)(c)

Some Landmark TPR rulingsCase law Important observations

Oracle India •The Tribunal held that transfer pricing provisions, being specific in nature, override the domestic tax avoidance provisions concerning related party transactions.

•Accordingly, if the Transfer Pricing Officer holds a transaction to be at arm’s length, there can be no disallowance under the pretext of excessive payment to related party under the provisions of Section 40(A) of the Act

Canoro Resources, •where it was held that the Transfer Pricing provisions, being more specific override the general provisions.

186

Some Landmark TPR rulingsCase law Important observations

Vertex •The Tribunal has affirmed that where a taxpayer has computed the arm’s length price as per law, in 'good faith’ and with ‘due diligence’, penalty should not be levied.

• This comes as welcome relief to taxpayers subjected to arbitrary or procedural penalty on transfer pricing adjustments.

Cargill India •The Tribunal had favored the taxpayer holding that where penalty was levied for ‘non-maintenance of documentation’.

•In this case, the Tribunal had ruled that Revenue has to call only forspecific and relevant information and not simply ‘all information’.

•It further held that the penalty would not be justified if the Revenue doesnot point out any specific default in complying with the documentationrequirements and does not consider any ‘reasonable cause’ that thetaxpayer may have resulting in the default 187

188

Revision : Applicability Charging section Associated Enterprise Deemed Associated Enterprises – Situations International transaction ALP & Methods

TP METHODOLOGIES -PRACTICAL ISSUES

189

• Introduction

• Methodologies and guidelines for selection of a method

• Tested party

• Practical issues arising in selection of a method

• Practical issues in applying any particular method

SYNOPSIS

190

• The law does not oblige a trader to make the maximum profit that he can out of his transactions. It is the income in the hands of the trader which is taxable. Any income he could have, but not earned, is not exigible to tax as income [CIT v. A Raman and Co. [1968] 67 ITR 11 (SC) ]

• As long as prices at which international transactions are entered into are ALPs, it is hardly relevant whether or not the AE has ensured that the assessee makes reasonable profits ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657

• No businessman can be compelled to maximise his profits : SA Builders 288 ITR 1 SC

Introduction

191

• ALP in relation to an international transaction shall be determined by one of the five methods

• Being the most appropriate method (MAM)

• MAM shall be determined having regard to - Nature of transaction- Class of transaction- Class of AEs- Functions performed by AEs- Other relevant factors as may be prescribed by Board

Section 92C (1) – Methodologies

192

• Other relevant factors as may be prescribed by Board as per Rule 10C(2) are

- Nature and class of international transaction (I.T.)- Class/classes of AEs entering into transaction and FAR performed - Availability/coverage/reliability of data necessary for application of

method- Degree of comparibility existing between I.T.s and U.T.s or between the

enterprises entering into such transaction- Extent to which reliable/accurate adjustments can be made to account for

differences between I.T.s and U.T.s or between the enterprises entering into such transaction

- Nature, extent and reliability of assumptions required to be made in the application of a method

Section 92C (1) – Methodolgies

193

• ALP to be determined with reference to an international transaction as per sections 92(1) and 92C(1)

• MAM shall be the method which is best suited to the facts and circumstances of each particular international transaction as per Rule 10C(1)

• As per Rule 10A(d), ‘transaction’ includes a number of closely linked transactions

• As per Section 92F(v) ‘transaction’ includes an arrangement, understanding or action in concert whether or not

- Same is formal or in writing- Same is intended to be enforceable by legal proceeding

Section 92C (1) – Certain aspects

194

• Section 92 C(3) provides for determination of ALP by AO

• If on basis of material/document/information in his possession

• If he is of opinion that

- Price charged/paid in an international transaction has not been determined in accordance with sub sections (1) & (2)

- Information/documents have not been kept and maintained in accordance with sec 92D(1) and Rule 10D

- Information/data used in computation of ALP is not reliable/correct- Assessee has failed to furnish information/document

Section 92C (3) – ALP determination by AO

195

• However, the power to determine ALP can be exercised only subject to the conditions of section 92C(3)

• Circular No.12 of 2001 makes it clear that AOs can have recourse to the above power only - under aforesaid circumstances (a) to (d) of sec 92C(3)- in the event of material information or document in his possession - on the basis of which an opinion can be formed that any such circumstance

exists

• Circular provides that in other cases, the value of international transaction should be accepted without further scrutiny


196

• The aforesaid power can be exercised only during the course of assessment proceeding

• Before determining ALP, AO has to give a show cause notice as to why ALP should not be determined on the basis of material or information or document in his possession


197

• Is it possible to take a stand that no method is applicable and hence TP is not applicable?

