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DT Simplified CA Final Direct Tax Laws &

International Taxation The Invictus – CA

Simplified DT Simplified CA Final Direct Tax

Laws & International Taxation DT Simplified

CA Final Direct Tax Laws & International Taxation


International Taxation DT Simplified CA Final Direct

Tax Laws & International Taxation DT Simplified CA

Final Direct Tax Laws & International Taxation DT

Simplified CA Final Direct Tax Laws & International

The Invictus – CA Simplified DT


Taxation DT Simplified CA Final Direct Tax Laws &




Simplified CA Final Direct Tax Laws &

International Taxation DT Simplified CA Final

Direct Tax Laws & International

Taxation DT Simplified CA Final Direct Tax

Laws & International Taxation DT Simplified CA

Final Direct Tax Laws & International Taxation


International Taxation DT Simplified


DT Simplified CA Final The Invictus –

CA Simplified Direct Tax Laws & Interna

CA Final – Nov 2019(Old & New Syllabus)

CA Dhaval Patanvadia

International

Taxation

DT – Simplified[Amended as per Finance Act 2018]

www.theinvictus.in

DT-Simplified

First Edition: February 2018

Second Edition: June 2018

Third Edition: February 2019

Fourth Edition: August 2019

Price: Your commitment towards sincere preparation :)

Published by: The Invictus Institute, Ahmedabad

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The Invictus - CA Simplified

+91-87800 58699

4th Edition

I believe that students learn best when they read with enjoyment. With intent to developing the interest of students in reading and enable them to cover the entire syllabus with multiple revision in very short span of time, I have brought out an abridged version of Direct Tax Laws. I hope It will prove to be a significant preparation resource for the students 1st Edition was introduced last year in February 2018 and It gives immense pleasure to introduce 4th Edition of “DT – Simplified” to the students of Final Level. In order to make it more simplified and smarter and benefit of student at large, I am introducing this as E-Book, so students can easily store on digital devices and read the same at any time anywhere. It is not just summary book but Smart Book. I will urge all students to take maximum benefit out of it. Multiple revisions will develop better understanding of the concepts and provide stronger grip on the subject, for which “DT –

Simplified” will certainly serve as a means. I would like express my sincere gratitude to CA Prarthana Bhatt, Students and other academic and technical members of the team for the constant support & motivation. It would never have been possible for me to take this work to completion without their incredible support and encouragement

Based on your feedbacks, this book has been divided in three parts

Part I – Basic Chapters

Part II – Assessment of Various entities, Assessment procedure, Appeals etc.

Part III – Non Resident & International Taxation & GAAR

Features of this E-Book

Covers the recent amendments [Written with red colour]

Section wise approach.

Covers the Selected Case Studies.

No need to carry physical book, Read anytime anywhere.

Read Smartly, Write Smartly…

Enjoy Reading…

My best wishes to you all...!

CA Dhaval Patanvadia

About “DT-Simplified”

Thanks for your love and support

Part III – International Taxation & GAAR

Chapter Particulars Page No.

1 Non Resident Taxation 1.1

2 Double Taxation Relief 2.1

3 Transfer Pricing 3.1

4 Advance Rulings 4.1

5 Equalisation Levy 5.1

6 Overview of Model Tax Conventions 6.1

7 Application & Interpretation of Tax Treaties 7.1

8 Base Erosion & Profit Shifting 8.1

A3 General Anti Avoidance Rule (GAAR) A3.1

Index

DT - Simplified

CA Dhaval Patanvadia www.theinvictus.in +91-87800 58699

1.1

CHAPTER – 1

Non-Resident Taxation

Section 6 – Residential Status

Residential Status of an Individual

Resident, if satisfies any one conditions, else treated as Non-Resident

(i) Stays in India ≥ 182 days during PY or

(ii) Stays in India ≥ 60 days during PY and ≥ 365 days during 4 PYs immediately preceding PY

Exception

The following individuals will be treated as resident only if the period of their stay during the relevant

previous year amounts to 182 days. i.e. condition (i) above.

It means, even if persons satisfy the condition (ii) above, they will not be treated as resident.

i. Indian citizens, who leave India in any previous year as a member of crew of an Indian ship or

for the purpose of employment outside India or

ii. Indian citizen or person of Indian origin engaged outside India in an employment or a business

or profession or in any other vocation, who comes on visit to India in any previous year.

While calculating period of stay for crew member, period commencing from joining to period ending

on signing off by that individual shall be excluded.

Ordinary Resident (OR) if satisfies all conditions, else treated as Not-Ordinary Resident (NOR)

(i) Resident in India in any 2 PYs out of 10 PYs preceding the relevant PY and

(ii) Stays in India ≥ 730 days during 7 PYs immediately preceding PY

Residential Status of an HUF

Resident, if Control and Management of affairs is situated wholly or partly in India

If Karta is OR, HUF also OR and

If Karta is NOR, HUF is also NOR

Residential Status of a Firm / AOP/AJP/Local Authorities

Resident, if Control and Management of affairs is situated wholly or partly in India

Residential Status of Company

Company shall be treated as Resident

If it is an Indian Company or

Place of Effective Management (POEM) of the company is in India in that year (if it is not an Indian Co.)

POEM is a place where key management and commercial decisions that are necessary for the conduct of

the business of an entity as a whole are, in substance made

Company is said to be non-resident if POEM of the company is outside India.

Determination of POEM [Circular No. 06/2017 & 08/2017]

To determine the POEM following test shall be applied

Test of Active Business Outside India (ABOI)

1. Company fulfilling the test of Active Business Outside India (ABOI)

POEM outside India, if majority BOD meetings are held outside India

POEM shall be in India, if decision making authority is not BOD but Indian parent or resident,

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1.2

2. Company other than those fulfilling the test of ABOI

Identify of persons who actually make the key management and commercial decision for conduct of

the business

Determine the place where these decisions are, in fact, made

Active Business Outside India - if fulfils cumulative conditions of

Its passive income (wherever earned) ≤ 50% of its total income

Asset situated in India < 50% of its total assets

Employees situated in India or resident in India < 50% of its total no. of employees

Payroll expenditure on such employees < 50% of its total payroll expenditure

Passive Income shall be aggregate of

Income from the purchase and sale of goods is from/ to its associated enterprises

Income by way of royalty, dividend, capital gains, Interest (except for banking companies and

public financial institutions) or Rental income whether or not involving associated enterprises

Section 5 – Scope of Total Income

Scope R & OR R but NOR NR

Income received or deemed to be received in India

Yes Yes Yes

Income accrue / arise or deemed to be accrue/arise in India

Yes Yes Yes

Income accruing/ arising outside India

Yes

Yes, only if Business controlled from / Profession set up in India

else, No

No

Income accrue or arise outside India and it is taken into account in a balance sheet prepared in India shall not

be deemed to be received in India [Explanation 1]

Once income is included on the basis of accrual/deemed accrual, such income shall not be included again on

receipt/deemed receipt basis in subsequent year. [Explanation 2]

Section 7 – Income deemed to be received in India

Contribution in excess of 12% of salary to recognised PF or Interest credited in excess of 9.5% p.a.

Contribution by CG/Employer under pension scheme referred u/s 80CCD

Employer’s Contribution and Interest thereon transferred from unrecognised PF to recognised PF

Section 9 – Income deemed to accrue or arise in India

Any income accruing or arising to an assessee in any place outside India whether directly or indirectly [Section

9(1)(i)]

through or from any business connection in India

through or from any property in India

through or from any asset or source of income in India

through the transfer of capital asset situated in India


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1.3

Explanations to Section 9(1)(i)

1. Following activities/operations shall be excluded

Income which is reasonably attributable to the operations carried outside India

Purchase of goods in India by a NR for export out of India

Collection of news and views in India by a NR for transmission out of India

Shooting of any cinematograph film in India by a NR being individual not citizen of India or

Firm/Company does not have any partner/any shareholder who is citizen/resident of India

Display of uncut and unassorted diamond in Special Notified Zone in India by a foreign company in the

business of mining of diamonds [Explanation 1]

2. Business connection shall include activity carried out through a person acting on behalf of NR

Must have an authority, which is habitually exercised in India, to conclude contracts on behalf of the non-

resident or,

habitually concludes contracts or plays the principal role leading to conclusion of contracts by that non-

resident and such contracts are

in the name of the non-resident; or

for the transfer of the ownership of, or for the granting of the right to use, property owned by that

non-resident or that non-resident has the right to use; or

for the provision of services by that non-resident.

