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India as an Investment destination

26 February 2020

1. Economic Outlook

2. India Regulatory Environment

3. India Tax Incentives

4. Tax Environment in India

5. Coffee Break

6. Transfer Pricing Landscape

7. Indirect Tax Landscape

8. Litigation Procedure and Alternative Dispute resolution

9. About EY India

10. AnnexureCo

nte

nts

1 Economic Outlook

26 February 2020 India as an Investment destination

India Economy at a glance

Vision: to become $ 5 trillion economy by 2025

Ranked 16th in Global FDI Confidence Index 2019, $473 Bn Foreign Direct Investment (from FY10 onwards)

India is currently the 5th largest economy, compared to 11th largest in 2013-14

One of the fastest growing major economy in the world ; projected to besecond largest economy by 2040

3rd biggest start up hub in world after China and US

Window of demographic dividend opportunity available till 2055- longer than any other country

Several industries de-regulated, state owned enterprise privatised and government opened its door to FDI

India has a large English speaking and young median age providing a large pool of employable work force

IMF projects India to grow by 5.8% in FY 2020-21 and 6.5% in FY 2021-22

India’s vibrant start-up ecosystem with 54 tech unicorns expected by 2024 (24 currently)


Ease of doing business is a key focus area for the Indian Government…

► Single Window Interface for Facilitating Trade on ICEGATE portal (portal for customs)

► e-Sanchit enabling digital filing of documents

► Almost all tax registration/filings are now online

► Online single window for all construction related approvals

► Colour coded zonal maps of various agencies online - to determine NoC requirement for plots

► Scheme of faceless electronic assessments

► Scheme of faceless appeals and penalty proceedings also proposed

Technology driven Government

► Goods and Services Tax : A unified nation-wide single tax regime that replaced 17 indirect taxes and a host of cesses

► Corporate Tax Rate reduced from 30% to 22%/15% (in case of new manufacturing companies)

► Insolvency and Bankruptcy Code- Resolution framework to help corporates clean up their balance sheets and reduce their debts – 1500+ cases brought under the process and 140+ been closed.

► FDI rules across approximately 20 sectors relaxed to boost capital inflow and expand market opportunities

► Proposal to establish investment clearance cellwhich will handhold investors for all clearances

► Proposal to subsume 44 labour laws in India into 4 labour codes –significantly reducing the compliance burden

Key Reforms

EoDB – Easing the procedure, lowering the compliance cost and cutting down tax evasion

“Given the size of India’s economy, these reforms and efforts are particularly commendable, India adopted the doing business indicator as a core component of their reform strategy”

-World Bank Doing Business 2020

Amongst 10 economies that improved the most in EoDB score in 2020

Rank improved in BRICS countries from 5th

(in 2014) to 3rdRanked 1st among South Asian countries compared to 6th rank in 2014

142134 130

100

7763

2014 2015 2016 2017 2018 2019


In recent years, multinationals have shown their confidence in India as their manufacturing hub..

Plans to expand manufacturing facility in Noida to double production and use it as global export base.

Expansion of manufacturing facility in Noida to double existing capacity.

Samsung expands existing Noida Unit making it world’s largest mobile factory

One Plus - biggest global R&D centre in Hyderabad

Elbit System JV with Adani Defence-manufacturing Facility in Hyderabad

Rafael JV with Astra Microwave-manufacturing facility in Hyderabad

Manufacturing facility in Haryana

Tech Lab established in Mumbai

Manufacturing facility in Pune

Huawei - R&D support centre

Manufacturing facility for Apple

States with Industrial promotion/Electronics hardware/ESDM Policy

Manufacturing facility for Xiaomi

Production plant for Apple

Manufacturing plant for Xiaomi in Chennai

Chennai

Sri City

Maharashtra

Bangalore

Haryana

Hyderabad

Noida/Greater Noida

Mandideep Avgol Nonwovens - manufacturing facility in Mandideep

Malanpur

Israel Weapon Industries JV with Punj Lloyd, -manufacturing plant in Malanpur

AnantapurKia Motors - production plant in Anantapur - USD1.1 billion investment

MG Motors - manufacturing plant in Halol, Gujrat Gujrat


Enterprise, Healthtech and Fintech constitute >40% of total Tech Start-ups

Emergence of a strong tech Start-up culture in India

Vertical Split of Tech Start-ups (2013-19)

Enterprise Software

Marketplace

FinTech

HealthTech

EdTech

Others

Industry Verticals

19%

14%

10%

6%6%5%

4%

4%

4%

4%

3%

3%

3%

2%

13%

Enterprise

Health Tech

Fin Tech

HR Tech

Ed Tech

Retail & Retail Tech

Travel & Hospitality

SCM & Logistics

Real Estate & Construction

Automotive

Industrial & Manufacturing

Food & Foodtech

Mobility

Agri Tech

Others


Both countries are committed to further boost the relationship…

Key highlights

India is Israel‘s 3rd largest trade partner in Asia

Bilateral trade has diversified into several sectors such as pharmaceuticals, IT and

homeland security

USD 5.65 billion (excluding defence) in 2018-19 as against USD 200 million in 1992

I4F fund - USD 40 Million (2017)- aimed to promote, facilitate and support joint Industrial

R&D between India & Israel

India is the largest buyer of Israel military equipment; Israel is amongst Top 3 defence

supplier to India

Trade Partner

Bilateral Trade

Defence

Technology

► Cooperation in electric propulsion for small satellites

► Cooperation in GEO-LEO optical link

► Plan of cooperation regarding atomic clocks

► India-Israel Development Cooperation – Three Year Work Program in Agriculture 2018-2020

► State Water Utility Reform in India

► Water conservation in India

► Setting up of India-Israel Industrial R&D & Technological Innovation Fund (I4F)

► Cyber Security Cooperation

► Cooperation in Oil and Gas Sector

► Amendments to the Air Transport Agreement

► Film-co-production

► Memorandum of Intent was signed between Invest India and Invest in Israel

2017 2018

List of MOUs signed between India and Israel

Proposal : Dual listing of the companies on both the stock exchanges, raising of corporate bonds and combating insider trading

2 India Regulatory Environment


► Facilitates FDI inflow into the country by laying down policy framework on FDI regime

► FDI Into India - two routes available:

► Automatic route - no approval required

► Approval route – Prior approval of the Government of India is required

An overview of India Regulatory Framework

DPIIT

Respective Ministries

RBI

FEMA & FDI

► Central bank of India

► Controls the monetary policy and Indian Banking system

► Entrusted with the administration and implementation of FEMA

► FDI proposals in relation to the sectors/ activities under Government/ approval route considered by the respective ministries/ departments

► Lottery Business

► Gambling and Betting

► Chit funds

► Nidhi company

► Trading in Transferable Development Rights

► Real Estate Business or construction of farm houses

► Manufacturing of cigars etc.

Prohibited Sectors

Sector/Activity Automatic Route Approval Route

Single brand retail trading

Multi brand retail trading

100%

100% (B2B – cash & carry)

upto 51%

Pharmaceuticals-Greenfield-Brownfield

100%74%

-beyond 74%

Telecom 49% Beyond 49%

Digital Media - Upto 26%

Defence & E-commerce Discussed in subsequent slides

FDI in manufacturing and service sector (including technology) is permitted 100%, except for few regulated sectors, illustratively


India Regulatory Framework - E-commerce Business

Key Conditions

Marketplace based model

E-commerce entity provides an IT platform to act as a facilitator between the buyer and seller

Inventory based model

E-commerce entity owns the inventory of goods and services and sells directly to consumers

Models of E-commerce

A vendor cannot purchase more than 25% of its purchase from the E-

commerce entity and its group companies

E-commerce entity will not exercise ownership over the

inventory or goods purported to be sold

E-commerce entity cannot, directly or indirectly,

influence the selling price of goods or services & shall

maintain level playing field

FDI not allowed100% FDI allowed under automatic route

Vendors in which the e-commerce entity or its group

companies have equity participation, not permitted to

sell on the platform of e-commerce entity


FDI – Defence Sector

Key Aspects to be considered

Illustrative list of products requiring IL

Military aircrafts including helicopters, lighter-than-air vehicle ; UAVs, Electronic equipment specially designed for military use; Specialised equipment for military training etc.