- Importer and its foreign collaborator, even if assumed to be related persons, their transaction value is to be accepted, when that relationship did not influence price CCE v. PRODELIN India (P.) LTD (2006) 202 ELT 13 (SC)

- By simply saying that none of the methods prescribed can be applied and citing excuses for the same, does not absolve an assessee of his statutory duty in determining ALP as per law : Starlite 192 Taxman (ii) [Mum ITAT] 6 Taxman.com 41

• Can assessee change the method from one year to another year- When there is no change in facts & circumstances- When there is a change

• Can AO/TPO change the method as aforesaid?

Practical issues arising in selection of a method

198

• Considerations for selecting a method

- The assessee is free to adopt any method as prescribed by law, if it considers that method as the most appropriate method : UCB India Pvt Ltd 121 ITD 131 (Mum.)

- Consideration as to which method will be more beneficial to the Revenue authorities is certainly not germane to the selection of most appropriate method : ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657


199

• Transaction method v. profit method

- Use only profit methods when transactions methods fail [ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657]

- TNMM is the appropriate method in case of service PE :. Morgan Stanley and Co. Inc. (2007) 292 ITR 416 (SC)

- Trend of OECD – Leans more towards TNMM


200

- the tested party will be the participant in the controlled transaction

- whose operating profit attributable to the controlled transactions can be verified

- using the most reliable data and requiring the fewest and most reliable adjustments, and

- for which reliable data regarding CUTs can be located.

- Consequently, in most cases the tested party will be least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential CUTs.

Tested Party : Sec. 1.482-5 of the US TP Regulations

201

• While determining MAM, it is first necessary to select the ‘tested party’ and the tested party will be the least complex of the controlled taxpayer and will not own valuable intangible property unique assets that distinguish it from potential CUTs: Development Consultants (P) Ltd. (2008) 115 TTJ (Kol) 577

• Tested party normally should be the party in respect of which reliable data for comparison is easily & readily available and fewest adjustments in computations are needed. It maybe local or foreign entity, i.e., one party to the transaction : Ranbaxy [2008] 110 ITD 428 (Delhi)

• If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. He is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer : Ranbaxy(supra)

Tested Party

202

• Aggregating of all foreign AEs as tested parties in taking their margin of profit for comparison with some American companies and six other companies with location not disclosed is not acceptable : Ranbaxy 110 ITD 428 (Delhi)

• The least complex party needs to be selected as the tested party for the purpose of carrying out Arm’s Length analysis. The reasons for testing the margins of a less complex party is that the simpler party requires a fewer and more reliable adjustments to be made to its operating profit margins. A foreign entity is unsuitable as a tested party because it is difficult to compare in different jurisdictions since the facts and circumstances are different in each geographical location. Moreover, it is difficult to obtain all relevant facts that could lead to a proper FAR analysis. Further the relevant data required to make the requisite adjustments is also very difficult to obtain in relation to the foreign comparables : Global Vantedge Pvt 2010-TIOL-24-ITAT-DEL

Tested Party

203

• CUP method

• Resale Price method

• Cost plus method

• Profit split method

• Transaction net margin method

METHODS

204

• When CUP may be chosen

• CUP is rejected in Eli Lilly and Co. and Subsidiaries v. CIR (84 US Tax Court Reports 996) as noted in UCB India 121 ITD 131 (Mum.)

As difference arising due to –

(a) credit terms; (b) supply of raw material; (c) packaging; (d) product quality; (e) patents.

between controlled and uncontrolled transactions could not be accounted for by a reasonable number of adjustments.

Practical issues in CUP method

205

• Aggregation of transactions

a) Yes : Rule 10A(d) – “transaction” includes a number of closely linked transactions.

a) No :

- Development Consultants 23 SOT 455 Kol- UCB India 30 STO 95 Mum- Ranbaxy 110 ITD 428 (Delhi)

Practical issues in CUP method

206

• Gharda Chemicals Ltd 130 TTJ 556 Mum

- Whole sale price and retail price are not comparable

- Price operated in UK/Australia cannot be compared with that of USA

Practical issues in CUP method - CUT

207

• Can Market Quotations be used as CUT?

- London Metal Exchange quotations provide the most reliable prices at which uncontrolled comparable transactions are entered into : MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657

- LIBOR could be taken : Perot Systems 2010-TIOL-51-ITAT-DEL

- Certificate of Market Committee produced is public document forming record of public body & rates disclosed therein to be treated as authentic : Rameshwar Das [2010] 30 VST 531 (P&H) HC

- Rates published in news papers like Economic Times cannot be used for benchmarking : Suresh Kumar Bajoria vs. Income Tax Officer [2008] 113 TTJ (Jp) 364

Practical issues in CUP method - CUT

208

• Gharda Chemicals Ltd 130 TTJ 556 Mum

External CUP contemplates comparison of price charged by assessee from its AE with open market price in that country from transactions between the unrelated third parties.

Take price at which such goods are imported by others on an average basis. Such an average price should be some realistic price representing the price from the

whole or the large part of whole of the imports made in USA of this product and not some isolated or a stray transaction.