No such authority but habitually maintain stock of goods in India

Secures orders in India wholly for NR or other NR who is controlling/controlled by/ under same

common control, as that NR

However, agent working independently shall not be considered [Explanation 2]

3. To cover new Digitized Business model, which do not require physical presence of itself or agent in India, Non-

Residents having Significant Economic Presence shall constitute business connection in India

Meaning of Significant Economic Presence in India

(a) transaction in respect of any goods, services or property carried out by a non-resident in India

including provision of download of data or software in India,

if the aggregate of payments arising from such transaction or transactions during the previous year

exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such

number of users as may be prescribed, in India through digital means

Provided that the transactions or activities shall constitute significant economic presence in India,

whether or not,—

the agreement for such transactions or activities is entered in India; or

the non-resident has a residence or place of business in India; or

the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or activities referred to

in clause (a) or clause (b) shall be deemed to accrue or arise in India. [Explanation 2A]

4. In above referred explanation 2, only income attributable to activity carried out in India shall be

considered [Explanation 3]

5. Expression ‘through’ includes ‘by means of’, ‘in consequence of’ or ‘by reason of’ [Explanation 4]

6. Capital Asset being shares/interest in company/entity incorporated outside India shall be deemed to have

been asset situated in India if such share/interest derives its value substantially from asset located in India.

Further dividend on such shares declared and paid out side India shall not be deemed to accrue/arise in

India [Explanation 5]


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1.4

7. Deemed to be derive its value substantially from asset located in India if

Value of asset [FMV as on the specified date] > 10 Crore and

Represents at least 50% of the value of all assets owned by company [Explanation 6]

8. Exemption to transferor of share/interest in foreign company if foreign entity along with his associated

enterprise directly/indirectly holding the Indian assets if it does not hold

Right of control or management of company/direct holding company or

Any voting power/shares/interest exceeding 5% in company/direct holding company. [Explanation 7]

Income from Salaries earned in India including salary for leave period forming part of employment contract

preceded and succeeded by such service rendered in India [Section 9(1)(ii)]

Income from Salaries paid by Government for service rendered outside India to a Citizen of India. However,

Allowances and Perquisites shall be exempt by virtue of section 10(7) [Section 9(1)(iii)]

Dividend paid by Indian company outside India [Section 9(1)(iv)]

Interest payable shall be deemed to accrue or arise in India [Section 9(1)(v)]

By Government or by Resident person except Money borrowed and used for business/profession outside

India or

By Non-Resident if money borrowed solely for carry out business/profession in India

Interest payable by Permanent Establishment (PE) of Non-Resident Banking Company to its Head

Office/Other PE/Any Other Part outside India shall be deemed to accrue/arise in India

Royalty payable shall be deemed to accrue or arise in India [Section 9(1)(vi)]

By Government or by Resident person except royalty payable for carry out business/profession outside

India or

By Non-Resident if royalty payable for carry out business/profession in India

Consideration for use or right to use computer software is within the meaning of royalty

Consideration in respect of any right, Property or Information is royalty

Lump sum royalty payable for computer software supplied by non-resident along with hardware under

scheme of Government shall be excluded

Software embedded in hardware with no independent functionality does not amounts to Royalty

[CIT v/s Alcatel Lucent Canada]

Fees for Technical Service payable shall be deemed to accrue or arise in India [Section 9(1)(vii)]

By Government or by Resident person except Service utilised for carry out business/profession outside

India or

By Non-Resident if Service utilised for carry out business/profession in India

Interest, Royalty or Fees for technical service payable by non-resident for carry out business/ profession in

India would always be deemed to accrue/arise in India whether or not such services are rendered in India

Section 9A – Certain activities not to constitute business connection in India

An eligible investment fund established or incorporated outside India

Shall not be said to be resident in India merely because the

Eligible fund manager undertaking fund management activities on its behalf is located in India.

Fund Manager acting on behalf of such Fund shall not constitute business connection in India


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1.5

Presumptive Taxation in case of Non-Resident

Section 44B - Presumptive Taxation from Shipping Business in case of Non-Resident

Profits and Gains of a non-resident engaged in the business of operation of ships are to be taken @

7.5% of the aggregate of the following amounts.

Paid or payable, whether in or out of India, to the assessee or to any person on his behalf on

account of carriage of passengers, livestock, mail or goods shipped at any port in India and

Received or deemed to be received in India by or on behalf of the assessee on account of the

carriage of passengers, livestock mail or goods shipped at any port outside India.

The above amounts will include demurrage charges and handling charges.

Assessee does not have option to declare lower profits.

Section 44BB - Presumptive Taxation from Exploration Business in case of Non-Resident

Profits and Gains of a non-resident engaged in the business of providing facilities & services in

connection with or supplying plant and machinery on hire used or to be used in the exploration for

and exploitation of mineral oils.

The profits and gains shall be deemed to be equal to 10% of the following amounts

Paid or payable, to the taxpayer in or out of India on account of such services and

Received or deemed to be received in India by or on behalf of the assessee on account of such

services.

Assessee can claim amount lower than the presumptive subject compliance with section 44AA and 44AB

Section 44BBA - Presumptive Taxation from Aircraft Business in case of Non-Resident

Profits and Gains of a non-resident engaged in the business of the operation of aircraft.

The profits and gains shall be calculated at flat rate of 5% of the following amounts

Amount paid or payable, in or out of India, to the tax payer or to any person on his behalf on

account or carriage of passenger, livestock, mail or goods from any place in India and

Amount received or deemed to be received in India by or on behalf of the taxpayer on

account of carriage of passenger, livestock, mail or goods from any place outside India.

Assessee does not have option to declare lower profits.

Section 44C – Deductions in respect of head office expenses in case of Non-Resident

This section is a non-obstante provision and anything contrary contained in sections 28 to 43A is not applicable

Deduction in respect of head office expenditure is restricted to the lower of

5% of “Adjusted Total Income” or

5% of the “average” adjusted total income (In case of loss) or

Amount attributable to business or profession of the assessee in India.

“Average” means average total income of immediately preceding 3 years relevant to AY. (In case of

assessee is assessable in less than three years, average shall be taken accordingly)


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1.6

Adjusted Total Income (ATI)

Total income computed in accordance with the provisions of the Act without giving effect to the

following

HO Expenses

Unabsorbed Depreciation

Capital Expenditure on Family Planning

Brought Forward Business loss u/s

72(1)

Brought Forward Speculation loss u/s 73(2)

Brought Forward loss under CG u/s 74(1)

Loss from Owning & Maintaining Race Horses

u/s 74A(3)

Deduction under chapter VI-A

Chapter XII – Determination of Tax in Special Cases.

Section 115A - Dividend, Interest etc. Tax Rate

Tax on certain income received by NR or Foreign Company [115A]

Dividend [other than 115-O] 20%

Interest received from Govt. or Indian Concern in respect of loan given to Govt. or Indian Concern

20%

Interest on Infrastructure Debt Fund referred to in Section 10(47) 5%

Interest received from Indian Co. or Business Trust in respect of monies borrowed in foreign currency referred to in Section 194LC

5%

Interest referred to in section 194LBA(2), being interest income of a business trust from a SPV, distributed by business trust to non-resident unit holders of a business trust

5%

Interest referred to in section 194LD payable between 1.6.2013 and 30.6.2020 to a Foreign Institutional Investor (FII) or Qualified Foreign Investor (QFI) on investment made in –

Rupee denominated bond of an Indian company

Government security

5%

Income received in respect of units purchased in foreign currency of a mutual fund or UTI

20%

Royalty or Fees for technical services by NR or Foreign Co.

If Permanent Establishment (PE) is in India (Section 44DA)

If PE is not in India (Section 115A)

(if DTAA provides lower rate, Rate in DTAA shall apply)

Normal Rate

10%

1) Special rate of tax is applicable on the above mentioned incomes. Balance income of the assessee will be chargeable to tax at normal rates applicable to assessee.