Defence products/ components/ parts not specified in the list do not require IL – hence 100% FDI is allowed under automatic route

For services in Defence Sector – as no IL requirement, 100% FDI is allowed under automatic route

Defence products subject to industrial license (IL) in India – List of products requiring IL notified


Funding and repatriation of funds

Foreign company

Establishes as a foreign company

Establishes as a Indian company

Liaison office Branch officeProject office Company LLP

Financing Indian Operations

Repatriationof funds

Inward remittances from foreign entity

Inward remittances from foreign entity and project revenue

Inward remittances from foreign entity and internal accruals

- LLP Contribution of foreign partner

- LLP not allowed to raise ECB

- Equity share capital- Convertible instruments (CCD/ CCPS) - External Commercial borrowings (ECB) etc.

Permitted subject to procedural requirement



- Dividend repatriation freely permitted- All-in-cost ceiling for interest

Profit share repatriation freely permitted


External Commercial Borrowings Guidelines

1. Eligible Borrower

► All entities eligible to receive FDI in terms of FDI Policy would be eligible to raise ECB

► SEZ units, EXIM bank etc. also permitted

2. Tracks

► Foreign currency denominated

► Indian Rupee Denominated

3. Minimum Average Maturity (MAM)

► All ECBs - 3 years

► For ECB raised by entities in manufacturing sector up to USD 50 million - 1 year

► ECB availed from foreign equity holder for working capital purposes, and general corporate purposes - 5 years

4. End Use restrictions (negative list)

► Real estate activities

► Investment in capital market

► Equity investment

If MAM period < 5 years/ <7 years / <10years (as the case may be), then

► Working capital purposes

► General corporate purposes

► Repayment of Rupee loans

► On-lending to entities for the above activities

3 India Tax Incentives


India has significantly reduced its tax rates…

What’s the update in tax rates of Indian Cos?

Tax exemptions/incentives not available if lower tax rate opted

► Profits of SEZ Units ► Profit linked deductions ► Additional depreciation/Investment allowance on installation of new plant & machinery► Weighted deductions on specified expenditures

Domestic Cos Manufacturing Cos

► ETR of 17.16%

► For New Co formed post 1st Oct 19 if they start output by 31 Mar 23

► Option exercised can’t be withdrawn

► No MAT

► Option to pay tax at 25.17%

► Exemption/incentive not available

► Option exercised can’t be withdrawn

► No MAT

New Regime

Old Regime

► Cos with less than INR 4bn Turnover

► ETR at 29.12%

► MAT at 21.55%

► Exemption/incentives available

► ETR at 29.12%

► MAT at 21.55%

► Exemptions/ incentives not available

► Cos with more than INR 4bn Turnover

► ETR at 34.94%

► MAT at 21.55%

► Exemption/incentives available

Domestic Cos without Incentives New Manufacturing Co without IncentivesDomestic Cos with Incentives

► ETR same as Old Regime depending on Turnover

► MAT cut from 21.55% to 17.47%


..to improves its tax competitiveness

*For new manufacturing companies set-up on/ after Oct 1, 2019 and commenced manufacturing on /before Mar 31, 2023

** Only central taxes

# OECD average statutory tax rate for 2018 was 21.4%

0%

10%

20%

30%

Brazil India-NewCos*

Russia India China SouthAfrica

BRICS Countries

0%

5%

10%

15%

20%

25%

30%

35%

ASEAN Countries

0%

5%

10%

15%

20%

25%

30%

35%

OECD Countries


Abolition of DDT has made it further attractive..

Particulars

Old Regime(Before tax rate deduction and abolition

of DDT)

New Regime (post tax rate reduction and abolition of DDP)

LLP

Turnover <4 billionOther domestic

CosDomestic Cos

(not claiming incentives) New Domestic manufacturing Cos

Income (A) 100.00 100.00 100.00 100.00 100.00

Less: Corporate tax (B) 29.12 34.94 25.17 17.16 34.94

Profit after tax (A- B) 70.88 65.06 74.83 82.84 65.06

Less: DDT @ 20.56%(D)/ Tax on Dividends in the hands of shareholder

12.09 11.10 7.48* 8.28* -

Net amount available to owners (E)

58.79 53.96 67.35 74.56 65.06

Total tax outflow (B+D) 41.21 46.04 32.65 25.44 34.94

In Budget 2020, DDT is proposed to be abolished with effect from 01 April 2020

* Rate of 10% is as per India-Israel treaty

Erstwhile Indian company was subject to DDT at the rate of 20.56% on Dividends

Surcharge at the highest rate has been considered for the above comparison

Above computation are on the assumption that the Co is not avaiailng incentives/ deduction


Offering various fiscal incentives to make it attractive and cost competitive…

Manufacturing in Bonded Warehouse (MOOWR)2

Preferential/ Free Trade Agreements

Foreign Trade Policy (FTP)

Reduced basic customs duty on capital goods and spares to 5% and ease of clearance

Procedure to be followed

4 6Contract Structuring5► Concessional/ nil rate of basic

customs duty on import from preferred trade nations

► Concessional rate of BCD ranging from 0 to 10%

► Import from countries like Japan, Korea, China, Singapore, Indonesia, Malaysia, Philippines, etc

► Ensuring better credit eligibility and reduction in cost of setting-up the plant

► Contract splitting and structuring

► Price bid finalisation

► Pre-bid meetings to educate contractors

► Duty exemption related to export obligation

► Export Promotion Capital Goods

► Export Oriented Units

► Advance Authorisation

State Incentives1► Stamp duty exemption

► Electricity duty exemption

► Capital & Interest Subsidy

► Employment- PF related benefits

► Land rebate

► State GST Refund (Net or Gross)

► Duty-deferment on import of inputs/ capital goods

► No Customs duty in case goods directly exported from warehouse

► Pay Customs Duty on domestic clearance of capital goods/ finished or manufactured goods

► Procurements from DTA permissible

Project Import Scheme (PIS)



3► Reduced basic customs duty on

capital goods and spares to 5% and ease of clearance

► Require to register import contract by making an application in writing to Custom Authorities

► Obtain Project Contract Registration Number (PCRN) number

Free Trade Warehousing Zone



7► Free Trade and Warehousing Zone

is a special type of Special Economic Zone, with focus on trading and warehousing

► Manufacturing cannot be carried out in a FTWZ

4 Tax environment in India


Taxation of Foreign companies

Scope of income - Income received, accruing or arise, deemed to accrue in India is taxed

Applicable tax rates:

Business Profits - If constitutes PE, taxed on net income basis - 43.68%

Business Profits - If no PE, no tax

Royalty / FTS - Taxed on gross basis @ 10% (India-Israel Treaty)

Interest-10% (India-Israel treaty)/5.46% (for specified borrowings)

Dividend-10% (India-Israel treaty)

Taxation of Indian companies

Scope of income - Worldwide income is taxed

Applicable tax rates :

Business income- 17.16% to 34.94% (depending upon the nature of business, incentives availed etc. – as discussed in previous slides )

Foreign Dividends – 17.472%

An overview of India Direct tax landscape..