If product A is imported by 100 parties at rates ranging between 50 US$ to 70US$ from different countries, lowest price of 50 USD cannot be taken as ALP.

Rather in such a situation the average price of 60 USD should be taken as ALP. A third party report cannot be the sole basis for determining the ALP on CUP

method for the reason that the third party is not a Government Agency of USA, which could vouch for the price

The third party, in turn, may have relied on certain stray instance Reliance on such selective data is not best guide for the determination of ALP.

Practical issues in CUP method – ALP determination

209

• Libor rate to be increased by average basis pont : Perot Systems 2010-TIOL-51-ITAT-DEL

• CUT price may be suitably enhanced for

- ‘significant service in producing the raw material’ and - ‘freight and insurance which is paid by the AE’.

[ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657 ]

Practical issues in CUP method - FAR

210

• When assessee enters into the raw material purchase transaction with the AE at an ALP, it is of no consequence whether or not he makes sufficient profits on manufacturing products from such raw material [ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657 ]

Practical issues in CUP method - Others

211

Year of data Number of comparables Different geographical locations Loss making companies as CUTs Super profit companies as CUTs Turnover filters Companies with controlled transactions as CUTs Internal cut v. External cut

Practical issues in TNMM

212

Search process - filters Application of TNMM – Entity level or transaction

level Operating costs/margin FAR analysis


213

Year of data : Rule 10B(4) read with proviso [See Rule 10D(4) also]

a) Same year

- CITv. Denso Haryana (P.) Ltd. [2010] 190 Taxman 389 (Delhi) HC - Aztek 107 ITD 141 (Bang.) (SB) - Mentorgraphics 109 ITD 101 Delhi- Philips 119 TTJ (Bang) 721 - Customer Service 2009-TIOL-424-ITAT-DEL- Skoda 122 TTJ 699 - Honewell 2009-TIOL-104-ITAT-PUNE [Future year cannot be taken]

b) Different year - Development Consultants 23 SOT 455 Kol577


214

Number of comparable companies

a) Even one comparable will do

1. Rule 10B(1)2. ICAI guidance note3. Vedaris Technology [2010] 131 TTJ (Del) 3094. Mentor Graphics [2007] 109 ITD 101 (Delhi)

b) There should be reasonable number of CUTs

Practical issues in TNMM – CUT selection

215

Primary filters

– Data not update – (i) no directors report(ii) no notes to accounts(iii) insignificant data(iv) no segment information

– Related party transactions

– Geography of operation – exports < 25%

– Consistent losses

– Functionally different

– Turnover ie size

– Exceptional year of operation

Practical issues in TNMM – Search process

216

Secondary filters

– Salary costs being < 25%

– R & D costs greater than 5%

– Forex filter

– Trading activity filter

– Asset filter when assets > revenues

Practical issues in TNMM – Search process

217

Different geographical area

Adjustments merely for volume off take, credit period and credit risk, though material are not sufficient to make the sale price to AE in Thailand comparable with the sale to unrelated party in Vietnam unless an adjustment for differential end user price in two countries is made : Intervet India (P.) Ltd. v. ACIT 130 TTJ 301 Mum


218

Loss making companies

- OECD draft notes dt 10.05.2006 has accepted to exclude loss as well as high profit making companies where tax payer is a captive enterprise

- A business organization with negative net worth cannot be treated at par with a normal business organization : Quark Systems Pvt Ltd Vs ITO 2010 TIOL 31 Chandigarh

- However, merely because a comparable is making loss, it cannot be excluded from the list of comparables : Quark Systems (supra)

- Loss and competition are normal incident of business and merely on above factors, exclusion is not justified : Sony India [2008] 114 ITD 448 (Delhi)


219

Companies making extra ordinary profits should be excluded :

- Quark Systems Pvt Ltd Vs ITO 2010 TIOL 31 Chandigarh

- Philips Software v. ACIT 119 TTJ (Bang) 721

- E-Gain Communication [2008] 118 TTJ (Pune) 354


220

Turnover filter

- Is captive service provider immune from size of turnover?

- Turnover of Rs 1 crore to infinite is a not reasonable classification as turnover base : Quark Systems Pvt Ltd Vs ITO 2010 TIOL 31 Chand

- Oversized companies to be avoided E-Gain Communication [2008] 118 TTJ (Pune) 354

- Guidance Note of ICAI


221

Can company with controlled transactions be considered?

a) Not even one such transaction is acceptable

- Mentor Graphics 109 ITD 101 Delhi- Philips 119 TTJ (Bang) 721

b) 10% to 15% of such transactions is tolerable

- Sony 114 ITD 448 (Delhi)


222

Internal cut or external cut : In case external comparables are not available due to lack of data in public domain, the AO may accept internal comparables including segmental data or internal TNMM : UCB India Pvt Ltd 121 ITD 131 (Mum.)

