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International Taxation: A Capsule For Quick Recap
International Taxation: A Capsule For Quick Recap
International Taxation:
A Capsule for Quick Recap
Globalisation, capital mobility and increased trade and services have resulted in the whole world virtually becoming
one market and consequently, international taxation has become a key concern area both for business enterprises
engaged in cross border transactions as well as for tax administrations of the concerned States. Considering its
significance, international taxation has been included as a dedicated part (i.e., Part-II) for 30 marks in Final (New)
Paper 7: Direct Tax Laws & International Taxation in the New Scheme of Education and Training.
In this capsule, diagrams, tables and flow charts have been extensively used to help you recap the significant
concepts, provisions and principles relating to international taxation, which have been discussed in detail in
Module 4 [International Taxation] of September 2018 edition of Study Material of Final (New) Paper 7. The Capsule
is divided into eight chapters in line with Module 4 of the Study Material. It may be noted that Chapters 1 to 5 of
Module 4 is relevant for Final (Old) Paper 7: Direct Tax Laws also, and to that extent this capsule is relevant for Final
(Old) course students also. As indicated in the title, remember that the capsule will only serve as a quick recap for
May 2019 and Nov 2019 Examinations. For comprehensive study, read the Study Material and RTP.
• POEM outside India, if majority BOD meetings are Stage 1: Identification of persons who actually make
held outside India the key management and commercial decision for
• If de facto decision making authority is not BOD conduct of the company’s business as a whole
but Indian holding Co. or any other person Stage 2: Determination of place where these decisions
resident in India, POEM shall be in India are, in fact, made
SCOPE OF TOTAL INCOME [SECTION 5]: Whether the following incomes are to be included in TI?
Fig 1.2
Income deemed to accrue or arise in
India [Section 9(1)]
10(6C) Royalty income or FTS under an agrmt with the Central Government (CG) for Foreign Co. (notified by
providing services in or outside India in projects connected with security of India the CG)
10(6D) Royalty income from or FTS rendered in or outside India to, the National Technical Non-corporate NR and
Research Organisation (NTRO) foreign Co.
10(15)(iii)(a) Int on deposits made by a foreign bank with any scheduled bank with approval of RBI. Bank incorporated outside
India and authorised to
perform Central Banking
functions in that country.
10(15)(iv)(fa) Int payable by scheduled bank on deposits in foreign currency (FC) where the a) NR or
acceptance of such deposits is duly approved by RBI. [Scheduled bank does not include b) Indvl or HUF, being
co-operative bank] a resident but not
10(15)(viii) Int on deposit made on or after 01.04.2005 in an Offshore Banking Unit ordinarily resident
10(48) Income received in India in Indian currency on a/c of sale of crude oil or any other Foreign Co. on a/c of sale of
goods or rendering of services as may be notified by the CG in this behalf. Foreign Co. crude oil, any other goods
and agreement (agrmnt) should be notified by the CG in national interest. or rendering of service. It
should not be engaged in
any other activity in India.
10(48A) Income accruing or arsing on a/c of storage of crude oil in a facility in India and sale of Foreign Co.
crude oil therefrom to any person resident in India. Foreign Co. and agrmnt should be
notified by the CG in national interest.
10(48B) Income from sale of leftover stock of crude oil from facility in India after the expiry of Foreign Co.
agrmt ref u/s 10(48A) or on termination of the said agrmt
Fig 1.5
Lower of
Exemption Allowable
u/s 115F
Fig 1.7
Fig 1.6 (Contd.) Special provisions for computing tax on income by way of
interest and dividend [Section 115A]
Meaning of Foreign Exchange Asset (FEA) Where the total income of a NR includes any income Rate of
by way of Tax
(1) Dividends [other than dividend ref u/s 115-O] 20%
(2) Interest recd from the Govt. or an Indian concern 20%
Acquired/purchased/ on moneys borrowed or debt incurred by the Govt./
Specified asset subscribed to in convertible Indian concern in FC, other than (3), (4), (5) and (6)
foreign exchange mentioned below
(3) Interest received from an infrastructure debt fund 5%
ref u/s 10(47)
Shares in an Indian Co.
(4) Interest ref u/s 194LC [Refer Fig. 1.11] 5%
Debentures issued by an Indian Co. (other than a Pvt. (5) Interest ref u/s 194LD [Refer Fig. 1.11] 5%
Co.)
(6) Interest ref u/s 194LBA(2) [Refer Fig. 1.11] 5%
Deposits with an Indian Co. (other than a Pvt. Co.) (7) Income received in respect of units purchased in FC 20%
of a mutual fund (MF) specified u/s 10(23D) or UTI
Notes:
Any security of the CG • No dedn in respect of any exp or allowance shall be allowed u/s 28
to 44C and 57.