► Tax year runs from 1st April to 31st March of next year

► Company is considered as resident if it is incorporated in India or Place of effective management is in India

► Business loss carry-over permitted up to 8 years from tax year in which loss is incurred subject to no change in shareholding of greater than 49%

► Depreciation loss is eligible for carry forward indefinitely

Surcharge at the highest rate has been considered for the above tax rates computation


India Tax and Regulatory Consideration For Foreign Companies

India tax & regulatory

considerations

17

26

5 3

4

Permanent Establishment

(PE)

Transfer Pricing

Personal taxation for employees

Royalty, FTS and EL

Compliance with other laws

Indirect tax cost in

supply chain

Significant Economic Presence

► Place of business / use of Indian group company office

► Prolonged presence of overseas employees

► Rendering services in India

► Negotiation / concluding contracts in India

► Characterisation of payment from Indian customer / Indian group company

► Tax on fee for online/ digital advertisement services

► Tax on business activities carried through digital means

► Revenue is determined basis aggregate payment or number of users registered

► Deferred until FY 21-22

► Optimise tax cost in supply chain

► Avail tax benefits and incentives

► Transactions between AE are required to be at arm’s length basis

► Transfer Pricing certificate confirming the same should be submitted

► Short term stay exemption –available or not?

► Tax compliances for employees (withholding, return etc.)

► Social- security benefits/ contributions

► Corporate Law compliances (registration, financials etc. )

► Adherence to foreign exchange laws (approvals, filings etc.)


PE in India - An overview

► PE is a taxable presence in a country outside the company’s place of tax residence.

► PE exposure may arise on account of overseas employees visiting India for business meetings, undertaking training, rendering technical services etc.

Different forms of PE provided in India-Israel tax treaty -

► Fixed Place PE

► Agency PE

► Installation PE

Apart from the above mentioned types of PE risk, tax authorities have been seen to even examine presence of any equipment or server for examining PE issue, especially in online / digital transactions

Overseas

India

Seconded or technical personnel

PE?

Sales/marketingagent


Activities to be reviewed in India to assess PE Risk…

Key Triggers

for PE

Prolonged presence of employees of foreign

company in India

Use of fixed place of business in India / office of Indian Company by employees of foreign company

Carrying of Business operations by foreign company through presence of employees of Indian entity,other

personnel or agents

Carrying on business operations by foreign

company through server / assets located in India

Secondment arrangement terms entered between foreign company and Indian company

Indian entity undertaking pre-sales and marketing services leading to negotiation and / or concluding contracts on behalf of foreign company in India

1

3

25

6

4


MLI has further extended the scope of PE in India-Israel tax treaty..

► Conclusion of contract by foreign parent, with support activities by Indian entity

► Preparatory and auxiliary arrangement exemption were availed, by separating the scope of work

► Splitting up of contracts in case of construction or turnkey project

F Co

I Co

Concludes contract

Customer

Coordination and ancillary services

Current no PE position in tax treaty

► Dependent agency PE (DAPE) rule extended to cover persons who habitually plays a principal role leading to conclusion of contracts that are routinely concluded without material changes

► The applicability of Specific Activity Exemption has been restricted to apply only if the activities qualify as Preparatory or Auxiliary

► Evaluate the activities carried on by one or more closely related enterprises at the same building site, construction or installation project to determine whether they are connected activities that should be aggregated.

Definition of PE expanded Considerations

► Revisit business model for future operations/ contracts?

► Revise inter-company contracts?

► Role and responsibilities of ‘agents’ to be reviewed?

Date of entry into effect for India inbound transaction is 1 April 2020


PE Attribution – what has been the view of Indian judicial authorities..?

► Fixed place and agency PE of GE overseas was constituted in India owing to the sales and marketing functions carried out in India

► 10% of the value of supplies made to the clients in India was considered the profits arising from such supplies; and

► Further 26% of such 10% is considered as attributable to activities undertaken in India

►Entire activities for carrying out sales were carried out in India (not only for products sold as distributor but also for direct sales made in India)

►In absence of data related to Global profit of India specific operations, 10% net profit rate was held reasonable

►30% of such 10% net profit was attributed to Indiaactivities

► PE determined under “fixed place” as well as “agency” PE rules► Activities carried out outside India not taxable

► 50% of profits allocated towards manufacturing activities ► 15% of profits allocated towards R&D activities

► Activities carried out in India taxable

PE Attribution Principles

►Buy-sell transaction of assessee with its Indian subsidiarywas already accepted to be at ALP by the tax authorities,therefore, no further income would be attributable to PE ofassessee in India

► 35% of profits allocated towards marketing activities

► Ruling upheld by Delhi High Court

If the transactions between the associated enterprises are carried out at an arm’s length, no further attribution, even if the PE is constituted in India- Held in the case of Morgan Stanley (2007) and affirmed in E-funds IT Solution Inc (2017)

Rolls Royce Plc (2011) Daikin Industries Limited (2018)

GE Energy Parts Inc. (2019)Celltick Technologies Ltd. (2019)

01 02

03 04

*Refer Annexure C for detailed discussion


Other key changes in India-Israel tax treaty due to MLI are..

Implications:

► PPT denies treaty benefits when, having regard to all relevant facts and circumstances, obtaining that benefit is one of the principal purposes for entering into a specific transaction

► Unless if granting that benefit is not contrary to the object and purpose of the relevant provisions of the tax treaty

► India-Israel treaty also has limitation of Benefit clause – which has a similar objective as PPT

Implications:

► Countries to allow access to Mutual Agreement Procedure (MAP) in transfer pricing cases and that they should implement the resulting mutual agreements by making appropriate corresponding adjustments

Principal Purpose Test (PPT) applicable Corresponding Adjustments

Implications:

► Dual resident entities – Tie breaker rule of place of effective management does not apply. Residency is to be determined through MAP

► Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions introduced

Other Key Changes

Following are the key changes ( other than PE) that would take place as a result of MLI ratification


What income-tax compliances , as foreign company is required to undertake in India?

Technology advancement/ Services rendered/ loan granted

I Co

F Co

Income received from India

► Royalty

► Managerial fee

► Consultancy/ Technical services

► Interest on debt

Israel

India

Key considerations

• Whether such income is taxable in India? Domestic tax law vs India-Israel tax treaty

• Whether F. Co. is required to obtain tax registration in India?

• Whether I Co. is withholding taxes on such income?

• Whether I Co./ F Co. is required to obtain lower withholding tax certificate?

• Whether F Co. required to file a ITR in India? What if entire taxes are withheld, is ITRstill required to be filed? (budget 2020 update)

• If related parties, whether Transfer Pricing provisions important?

• Whether F Co. is required to file tax return even if it is earning exempt income inIndia?

• What documents are required to claim the treaty benefit?

Some consequence of non-filing the tax return


India is active in implementing measures as per BEPS Action plans..

Action Plan on BEPS

Permanent

Establishment &

Digital economy

Aggressive Tax

Planning

Interest

Deductions

Increased

DocumentationDispute

Resolution

Control Foreign

Corporations

(CFC)

Place of Effective Management (POEM) Rules introduced effective April 2016

► Broadening the Permanent Establishment concept

► Impact on agency arrangement

► Equalization levy on specified transactions effective

June 2016

► Expanded the definition of business connection to include SEP effective from FY 2021-2022

► Limitation of interest deductions for debt funding

► Impact on various financial instruments

► Rebalance of capital structure

► Section 94B introduced effective April 2018

► Disclosure of aggressive tax planningarrangements

► Revisit holding company or hub

► companies structure► Countering harmful tax practices

(Tax rulings, etc.)

