Presented By
CA Swatantra Singh,
B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com
1
Issues on International Taxation
2
What we Discuss To-day
Why
What
is
How
to
understand
/ practice
International
Taxation
3
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
4
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
5
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 issuemany states follow right to tax worldwide
income of their residents
6
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
7
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)
8
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
9
What is International Taxation
 Purpose of International Taxation
 Objectives of International Taxation
 Legislation of International Taxation
10
Purpose of International Taxation
 Taxing Residents World-Wide Income
 Taxing Non-Residents National Income
11
Purpose of International Taxation
India
Germany
Mr. Patel Indian Resident.
Indian Income
Rs. 1,000.
Mr. Patel German Interest
Income Rs.100.
Mr. Smith Indian Interest
Income Rs. 200.
Mr. Smith German Resident.
German Income
Rs. 2,000.
INDIA would want to tax Mr. Patel
Amount
(in Rs.)
On his Indian Income – On Source + Residence Basis
German Income
- On Residence Basis
1,000
100
Sub Total
1,100
India would also tax Mr. Smith
on his Indian Interest income on Source Basis
200
Total
1,300
12
Purpose of International Taxation
Germany would tax Mr. Smith
Amount
(in Rs.)
On his German Income on Source + Residence Basis
2,000
On his Indian Income on Residence Basis
200
Total
2,200
Germany would tax Mr. Patel
On his German Income on Source Basis
100
Total
2,300
Thus – Domestic Income by a resident causes no problems
of Double tax.
Rs. [3,000]
Only when a resident of one country gets income from
another country, Double tax issues arise
Rs. [300]
13
Objectives of International Tax
14
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
15
Legislation of International Taxation
International Law
International Tax
Tax Treaties
16
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
17
MODELS
 Are we talking about Role Models
Mahathma
Gandhi
Swami
Vivekananda
Atal Bihari
Vajpayee
18
MODELS
 Are we talking about Super Models
Aishwarya Katrina
Rai
Kaif
Priyanka
Chopra
19
MODELS
 We are talking about Model Conventions
OECD Model Convention
UN Model Convention
US Model Convention
Indian Model Convention
20
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
21
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
22
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 negotiations
Most Indian Treaties are based on UN Model
23
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
24
Tax Treaties - Objectives
Avoid Double
Taxation
Prevent Fiscal
Evasion
Limit tax
Prevent Tax
Discrimination
OBJECTIVES
Allocating
Taxing
Jurisdiction
Promote
Investment &
Mutual
Relation
Certainty of
Tax Treatment to
Investors
Exchange of
Information
Ease in
Recovery
of Tax Dues
25
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
26
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.
27
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.
28
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)
29
Tax Treaty - Structure
Application
Articles
•Art. 1 – Persons
Covered
• Art. 2 – Taxes
Covered
• Art. 3 – General
Definitions
Distributive
Rules
• Active
Income :
•Art. 9 –
Associated
Enterprises
Art. 7, 8, 14,
15, 16, 17,
19 and 20
• Art. 23 –
Elimination of
Double Taxation
• Art. 4 – Resident
• Art. 5 – Permanent
Establishment
• Art. 30 – Entry into
Force
• Art. 31 –
Termination
Anti-Avoidance
Provisions
• Passive
Income :
Art. 6, 10, 11,
12, 13,
18 and 21
• Art. 26 –
Exchange
Of Information
• Art. 27 –
Assistance
In Collection of
Taxes
Miscellaneous
Provisions
•Art. 24 –
Non Discrimination
• Art. 25 –
Mutual Agreement
Procedure
• Art. 28 –
Members of
Diplomatic
Missions and
Consular
posts
• Art. 29 –
Territorial
Extension
30
Tax Treaty - Structure
Active Incomes
Passive Incomes
Art. 7 - Business Profits
Art. 6 - Immovable Property
Art. 8 - Shipping, etc.