• Is assessee estopped by companies originally selected?No : Quark Systems Pvt Ltd Vs ITO 2010 TIOL 31 Chand


223

• When information available in public domain is not sufficient to make the comparisons possible, it is inevitable that some approximations and reasonable assumptions are to be made : Skoda Auto India (P.) Ltd. 122 TTJ 699 Pune


224

TNMM evaluates profitability of transactions rather than profitability of an enterprise.

• Transaction of different nature cannot be aggregated for the purpose of comparison under TNMM.

• In practice though the profitability of comparable entities is used to benchmark the international transactions of taxpayers, however, in such a scenario an underlying assumption overrides the analysis for the lack of data.

• Acting assumption in such case is that due to a well designed functional analysis only those companies are taken as comparables which have undertaken homogeneous & comparable transactions.

• Thus, in such a scenario, the profitability of the comparable entities, in effect, represents the profitability of comparable transactions. Source : OECD TP guidelines 1995 clause 3.42 applied in Global Vantedge Pvt Ltd 2010-TIOL-24-ITAT-DEL


225

Comparing the operational margin at entity level cannot be termed as TNMM : UCB India 121 ITD 131 (Mum.)

TNMM to be applied on Entity level or transaction level

226

Provision for future losses to be deducted : Honeywell 2009 TIOL 104 Pune

• TNMM as per Rule 10B refers to net profit and not operating profit. Therefore, there is no scope for reducing interest and other overheads : T Two International Pvt Ltd 2010-TIOL-166-ITAT-MUM

• Profit before depreciation may be taken for benchmarking : Schefenacker Motherson [2009] 123 TTJ (Del) 509

Practical issues in TNMM – Operating costs/margin

227

If high import content is necessitated by the extraordinary circumstances beyond assessee's control, may warrant an adjustment in operating margin : Skoda Auto India 122 TTJ 699 Pune

Reimbursement of advertisement expenditure by associated enterprise, Provision written back, Balances written back, Insurance claim and Interest received from customers for delayed payment cannot be excluded from normal operating profits : Sony India P. Ltd. [2009] 315 ITR (AT) 150 (Delhi)

Practical issues in TNMM – Operating costs/margin

228

Intangibles and Risks : Make 20% adjustment as per Sony India [2008] 114 ITD 448 (Delhi)

• No blind adjustments without examination of vital issues : Philips 2009 TIOL 123 Kar HC & Vedaris Technology (P) Ltd. [2010] 131 TTJ (Del) 309

• Adjustments should be made for risk, working capital and R&D

- Mentor Graphics 109 ITD 101- Schefenacker Motherson [2009] 123 TTJ (Del) 509 - E Gain Communications 118 ITD 243 Pune

Practical issues in TNMM – FAR

229

Use of trademark and logo by domestic AE : Maruti Suzuki India Ltd. [2010] 31 CAPJ 158

- Where use is discretionary : No adjustment

- Where use is mandatory : Appropriate payment should be made by foreign AE, on account of the benefit it derives in the form of marketing intangibles, obtained by it from such mandatory use of its trademark and/or logo.

- Expenditure incurred by domestic AE on advertisement etc., need not be paid by foreign AE as long as such expenses don’t exceed what an independent person would have incurred in similar situations


230

Start up assessee v. Established comparables – Adjustment towards idle capacity: Global Vantedge Pvt 2010-TIOL-24-ITAT

- Looking into the IT industries which were in booming stage, a surplus capacity to the extent of 1/3rd of the existing capacity is treated as normal in this industry in anticipation of future growth in business and an adjustment to the profitability of the comparables should be made to the extent of 33.33%.

- the profitability of the comparables need to be adjusted by the above %age to bring them to a level of inefficiency that appellant operated at.


231

Is fact of AE suffering losses justification for lower margin?

- No as per Gharda Chemicals Ltd Vs DCIT, 130 TTJ 556 Mum

- Yes as per DCIT v. M/s. Indo American Jewellery 131 TTJ (Mumbai) 163

- The total adjustment made to assessee together with the ALP already reported by him cannot exceed the total revenue earned by him and his AE from third party independent clients : Global Vantedge 2010-TIOL-24-ITAT-DEL

Practical issues in TNMM – Other aspects

232

Can industry average/norm be used as a benchmark?

- Yes as per CIT. v. DUA and associates P. Ltd., [2009] 316 ITR 224 (P & H) HC [Hotel industry – Non TP case]

- Report on the Indian BPO Industry prepared by INGRES, a division of ICRA Ltd could be used to benchmark marketing effort in the absence of any other evidence : Global Vantedge Pvt 2010-TIOL-24-ITAT


233

• Can ALP margin be worked when assessee is working as per Government regulations?