► General Anti Avoidance Rules effective April 2017

► CbC reporting; Master file/ local file;

► Automatic exchange of information between countries; Re-examine TP documentation

► Re-examine the approach toward dispute

resolution

► Increase in disputes post BEPS reforms

► Greater use of Mutual Agreement Proceedings/ Advanced price Agreements


Other key tax controversies in India Software Royalty

Key controversies on Royalty

Copyright v/s

Copyrighted article

Offshore supplyof software

Whether software development qualify as manufacturing

payments made to purchase of software embedded in the equipment

Reproduction/ one to many installation of software on chipsets

Reselling of software without use i.e. without downloading

Key Considerations

Copyright v/s copyrighted article

► Whether right to reproduce is given?

► Whether distributor has obtained a commercially exploitable right in a copyright ?

► Whether access is provided to source code of the software?

► Taxability of annual maintenance services provided with software?

There is considerable litigation in India regarding characterisation of amounts received for supply of software. Indian High Courtshave divergent views on the issue of whether such consideration should be construed as royalty, and consequently, be taxable inIndia. The matter is now pending before the Supreme Court for final adjudication.

5 Transfer Pricing Landscape


TP Audit Update

► Scheme for faceless/ e-assessment introduced. Taxpayers required to produce their response to notices or communication electronically through their e-filing account on the e-filing portal

► Transfer pricing continues to remain the biggest litigation area for MNCs in India. Aggressive positions taken by revenue authorities during the course of recently concluded tax audit for tax year 2016-17

► Major focus area in the TP audits was:

► Mark-up for information technology (IT) services in the range of 20%–25%

► Mark-up for IT-enabled services (ITES) in the range of 18%–24%

► Adjustment on account of excessive advertising, marketing and promotion (AMP) expenses using residual profit split method (RPSM) – Adjustment upheld by Dispute Resolution Panel

► Royalty/Intra-group services (IGS) transaction continues to be the soft target with issues around benefits test, duplicative services

► Inclusion of notional cost (stock option expenses (SOE)) in cost base for markup

► Business restructuring transactions closely evaluated

► Interest adjustment on outstanding receivables

► Foreign Co. income on flip-side transactions adjusted where Indian Cos. are in losses


Road ahead

► Revenue authorities inclined to conduct Transfer Pricing surveys for tax years 2016-17 for large taxpayers.

► Focus areas would include detailed fact finding around correctness of FAR profile documented in TP study, availability of inter-company agreements, adequacy of documentary evidences maintained to support ALP determination, etc.

► Data from Master File and Country-by-Country Report to be used for selection of audit and risk assessment – Focus on value chain analysis – development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) discussion for contract R&D centres and Indian companies engaged in AMP activities.

TP Audit Update


India APA programKey benefits

► In India, APA Program was launched in 2012 as a mechanism to proactively resolve transfer pricing disputes and foster a non –adversarial tax regime;

► India APA program provides taxpayers option to enter into Unilateral, Bilateral and Multilateral APA

CertaintyDispute resolution in one year does not guarantee acceptance of positions in subsequent years. On the other hand, APA provides certainty of tax positions for 9 years-– 5 future and 4 roll back years.

Saving in time~12 years to resolve an issue under domestic litigation. Conclusion of UAPA/ BAPA within 2-3 years time frame.

Insight driven solutionsAPA offers fact specific unique solutions to non-routine transfer pricing issues which are difficult to resolve through domestic litigations route.

Reduced compliance cost No annual TP documentation requirements post signing of APA – APA Compliance report needs to be filed.

Double tax mitigation via BAPA

1

2

3

4

5


India APA program highlightsStory so far

► Program Program has matured and strengthened over the past 7 years since its

commencement – Number of applications filed (1,155 until March 2019) and

agreements signed (~300+) a testimony to that

► Of the 300 APAs signed till 30 September 2019 - 33 are BAPAs and 267 are

UAPAs

► 27% of total applications filed in tax year 2018-19 represent BAPA applications

► Number of tax year litigations which have ended : 890 which would have

clogged the tax courts

► Program successful in winning the confidence of taxpayer - Complex transfer

pricing issues (variable royalty/IGS/marketing intangibles) prone to long-drawn

litigation increasingly resolved through APAs and taxpayers obtain certainty for

9 years (including roll back)

► GOI is committed to strengthen the programme by providing it with adequate

resources


India APA program highlightsIndia APA authority approach - Key observations on recent trends

► Preference to BAPAs increasing over the years –substantial increase in BAPA applications vis-à-vis UAPA applications

► Priority given to APA renewals instead of following first in, first out (FIFO) approach

► Open to revision of concluded APAs – substantive revisions were made to one India UK BAPA to accommodate changed economic circumstances

► Inclusive Framework's peer review report highlights exchange of 300+ APA/PE rulings by India

► Consideration of application of profit split/ revenue split in APA applications for Indian entities providing high-end services such as investment banking/Knowledge Process Outsourcing (KPO)

► Time period within which receivables should be received – if timeline breached, interest imputed thereon. LIBOR + basis points considered in cases where invoices are raised in foreign currency and flat rate of 1% per month


India APA program highlightsUnilateral APA closures

► Contract R&D services

► Cost plus for contract software development services if DEMPE performed by overseas entity

► Markup to be increased by 1% if Indian employees’ name appears in product patents as co-inventors – Total number of such patents cannot exceed a prescribed number during the APA term

► Realisation period of invoices agreed between 60-90 generally. However, extended credit period provided in exceptional situation such as highly leveraged overseas service recipient company/ group

► Guarantee fee

► Yield curve approach used to determine arm’s-length guarantee fee

► Guarantee fee rate also applicable on “debt substitution”

► Brand royalty/AMP expense

► Royalty paid by Indian Co. split between brand and technology royalty

► AMP expense – 3.5%/4.5% of gross sales considered as bright line; over and above bright line to first offset allowed brand royalty; any amount not offset to be charged at a cost plus 15% markup

► Technology royalty % agreed under APA basis the filing position of the taxpayer in APA

► Receipt of brand royalty

► Royalty to be charged only for legal ownership if DEMPE (development, enhancement, maintenance, protection and exploitation) performed by overseas entity – Based on “incremental net revenue”


APA Case Study 1Provision of SWD, ITES, marketing and technical support services

F Co.

I Co.India

Remunerates ICo. on a cost plus mark-up basis

Provision of services

Facts:

I Co.

► I Co. is engaged in the provision of following services:

► Software development services (SWD) [rendered to Israel associated enterprise (AE)]

► IT back office support services (ITES) [rendered to US AE]

► Pre-sales and post-sales technology support [rendered to non-US AE]

F Co.

► F Co. deals in electronic products and related software for the electronics and technology industry

Key positions/Critical assumptions

► I Co. converted its UAPA application into BAPA application - Fresh BAPA application was filed (for transactions with US AEs) in India

to cover additional years and to align with years covered by BAPA application filed in US. Transactions with non- US AEs continue to

be covered by UAPA.

► Aggregation of transactions and application of Transactional Net Margin Method (TNMM) accepted

► Both the US CA team as well as India CA discussed about the existence patents wherein I Co.’s employees were named as co-

inventors for patents filed by F Co. However, no additional mark up has been proposed for such patents, provided that the patents

do not cross a certain threshold

► Operating margin in the range of 16% to 17% agreed for SWD segment and 15% agreed for ITES segment. Margins offered in the

BAPA are lower than those offered in the UAPA by 100-200 bps

► India CA has agreed on downward adjustment to profit where operating margin in books exceed the above mentioned margins

Lower margins (to the tune of 2%) proposed to agreed in BAPA vis-à-vis UAPA


APA Case Study 2Variable royalty model

F Co.

I Co.India

Third-party customers

Payment of royalty for all IP and technical support (proposed)

Payments for purchase of: 1. Equipment2. Services

Payment for raw material/finished goods

Facts:

I Co.