2) No deduction in respect of any expenditure or allowance shall be allowed to the assessee under sections 28 to 44C and section 57 in computing the above income.

3) Deduction under Chapter VI-A is not available in respect of dividend and interest referred above

4) It shall not be necessary for the assessee to furnish a return of income if the following conditions are satisfied:

Total income consists of only the interest or dividend income referred above and

TDS has been deducted from such income.


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1.7

Section 115AB - Income from units purchased in foreign currency or capital gains arising from their transfer in case of offshore fund

LTCG to Overseas Financial Organisation (Offshore Fund) on transfer of units of MF acquired in foreign currency

LTCG upto ₹ 1,00,000 shall be exempt u/s 112A, balance shall be taxable

STCG shall be taxable @15% [111A]

10%

1) No benefit of Indexation

2) No deduction shall be allowed to the assessee under sections 28 to 44C or section 57(i)/(iii) or under Chapter VI-A in computing the above income

Where the GTI of the Overseas Financial Organisation consists of other incomes, then, the deduction under Chapter VI- A will be available in respect of other incomes. The normal provisions of the Income-tax Act,1961 will apply for computation of other income

Section 115AC - Income/Capital Gain from bonds or GDR purchased in foreign currency

LTCG/Interest Income from Bonds of Indian Co. or GDR acquired in Foreign Currency 10%




Total income consists of only the interest or dividend income referred above and


Section 115AD - Income of Foreign Institutional Investors (FII) from securities or capital gains

Income received by FIIs from securities other than MF [115AD]

LTCG

LTCG u/s 112A, exceeding ₹ 1 Lakh

STCG other than 111A

STCG u/s 111A

Interest other than referred to in 194LD

Interest referred to in 194LD

Other Income

10%

10%

30%

15%

20%

5%

Normal Rate


2) The deduction under Chapter VI-A will be available in respect of other incomes



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1.8

Section 115BBA - Tax on non-resident sportsmen or sports associations

Income received by NR Sports man (Not Citizen of India), NR Sports Association or NR Entertainer for

Participation in India for any game (Other than lotteries, card games etc.)

Guaranteed amount paid or payable

Income received or receivable from his performance in India

20% plus Surcharge if Applicable plus HEC @ 4%

1) Match Referee does not fall within meaning of Sportsman [Indcom vs. CIT (Cal. HC)]

2) No deduction shall be allowed to the assessee in respect of any expenditure or allowance

3) The deduction under Chapter VI-A will be available in respect of other incomes


Total income consists of only the income referred above and


Chapter XII-A – Non-Resident Indian (NRI) derives Investment Income or LTCG

Section 115C – Definition

Investment Income:

Any income derived other than referred to in section 115-O from foreign exchange asset

Foreign Exchange Asset:

Following asset acquired in foreign exchange

Shares of Indian Company

Debentures of Indian Public Company

Deposits with an Indian Public Company

Securities of Central Govt.

Any other assets as may be notified by CG

Non-Resident Indian

An individual, being a citizen of India or person of Indian origin who is not a resident

Section 115D – Method of Computation

Income shall be computed on gross basis, no deductions under any provision shall be available

No deductions under Chapter VI-A

Indexation benefit under second proviso to Section 48 is also not available

Other income shall be computed as per normal provisions.

Section 115E – Tax Rates

LTCG @ 10% + Surcharge (if Applicable) + Cess

Investment Income @ 20% + Surcharge (if Applicable) + Cess

Other Income @ Normal Rate


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1.9

Section 115F – Exemption for LTCG

Exemption shall be available proportionately to the extent of

LTCG Cost of Acquisition of New Asset / Net Sale Consideration

New asset acquired should not be transferred upto 3 years, otherwise LTCG exempt earlier shall be taxable in the year of transfer.

Section 115G – Option not to file ITR

Non-resident shall be exempt from filing of ITR if,

Total Income consist only Investment Income or LTCG or Both

Such income is subject to TDS

Section 115H – Continuance of benefit even after NRI becomes Resident

If NRI becomes Resident, He can file declaration along with ITR

That he wants to be governed by the provision of Chapter XII-A

These provisions shall apply until the transfer or conversion of such asset into money

Section 115I – Option to opt out from this chapter

Assessee can opt out from the applicability of the provisions of this chapter.

Assessee can pay normal tax instead of specified in section 115E above.

Withholding Tax Provisions (TDS) in respect of Payment made to NRs

Section Particulars of Payment TDS

192 Salary Avge. Rate

192A Premature withdrawal of PF exceeding ₹ 50,000 10%

194B Winnings from lottery, games etc. [Payment > 10,000] 30%

194BB Winnings from Horse Races [Payment > 10,000] 5%

194E Payment of NR Sportsmen, Association, Entertainer u/s 115BBA 20%

194G Commission on sale of lottery Tickets [Payment > 15,000] 5%

194LB Interest on Infrastructure Debt Fund 5%

194LBA (2)

Distribution of Interest income received by Business Trust from SPV, to Unit holders

5%

194LBA (3)

Distribution of rental income directly received by Business Trust from real estate business, to Unit holders Rates in

Force 194LBB Investment fund paying income to a Unit holder [other than PGBP]

194LBC Income in respect of investment made in securitisation trust

194LD Interest payable to FII or QFI on investment made in RDB or GDR 5%

195 Any other payment to Non-Resident Rates in Force


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1.10

196B Income from MF or UTI purchased in foreign currency payable to Offshore Fund

10%

196D Income of FII from securities referred u/s 115AD(1) 20%

Notes:

1) Above rates shall be increased by Surcharge, if applicable and HEC

2) Rates in force means rate specified in Finance Act or DTAA as the case may be


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2.1

CHAPTER – 2

DOUBLE TAXATION RELIEF

Double Taxation Relief

Tax shall be levied based on the following rules.

Residence Rule : Power to tax rest with country in which tax payer resides

Source Rule : Income shall be taxed in the country of origin irrespective of residential status

If both the rules apply simultaneously, tax shall be payable at both countries. Hence it will give rise to double taxation.

In India income of a person taxable on the basis of residential status. It may also happen that same income is taxable in another country on this basis or other basis

In order to tackle such situation relief in respect of double taxation is provided

Double Taxation Avoidance Agreement (DTAA) lays down rules for the taxation of Income by source country and the residence country.

Section 90 & 90A – Bilateral Relief

CG enters into an agreement with the Govt. of other country or specified territory outside India

For grating the double taxation relief or exchange of the information to prevent tax evasion

Under bilateral relief tax exemption method is followed, income taxed in one country shall be exempt in the other country

Tax shall be levied by country in which

PE (Permanent Establishment) is available [PE means fixed place of business or profession]

If PE is available in both the country, country where place of effective management is situated

Does not have PE in any country,

Country in which assessee has a permanent home

If home is available in both the country, country with which the economic & personal

relationship is closer i.e. centre of vital interest.

Other points

DTAA or Income Tax Act whichever is more beneficial to assessee shall apply

Non-resident to whom DTAA applies, shall be allowed to claim relief only if a Tax Residence

Certificate (TRC) of his being resident in foreign country is obtained by him from foreign govt.

Section 91 – Unilateral Relief

Income arise in the country which India does not have any DTAA

Conditions to be fulfilled

Assessee must be resident of India during the year in which income is taxable

Income accrues or arise to him outside India

Tax should have need paid or deducted in foreign country

There should be no DTAA with that country.


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2.2

Computation of Relief

1. Compute Net Taxable Income (Including foreign income)

2. Compute the Gross Tax payable (including Cess & Surcharge but before adjusting

TDS/TCS/MAT Credit/Advance tax etc.)

3. Find out Average Rate of Tax = Gross Tax / Net Taxable Income

4. Determine the rate at which tax paid/deducted on foreign income

5. Tax rate for relief = lower of Avge. Tax Rate (Step-3) or Foreign Tax Rate (Step-4)

6. Relief u/s 91 = Foreign Income Rate determined in step 5


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3.1

CHAPTER – 3

Transfer Pricing

Section 92 – Computation of Income from Income from International Transaction.

Any income, allowance for expense or interest arising from the international transactions shall be

determined at “Arm’s Length Price” (ALP).