Art. 10 - Dividends
Art. 14 - Independent Personal Services
Art. 11 - Interest
Art. 15 - Dependent Personal Services
Art. 12 - Royalties & FTS
Art. 16 - Directors
Art. 13 - Capital Gains
Art. 17 - Artistes & Sports persons Art. 18 - Pensions
Art. 19 - Government Services
Art. 20 – Students
Art. 21 - Other Income
31
Tax Treaty – Definition of Articles
Scope 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
32
Tax Treaty – Definition of Articles
 Article 3-General Definitions
1. Person –Individual, Company, taxable unit (Partnership?)
2. Company-Body corporate or entity treated as company or body
corporate for tax purposes
3. Contracting State – India or the other country
4. Enterprise of a Contracting State
4. 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 Dynamic
Different views by 2 countries
33
Tax Treaty – Definition of Articles
Article 4 - Residence
A 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
34
Tax Treaty – Definition of Articles
Article 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
35
Tax Treaty – Definition of Articles
ACTIVE & PASSIVE INCOME
 Passive Income-refers to income derived from investment
in tangible / intangible assets.
Equity Investment
Debt
Right/Permission to use
assets
Disposal of
capital assets
Dividend
Yiel
ds
Interest
Rent /
Royalties
Capital Gain
owned
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
36
36
Tax Treaty – Definition of Articles
Type of Distributive Rules -
 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)
37
Tax Treaty – Definition of Articles
Passive Income Distributive Rights Article
Ref.
Nature of Income
Taxing Right
of Source
State
6
Income from Immovable
Property
Has the first right to
tax
10
Dividend Income
Has the right
to tax
provided rate
does not
exceed the
agreed rate of
tax as per
DTAA
11
Interest Income
12
Royalties and Fees for
Technical Services
13
Capital Gains
Has the first right to
tax
18
Pensions
Cannot tax pension
Taxing Right
of State of
Residence
Reserves
the right to
tax
Remarks
Dividend is not
taxable in India.
DDT is levied upon
the
company
declaring dividends
Tax
can
be
determined as per
the domestic lax
Can tax Pension
38
Tax Treaty – Definition of Articles
Active Income Distributive Rights Article
Ref.
Nature of
Income
Taxing Right of
Source State
7
Business Profits
Yes, if PE exists in the
source state
8
Shipping & Air
Transport
Cannot tax this income
14
Independent
Personal
Services
Yes, if the person has a
fixed base or his stay
extends beyond 90
days
15
Dependent
Personal
Services
(Employment)
Yes, if employment is
exercised in the source
state. Cannot tax if stay
is less than 183 days
Taxing
Right of
State of
Residence
Remarks
Income attributable to
PE alone can be taxed
in source state
Reserves
the right
to tax
Income attributable to
Fixed Base alone can
be taxed in source state
If salary is paid on
behalf
of
foreign
employer and is not
borne by PE, then
source state cannot tax
the salary
39
Tax Treaty – Definition of Articles
Active Income Distributive Rights Article
Ref.
Nature of
Income
Taxing Right of
Source State
16
Directors’ Fees
Yes, the source state
can tax the same
17
Artiste & Athletes
Yes, the source state
can tax the same
19
Govt. Service
Remuneration
No, unless the person
rendering
service
happens to be a
resident of and national
of the source state
20
Students &
Apprentices
No taxing rights
21
Other Income
Yes, the source state
can tax the same
Taxing
Right of
State of
Residence
Remarks
DTA may specify the
extent to which the
income may be exempt
Reserves
the right
to tax
40
Tax Treaty – Definition of Articles
Anti-Avoidance Provisions Article
Ref.
Title
Comments
9 Associated Adoption of Arms Length
Enterprises Price in transactions between
Associated Enterprises
26 Exchange
of
Information
27 Assistance Both the contracting states
in
shall assist each other in
collection collection of revenue claims
of taxes
41
Tax Treaty – Definition of Articles
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
42
Tax Treaty – Definition of Articles
Miscellaneous Provisions Article Ref.