► Engaged in manufacturing and distribution of certain equipment and provision of services in relation to that equipment to third-party customers in India; characterized as a routine/limited risk entity targeting an arm’s-length operating margin fully dependent on intellectual property (IP) owned by the F Co.

F Co.

► Owner and licensor of all IP – manufacturing technology, tools, process, services portfolio, global customer relationships, etc.


► Aggregation of transactions and application of TNMM /RPSM accepted

► I Co. to earn a guaranteed fixed return on sales as it is a limited risk entity. In case of shortfall, subvention/TP adjustment to

be given by F Co.

► In case I Co.’s profit margin exceeds the guaranteed return on sales, a portion of the excess profit (basis contribution analysis)

can be paid as variable royalty to F Co. towards right to use the IP

India negotiated its first BAPA with Switzerland-basis above-mentioned methodology.


APA Case Study 3Intra-group services cross charge

H Inc.

Facts:

H Inc.

► H Inc. is a centralized support entity of the group rendering marketing, technical, managerial, administrative and other operational support services to group entities worldwide

► H Inc. undertakes a cost allocation whereby costs incurred by H Inc. for centralized services are charged to operating companies (OpCos), (including 5% mark up) after excluding shareholder functions cost, duplicative costs, etc.


► India APA team evaluated in detail the nature of services received (including documentary evidence of services

received), benefits derived and cost allocation keys used for allocation of management cost. Post the analysis of

such data, the following was agreed:

► Management cost to be allocated basis the cost allocation keys and cost plus mark up specified in the Inter Co agreement

► Value of management cost not to exceed a prescribed percentage of the operating revenues. If the same exceeds the prescribed percentage, the Applicant needs to inform India CA about the reason for such excess including change in accounting method (if any) and introduction of new cost items. The two CAs will discuss and agree on the value to which such amount may be restricted

► New services can be included in the APA once the Indian APA authority is informed and both the CAs agree to include and revise the existing APA

► Self confirmation memo to be filed along with annual compliance report which is to be accompanied with few indicative sample documents to evidence receipt of services – This shall be adequate indicator of utilization of services

OpCo 3

Payment for management cost

Payment for management cost

OpCo 1 OpCo 2


Mutual Agreement ProcedureOverview

► Mutual Agreement Procedure (MAP) is an alternate mechanism

► for the resolution of international tax and transfer pricing disputes

► which are not in accordance with the tax treaty

► Resolution of dispute through

► The intervention of Competent Authority (CA) of each state

► Aims to arrive at a mutually acceptable solution (resolution not a compulsion for the CAs)

► Described and authorized by Article 25 of the OECD Model Tax Convention

► Aimed to eliminate double taxation that could arise from a tax/TP adjustment

► MAP available in addition to and not in substitution of the domestic remedies - CIT vs Visakhapatnam Port Trust (1983- 144 ITR 146-A.P)


MAP - Key Statistics

India MAP stats

► Mostly MAP cases settled with US followed by UK, Japan, Denmark, China, Australia and Sweden

► Framework agreed with US to resolve IT/ITES TP disputes - About 90 years of non-framework MAP disputes were resolved involving brand royalty, technical royalty & Intra group services

► 73 MAP cases (TP – 72 and others – 1) were resolved by Indian CA during 2018

► MAP cases pending as on 31 Dec 2018 – 841 (TP cases – 710 and others – 131)

► In 2020, India CA held discussions with CA from Switzerland and UK. The discussions resulted in conclusion of 7 MAP cases with Switzerland and 10 MAP cases with UK

Israel MAP Stats

► Total 4 MAP cases (TP – 1 and others – 3) were resolved by Israel CA during 1 Jan 2018 to 31 Dec 2018 period, fully eliminating double taxation.

► MAP cases pending as on 31 Dec 2018 – 15 (TP cases – 8 and others – 7)

6 Indirect Tax Landscape


Inter-state supplies / Import ofgoods & services (Integrated GST)

Intra-state supplies(CGST/ SGST)

Supply of goods and services alongwith import thereof in India,attracts GST

Brief Overview

Indian IDTGoods and Services Tax (GST)

Import of goods into India is subject to Customs duty*

Basic Customs duty ('BCD’)(Generally ranging from 5% to20%)

Social Welfare Surcharge('SWS’)(10% on the amount of BCD)

Integrated GST ('IGST')

Indian Customs Law

*Safeguard/ Anti-dumping duty may also be levied depending upon the nature of goods imported, and the country of import


Import Duty Cost

Import of plant and Machinery

Basic Customs Duty (7.5% to 10%)

Social Welfare Surcharge (10% of

basic Customs duty)

Integrated Goods and Services tax (5% to

28%)

Non-Creditable

Creditable

IllustrationCustoms

duties

Rate P&M

Plant, Machinery and Spares imported 90

Clearance, freight cost for the above (including landing charges)

10

Final Cost of Import of Plant and Machinery 100

Basic Customs Duty 7.5% 7.50

Social welfare surcharge 10% 0.75

Import IGST 18% 19.50

Total Landing Cost (including all taxes) 127.75

Creditable IGST 19.50

Total non-creditable tax cost 8.25

Net landing price 108.25*Safeguard/ Anti-dumping duty may also be levied depending upon the nature of goods imported, and the country of import


Process Flow

Creditable taxes

CGST, SGST

CGST, SGST

Non creditable taxes

Local procurement of raw material (In case of manufacturer)

Intra-state procurement of services

Inter-State procurement of raw material (in case of manufacturer)

IGST

Inter-state procurement of services

IGST

India

Import of goods Export of goods & ServicesOutside India

IGST (Reverse Charge)

BCD, SWSIGST

Distributors in India

CGST,SGST/ IGST

Import of Goods & Services

► Concessional rate of duty under IGCR Rules/ FTA’s, PI. Other benefits such as EPCG, AA may also be explored

Export of Goods & Services

► Export incentives under Customs, GST & FTP

Domestic Supplies

► GST applicable on domestic supplies

► Reduced cascading of taxes

► De-centralised compliances

Zero rated under GST

Manufacturer/ Trader/ Service Provider

OEM in India

CGST,SGST/ IGST

End Customers

CGST,SGST/ IGST

Import of services

CGST,SGST/ IGST

Refer Annexure D for discussion on GST compliances

7 Litigation Procedure and Alternative Dispute resolution


Litigation procedure and timelines

Supreme Court

High

Court

Appellate Tribunal (ITAT)

First Appellate Authority

(DRP, CIT(A))

Field Officers (TPO, AO)

1 to 3 Yrs

3 to 4 Yrs

2 to 3 Yrs

3 to 5 Yrs

4 to 7 Yrs13 to 21 Years

Including Stay and Penalty proceedings

► Most tax disputes are dealt with under the traditional dispute resolution avenues

► Substantial period of time taken at each level of dispute resolution forum

► At times, pro-tax revenue approach perceived at lower levels

► Drawbacks of prolonged litigation:

► Huge tax compliance costs (time + money)

► Uncertainty

► Lack of investor confidence

► Distorts Governmental budgeting

► Need for robust, effective and speedy ADR mechanisms


Alternate Dispute Resolution (ADR) mechanism

► AAR- For obtaining upfront certainty in case of complex tax issues

► DRP-Resolving the disputes relating to Transfer Pricing in International Transactions

► Vivaad se viswaas – One-time scheme which providesresolution mechanism for pending direct tax disputes across various appelate forum. It offers a complete waiveron intrest and penalty to taxpayer who pay their disputedtaxes upto 31st March 2020

► MAP- Mechanism through which competent authorities consult to resolve disputes regarding the application of double taxation conventions

► APA – Mechanism to proactively resolve transfer pricing disputes ;APA provides certainty of tax positions for 9 years-– 5 future and 4 roll back years.