While determining arm’s length price under the provisions of transfer pricing regulations, if the income works out to a figure lower than the income shown in the books of accounts, the provision of

transfer pricing regulations will not apply

Section 92A – Associated Enterprise.

Circumstances Conditions

1 One enterprise holds, directly or indirectly Voting Power ≥ 26% in Other Enterprise

2 Any person or enterprise holds, directly or indirectly

Voting Power ≥ 26% in each of such Enterprise

3 where one enterprise is a firm, AOP or

BOI

the other enterprise holds ≥ 10%

interest in such firm, AOP or BOI

4 Loan advanced by one enterprise to the other enterprise constitutes

Loan Advanced ≥ 51% of Book Value of Total Assets of Other Enterprise

5 One enterprise guarantees Guarantee given ≥ 10% of Total Borrowings of Other Enterprise

6 More than half of the BOD or members of the governing board, or

one or more executive directors or

executive members of the governing board of one enterprise

Appointed by the other Enterprise

or

Appointed by the same person or persons

7 The manufacture or processing of

goods or articles or business carried out by one enterprise is wholly dependent on

Use of know-how, patent, copyrights,

trademarks, licences, franchises or

Any other business or commercial rights of similar nature, or

Any data, documentation, drawing, invention, model, design, secret formula or

Process, of which the other enterprise is the owner or has exclusive rights

8 90% or more of the raw materials and consumables required by one enterprise are

Supplied by the other enterprise, or

To persons specified by the other enterprise and

The prices and other conditions relating to the

supply are influenced by such other enterprise

9 The goods or articles manufactured or processed by one enterprise

Sold to the other enterprise, or

To persons specified by the other enterprise and

The prices and other conditions relating to the

supply are influenced by such other enterprise

10 where one enterprise is controlled by an individual / HUF

The other enterprise is controlled by an Individual / member of such HUF or

By a relative of Individual / member of HUF or

Jointly by such Individual / member and his relative


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3.2

Section 92B – International Transactions.

It means a transaction between two or more Associated Enterprises (AE)

Either or both of whom are non-residents,

In the nature of purchase, sale, lease, provision of services, lending or borrowing money etc.

Transactions between Unrelated Person and AE shall be deemed to be International Transactions if

There exists a prior agreement between the Other Person and the AE or

Terms of transactions are determined by AE

Other person may or may not be non-resident.

Section 92C – Arm’s Length Price (ALP).

“Arm’s length price” means price which is applied or proposed to be applied in a transaction between

persons other than associated enterprises in uncontrolled conditions.

ALP shall be determined using most appropriate method from following.

1 Comparable Uncontrolled Price (CUP) Method

[Useful when Comparable Uncontrolled Transactions are available]

Price charged in uncontrolled transactions XXXX

Adjustment : Difference between International Transaction and Uncontrolled Transaction

XXXX

Arm’s Length Price XXXX

2 Resale Price Method

[To determined value of goods purchased from AE]

Price charged to unrelated parties XXXX

less : Normal Gross Profit Margin on such transaction XXXX

less : Purchase related expenses on such transaction XXXX


XXXX


3 Cost Plus Method

[To determined value of goods transferred between AE]

Direct Cost plus Indirect Cost of production XXXX

Add : Normal Gross Profit Mark-up on such cost XXXX


XXXX



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3.3

4 Profit Split Method

[Transactions executed jointly which cannot be evaluated separately]

Determine total profit from such Jointly executed transactions and allocate the share of AE depending upon their contribution such as funds employed, manpower employed etc.

Cost incurred by AE XXXX

Add: Allocation of profit as calculated above XXXX


5 Transactional Net Margin Method

Net Profit margin realized by enterprise or unrelated enterprise from Comparable uncontrolled transaction.


XXXX


In case of more than one price determined as per Most Appropriate Method, the Arithmetic Mean of such prices shall be the ALP [in case where dataset consisting of less than 6 entries]

If the difference between ALP and Actual Price is upto

1% in case of wholesale trading or

3% in other cases

Then actual price shall be the ALP.

If the difference is more than above specified percentage, entire difference shall be added

Rule 10CA – Where more than one price determined by Most Appropriate Method

Where dataset consisting of more than 6 entries, ALP shall be determined as below

Step-1 Construct the Dataset by placing the all prices in ascending order

Step-2 Determine the range starting from “35th Percentile” and ending at “65th Percentile”

Step-3 if Actual Transaction Price falls within the range as determined in Step-2, then Actual Transaction Price shall be ALP

Step-4 if Actual Transaction Price does not fall within the range, ALP shall be taken to be the Median of the dataset i.e. 50th Percentile

Example

Step-1: Dataset in ascending order (no. of entries are more than 6)

Sr. No. 1 2 3 4 5 6 7 8 9 10

ALP 60 68 70 73 92 103 108 115 130 135

Step-2: Determination of Range

Total no. of entries = 10

35th Percentile = 10 35/100 = 3.5 65th Percentile = 10 65/100 = 6.5

As both the value are not the whole no. hence next higher no i.e. 4 and 7 respectively

Starting point of range of ALP (4th in the range) = 73

Ending point of range of ALP (7th in the range) = 108


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Step-3: Actual Transaction Price = 90

It falls within the range, hence, Actual Price shall be the ALP = 90

Step-4: Actual Transaction Price = 110

It falls outside the range, hence, ALP shall be determined based on Median

Median = 10 50/100 = 5

As this is the whole number. hence, Average of the value at 5 and at 6 (i.e. next higher) shall be the median

Median = (92 + 103)/2 = 97.5

ALP = 97.5

Determination of ALP by AO

AO shall determine ALP, if based on the information available with him, of the opinion that,

Assessee failed to compute the ALP as per most appropriate method

Data used for ALP is not correct or not reliable

Relevant documents are not maintained by assessee

Assessee failed to furnish information/documents required u/s 92D

AO shall give an opportunity of being heard to the assessee.

Effect of ALP determine by AO

The income of other enterprise shall not be re-computed. i.e. No benefit to other

enterprise.

No deduction u/s 10AA or under Chapter VI-A shall be allowed to assessee against such

increased income.

Section 92CA – Reference to Transfer Pricing Officer (TPO).

If AO is of opinion that it is necessary & expedient to do so, He shall refer the case to TPO with prior approval of CIT. This option is not available with Assessee.

On such reference TPO can call upon assessee to produce evidence/computation in support of ALP

TPO can also consider other transactions which discovered during the course of proceedings

TPO shall pass an order determining ALP after considering the evidence and material gathered.

Order passed by TPO shall be binding on AO

TPO has to pass an order at least 60 Days before the expiry of the time limit u/s 153 and 153B

In case of assessment proceeding stayed by court or reference has been made u/s 90 to 90A, time

available to TPO (after excluding the period of stay) is less than 60 days, remaining period shall be

extended to 60 days.

In case of case referred to TPO, time limit u/s 153 and 153B shall be increased by 12 months.

AO can rectify mistake apparent u/s 154, AO shall also rectify the order to bring it in conformity with order of TPO


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Section 92CB – Safe Harbour Rules

Circumstances under which IT Authorities shall accept the transfer price declared by the assessee.

If the transfer price declared by the assessee in accordance with circumstances below

Sr. Eligible

Transactions Circumstances

Minimum Requirement

1 Software Development Service

Value of the international Transaction Operating Margin.

≤ 100 Crore ≤ 17%

More than 100 crore but ≤ 200 Crore ≤ 18%

2 Information Technology enabled services


≤ 100 Crore ≤ 17%

More than 100 crore but ≤ 200 Crore ≤ 18%

3 Knowledge Process Service (KPO)

[Value of the international Transaction ≤ 200 Cr.]

Employee cost in relation to Op. expenses Operating Margin.

≥ 60% ≤ 24%

More than 40% but less than 60% ≤ 21%

≤ 40% ≤ 18%

All of above 3 services does not include any R&D services whether or not in the nature of contract R&D services

4 R & D Services wholly or partly related to Software Development


≤ 200 Crore ≤ 24%

5 R & D Services wholly or partly related to Generic Pharma Drugs


≤ 200 Crore ≤ 24%

Operating Profit Margin Operating Profit / Operating Expenses 100 In relation to International Trans.