- Where no profits is inferable, there in no option except to accept declared price [In Exxon Corpn. & Affiliated Companies al v. CTC Memo 1993-616]

- Where payment is made to cane growers as per the directions of the State Govt, assessee cannot be accused of paying to the cane growers in excess of the fair market price : CIT v. Manjara Shetkari Sahakari Sakhar Karkhana [2008] 301 ITR 191 (Bom) HC


234

• Is TPO bound by acceptance of transaction by other department?

- RBI's approval does not put a seal of approval as per Perot Systems Tsi 2010-TIOL-51-ITAT-DEL

- Declaration in customs does not bind the assessee in TP proceedings DCITVs M/s United Racing & Bloodstock Breeders Pvt Ltd 2009-TIOL-423-ITAT-BANG

- Circ No.6 dated 6th July, 1968 with reference to sec 40A(2) : payment approved by one wing of Government, cannot be treated as unreasonable by another wing of the same Government.


235

OECD : Customs adjustment cannot be automatically taken


Customs TP Income tax TPIntangibles are ignored Intangibles are considered

Functional analysis is not recognised

Functional analysis is recognised

Post import adjustments are not usually carried out

Post import adjustments are usually carried out

Aggregation of transactions is not accepted

Aggregation of similar transactions is acceptable

236

Is TPO bound by acceptance of transaction by other department?

- Agreements having been approved by the various Government authorities from time to time, the terms thereof could not be regarded as unreasonable or excessive and the same, in any case, cannot be considered as sham or collusive merely on the basis of surmises and conjectures.

- Sheraton International Inc. vs. DDIT (2007) 107 ITD 120 (Delhi) : - CIT vs. Lucas TVS Ltd. (1997) 226 ITR 281 - CIT vs. Sriram Pistons and Rings Ltd. (1990) 181 ITR 230 Del- The expenses have been incurred after obtaining FIPB approval from the

R.B.I cannot be said to be not at ALP : KLM Royal Dutch Airlines v. ADIT [2007] 292 ITR 49 [Delhi HC]


237

Adoption of operating margin?

- To be applied only on international transactions and not on all transactions : IL Jin Electronics 2010 TIOL 151 (Mum Tri)

- TNMM should be applied by working out the average net profit. The adjustment should be worked out by reducing the net profit declared by the assessee from the gross sales and then divide the same in the controlled and uncontrolled sale and apply the net profit rate : T Two International Pvt Ltd 2010-TIOL-166-ITAT-MUM

- Revenue earned by assessee from servicing independent clients, without involvement of related party should not be benchmarked. The proportionate costs attributable to such revenue should be ignored while computing ALP : Global Vantedge Pvt Ltd 2010-TIOL-24-ITAT-DEL


238

• Is TP applied on cost sharing?

- Section 92(2)

- OECD Guidelines on TP [noted in ABB Ltd., In Re [2010] 322 ITR 564 (AAR)]

“each participant in a CCA would be entitled to exploit his interest in the CCA separately as an effective owner thereof and not as a licensee, and so without paying a royalty or other consideration to any party for that interest. Conversely, any other party would be required to provide a participant proper consideration (e.g., a royalty), for exploiting some or all of that participant’s interest”


239

• Is assessee/AO/TPO bound to adopt same ALP margin as earlier year when facts have not changed?

- Mandate to use contemporaneous data : Rule 10B(4)

- In absence of any change in factual position, profit rate declared and accepted in preceding years constituted a good basis for working out gross profit rate as per CIT v. Inani Marbles (P) Ltd. [2008] 175 Taxman 56 (Raj.)


240

• How is IPR to be dealt with in TNMM?

- The income arising from the transfer of its right, title and interest in and to the trade-marks is taxable in India under the Income-tax Act, 1961. 'Independent valuation report' obtained by the applicant may be accepted by the department if it is found true and correct on examination : 2008 - TMI - 4676 - AAR


241

http://www.taxmanagementindia.com/Site-Map/Income_Tax/Detail_Case_Laws.asp?ID=4676

| 242

IS THERE A TIME LIMIT FOR MAKING TP REFERENCE?

Limitation for initiating scrutiny

assessment

Sep 30 2011

Limitation for initiating

TP audit

Dec 31 2011

Limitation for completion of

TP audit

Oct 31 2012

March 31 2019

Date till whichdocumentation is

required to be maintained

Deadline for maintaining

documentation, filing tax return

and accountant’s

report

Sep 30 2010

AY 2010-11

Second proviso to Sec 153(1) – “during the course of proceeding for the assessment of total income, a reference u/s.92CA(1) is made”

| 243

TP ASSESSMENT BY JDIT – VALIDITY? Explanation to section 92CA(7) —For the purposes of this section, “Transfer Pricing Officer”

means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons

Sec 2(28C) - “Joint Commissioner” means a person appointed to be a Joint Commissioner of Income-tax or an Additional Commissioner of Income-tax u/s.117(1)