► Settlement commission-Settle the tax liabilities in complicated cases avoiding endless and prolonged litigation

ADR Mechanism

Authority of Advance Ruling (AAR)

Vivaad se vishwaasscheme

Settlement Commission (SC)

Dispute Resolution Process

Advance Pricing Agreements (APA)

Mutual Agreement Procedure (MAP)


Advance Ruling - Concept

► Advance ruling provides a mechanism for an upfront resolution of questions related to tax liability of a non-resident in India

► Authority for Advance Ruling (AAR) is an independent quasi-judicial body which issues Advance Rulings on Income Tax matters

► With respect to tax liability arising from India related transaction which has been undertaken or proposed to be undertaken

► Mixed questions of law and fact can be included in the application

► The questions may relate to any aspect of the applicant’s liability including international aspects and aspects governed by the Double Tax Avoidance Agreements (‘DTAA’)

Concept of an Advance RulingQuestions which can be raised before AAR?

► Questions pending in the applicant’s case before the Revenue authorities, Appellate Tribunal or any Court at the time of the application

► Question which involves determination of fair market value of any property

► Questions relating to a transaction or an issue which is designed prima facie for avoidance of income-tax

Questions which cannot be raised before AAR


Vivad Se Vishwas scheme to resolve pending litigations

Finance Minister in its budget speech stated –

“.. in the past our Government has taken

several measures to reduce tax litigations Currently,

there are 4,83,000 direct tax cases pending in various

appellate forums i.e. Commissioner (Appeals),

ITAT, High Court and Supreme Court. This year, I propose to bring a scheme similar to the indirect tax

Sabka Vishwas for reducing litigations even in the direct

taxes…”

Scheme► Settling pending litigation/appeals relating to tax arrears as on 31st January 2020 to grant immunity from interest,

penalty and prosecution under the Income-tax Act, 1961 at following forums –► Commissioner of Income Tax (Appeals) [CIT(A)] ► Income Tax Appellate Tribunal [ITAT] ► High Court [HC]► Supreme Court [SC]

► The scheme aims at quick closure of pending litigations which will allow businesses to deploy energy and resources saved by opting for the scheme, towards business activities.

Types of mattersAmount payable under the Scheme on or before 31st March 2020

Amount payable under the Scheme after 1st April 2020 till the last date

Disputed Tax ( with complete waiver of interest and penalty)

100% of disputed tax

(complete waiver of interest levied/leviable)

100% + plus 10% of disputed tax (If quantum of 10% of disputed tax is more than aggregate of interest and penalty, such excess shall be ignored)

Way Forward

► Analyse and identify the pending cases where the Scheme can be applied. ► File a petition to withdraw appeal, file declaration and furnish proof of withdrawal of appeal with Income tax

authorities► Pay the disputed tax amount determined by Income tax authorities in the order and intimate the same.

8 About EY India

India as an Investment decision

About EY IndiaWho we are and what we stand for

Who we are

► People who demonstrate integrity, respect and teaming

► People with energy, enthusiasm, and the courage to lead

► People who build relationships based on doing the right thing

What we stand for

At EY, we’re committed to building a better working world – one with increased trust and confidence in business, sustainable growth, development of talent in all its forms, and greater collaboration.

EY – a global leader

EY is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 270,000 people are united by our shared values and their unwavering commitment to quality.

270,000 people 700+ offices

150+ countries 1 unwavering

commitment

Highest performing teams

► Focus on human equity and inclusiveness empowers every individual

► Work in inclusive, geographically borderless teams to bring diverse perspectives and move quickly to actions and results

► Our diverse team means an exceptional client experience which is our commitment to you

Industry focused

► Invested in knowing your industry

► Valued understanding of your critical issues and challenges that shape your business

► Knowledge hubs provide timely and relevant industry, technical and regulatory information to help you meet current and evolving needs

Exceptional client service

► Largest worldwide network, bringing the right people in the right locations, building trust and enriching relationships

► Proactive, visible and timely in sharing our knowledge, perspectives and experience – this is our mindset and culture

► This is what differentiates in the market and how EY builds a better working world


About EY IndiaOur Services Domain

Assurance Tax Transactions Advisory

► Assurance services under - International GAAP, US GAAP and IFRS

► Forensic & Integrity Services

► FAAS – Financial Accounting Advisory Services

► CCaSS

► Business tax

► Global Compliance and reporting

► People Advisory Services

► International tax

► Indirect tax

► DigiGST®

► Transaction tax *

► Transfer Pricing

► Estate Planning for Family Business

► Litigation Advisory

► Tax Performance Advisory

► Digital Tax

► M&A Advisory

► Valuation, Modeling and Economics

► Transaction Diligence

► Corporate Finance Strategy

► Project Finance and Infrastructure

► Restructuring

► Operational Transaction Services

► PE Value Creation

► Capital Market Services^

► Working Capital Management

► Transaction tax

► PI

► People & organisation

► Finance

► IT Advisory

► Customer

► Supply Chain

► Strategy

► Risk Advisory

► Internal Audit

► Risk Assurance

► Risk transformation

► Information security

► Financial Service

*Transaction tax is a specialist service provided by an optimal mix of tax and transaction professionals. It pertains to M&A deals and other related Corporate restructuring from a tax, regulatory and commercial perspective.

^ Capital Market Services are provided by EY Merchant Banking Services P. Ltd, a SEBI Registered Category 1 Merchant Banker


About EY IndiaWe are the leading tax advisory firm

• Tax Knowledge & Solutions - EY is the only ‘Big Four’firm in India having a dedicated Tax Knowledge & Solutions Group powered by some of the finest tax minds in the country like Pinakin Desai, Nihal Dalvi, Rajendra Nayak focused around technical research, innovation, ideation and tax solutions

• Tax Policy Advisory Group - Extensive efforts and engagement with the Government, eg. Dispute Resolution Panel, APA program, Safe Harbour rules, etc.

• PDS Legal - An affiliate, with significant expertise in the spheres of tax, commercial and regulatory laws and assisting clients on India entry regulations from a legal perspective

• Market leading Litigation practice - Our litigation leader Rajan Vora is recognized consecutively for the 5th time as one of the top 10 tax dispute advisers in India by International Tax Review in 2015

4179 Tax Professionals 11 Locations Comprehensive Services143 Tax Partners

► Ranked as #1 brand for Tax Services in India in biennial Global Brand Survey 2017 (Ipsos) 2015 (Kantar) 2013 (TNS), 2011 (TNS)

► Tax dispute and litigation firm of the year –Asia Tax Awards 2015 presented by ITR

► A tier-one tax firm for the 14th consecutive year – Euromoney ITR, World Tax Guide 2017

► Top Tax Dispute Resolution Lawyers and Advisors in India – International Tax Review

9 Annexure


Annexure A - Start-up recognition by DPIIT

S

Recognition of

‘Start-up’ by DPIIT

An entity (company/ partnership firm/ LLP) satisfying the following conditions can be recognised as ‘start-up’ by Department of Promotion of Industry and Internal Trade (DPIIT) -

► operating ≤ 10 years

► turnover ≤ INR 100 crores since incorporation

► involved in innovation, development or improvement of products or processes or services / scalable business model with a high potential of employment generation or wealth creation

► Not formed by splitting up, or reconstruction of existing business

► Self-certification and compliance under 3 Environmental & 6 Labour Laws

► Income-tax exemption for a period of 3 consecutive years, tax exemption for investments above FMV

► Easy winding up in 90 days under Insolvency & Bankruptcy Code, 2016

► Start-up patent application & IPR protection with fast track patent application (upto 80% rebate)