Section 92CC – Advance Pricing Agreement (APA)

CBDT, with prior approval from CG, may enter into an APA with any person to determine ALP or to determine manner in which ALP shall be determined

Such APA shall be valid for such period not exceeding 5 consecutive PYs as specified in APA

APA may apply for any period maximum 4 years preceding the first of the PY referred in APA [Provision for Roll Back in APA]

APA shall be binding on CIT & AO under him and Person who entered into such APA

APA shall not be binding if there is change in Law/Facts


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CBDT may declare an APA void-ab-initio if such APA is obtained by way of fraud or misrepresentation of facts.

Section 92CD – Effect of Advance Pricing Agreement (APA)

Where any person entered into an APA and prior to that ITR has been filed for any PY to which APA

relates, such person shall furnish modified return as per APA within 3 months from the end of the

month in which such APA was entered into

Where any assessment is pending on the date of filing of modified ITR, AO shall consider the modified return for the purpose of assessment and time limit provided u/s 153/153B/144C shall be

extended by 12 months.

Where any assessment is completed before the date of filing of modified ITR, AO shall consider the modified return and re-assess the income of the PY within 12 months from the end of FY in which

modified return was filed

APA shall override the provisions contained in section 92C and 92CA

Section 92D – Records to be maintained

Where any person entered into an international transactions or specified domestic transaction has to

maintain prescribed documents as specified by CBDT.

It is obligatory only when aggregate value of international transactions exceed ₹ 1 Crore

Even if the aggregate value of the international transactions is less than ₹ 1 crore, the assessee will

have to maintain adequate records and evidence to show that the international transactions with

associated enterprises are on the basis of ALP

Such documents are required to be maintained for 8 years from the end of the relevant AY

Indian Rules on Master File & Country by Country (CbC) reporting. [Notification No. 92/2017,

dated 31.10.2017]

Section 286 provides that every constituent entity resident in India, shall, if it is constituent of an international group, the parent entity of which is not resident in India, notify the prescribed income-

tax authority, on or before the prescribed date, in the form and manner, as may be prescribed,

The salient features of the Country-By-Country Report and Master File rules are as under:

Master File Reporting – Form 3CEAA Threshold Limit Due Date

Consolidated Group Revenue of the “International Group” for the Accounting Year

> INR 500 Crore For FY 2016-17

31-03-2018

For Subsequent Years

On or before the due date of filing of ITR u/s 139(1)

and

Aggregate value of International Transactions

a. During the accounting year, as per books of accounts

or

b. In respect of intangible property during the accounting year, as per books of accounts

> INR 50 Crore

or

> INR 10 Crore


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Country by Country (CbC) Reporting – Form 3CEAC

Threshold Limit Due Date

Consolidated Group Revenue for the Accounting Year

> INR 5500 Crore Within Period 12 Months from end of said accounting year

Part A of Form 3CEAA is to be filled by every constituent entity of an international group regardless

of whether it qualifies under the threshold for furnishing Master File.

However, to reduce the compliance burden, such international group having multiple Indian constituent entities can designate one constituent entity to file Part A on its behalf.

Section 92CE – Secondary Adjustments

“Primary adjustment” to a transfer price means

The determination of TP in accordance with the ALP

Resulting in an increase in the total income or reduction in the loss,

as the case may be, of the assessee.

"Secondary adjustment" means an adjustment

In the books of accounts of the assessee and its AE

To reflect that the actual allocation of profits between the assessee and its AE

Are consistent with the TP determined as a result of primary adjustment,

Thereby removing the imbalance between cash account and actual profit of the assessee.

As per the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

(OECD transfer pricing guidelines), secondary adjustment may take the form of constructive

dividends, constructive equity contributions, or constructive loans

The provisions of secondary adjustment are internationally recognised and are already part of the transfer pricing rules of many leading economies in the world. Whilst the approaches to secondary

adjustments by individual countries vary, they represent an internationally recognised method to

align the economic benefit of the transaction with the arm's length position.

In order to align the transfer pricing provisions in line with OECD transfer pricing guidelines and international best practices, new section 92CE has been inserted to provide that the assessee shall be

required to carry out secondary adjustment where the primary adjustment to transfer price:

Has been made suo motu by the assessee in his return of income; or

Made by the AO has been accepted by the assessee; or

Determined by an APA entered into by the assessee under section 92CC; or

Made as per the safe harbour rules framed under section 92CB; or

Arising as a result of resolution of an assessment by way of the mutual agreement procedure

under an agreement entered into under section 90 or 90A for DTAA.

Non Repatriation of Excess Money by the AE shall be deemed to an advance

Excess Money = ALP determined in Primary Adjustments Less Actual Price at which

International Transactions took place


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Such excess money shall be deemed to be an advance made by assessee to AE, If such excess

money is not repatriated within 90 days from following dates [Rule 10CB (1)]

Case Date

1 Primary Adjustments made suo-motu by Assessee in ROI Due Date of ROI u/s 139(1)

2 Primary adjustments to transfer price as determined in the order of the AO or the appellate authority has been accepted by the assessee

Date of the Order

3 APA has been entered into by Assessee Due Date of ROI u/s 139(1)

4 Assessee has exercised option as per Safe Harbour Rules Due Date of ROI u/s 139(1)

5 Agreement under the mutual agreement procedure under a DTAA

Due Date of ROI u/s 139(1)

Computation of Interest Income in case of failure to repatriate excess money within above time limit.

Interest shall be computed at the rates mentioned below [Rule 10CB(2)]

Case Rate

1 International Transactions denominated in INR

One year lending rate of SBI as on

1st April of relevant PY + 3.25%

2 International Transactions denominated in Foreign Currency

Six Months LIBOR as on

30th September of relevant PY + 3.00%

Secondary adjustment shall not be carried out if,

If Primary Adjustments made in case of assessee in any previous year does not exceed ₹ 1

Crore and the primary adjustments is made in respect of AY 2016-17 or earlier AYs

Penalties

Section Default Penalty

270A Under Reporting of Income

(However addition made in conformity with ALP as determined by TPO shall not be regarded as under reporting of income where the assessee has maintained the documents and disclosed all material facts.)

Mis-Reporting of Income

50% of tax payable on under reported income

200% of Tax payable on such mis-reported income

271AA Failure to keep & maintain

Information or documents as per sec. 92D Fails to report transactions Fails to maintain / furnish / correct

information or documents

2% of the value of International Transactions or Specified Domestic Transactions

271BA Failure to furnish the report of CA u/s 92E Rs. 1,00,000

271G Failure to furnish information required during proceedings u/s 92D(3)

2% of the value of International Transactions or Specified Domestic Transactions

271GB Default in furnishing of country by country report by an entity as required u/s 286

Rs 5,000 for delay upto 30 days

Rs 15,000/day beyond 30 days

Rs 50,000/day for default continues even if order of levying penalty as above is served


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Rs. 5,000/day from the period for furnishing information before prescribed authority is expired

Rs 5,00,000 for submission of inaccurate information

Section 92E – Audit Report

Where any person entered into an international transaction is required to obtain a report from

chartered accountant in Form 3CEB

Such report is required to be furnished on or before 30th November of AY

Section 92BA – Specified Domestic Transactions

Where the aggregate value of following transactions in the PY > 20 Cr.

Transactions referred to in Section 80IA (8), Section 80IA (10), Section 80A

Any transactions referred in any other section under chapter VI-A or Section 10AA to which

provision of 80IA (8)/(10) are applicable

Any other transactions as may be prescribed.

the methods of computation of arm’s length price for an international transaction would be applicable to a specified domestic transaction also.

Section 94A – Notified Jurisdictional Area (NJA)

To discourage assessee from entering into transactions with persons located in countries or territories which do not have effective information exchange mechanism with India

CG may notify any country or territory outside India to be NJA

Effect of NJA

All parties shall be deemed to be an Associated Enterprise

Transactions shall be deemed to be international transactions

All the provisions of transfer pricing shall apply

Assessee have to maintain & submit documents as prescribed.

If any payment made to person located in NJA, TDS shall be deducted at higher of 30% or Rate in force or Rate specified in IT act

Section 94B – Limitation of Interest deduction

Provision is applicable to Indian Company or PE of foreign company in India being borrower.