Title
24
Non-Discrimination
25
Mutual Agreement Procedure
28
Diplomatic Missions & Consular Posts
29
Territorial Extension
43
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
44
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
45
How to Practice International Taxation
 Concepts of International Taxation
 Applying Tax Treaties
 Domestic Law Regulations
 International Tax Planning
 Role of CA’s
 Reference
46
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
47
Concepts of International Taxation
 Tie-Breaker rule for Residential Status
 Permanent Establishment
 Force of Attraction
 Associated Enterprises Transactions
 Beneficial Ownership
 Make Available
 Tax Relief
48
Concepts of International Taxation
 Most Favored Nation Clause
 Non-Discrimination Clause
 Mutual Agreement Procedure
 Exchange of Information
 Controlled Foreign Companies
 Treaty Shopping
 Thin Capitalisation
49
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
50
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
51
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
52
Concepts of International Taxation
Connecting Factors - For taxing jurisdiction, there are two Connecting Factors
internationally accepted.
53
Concepts of International Taxation
 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
54
Concepts of International Taxation
Assessee
Tax Subject
Indian Resident
World Income
Taxable
For Non-resident &
NORs
Only Income Sourced
In India is taxable
Income
Tax Object
India
India
In
di
a
Foreign Sourced Income
earned by Non-Residents
Not Taxable in India.
There is no nexus with
India.
Indian Sourced Income,
Taxable in India.
Irrespective of Status
of Assessee.
Foreign Sourced Income
Taxable ONLY IF
Earned by
Indian Resident
55
Concepts of International Taxation
Tax Subject
Connecting Factors
Tax Object
Tax Country
56
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)
57
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
58
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’
59
Concepts of International Taxation

Make Available –
Technology should be transferred to another person

Tax Relief –
The methods of tax relief available from juridical double
taxation are
Full Exemption
Exemption Method
Exemption with Progression
Tax Credit Method
Full Credit
Deduction Method
Ordinary Credit
Tax Sparing Method
a.
b.
c.
d.
60
Concepts of International Taxation
 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
61
Concepts of International Taxation
 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.
62
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.
63
Concepts of International Taxation
•Treaty Shopping What does it Mean?Co.
incorporated in
Indian
Foreign Invest
Invest
Mauritius (Shell
Compan
Investor
s in
s
in
Co.) which in
y
turn
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.”
64
Concepts of International Taxation
•Thin Capitalization  Interest on loan is a tax deductible
Australia
expenditure, while dividend on
shares is not
 High debt, low equity preferred
 Thin capitalization rules provide
90%
Cyprus
Interest
normative debt to equity ratio
 In case of excess debt, interest re-
characterized as dividend and tax
deduction not available
Loan
60%
Russia
65
Applying Tax Treaties
Step 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
66
Domestic Tax Systems
 To have knowledge of Domestic Tax
Systems of various countries
 Incentives provided in various countries
 Anti Avoidance Measures of various
countries
67
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
68
Draft Direct Taxes Code Bill
Revised draft of DTC Bill delayed!
Nine Critical Areas on which Position Papers are expected to be released
Tax Treaty Override
Management and Control of
Foreign Cos.
Taxation of House
Property for Individuals
(Self Occupied)
General
Anti- Avoidance
Rule
Tax on
Gross Assets
Shift from
EEE to EET system
for savings and
investments
Capital
Gains Tax
Deductions for
Retirement
Benefits
Taxation
of Charitable
Organizations
69
Section 206AA
- Compulsory furnishing of PAN by Recipient
 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?
70
70
Withdrawal of Circulars 23/
1969 and 786/2000
71
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
72
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.
74
Retrospective Amendment to
Explanation to Section 9(1)
75
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, 2010
In 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.