Sec 2(9A) - “Assistant Commissioner” means a person appointed to be an Assistant Commissioner of Income-tax or a Deputy Commissioner of Income-tax u/s.117(1)

Sec 2(28D) - “Joint Director” means a person appointed to be a Joint Director of Income-tax or an Additional Director of Income-tax u/s.117(1)

Sec (19C) - “Deputy Director” means a person appointed to be a Deputy Director of Income-tax u/s 117(1)

Notification by CBDT authorising JDITs as TPOs – Validity in view of provisions?

| 244

VALIDITY 133(6) INFORMATION Second proviso to sec.133(6) – Provided further that

the power in respect of an inquiry, in a case where no proceeding is pending, shall not be exercised by any income-tax authority below the rank of Director or Commissioner without the prior approval of the Director or, as the case may be, the Commissioner

Validity of centralized collection of information and distribution to various assessment circles

| 245

AE TRIGGER Sec 92A(1) – AE definition - Participation in management or control or capital of

other enterprise

Sec 92A(2) – deemed to be AE - 12 triggers– CBDT clarified that falling under 92A(2) is necessary to be treated as AE

Will it hold good even if there is no participation in management or control or capital

Usage of “for the purpose sub-section (1) in sec 92A(2)”– Principle of deeming fiction and purpose interpretation

Sec 92A(2)(i) – “the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise” – will cover all customers? What words to be supplied to interpret?

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TRANSFER PRICING - UNLIMITED Ranbaxy

Fab India

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IS PROFIT SHIFTING INCENTIVE A PRE-REQUISITE? Aztec software (5 member spl bench)

– Necessary and expedient; Tax avoidance need not be established before reference

– TP reference is valid even if unit is enjoying tax holiday

– Philips software x MSS India

– Indo-American Jewellery

Coca Cola India

– Pure domestic transaction between project office in India (status is non-resident) and Indian co (AE)

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TP NOT TO APPLY IN THE ABSENCE OF CHARGE

Dana Corporation (AAR)

Amiantit International (AAR)

– Absence of charge due to failure of computational provisions

– Did not consider Sec 47 exemption

Vanen burg (AAR)

– Transfer not liable to tax in India as per DTAA provisions

| 249

TP VS OTHER PROVISIONS 40A vs TP provisions

– Jurisdiction of AO vs TPO

– Aztec Software

– Oracle India

45(3) vs TP provisions – General vs Specific

– Canoro Resources

| 250

TP AND 10A/10B Tweezerman India – Beware of super profits!

– More than ordinary profits in eligible business due to close relationship with any other profits – sec 80IA(10)

I-gate : Suo motu TP adjustment– 92C(4): Where an arm’s length price is determined by the Assessing Officer

u/s.(3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined :

– Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section

– However, realization in foreign exchange condition to be met for availing 10A deduction

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AMENDMENT TO 5 PERCENT ADJUSTMENT Position prior to amendment - “Provided that where more

than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.”

Plethora of decisions that 5 percent is available as a standard adjustment even if price is out of the 5 percent range– Sony India, Development Consultants, Philips Software

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AMENDMENT TO 5 PERCENT ADJUSTMENT..2 Amendment with effect from 1.10.2009 - “Provided that where more than one

price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices; Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price”

Memorandum explaining Finance Bill, 2009 – “amendment is effective for all assessments done after 1.10.2009”

Amendment prospective or retrospective?

SAP Labs India Pvt Ltd (Bang ITAT) – Amendment applicable from AY 2009-10 only– Should it be read as AY 2010-11 and subsequent years only?

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TP AND ROYALTY Maruti Suzuki and the Concept of Reverse royalty

– TP risk to import distributors on possible disallowance of advertisement expenditure

– Mere arm’s length revenue not sufficient

– Expenditure also to be at arm’s length

Royalty on sales and claim of bad debts– CA Computer Associates - Bad debts written off cannot be a

factor to determine arm’s length nature of royalty

RBI ceiling rates not accepted as benchmarks– Coca cola India; Perot systems

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TP AND INTEREST ON LOANS Loan vs Quasi equity – Perot Systems

PLR vs LIBOR – VVF

Netting off receivables – Boston Scientific

Loan vs Trade receivables – Nimbus communications

Promoter’s guarantee to foreign subsidiary

GE Canada ruling and implicit guarantee

| 255

DEVIATING FROM 3CEB AND DOCUMENTATION

Quark systems– Company selected in own documentation can be

sought to be excluded

AM Todd co– Spot rates inadvertently taken in 3CEB

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BENCHMARKING ISSUES Rejection of TP documentation without reasons – Mentor

graphics, Indo american Jewellery

Tested party – Ranbaxy x Development consultants

Contemporaneous search – Philips, Toshiba

Aggregation of transactions – Star India, Ranbaxy

Previous year data – Customer Service

Subsequent year data – Denso Haryana

Different year ending – Honeywell

Related party transactions – Sony India; Philips

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BENCHMARKING ISSUES Loss making comparables – Sony India