Provision is applicable only when such interest exceeds ₹ 1 Crore

In order to fix a ceiling limit on the amount of interest deductible in computing companies taxable profits

Interest expenses claimed by an entity to its AE shall not be deductible in computation of income under the PGBP to the extent that it arises from excess interest.

Excess Interest means lower of

Total Interest in excess of 30% of EBITDA of borrower or

Interest paid or payable to AE for that previous year


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CHAPTER – 4

ADVANCE RULINGS

Section 245N to 245V deals with Advance Ruling

Advance Ruling

Ruling determined by the Authority in relation of transactions / tax liability

Transactions

(i) Undertaken or is proposed to be undertaken by a non- resident applicant

(ii) Undertaken or is proposed to be undertaken by a resident applicant with such non-resident.

(iia) By resident applicant, such determination shall Include the determination of any question of law or of fact specified in the application.

(iii) in respect of an issue relating to computation of total income which is pending before any Income-tax Authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or fact in relation to such computation of total income specified in the application.

(iv) whether an arrangement, which is proposed to be undertaken by any person being a resident or a non-resident, is an impermissible avoidance arrangement as referred to in Chapter X-A or not.

Applicant

Non Resident referred to in (i) above

Resident referred to in (ii) above

Resident – Tax liability arising out of one more transactions ≥100 Crore referred to in (iia) above

Other Resident notified by CG [PSU is notified till date]

Person referred to in (iv) above

Where a resident applicant has made an application to AAR and referred issues therein for decision of AAR,

then, any Income-tax Authority or Tribunal should not take any decision in respect of such issues. In other

words, a resident assessee cannot pursue both the remedies [Section 245RR]

Application to AAR

Application to shall be made in prescribed from stating issues on which ruling is sought.

Application shall be in quadruplicate and accompanied by prescribed fees.

Application can be withdrawn within 30 days from the date of application.

Procedure on receipt of application

AAR shall forward a copy of application to CIT to furnish the relevant records.

However, AAR shall not allow the application if question raised in application is

Pending with Income Tax Authorities / Tribunal / Court [Notified resident can seek ruling even

if case pending with IT Authorities and Tribunal, no relief in case of case pending with Court]


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Determination of Fair Market Value

Transactions designed for avoidance of tax

Opportunity of being heard shall be given to applicant before rejecting the application.

If application is allowed, AAR shall pronounce its ruling within 6 months from the date of receipt of the application.

Copy of ruling shall be forwarded to assessee and CIT

Applicability of advance ruling

Ruling shall be binding on

To the Applicant who had sought

In respect of specific transactions to which it was sought

IT authorities upto the level of CIT who are having jurisdiction over applicant

Ruling shall not be binding if there is change in law or facts

Ruling shall be void ab initio if obtained by fraud or misrepresentations.


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CHAPTER – 5

EQUALISATION LEVY

Equalisation Levy [Chapter VIII in Finance Act 2016]

Equalisation levy @ 6% applicable if payment made for specified services to Non-resident by

A person resident in India and carrying on business or profession or

Non-resident having PE in India

Non Applicability:

If aggregate payment for specified services ≤ 1,00,000 in PY

Payment made for specified service is not for the purpose of business or profession

Specified Service means

Online Advertisement

Any provision for digital advertising space or any other facility or service for the purpose of

online advertisement

Any other service as may be notified by the Central Government

Collection and recovery of equalisation levy

Levy shall be deposited to Govt. upto the 7th of next month

If person fails to deduct the levy, then also he is liable to pay levy to Govt. i.e. Calculation shall

be done using grossing up principle.

Eg. Mr. A has paid ₹ 1,41,000 to Facebook Inc. for advertisement without deduction of

equalisation levy.

Gross Amount = 1,41,000 / 94% = 1,50,000

Equalisation Levy = 1,50,000 × 6% = 9,000

In case delay in deposit, Interest @ 1% p.m. or part of the month shall be applicable and

penalty of 1,000/day during which such default continues.

Penalty in case of failure to deduct the levy – 100% of levy that assessee failed to deduct

Disallowance of expenditure u/s 40(a)(ib) if,

Such levy has not been deducted or

Deducted but not deposited upto due date of filing of ITR.

Where such levy is deducted in subsequent PY or deducted but deposited after due date of filing of

ITR, Expenditure allowed in the PY in which such levy is paid

Exemption u/s 10(50)

In order to avoid double taxation

Income on which equalisation levy is deducted shall be exempt in the hands of person to whom

such payment is made.


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CHAPTER – 6

OVERVIEW OF MODEL TAX CONVENTIONS

Significant differences between UN and OECD Model Tax conventions

OECD Model is essentially a model treaty between two developed nations whereas UN Model is a

model convention between a developed country and a developing country.

Further, OECD Model advocates the residence principle, i.e., it lays emphasis on the right of state of residence to tax the income, whereas the UN Model is a compromise between the source principle

and residence principle, giving more weight to the source principle as against the residence principle.

Manner of Application of Tie-Breaker Rule

If a person is considered to be resident of both the Contracting States, relief should be sought from Article 4

of the Tax Treaty. A series of tie-breaker rules are provided in Paragraph 2 Article 4 of Model Convention to

determine single state of residence for an individual.

The tie-breaker rule would be applied in the following manner:

The first test is based on where the individual has a permanent home. Permanent home would mean a dwelling place available to him at all times continuously and not occasionally and includes place

taken on rent for a prolonged period of time. Any place taken for a short duration of stay or for

temporary purpose, may be for reasons such as short business travel, or a short holiday etc. is not

regarded as a permanent home.

If that test is inconclusive for the reason that the individual has permanent home available to him in both Contracting States, he will be considered a resident of the Contracting State where his personal

and economic relations are closer, in other words, the place where lies his centre of vital interests.

Thus, preference is given to family and social relations, occupation, place of business, place of

administration of his properties, political, cultural and other activities of the individual.

Paragraph (ii) establishes a secondary criterion for two quite distinct and different situations:

The case where the individual has a permanent home available to him in both Contracting

States and it is not possible to determine in which one he has his centre of vital interests

The case where the individual has a permanent home available to him in neither Contracting State.

In the aforesaid scenarios, preference is given to the Contracting State where the individual has a

habitual abode.

If the individual has habitual abode in both Contracting States or in neither of them, he shall be treated as a resident of the Contracting State of which he is a national.

If the individual is a national of both or neither of the Contracting States, the matter is left to be considered by the competent authorities of the respective Contracting States


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Permanent Establishment (PE) as per model tax conventions and significance of this concept in

Tax Treaties

The Concept of PE is defined in Article 5 of tax treaties. Article 5(1) of the UN Model and OECD Model reads as follows:

"For the purposes of this Convention, the term PE means a fixed place of business through which the business of an enterprise is wholly or partially carried on."

This expression is invariably used in all tax treaties. It has considerable importance as Article 7 mandates that existence of a PE in a jurisdiction is a pre-requisite for the purpose of taxation of business profit of an enterprise in that jurisdiction.

In this Module, the jurisdiction or country of residence of the person is referred to as the Resident State (or State R) and the jurisdiction or country where the PE is located is referred to as the Source State (or State S).

The definition of PE is significant for Several Articles. The term “Fixed base in Article 14

(Independent Personal Services) can be understood by reference to the term “permanent

establishment”.

Articles including 11 and 12 (dealing with interest, and royalties respectively) provide for reduced rates of tax at sources on payments of these items of income to a resident of the Resident state when

income is not effectively connected to a PE in Source State.

The concept of PE is also relevant in determining which contracting State may tax certain gain under

Article 13 (Capital gains) and certain “other income” under Article 21

“Royalty” under the UN Model Tax Convention. Is it different from the definition contained in

OECD Model?

Article 12(3) of the UN Model Convention contains the definition of the term “Royalty”. Whereas

Article 12(2) of the OECD Model defines the term “Royalty”.

“Royalty 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 cinematograph films, or films or tapes

used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret

formula or process, or for the use of, or the right to use, industrial, commercial or scientific

equipment, or for information concerning industrial, commercial or scientific experience”.