76
Applicability of Tax Treaty
77
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
78
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
79
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
80
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 (NonDiscrimination), 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
Features
Definition of royalties specifically includes
consideration for use of computer software /
computer programs
Rentals and other income from
cinematographic films are considered as
business profits and not as royalties
Treaties covered
Malaysia, Morocco, Namibia, Russia,
Trinidad and Tobago, Turkmenistan,
Kazakhstan and Kyrgyz Republic
Libya
83
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
No separate article for FTS
Covered only if it make available technology
Payments for teaching in or by educational
institutions excluded in treaties with
Australia, Bangladesh, Brazil, Greece,
Indonesia, Libya, Mauritius, Nepal,
Philippines, Sri Lanka, Syria, Thailand, UAE
and UAR
USA, UK, Australia, Canada, Cyprus, Finland,
Malta, Netherlands, Portugal, and Singapore
USA, UK and Switzerland
88
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
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
94
same
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
Overview of Transfer Pricing Regulation
106
PRESENTATION OUTLINE
 Introduction
 Indian transfer pricing regulation – A bird’s
eye view
 Key issues – A macro perspective
107
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
108
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
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
111
INTRODUCTION
RELAVANCE :
 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
112
113
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
114
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
115
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 AUGUST
2001
Circular No 12 issued
116
Section 40A(2)(b) vs TPR
Section 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
SC Decision of CIT v. GlaxoSmithKline Asia Private Limited
117
TPR – Developments since
Finance Act , 2001
December 2001
Circular No 14 issued
( Explanatory nature)
April 2002
Guidance note issued by
ICAI
May 2002
Finance Act 2002 notified
118
Key Operative Provisions :
Section 92
Income arising from an
international transaction to be
computed with regard to ALP
Section 92A/B/F r/w Meaning & Definition
Rule 10A
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
119
Applicability of TPR :
 22 Basic
BASIC Conditions
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
120
IMPORTANT MEANINGS &
DEFINITIONS :
Section 92A
Associated Enterprise
Section 92B
International Transaction
Section 92C
Section 92F ( i )
Computation of Arm’s length
price
Accountant
Section 92F (ii)
Arm’s length price ( ALP)
121
IMPORTANT MEANINGS &
DEFINITIONS :
Section 92F (iii)
Enterprise
Section 92F ( iiia)
Permanent establishment
Section 92F ( iv)
Specified date
Section 92F (v)
Transaction
122
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
123
Associated Enterprise
• In order to be AEs the entities must be
“Enterprises” as defined in S.92F(iii)
• 92A (1) (a) Direct participation .
A
Management,
Capital, etc
B
124
Associated Enterprise
• Indirect Participation
A
I
Management,
Capital, etc.
B
Intermediary
125
Associated Enterprise…
[S.92A(2)(a)] Equity holding of not less than 26
%
A Ltd
Not less
than 26%
B Ltd
A Ltd
B Ltd
C Ltd
40%
50%
Intermediary
126
Associated Enterprise…
[S.92A(2)(b)] Equity holding of not less than
26 %
A Ltd
40%
B Ltd
50%
A Ltd controls not less than
26% of the voting power
of B Ltd & C Ltd.
C Ltd
127
Associated Enterprise…
[S.92A(2)(c)] Loan advanced
B Ltd
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
128
Associated Enterprise…
[S.92A(2)(d)] Guarantees
B Ltd
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.
129
Associated Enterprise…
[S.92A(2)(e)] Board of Directors/Governing Board
A Ltd
Appoints more
than half of the
Board of Directors
or
one or more
Executive Director
of the Governing
Board
B Ltd
130
Associated Enterprise…
[S.92A(2)(f)]Board of Directors/Governing
Board
Mr. X
A Ltd
Appoints more
than half of the
directors
Appoints two
executive
directors
B Ltd
131
Associated Enterprise…
[S.92A(2)(g)]Use of know-how, patents,etc.
B Ltd
A Ltd
A Ltd provides B Ltd
with technical knowhow for the
manufacture of
goods.
132
Associated Enterprise…
[S.92A(2)(h)] Supply of raw materials & price of
B Ltd
supply
A Ltd
(Manufact
urer)
supplies more
than 90% of
the raw
material
required for A
Ltd
B Ltd
Supplier
Price & other
conditions influenced
by B Ltd.