► Easier public procurement norms like exemption from earnest money deposit and prior turnover/experiencerequirements

► SIDBI fund of funds for investment into start-ups through Alternate Investment Funds

Benefits of

registration

The Government launched the ambitious ‘Start-up India’ movement to support new budding entrepreneurs

Back


Annexure A - Incentives for start-ups

Share issue > FMV

► Excess taxable for recipient company. Exempt for start-up if

► aggregate amount of paid up share capital and share premium ≤ INR 25 crores

► not invested in the specified assets

► duly signed declaration to DPIIT

► DPIIT shall internally forward the same to the CBDT

Carry forward/ set off of losses of start-up allowed (for 7 years) if

Earlier - continuity of 100% of original shareholders

From FY 2019-20 -

► continuity of 51% beneficial shareholding or voting power

or

► continuity of 100% of original shareholders

Angel taxation[Section 56(2)(viib)]

Set off & carry forward of losses

[Section 79]

Profit-linked tax deduction

[Section 80-IAC]

100% profit linked deduction for any 3 years in a block of 10 years

Conditions-

► Eligible business-same as of DPIIT recognition

► Entity- Company/ LLP

► Incorporation - After 1 April 2016, before 1 April 2021

► Turnover ≤ INR 100 crores

► Certificate- by Inter-ministerial board

Deferment of ESOPs taxation issued by Eligible start-ups

Exemption to individual for investment in start-

up

Back

►Capital gains exemption to an individual or HUF on sale of long-term capital assets, being a residential property (a house or a plot of land),

►The net consideration received is invested for subscription of equity shares of eligible start-up

►Such funds are utilised by the eligible start-up for purchase of new assets

Taxable on earlier of :

► 5 years from the Financial Year in which the specified security or sweat equity share is allotted / transferred to the employee

► Date of the sale of specified security or sweat equity shares

► Date of cessation of employment


Annexure B - Daikin Industries Ltd

► Daikin Japan engaged in the development, manufacture, assembly and supply of air-conditioning and refrigeration equipment, had a wholly-owned subsidiary Daikin India

► Daikin Japan sold air-conditioners to Daikin India and also made direct sales to third parties in India

► In absence of Daikin Japan submitting any cogent evidence of it being directly undertaking marketing activities in respect of sales in India, Assessing officer held that such activities were, in fact, done by Daikin India simultaneous with making sales in respect of their own distribution activity and Daikin India was held dependent agent PE for Daikin Japan

► Adjudicated as follows:

► Entire activities of identifying customers, negotiating and finalizing prices with customers in India were done by Daikin India (not only for products sold as distributor but also for direct sales made in India by Daikin Japan)

► In absence of data related to Global profit of India specific operations, 10% net profit rate was held reasonable

Contd.

► And net profit attributable to marketing activities in India was held at 30% of the net profit so determined at 10% of Sales in India

► Profit on commission received by Daikin India should be reduced from profit attributed to PE

Daikin Japan

Daikin India

Japan

India

Back

Sale of ACs

Third parties

Sale of ACs


Annexure B - Rolls Royce Plc

► RRPLC, UK Company engaged in supply of aero engines to Indian customers

► RRIL, subsidiary of RRPLC, with offices in India is engaged in providing marketing support services to RRPLC on a cost plus basis

► Employees of RRPLC visited India frequently, occupied and used premises of RRIL during visits for business purposes. Indian customers were required to route orders through office of RRIL


► RRIL is PE of RRPLC, since RRIL’s premises used by RRPLC and employees of RRIL solicited orders for RRPLC

► Attribution to India – Initially 100%, after protracted litigation across appellate levels, reduced to 35% for marketing activities

► R&D expenditure not allowed deduction for computation of global profit margin

RR PLC

RRIL - LO

UK

India

Marketing Support

Back

RRIL

Subsidiary


Annexure B – Celltick Technologies Limited.

► The assessee-Israeli company was engaged in the business of developing software and marketing active content for mobile phones all over the world. It earned revenues from providing software solutions to an Indian concern, who was its 100 per cent subsidiary, for onward distribution to third party customers.

► The Assessing Officer held that, in terms of the arrangement with the said concern, it could be construed that the said concern was liable to be considered as a 'dependent PE' of the assessee in India.

► The Dispute Resolution Panel held that the revenues earned by the assessee were taxable in India as 'business profits' in terms of Article 7 of the India-Israel Tax Treaty. It, further, held that the subsidiary constituted a 'Dependent Agent Permanent Establishment' (DAPE) of the assessee in India. It also upheld the estimation made by the Assessing Officer.

► Adjudicated as follows:► It is to be considered that the proposition sought to be canvassed by the assessee has the

approval of the Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley & Co. In fact, in a subsequent judgment in the case of Asstt. DIT v. E-funds IT Solution Inc . the Supreme Court reiterated the earlier proposition laid down in the case of Morgan Stanely & Co. (supra), and in doing so, it took into consideration the transfer pricing assessment made in the case of the Indian subsidiary. In that case too, in the case of the Indian subsidiary, the transaction with the foreign assessee was accepted to be at an arm's length price.

► Accordingly, it was held by the Supreme Court that the 'arm's length principle' stood satisfied and, therefore, no further profits could be attributable even if there existed a Permanent Establishment (PE) of the foreign assessee in India

► In view of the aforesaid discussion, it is to be held that, since the appropriate 'arm's length principle' has been satisfied in the instant case, nothing more would be left to be taxable in India by attributing any further income to the Permanent Establishment (PE) of the assessee in India.

CelltickTechnologies Limited, Israel

CelltickTechnologies

Limited

Israel

India

Software solution

Back

Third-party customers

Onward distribution


Annexure B - GE Energy Parts Inc.

► GEIOUC (a group affiliate) established a LO in India to act as a communication channel between head office & its India customers

► Further, GE group had an Indian entity, GE India, which entered into a GSA with GEIOUC under which GE India rendered market support services to various group companies

► Various GE foreign entities’ employees worked in India & were assigned separate chambers/ rooms at their disposal. They undertook sales and marketing functions & were authorized to amend the conditions of contract with customers


► The tax authorities held that a fixed place and agency PE of GE overseas was constituted in India owing to the above. Tax tribunal upheld the authority’s contentions i.e. ► 10% of the value of supplies made to the clients in India as theprofits arising from such supplies; and ► further 26% of such 10% is considered as attributable to

activities undertaken in India

► Delhi High Court upheld the tribunal’s view.

GEIOUC(group affiliate)

GE IndiaLiaison Office

(LO’)

GE Energy along with group affiliates

Expatriates

Support

TeamPerforms sales and marketing activities from LO

Indian CustomersContract for

sale of equipment

Global service agreement (GSA)

Outside India

India

Tax authorities

Survey

Back


Annexure C - Incentives available to investors across States

Land related

► Stamp duty waiver/ concessions► Other concessions on registration charges, property taxes, conversion

charges and so on ► Single window clearance

Expenditure related

► Electricity duty exemption► Rebates in tariffs for electricity/ water/ gas► Subsidies on use of cleaner manufacturing technology, pollution

control, etc.

Capital investment & employment

► VAT/ CST/ GST linked subsidies/ soft loan/ exemption► Exemption or refund of entry taxes/ octroi► Subsidies linked to social security contributions (PF/ ESI)► Other subsidies (technology, transport, interest, etc.)► Special incentive package may be negotiated for Mega ProjectsThe extent and process of claiming incentives vary from state to state

► Ensuring availability of Land, water & power► Dedicated power feeders for large units or industrials areas

► Common effluent treatment plant for industrial estates/areas/clusters

► Vendor Development Initiatives► Patent and quality certifications► Technology adoption and upgrade programs► Cluster development incentives and initiatives

Non Fiscal Incentives Fiscal Incentives

Incentives

Most of the states also offer customized package of incentives beyond a threshold level of investment and employment generation

Large and Mega investors

Benefits dependent on size of eligible investment, location, employment generation, nature of products, social impact & secondary benefits, etc.