Entity wide TNMM and segmentals – UCB

Business model differences and adjustments – Skoda auto

Adoption of cash profits as Profit Level Indicator (PLI):Schefenecker

Foreign exchange fluctuation is operating income – SAP labs

Expense reimbursement is operating income – Sony India, Chrys capital

Recovery for expenses vs rendering of service – Zydus Altana Health care

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TP IN THE CUP Patented vs Generics – UCB, Cheminova

Spot rates at the time of entering into contract – AM Todd

Rates stated in expert report as CUP – Gharda chemicals

Industry average rates – Aztec, 3Global services, Essar

Market/Geographical comparability – Gharda, Intervet, Dufon

Retail vs wholesale – Gharda, Dufon

Comparison on weighted average price of all tested transactions in the year - Dufon

Samsung Electronics - Karnataka High Court

Textronics US

100 percent

French Co.

USA

Samsung India

Korea

India

Samsung Korea

France

Import of shrink wrapped software

Karnataka High Court decision Payer cannot determine the taxability in India

of Non-resident (No reference to CBDT Circulars by HC)

Withholding tax obligation relieved only by application and Certificate / Order from the Tax authorities

Taxability of software import transaction per se not dealt with

Relied on it’s own interpretation of Supreme Court decision in A.P. Transmission Corporation

Current Position Hearing before Supreme Court fixed in August

2010 Payment of demand stayed

259 259

Van Oord ACZ India (P) Ltd. vs. CIT – Delhi HC

260

On VO India’s application for Nil withholding on reimbursements of mobilization, demobilization costs to Netherlands Parent Company, the Tax Authorities:

Directed tax withholding at 11 percent

Sum disallowed u/s 40 (a) (i) n absence of thereof

Delhi High Court ruled:

VO India was not liable to deduct tax under Section 195(1) since the payments were mere reimbursements and not income

Obligation to withhold tax is only when the payments are income chargeable to tax in India

Karnataka HC decision in Samsung not followed

Delhi HC in Maharishi Housing is on same lines

260

Prasad Production – Chennai Tribunal (SB)

261

The SB deviated from the decision in Samsung (Kar HC) and held as under:

SC decision in A.P Transmission related to sums chargeable to tax including income embedded in the sums paid

On proper construction of SC decision, witholding tax obligation is attracted only on payments to non-resident which are liable to tax in India - not otherwise

There is no basis to contend that Payer cannot determine the tax liability of the Payee qua the payments proposed

Certificate from a CA is an alternate procedure to Section 195(2) as laid down by the CBDT Circulars

The withholding tax process is tentative and is subject to assessment thereby protecting interest of all parties involved

261

E*Trade USA

E*Trade Mauritius

HSBC VioletMauritius

IL&FSIndia

WOS

AAR Ruling CBDT Circular No. 789 applies and the Certificate of

Residence is relevant to determine beneficial ownership / confer treaty benefits

The SC in Azadi Bachao found no legal taboo against treaty shopping

The motive does not impact legality or validity of the transactions

Tax Treaty benefits are to be granted so long as transaction done within the framework of law

E*Trade Mauritius is eligible to benefits of the India-Mauritius Tax Treaty

Note: Earlier the Bombay HC had refused to go into merits and the matter with consent of Parties was restored back to Tax Office

Sale of shares of ILFS, India

E*Trade – AAR - Validity of Treaty Shopping

262 262

SAAC, Saudi Arabia

AIH, Bahrain

AFIL, India

Facts

Under Group Restructuring process, all non European investments (including India) were proposed to be held by ACHL Cyprus

AAR Ruling

Charging Section and Computation provision to be read together and where Computation provision fails, Charging Section also fails

In absence of consideration on share transfer, Computation mechanism fails - Charging Section fails – B C Srinivasa Setty (SC)

In view of above, no taxes were required to be withheld in India, since there was no Income chargeable to tax

Transfer pricing provisions not applicable in absence of Income chargeable to tax

Caution – Impact of Section 56(2)(viia)

ACHL, Cyprus

100 percent

70 percent

Share contributionwithout consideration

Amiantit – AAR - No Capital Gain on Nil Consideration

263 263

PG Germany

PG Netherlands

PG India

Facts Post incorporation, all shares in PG India were transferred by

PG Germany to PG Netherlands for a consideration determined under FEMA Regs.

PG Netherlands thereafter made substantial equity investment in PG India to support expansion plans

PG Netherlands proposes to transfer shares of PG India to another Non resident – which Treaty to apply Netherlands or Germany?