C Ltd
Supplies
to A Ltd.,
133
Associated Enterprise…
[S.92A(2)(i)] Sold to the enterprise or persons specified by the
other
enterprise
Price & other conditions influenced by B Ltd.
A Ltd
(Manufact
urer)
A Ltd sells
goods
to B Ltd
B Ltd
(Buye
r)
Price & other
conditions influenced
byCB Ltd
Ltd.
(Buyer
specifie
d by B
Ltd)
134
Associated Enterprise…
[S.92A(2)(j)] Control by individual/relative
Mr.P and Mr.R are relatives
Mr.P
Joint control
Controls
A Ltd
Mr.R
Controls
B Ltd
135
Associated Enterprise…
[S.92A(2)(k)] Control by HUF/members of HUF
HUF P
Controls
A Ltd
Mr.R, a
member of
HUF P or
relative of
Mr.R.
Controls
B Ltd
136
Associated Enterprise…
[S.92A(2)(l)] Control by Firm/AOP/BOI
AFirm
Not less
than 10%
B
Firm
137
Section 92A : Associated Enterprise
 An Enterprise
which directly or
indirectly
participate in
Management or
Control or Capital
(M C C) of the
other Enterprise
DIRECT
A
M
C
C
B
( Section 92A (1)(a) )
INDIRECT
A
M
C
C
I
M
C
C
B
138
Section 92A : Associated Enterprise
 AEs in which one
 COMMON M C C
or more persons
participate, directly
or indirectly,
in M C C of more
than one Enterprise
(section 92A( 1 )(b) )
A
B
C
139
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
140
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
141
Section 92A (2) : Deemed Associated
Enterprise ……...
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
8
142
Section 92A (2) : Deemed Associated
Enterprise
……...
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
143
Section 92B:International Transaction

1.
2.
3.
4.
5.
6.
Means transaction between two or more AE ,
either or both of whom are non residents, in the
nature of :
Sale of products
Purchase of products
Provision of services
Lending or borrowing
Cost sharing arrangements
Leasing & hiring of assets,etc
144
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
Other Definitions u/s 92F :
92F( i )
Accountant
As per sec 288(2)
92F( ii )
ALP
92F( iii )
Enterprise
Price in uncontrolled condition
other than for AE
Person (including PE of such
person)
92F( iiia ) Permanent
establishment
92F( iv )
92F( v )
Fixed place of business through
which business is wholly or
partly carried on
Specified date Due date as per section 139(1)
explanation 2
Transaction
Arrangement,understanding or
action in concert
146
Other Definition in Rule 10A :
10A (a) Uncontrolled Transaction between
transaction 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
147
Section 92C :Computation of ALP
 ALP shall be determined having regard
1.
2.
3.
4.
to :
Nature of transaction or class of
transaction
Class of associated enterprise
Functions performed
Other relevant factors as may be
prescribed by CBDT
148
Methods for Computation of ALP
1.
2.
3.
4.
5.
6.

Comparable uncontrolled price (CUP)
Resale price method (RPM)
Cost plus method (CPM)
Profit split method (PSM)
Transactional net margin method (TNMM)
Such other method as may be prescribed by the
Board
ALP shall be most appropriate method (MAP)
out of the above
149
Division of ALP based on :
 Transaction methods
 Other methods /
transactional profit
methods :
CUP
RPM
CPM
PSM
INTER
NAL
TNMM
EXTER
NAL
150
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 )
Adjusted
Price of
CUT is ALP
CUT is
identified
CUT is adjusted to a/c
For differences in
IT & CUT
151
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
152
Resale Price Method : RPM
Rule 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 to
arrived at ALP
10
NORMAL GP
as per CUT is 10%
A
12
15 (-) 10%
=13.50
AE
13.50 (-)
EXPS
15
xyz
ALP
153
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
154
Cost Plus Method : CPM (C+)
Rule 10B( c )
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 10
ID 05
--TC 15
==
A
STRUCTURE
GP
10%
CUT
ALP
AE
(To consider fn
& other diff. )
155
Types of transactions considered appropriate for
adoption of CPM method
 Provision of services
 Contract manufacturing
Subsidiary or
peripheral
 Joint facility arrangement
 Transfer of semi finished goods
 Long term buying & selling arrangements
156
Profit Split Method : PSM
Rule 10B (d)
1. PSM applied when there is transfer of unique intangibles
2. Multiple IT so interrelated that they can not be evaluated
separately for the purpose of determining ALP
Combined NP
of AEs
15
AE
6
A
9
Relative contribution of each AE to be identified based on:
Functions performed
Assets employed or to be employed
Risk assumed
Reliable external market data
157
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 basis
That reflects the functions & risks of each of the parties
158
Transaction Net Margin Method : TNMM
Rule 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
8%
Y
ALP shall be based on 8%margin
159
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.