Article 12(2) of the OECD Model is identical to Article 12(3) of the UN Model except that the OECD Model specifically excludes the following from “royalties”:

Rentals for “films or tapes used for radio or television broadcasting”;

Equipment rentals

[In certain situations, the lease rental for industrial, commercial or scientific equipment may include

an element of “royalty” (e.g. for use of a patent). In such cases, the lease rent may be treated as a

“royalty” as per Article 12(2) of the OECD Model to the extent it could be attributed to the use of the

patent].

Such rentals are taxable under Article 7 or 21 of the OECD Model.


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Exemption Method for elimination of double taxation under UN Model Convention.

If double taxation arises by application of tax treaty, then, Article 23 in UN Model Convention 2011

provides relief to tax payer. Article 23 provides for the mechanism through which tax credit/

exemption may be available in the country of residence for TDS in the source country.

Generally, credit/exemption is available only if the taxes have been rightfully deducted in the source country. Article 23A provides exemption method to eliminate the double taxation. The provisions of

Article 23A are given below.

Art/Para UN Model Convention 2011

1 Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall, subject to the provisions of paragraphs 2 and 3, exempt such income or capital from tax

2 Where a resident of a Contracting State derives items of income which, in accordance with the provisions of articles 10, 11 and 12, may be taxed in the other Contracting State,

The first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State.

Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income derived from that other State

3 Where in accordance with any provision of this Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State,

Such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.


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CHAPTER – 7

APPLICATION & INTERPRETATION OF TAX TREATIES

“In addition to allocating the taxing rights and elimination of double taxation, there are various

other important considerations while entering into tax treaty”. Elucidate

In addition to allocating the taxing rights and elimination of double taxation, there are various other

important considerations while entering into a tax treaty, as mentioned below:

Ensuring non-discrimination between residents and non-residents

Resolution of disputes arising on account of different interpretation of tax treaty by the treaty

partner.

Providing assistance in the collection of the fair and legitimate share of tax.

Further, in addition to above, there are some other principles which must be considered by

countries in their tax system

Equity and fairness: Same income earned by different taxpayers must be taxed at the same

rate regard less of the source of income

Payment Neutrality and efficiency: Neutrality factor provides that economic processes

should not be affected by external factors such as taxation. Neutrality is two-fold

(a) Capital export neutrality (CEN) and

(b) Capital import neutrality (CIN).

CEN provides that business decision must not be affected by tax factors between the country of

residence and the target country;

CIN provides that the level of tax imposed on non-residents as well as the residents must be

similar.

Promotion of mutual economic relation, trade and investment: In some cases, it is

observed that avoidance of double taxation is not the only objective. The other objective may

be to give impetus to a country’s overall economic growth and development.

What is the General Rule of Interpretation under Vienna Convention of Law of Treaties?

Article 31 of Vienna Convention of Law of Treaties contains the General Rule of Interpretation. It lays down

that following general rule of interpretation:

A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms thereof in the context and in the light of its object and purpose.

The context for the purpose of interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexure Any agreement relating to the treaty which was made between all the parties in connection

with the conclusion of the treaty; Any instrument which was made by one or more parties in connection with the conclusion of

the treaty and accepted by the other parties as an instrument related thereto.

The following shall be taken into account, together with the context in that:

Any subsequent agreement between the parties regarding the interpretation of the treaty or

the application of its provisions;

Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;

Any relevant rules of international law applicable to relation between the parties.


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A special meaning shall be given to a term if it is established that the parties so intended

“Treaty prevents not only ‘current’ but also merely ‘potential’ double taxation”. Elucidate.

Tax treaties only distribute or assign taxing jurisdiction. It does not impose tax. Having assigned the jurisdiction of tax between the State of Residence and State of Source,

The domestic tax laws of the respective State determine taxing rules. Taxing experts in early 1920 appointed by the League of Nations describe the method of classification as Contracting States dividing tax sources and tax objects amongst themselves by mutually binding themselves not to levy taxes or to tax only to a limited extent.

English lawyers called it “Classification and Assignment Rule”, whereas German jurists called it the “Distributive Rule”.

According to this principle, “to the extent that an exemption is agreed to, its effect is in principle independent of both whether the Contracting States imposes a tax, in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax”.

The point here is that having agreed to part the right of tax with the other state, that state may or may not levy tax and if the state in whose favour right to tax is devolved, chooses not to tax such income, then it may result into double non-taxation.

The argument in favour of double non-taxation is that income would be subject to tax in the exempt state as and when the exemption is withdrawn or tax is levied. Thus, it takes care of future liability of tax.

Prof. Klaus Vogel, commenting on US – German DTAA observed: “Thus, it is said that the treaty prevents not only ‘current’ but also merely ‘potential’ double taxation.”

(A) Treaties are entered into for “Mutual Benefits”

Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally

Treaties are negotiated and entered into at a political level and have several considerations as their basis. Thus, treaties should be seen in the context of aiding commercial relations between treaty partners.

(B) A tax treaty provision may have an unequal effect

State A imposes tax but state B does not impose a tax, yet wordings of the treaty are reciprocal –

So that if and when State ‘B’ does introduce such a tax, the treaty rates would be operative in State ‘B’. Until such time there would be an unequal effect.

Moreover, State ‘A’ may make a distributive rule operative upon fulfilment of certain condition or comparable feature.

E.g., Indo-Jordan DTAA provides that a capital gain on sale of shares arising to a resident of Jordan is taxed only in Jordan. However, if Jordan does not tax such a gain, then the right to tax reverts to India.

What is the difference between “Monist Views” and “Dualist Views”?

The Income-tax Act, 1961 provides that where the Indian Government has entered into DTAAs which are applicable to the taxpayers, then the provisions of the Act shall apply to the extent they are more beneficial to the taxpayer.

Internationally this situation is known as “Monist View” wherein International and National laws are part of the same system of law, where DTAA overrides domestic law. Some other countries which follow such a system are: Argentina, Italy, the Netherlands, Belgium and Brazil.


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7.3

The other prevalent view is known as “Dualistic View” wherein International Law and National Law are separate systems and DTAA becomes part of the national legal system by specific incorporation/ legislation. In case of Dualistic View, DTAAs may be made subject to provisions of the National Law. Some of the countries that follow Dualistic View are Australia, Austria, Norway, Germany, Sri Lanka, and the UK.

What are the Extrinsic Aids to interpretation of a tax treaty?

A wide range of extrinsic material is permitted to be used in interpretation of tax treaties. According to Article 32 of the Vienna Convention the supplementary means of interpretation include the preparatory work of the treaty and the circumstances of its conclusion.

According to Prof. Starke one may resort to following extrinsic aids to interpret a tax treaty provided that clear words are not thereby contradicted:

Interpretative Protocols, Resolutions and Committee Reports, setting out agreed interpretations;

A subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions [Art. 31(3) of the VCLT];

Subsequent conduct of the state parties, as evidence of the intention of the parties and their conception of the treaty;

Other treaties, in pari materia (i.e., relating to the same subject matter), in case of doubt

Provisions in Parallel Tax Treaties If the language used in two tax treaties (say treaties: X and Y) are same and one treaty is more

elaborative or clear in its meaning (say treaty X) can one rely on the interpretation/explanations provided in a treaty X while applying provisions of a treaty Y?

However, the views of the Indian Judiciary are not consistent in this respect. There are contradictory judgments by Indian courts/tribunal in this regard.

International Articles/Essays/Reports

International Article/Essays/Reports are referred as extrinsic aid for interpretation of tax treaties. Like, in case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), the High Court obtained “useful material” through international articles.

Cahiers published by International Fiscal Association (IFA), Netherlands

“Cahiers de Droit Fiscal International” is the main publication of the IFA, which is published annually and deals with two major topics each year. Cahiers were relied upon in case of Azadi Bachao Andolan’s (supra) case by the SC.

Protocol Protocol is like a supplement to the treaty. In many treaties, in order to put certain matters beyond

doubt, there is a protocol annexed at the end of the treaty, which clarifies borderline issues. A protocol is an integral part of a tax treaty and has the same binding force as the main clauses

therein. Protocol to the India-US tax treaty provides many examples to elucidate the meaning of the term

“make available”. Protocol to India France treaty contains the Most Favoured Nation Clause. Thus, one must refer to protocol before arriving at any final conclusion in respect of any tax treaty provision.