Back


Annexure C - Manufacturing in Bonded Warehouse (‘MOOWR’)

Illustration Customs duties

Rate P&M

Plant, Machinery and Spares imported 90


10

Final Cost of Import of Plant and Machinery 100

Basic Customs Duty Nil 0

Social welfare surcharge Nil 0

Import IGST Nil 0

Total Landing Cost (including all taxes) 100

Duty Saving/ deferment 27.75

Duty payable at the time of disposal Machinery domestically (credit available for IGST)

27.75

Duty payable if Machinery is exported after use 0

► Import of old machinery is also included under MOOWR, 2019 for deferment/ non payment of Duty

► Deferment/ non payment of BCD & GST on imported machinery

► It is a new scheme and is currently in an evolution stage. Strong impetus by governmental agencies in opting the Scheme.

Benefits

1

2

3

4

Duty-deferment on import of Inputs/ Capital goods

Pay Customs Duty on domestic clearance of capital goods/ finished or manufactured goods

No Customs Duty on direct exports from

warehouse

Procurement from DTA permissible*

*GST implications may arise in case of domestic procurement

**Optimised State incentives

Back


Annexure C - Project Import Scheme

• Setting up of Industrial plant is notified under heading 98.01. Hence, the project should be eligible for claiming concessional customs duty benefit under PIS.

IllustrationCustoms

duties (PI)Customs

duties

Rate P&M P&M

Plant, Machinery and Spares imported 90 90


10 10

Final Cost of Import of Plant and Machinery 100 100

Basic Customs Duty 5% 5.00 7.50

Social welfare surcharge 10% 0.5 0.75

Import IGST 18% 19.00 19.50

Total Landing Cost (including all taxes) 124.50 127.75

Creditable IGST 19.00 19.50

Total non-creditable tax cost 5.5 8.25

Net landing price 105.50 108.25

Total Duty saved ( Difference in landing price) 2.75

PIS is a mechanism for providing concessional rate of customs duty to specified projects and facilitate administrative procedures involved in customs clearance

Machinery & inputs required for initial set up of specified projects are permitted to be imported at a concessional rate of Basic customs duty (‘BCD’)

Goods required for the specified projects, are classifiable under a specific Customs Tariff heading ‘9801’

Back


Annexure C - Free Trade Agreements

Preferential Access

World Trade Organization (WTO) promotes multilateralism i.e. treating every country with the same concessions or at least provide Most Favored Nation (MFN) status to every member country.

Periodic Review Restrictions Dispute Resolution

FTAs have provisions for periodical review and amendment at specified intervals as mutually discussed and decided.

FTAs impose restrictions regarding rules of origin (ROO) which need to be followed to avail of the benefits under the specific FTA.

Any dispute under FTA can be resolved by mutual discussions or procedure as stipulated under FTA terms or through the aegis of WTO.

Each country specifies a separate list of goods/ services for preferential access.

Tariff reductions may also be different.

► FTAs are trade agreements where two or more nations agree on the terms of trade between them

► They determine the tariffs and duties that countries impose on imports and exports

► All trade agreements affect international trade

► FTAs normally cover trade in goods such as agricultural or industrial products

Back


Annexure C - Civil Credit structuring

Exp

an

sio

n o

f P

lan

t

Immovable Part

Plant & Machinery

Other than Plant & Machinery

Goods/ services taxable at

28% or 18%

Indivisible contract taxable at 18%

Goods/ services taxable at

12% or 5%

Divisible Contract

Separate contract for goods/ services

Movable Part

Non Creditable

Creditable

Grey Areas :

► Works contract has been defined to restrict the same to “immovable property” only – what would qualify as ‘immovable’?

E.g.Furniture, Lighting etc.

Whether Storage tanks will qualify as Plant & Machinery under GST?

Note: Credit of immovable part of the project not qualifying as plant & machinery would not be available. Hence, the possibility of entering into two contracts for mitigating the overall project cost, can be explored

► Under GST, EPC Contract of an immovable property qualifies as Works Contract

► Typically, works contract is exigibleto 18% blanket GST rate, irrespective of actual classification of goods and services

► Credit shall be limited to (i) goods and services or both used for construction of plant & machinery or (ii) any movable part

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Annexure C - Foreign Trade Policy

* To be soon replaced with the proposed Remission of Duties or Taxes on Export Product Scheme (‘RoDTEP’) offering similar benefits as in case of MEIS

02

Advance authorization scheme

Allows duty free import of inputs, which are physically incorporated in export product (making normal allowance for wastage).

04

Export Promotion Capital Goods (EPCG)

Allows import of capital goods including spares for pre production, production and post production at zero duty

03

Export Oriented Unit (EOU)

Exemption from Customs duty and GST subject to fulfillment of certain export obligations

01

Merchandise Export from India Scheme (MEIS)*

Objective of the MEIS Scheme is to promote the manufacture and export of notified goods / products by providing scrips against exports from India

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Annexure C - Free Trade and Warehousing Zones (‘FTWZs’)Back

The Free Trade & Warehousing Zones (FTWZ) shall be a special category of Special Economic Zones with a focus on trading and warehousing

Key Benefits

► Exemption from Customs duty at the time of import of goods

► Exemption from GST in case of domestic procurements

► Packing or re-packing without processing, and labelling as per customer or marketing requirements could be undertaken within the FTWZ

► Limited compliance requirement compared to normal SEZ registration

• However, a unit registeredas an FTWZ shall not beallowed to undertake anymanufacturing activity

• FTWZ to satisfy exportobligation to avail specifiedbenefits


Annexure D –GST Compliance Overview

GST Customs

Compliances

► Registration

► Documents, Accounts and Records

► Returns

► Tax Payment

► Audit and Assessment

Penalty

► No penalty/ 15% penalty in case tax paid before issuance of SCN

► Can go up-to 100% tax payable

Prosecutions

► Can range from 6 months to 5 years

► Will depend upon quantum of tax paid, and how the matter is presented

Penalty

Can vary from twice the duty amount to five times the value of goods

Prosecution

Can vary from 3 years to 7 years

Compliances

► Registration

► Classification

► Valuation

► Import/ export procedure

► Determining duty rate

► Accounts and records

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Monthly Return with Annexures❖ ANX-1 (Outward)❖ ANX-2 (Inwards)❖ RET-1❖ ANX-1A❖ RET-1A

Introduction of GST from July 2017

Inwards - GSTR-2 (PR vs 2A)

(Recon based Response)

GSTR-3 (Auto-generated)

replaced by GSTR-3B (Summary)

Purchase Reconciliations

Introduction of E-Way Bill to track the movement of goods

Current State

Journey started with 3 return forms1. Outward Supply -GSTR-1

(Continued till date)2. Inward -GSTR-2 (Suspended)3. Summary -GSTR-3 (Never

experienced)

❖ Generation of Invoices from Indian Government Portal

❖ Effective from 01 Apr 2020

Certain validations / checks implemented by GSTN

❖ Unit of Measurement

❖ Calculation of tax amounts

❖ Credit Note value cannot exceed Invoice Value

Only invoices uploaded by Vendor are eligible for credit availment

ONE-WAY FLOW OF INVOICES

New Return Forms

E-Invoicing (IRN)

*For monthly return filing frequency

Annexure D –The complex journey so far and the one ahead Back

Thank You!!

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