160
Computation Related Documents
Degree of Similarity Required Under Various Methods:
Methods to
be used
CUP
PRODUCT
FUNCTIONS
RESOURCES
RISKS
COMPLEXITY


CPLM/RPM


TNMM



PSM




161
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.
162
Most appropriated method ( MAM) for ALP
Factors for Selection of MAM [Rule 10C R.W. S. 92C]:
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 Appropriate Method must be Reliable Measure of ALP
163
Most appropriate Method - Rule 10C
In 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
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)
167
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
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.
169
PRESCRIBED DOCUMENTATION
• Principal Documents [Rule 10D(1)]
• Supportive Documents[Rule 10D(3)]
170
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)]
171
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)
172
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
173
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 documents
o Transaction – specific documents
o 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
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 uncontrolled 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
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
180
Important clauses of 3CEB
Clause 8
Clause 9
Clause 10
Clause 11
Clause 12
Clause 13
Transaction in respect of tangible
property
Transaction in respect of intangible
property
Particulars in respect of provision of
services
Particulars in respect of lending or
borrowing money
Particulars in respect mutual agreement
or arrangement
Particulars in respect any other
transaction
181
Penalties
Section under the
Income-Tax Act.
271 AA
271 G
271 BA
271(1)(c) read with
explanation 7
Particulars
Penalty
Failure to maintain
documentation
2% of the value of each
international transaction
Failure to furnish/submit
any information/document
to the transfer pricing
officer
Failure to furnish
accountant’s report
2% of the value of the
international transaction
for each such failure.
INR 1,00,000
Transfer pricing adjustment 100-300% of amount of tax
considered as concealed
on adjustments
income
182
Penalties for non compliance of TPR
Section
Addition made in computing
271(1)(C) total income u/s 92C(4) shall be
explanation deemed concealed income
7
100% 300% of tax
sought to be
evaded
Section
271AA
Failure to keep & maintain such 2% of value
information & documentation as of each
per section 92D
international
transaction
Section
271BA
Failure to furnish accountant’s
report as per section 92E
Section
271G
Failure to furnish any
information or documents as
required u/s 92D(3)
Reasonable Cause
Sec 273B
Rs. 1 LAC
2% of the
value of
transaction
for each
failure
183
Components of TPR
Is there and
internationa
l transaction
Transfer Pricing
Regulations not
applicable to the
No
transactions. No ALP
to be determined
Yes
Between
the AEs
No
184
Components of TPR…
At l east 1
AE is NonResident
Transfer Pricing
Regulations not
applicable to the
No
transactions.
No ALP to
be determined
Yes
Are
International
transaction
Adjustments to total
No
income is made
at ALP ?
Levy of penalty
u/s 271(1)(c)
185
Some Landmark TPR rulings
Case 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 rulings
Case 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 for
specific and relevant information and not simply ‘all information’.