Preamble Preamble to a tax treaty could guide in interpretation of a tax treaty. In case of Azadi Bachao

Andolan, the Apex Court observed that ‘the preamble to the Indo-Mauritius Double Tax Avoidance


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7.4

Convention (DTAC) recites that it is for the ‘encouragement of mutual trade and investment’ and this aspect of the matter cannot be lost sight of while interpreting the treaty’. These observations are very significant whereby the Apex Court has upheld ‘economic considerations’ as one of the objectives of a Tax Treaty.

Mutual Agreement Procedure [MAP] MAP helps to interpret any ambiguous term/provision through bilateral negotiations. MAP is more

authentic than other aids as officials of both countries are in possession of materials/documents exchanged at the time of signing the tax treaty which would clearly indicate the object or purpose of a particular provision. Successful MAPs also serve as precedence in case of subsequent applications


DT - Simplified


8.1

CHAPTER – 8

BASE EROSION AND PROFIT SHIFTING

What do you understand by base erosion and profit shifting? Describe briefly its adverse effects.

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies

That exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or

To shift profits to locations where there is little or no real activity but the taxes are low,

Resulting in little or no overall corporate tax being paid.

Adverse Effects of BEPS

Governments have to cope with less revenue and a higher cost to ensure compliance.

In developing countries, the lack of tax revenue leads to significant under-funding of public investment that could help foster economic growth.

BEPS undermines the integrity of the tax system, as reporting of low corporate taxes is considered to be unfair.

When tax laws permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted, other taxpayers, especially individual taxpayers in that jurisdiction bear a greater share of the burden. This gives rise to tax fairness issues on account of individuals having to bear a higher tax burden.

Enterprises that operate only in domestic markets, including family-owned businesses or new innovative businesses, may have difficulty competing with MNEs that have the ability to shift their

profits across borders to avoid or reduce tax.

Fair competition is harmed by the distortions induced by BEPS

What are the significant OECD Recommendations under Action Plan 1 of BEPS? Which

recommendation has been adopted in Indian tax laws?

The OECD has recommended several options to tackle the direct tax challenges which include:

Modifying the existing PE rule to provide that whether an enterprise engaged in fully de-materialized digital activities would constitute a PE, if it maintained a significant digital presence in another

country's economy.

A virtual fixed place of business PE in the concept of PE i.e., creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on

business through that website

Imposition of a final withholding tax on certain payments for digital goods or services provided by a

foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital

transactions received by a non-resident from a resident or from a non-resident having permanent

establishment in other contracting state

In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled "Equalisation Levy", provides for an equalisation levy of 6% of the amount of consideration for specified services

Discuss the provision incorporated in the Income-tax Act, 1961 in line with the OECD

recommendations under Action Plan 4 of BEPS.

Section 94B has been introduced to provide cap on interest expenses

[ Refer Chapter 3 – Transfer Pricing ]


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8.2

Describe the three tier structure for transfer pricing documentation mandated by BEPS Action

Plan 13.

Action 13 contains a three-tiered standardized approach to TP documentation which consists of:

Master file:

Master file requires MNEs to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies.

The master file is to be delivered by MNEs directly to local tax administrations.

Local file:

Local file requires maintaining of transactional information specific to each country in detail covering related-party transactions and the amounts involved in those transactions.

In addition, relevant financial information regarding specific transactions, a comparability analysis and analysis of the selection and application of the most appropriate transfer pricing method should also be captured.

The local file is to be delivered by MNEs directly to local tax administrations.

Country-by-country (CBC) report:

CBC report requires MNEs to provide an annual report of economic indicators viz. the amount of revenue, profit before income tax, income tax paid and accrued in relation to the tax jurisdiction in which they do business.

CBC reports are required to be filed in the jurisdiction of tax residence of the ultimate parent entity, being subsequently shared between other jurisdictions through automatic exchange of information mechanism.

What are the ways in which hybrid mismatch arrangements are used to achieve unintended

double non-taxation or long-term tax deferral?

Hybrid mismatch arrangements are sometimes used to achieve unintended double non-taxation or long-term tax deferral in one or more of the following ways -

Creation of two deductions for a single borrowal;

Generation of deductions without corresponding income inclusions;

Misuse of foreign tax credit; and

Participation exemption regimes.


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A3.1

Annexure – 3

General Anti Avoidance Rules

Section 95 - Applicability of General Anti-Avoidance Rule

GAAR provides that an arrangement entered into by an assessee may be declared to be an Impermissible

Avoidance Arrangement (IAA) and the consequence in relation to tax arising there from may be determined

subject to the provisions of this Chapter.

The section further clarifies that the provisions of this Chapter may be applied to any step in, or a part of, the

arrangement as they are applicable to the arrangement.

If there is a conflict with provisions in other sections, then this section shall prevail over other conflicting

provisions.

The term arrangement means

any step in, or a part or whole of, any transaction, operation, scheme,

agreement or understanding, whether enforceable or not, and includes

the alienation of any property in such transaction, operation, scheme, agreement or understanding

Section 96 - Income of Impermissible Avoidance Agreement (IAA)

An impermissible avoidance arrangement (IAA) means an arrangement, the main purpose or one of the main purposes of which is (Twin Condition)

To obtain a tax benefit by means of

Reduction or avoidance or deferral of tax or other amount payable or

Increase in a refund of tax or other amount under this Act; or

Reduction or avoidance or deferral of tax or other amount that would be payable under this Act, as a result of a tax treaty; or

Increase in a refund of tax or other amount under this Act as a result of a tax treaty; or

Reduction in total income or

Increase in loss

and

Any of the tainted element refers to an arrangement entered

Non-arm’s length dealings where an arrangement creates rights and obligations, which are not normally created between parties dealing at arm‘s length. this tainted element is to be examined only in those transactions which are not covered by Transfer Pricing regulations (i.e. SAAR)

Results in misuse or abuse of the provisions of the Act. Where the law is followed in letter or form but not in spirit or substance, or where the arrangement results in consequences which are not intended by the legislation, revealing an intent to misuse or abuse the law.

Manner normally not employed for a bona fide purpose. In other words, it means an arrangement that possesses abnormal features.

Lacks commercial substance or is deemed to lack commercial substance

Section 97 – Arrangement to lack commercial substance.

The substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part. In other words, it reflects the inherent ability of the law to remove the corporate veil and look beyond form. or

It involves or includes—

Round trip financing i.e. funds are transferred among the parties without any substantial commercial purpose.

An accommodating party i.e. main purpose of participation of the party is to obtain tax benefit for the assessee. It is not necessary that such party should be connected to the taxpayer


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A3.2

Elements that have effect of offsetting or cancelling each other; or

A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction; or

It involves the location of an asset or of a transaction or of the place of residence of any party which is without any substantial commercial purpose other than obtaining a tax benefit for a party. or

It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.

Section 98 – Consequences of IAA.

If an arrangement is declared to be an IAA, then the consequences may include denial of tax benefit or a benefit under a tax treaty. The consequence may be determined in such manner as is deemed appropriate in the circumstances of the case.

Certain illustrations of the manner have been provided, namely:—

Disregarding, combining or re-characterizing any step in, or a part or whole of, the IAA;

Treating the IAA as if it had not been entered into or carried out;

Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

Deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount;

Reallocating amongst the parties to the arrangement—

Any accrual, or receipt, of a capital or revenue nature; or

Any expenditure, deduction, relief or rebate;

Treating—

The place of residence of any party to the arrangement; or

The situs of an asset or of a transaction,

At a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; or

Considering or looking through any arrangement by disregarding any corporate structure.

It has also been provided that –

Any equity may be treated as debt or vice versa;

Any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or

Any expenditure, deduction, relief or rebate may be re-characterised.

Section 99 – Treatment of connected persons and accommodating party

As per section 99, for the purposes of Chapter X-A, in determining whether a tax benefit exists

The parties who are connected persons in relation to each other may be treated as one and the same person;

Any accommodating party may be disregarded;

Such accommodating party and any other party may be treated as one and the same person;

The arrangement may be considered or looked through by disregarding any corporate structure.


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