AAR Ruling Netherlands Treaty applies as PG Netherlands

Has substance – Significant investment in India Is a separate legal entity No legal / factual basis to show PG Germany is real

beneficial owner of shares and the capital gains that would accrue

Conduit approach or colorable device seem conspicuously absent

Non resident

Proposed share transfer

AAR-- Share Transfer not taxable as per Treaty

264 264

Sea Gate Singapore – AAR - Demarcated warehouse space is PE

Facts ISP to provide earmarked warehouse

space to SCo. with requisites such as storage racks, electronic devices etc.

SCo.’s representatives have a right to enter the warehouse for inventory verification, inspection, audit, repackaging etc.

ISP to give delivery to OEM on behalf of SCo.

The AAR Ruled: Demarcated space in the warehouse

of ISP constitutes PE of SCo. under Article 5(1) – ISP-SCo act in cohesion to effect Delivery

Attribution – PE should be treated as a distinct enterprise carrying on part of sales activity in India – Amounts paid to ISP and other expenses deductible

SCo.(Manufacturer & Seller

of Hard Disk)

OEM Customers (Equipment

Manufacturer)

Singapore

India

ISP (Independent Service

Provider)

Keep stock of SCo. and delivers goods

on Just-in-time basis

Invoices for goods directly

Pays directly

Ships goods based on OEM purchase order & property in goods remains

with SCo.

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Recent judgments on Transfer Pricing

Ruling Key principles / TakeawaysIndo American Jewellery, Mumbai ITAT

Transfer pricing study and ALP determined cannot be rejected simply without any cogent reasons

The fact that AE earned meager profit or incurred losses as compared to the taxpayer showed that there was no transfer of profit by the taxpayer out side India

As tax rates were higher in the overseas jurisdiction as compared to India, there would be no incentive to shift profits offshore

Firmenich Aromatics (India) Pvt. Ltd, Mumbai ITAT

No penalty for bona fide difference of opinion between the Revenue and the taxpayer on the Most Appropriate Method, as it cannot be construed to be concealment of facts or furnishing of inappropriate particulars

Intervet India Private Limited, Mumbai ITAT

Reasonably accurate adjustments for differences in economic and market conditions in different locations must be made in applying the CUP method

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Ruling Key principles / Takeaways

Chrys Capital Investment Advisors India Pvt. Ltd., Delhi ITAT

Non-operating income - such as interest, dividend, income from share trading, etc. to be excluded in determining the amount of the profit margin under TNMM

Expenses incurred on behalf of AE if included in operating cost, any reimbursement pertaining to such expenses must be included in operating revenue

Toshiba India Private Limited, Delhi ITAT

AO not to make any changes to the set of comparable companies without providing cogent reasons for the same

ALP to be determined by a systematic approach and cherry-picking of comparables is not acceptable

3 Global Services Private Limited, Mumbai ITAT

Hourly rate billing for the customer care business segment published by NASSCOM is an acceptable external CUP for benchmarking IT enabled services

Detailed FAR analysis for tested party and comparable companies is crucial


267 267

Ruling Key principles / TakeawaysIL Jin Electronics (I) Pvt. Ltd, Delhi ITATT Two International Pvt. Ltd., Tara Jewels Exports Pvt. Ltd. and Tara Ultimo Pvt. Ltd v. ACIT, Mumbai ITAT

Computation of transfer pricing adjustment must be restricted only to the international transactions of the taxpayer and not on the entire sales of the company

Only net profit margin should be considered for TNMM and there is no scope for reducing interest or other overheads

CA Computer Associates Private Limited, Mumbai ITAT

ALP is to be determined by the methods prescribed in the Indian Tax Laws

Bad debts written off cannot be a factor to determine the ALP

Perot Systems TSI (India) Ltd, Delhi ITATVVF Limited, Mumbai ITAT

Interest –free loans by Indian Companies to foreign subsidiaries do not comply with arm’s length standard

Benefit of +/- 5 percent safe harbor is available only where more than one arm’s length price is determined.

RBI’s approval does not endorse the arm’s length character of the international transaction


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Section 56(2)(viia) – Key Issues

Can a NR seek to rely on DTAA to mitigate the impact of Section 56(2)(viia)?

Whether receipt of shares from an AE at a price below FMV or for a Nil consideration could result in transfer pricing adjustment under Section 92 in the hands of the transferor? Could this lead to double taxation i.e. taxation in the hands of recipient as well as transferor?

Whether FMV as notified by CBDT under Section 56 could also be considered as an “ALP” for the purpose of transfer pricing provisions under Section 92?

Whether shares in an Indian Co. can be considered to be received outside India by a NR if the transfer agreement is executed outside India? and hence, could it be argued that such receipt is not taxable in India under Section 5(2)?

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Presented By

CA Swatantra Singh, B.Com , FCA, MBA Email ID: [email protected] New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

mailto:[email protected]

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