•It further held that the penalty would not be justified if the Revenue does
not point out any specific default in complying with the documentation
requirements and does not consider any ‘reasonable cause’ that the
taxpayer may have resulting in the default
187
Revision :
 Applicability
 Charging section
 Associated Enterprise
 Deemed Associated Enterprises – Situations
 International transaction
 ALP & Methods
188
TP METHODOLOGIES -PRACTICAL
ISSUES
189
SYNOPSIS
• 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
190
Introduction
• 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
191
Section 92C (1) – Methodologies
• 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
192
Section 92C (1) – Methodolgies
•
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
-
-
193
Section 92C (1) – Certain aspects
• 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
194
Section 92C (3) – ALP determination by AO
• 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
-
195
Section 92C (3) – ALP determination by AO
• 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
Section 92C (3) – ALP determination by AO
• 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
Practical issues arising in selection of a method
•
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?
198
Practical issues arising in selection of a method
• 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
Practical issues arising in selection of a method
• 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
-
Tested Party : Sec. 1.482-5 of the US TP
Regulations
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.
201
Tested Party
•
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)
202
Tested Party
•
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-24ITAT-DEL
203
METHODS
• CUP method
• Resale Price method
• Cost plus method
• Profit split method
• Transaction net margin method
204
Practical issues in CUP method
•
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)
(b)
(c)
(d)
(e)
credit terms;
supply of raw material;
packaging;
product quality;
patents.
between controlled and uncontrolled transactions could not be accounted
for by a reasonable number of adjustments.
205
Practical issues in CUP method
• 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)
-
206
Practical issues in CUP method - CUT
• 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
207
Practical issues in CUP method - CUT
• 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
208
Practical issues in CUP method – ALP
determination
•
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. 209
Practical issues in CUP method - FAR
• 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)
210
657 ]
Practical issues in CUP method - Others
• 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 ]
211
Practical issues in TNMM
 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
212
Practical issues in TNMM
 Search process - filters
 Application of TNMM – Entity level or transaction
level
 Operating costs/margin
 FAR analysis
213
Practical issues in TNMM
 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
Practical issues in TNMM – CUT selection
 Number of comparable companies
a) Even one comparable will do
1.
2.
3.
4.
Rule 10B(1)
ICAI guidance note
Vedaris Technology [2010] 131 TTJ (Del) 309
Mentor Graphics [2007] 109 ITD 101 (Delhi)
b) There should be reasonable number of CUTs
215
Practical issues in TNMM – Search process
 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
216
Practical issues in TNMM – Search process
 Secondary filters
– Salary costs being < 25%
– R & D costs greater than 5%
– Forex filter
– Trading activity filter
– Asset filter when assets > revenues
217
Practical issues in TNMM – CUT selection
 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
Practical issues in TNMM – CUT selection
 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
Practical issues in TNMM – CUT selection
 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
Practical issues in TNMM – CUT selection
 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
Communication [2008] 118 TTJ (Pune) 354
E-Gain
- Guidance Note of ICAI
221
Practical issues in TNMM – CUT selection
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
Practical issues in TNMM – CUT selection
 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
Practical issues in TNMM – CUT selection
• 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
Practical issues in TNMM – CUT selection
 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
225
TNMM to be applied on Entity level or transaction
level
 Comparing the operational margin at entity level
cannot be termed as TNMM : UCB India 121 ITD
131 (Mum.)
226
Practical issues in TNMM – Operating costs/margin
 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
227
Practical issues in TNMM – Operating costs/margin
 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)
228
Practical issues in TNMM – FAR
 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
229
Practical issues in TNMM – FAR
 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
Practical issues in TNMM – FAR
 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
Practical issues in TNMM – Other aspects
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-24ITAT-DEL
232
Practical issues in TNMM – Other aspects
Can industry
benchmark?
average/norm
be
used
as
a
- 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-TIOL24-ITAT
233
Practical issues in TNMM – Other aspects
• 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)
234
Practical issues in TNMM – Other aspects
• 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
Practical issues in TNMM – Other aspects
Customs TP
Income tax TP
Intangibles 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
 OECD : Customs adjustment cannot be automatically taken
236
Practical issues in TNMM – Other aspects
 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
Practical issues in TNMM – Other aspects
 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
Practical issues in TNMM – Other aspects
• 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
Practical issues in TNMM – Other aspects
• 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]
240
Practical issues in TNMM – Other aspects
• 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
IS THERE A TIME LIMIT FOR MAKING TP REFERENCE?
AY 2010-11
Sep 30
2010
Deadline for
maintaining
documentation,
filing tax return
and
accountant’s
report
Sep 30
2011
Limitation for
initiating scrutiny
assessment
Dec 31
2011
Limitation
for initiating
TP audit
Oct 31
2012
Limitation for
completion of
TP audit
March 31
2019
Date till which
documentation is
required to be
maintained
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”
| 242
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?
| 243
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
| 244
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?
| 245
TRANSFER PRICING UNLIMITED
 Ranbaxy
 Fab India
| 246
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)
| 247
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
| 248
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
| 249
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
| 250
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.”
| 251
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?
| 252
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
| 253
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
| 254
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
| 255
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
| 256
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
| 257
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
| 258
Samsung Electronics - Karnataka High Court
Karnataka High Court decision
Textronics US
 Payer cannot determine the taxability in India
of Non-resident (No reference to CBDT
Circulars by HC)
French Co.
 Withholding tax obligation relieved only by
application and Certificate / Order from the
Tax authorities
 Taxability of software import transaction per se
not dealt with
France
USA
Samsung
Korea
Korea
India
100 percent
 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
Import of shrink wrapped
software
Samsung India
 Payment of demand stayed
259
259
Van Oord ACZ India (P) Ltd. vs. CIT – Delhi HC
 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
260
Prasad Production – Chennai Tribunal (SB)
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
261
E*Trade – AAR
- Validity of Treaty Shopping
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 IndiaMauritius Tax Treaty
E*Trade USA
WOS
E*Trade
Mauritius
HSBC Violet
Mauritius
Sale of shares of ILFS, India
IL&FS
India
Note: Earlier the Bombay HC had refused to go into merits
and the matter with consent of Parties was restored back
to Tax Office
262
262
Amiantit – AAR
- No Capital Gain on Nil Consideration
Facts
SAAC, Saudi Arabia
Share contribution
without consideration
AIH, Bahrain

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)
100 percent
70 percent
Under Group Restructuring process, all non European
investments (including India) were proposed to be held
by ACHL Cyprus
ACHL, Cyprus
AFIL, India
263
263
AAR-- Share Transfer not taxable as per Treaty
Facts
PG Germany
Proposed share transfer
PG Netherlands

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
Non resident

Netherlands Treaty applies as PG Netherlands
 Has substance – Significant investment in India
PG 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
264
264
Sea Gate Singapore – AAR
- Demarcated warehouse space is PE
SCo.
(Manufacturer & Seller
of Hard Disk)
Invoices for
goods directly
Ships goods based
on OEM purchase
order & property
in goods remains
with SCo.
Singapore
India
Pays directly
OEM
Customers
(Equipment
Manufacturer)
ISP
(Independent Service
Provider)
Keep stock of SCo.
and delivers goods
on Just-in-time basis
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
265
265
Recent judgments on Transfer Pricing
Ruling
Key principles / Takeaways
Indo 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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Recent judgments on Transfer Pricing
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
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Recent judgments on Transfer Pricing
Ruling
IL Jin Electronics (I) Pvt.
Ltd, Delhi ITAT
T Two International Pvt.
Ltd., Tara Jewels Exports
Pvt. Ltd. and Tara Ultimo
Pvt. Ltd v. ACIT, Mumbai
ITAT
Key principles / Takeaways
 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
Perot Systems TSI (India)
Ltd, Delhi ITAT
 Interest –free loans by Indian Companies to foreign
subsidiaries do not comply with arm’s length standard
VVF Limited, Mumbai ITAT
 Benefit of +/- 5 percent safe harbor is available only
where more than one arm’s length price is determined.
 Bad debts written off cannot be a factor to determine the
ALP
 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
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)?
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?
Can a NR seek to rely on DTAA to mitigate the impact of Section
56(2)(viia)?
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Presented By
CA Swatantra Singh, B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com
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