• Dedn under Chapter VI-A is not available.
Other assets notified by the CG • The assessee is not required to furnish a return of his income (ROI)
if the following conditions are satisfied:
(a) The TI consists of only the abovementioned incomes and
(b) TDS has been deducted from such income.
Is right, property or contract effectively connected with PE/Fixed Place of Profn (FPP) in India?
Yes No
Royalty & FTS would be computed as per sec 44DA under the head Concessional rate of tax@10% u/s 115A on
“PGBP” as per the provisions of the IT Act, 1961; and normal rates of gross royalty/FTS would apply
tax would apply
No dedn of any exp or allowance is allowable
u/s 28 to 44C or u/s 57
A/cs & Audit Dedn of exp Dedn under Chap VI-A permissible
No exemption from
filing ROI u/s 139(1)
BoA to be No dedn in resp of No dedn in respect of
BoA to be exp not incurred amts paid (other than
maintained as
audited & Audit wholly & exclusively reimbursement of
per sec 44AA
Report to be in relation to PE/ actual exp) by PE/FPP
furnished along FPP in India to HO & other offices
with ROI
Fig 1.9
Special provisions for computing tax on income of FIIs from securities [Section 115AD]
S. No. Income Rate of Tax
(a) Income recd in respect of securities other than 20%
• income by way of dividends ref u/s 115-O
• income on units ref u/s 115AB i.e., units of MF specified u/s 10(23D) or UTI
• Interest ref u/s 194LD
(b) Interest referred u/s 194LD [Refer Fig 1.11] 5%
(c) Income by way of STCG arising from the transfer of securities (other than STCG u/s 111A) 30%
(d) Income by way of STCG u/s 111A 15%
(e) Income by way of LTCG arising from the transfer of securities (other than LTCG u/s 112A) 10%
(f ) Income by way of LTCG u/s 112A exceeding R 1 lakh 10%
Notes:
• No dedn for any exp or allowance shall be allowed u/s 28 to 44C and 57 from income from securities (ref. to in (a) and (b) above).
• Dedn under Chapter VI-A is not allowable in case of income from securities, STCG or LTCG arising from transfer of securities.
• Conversion to foreign currency and indexation benefit would not be available while computing capital gains on transfer of securities.
Fig 1.10
Special provisions for computing tax in case of NR sportsmen or sports associations [Section 115BBA]
S. No. Assessee Income Rate of Tax
(a) A sportsman (including Any income recd or receivable by way of—
an athlete), who is not a (i) participation in India in any game (other than a game winnings wherefrom are
citizen of India and is a taxable u/s 115BB) or sport; or
NR (ii) advertisement; or
(iii) contribution of articles relating to any game or sport in India in newspapers,
magazines or journals;
(b) A NR sports association Any amt guaranteed to be paid or payable to such association or institution in relation 20%
or institution to any game (other than a game the winnings wherefrom are taxable u/s 115BB) or
sport played in India
(c) An entertainer who is not Any income recd or receivable from his performance in India
a citizen of India and is a
NR
Notes:
1. No dedn of any exp or allowance shall be allowed under the Act from the income referred above.
2. The assessee is not required to furnish a return of his income if the following conditions are satisfied:
(a) The TI consists of only above mentioned income and
(b) TDS has been fully deducted from such income.
3. “Match referee” does not fall within the meaning of “sportsmen” to attract the provisions of sec 115BBA. Therefore, although the payments
made to NR ‘match referee’ are “income” which has accrued and arisen in India, the same are not taxable under the provisions of sec 115BBA.
They are subject to the normal rates of tax [Calcutta High Court in Indcom v. CIT (TDS)(2011) 335 ITR 485]
10 January 2019 The Chartered Accountant Student
194B Income by way of winnings from lotteries, crossword puzzles, card games and other games of
30%
any sort, where payt to a person > R10,000
194BB Income by way of winnings from horse races, where payt to a person > R 10,000 30%
194E Specified payts referred u/s 115BBA to NR sportsmen/sports association or an entertainer 20%
194G Commission etc. on the sale of lottery tickets, where payt > R15,000 5%
194LBA(2) Distribution of any interest income, recd or receivable by a business trust (BT) from a SPV, to
5%
its unit holders.
194LBA(3) Distribution of any income received from renting or leasing or letting out any real estate asset
directly owned by the BT, to its unit holders.
194LBB Investment fund paying income to a unit holder [other than income chargeable under PGBP At the rates in
which is exempted u/s 10(23FBB)]. force
194LD Interest payable between 1.6.2013 and 30.6.2020 to a FIl or QFI on investment made in –
- RDB of an Indian Co. 5
- Govt. security
195 Payment of any other sum to a Non-corporate non resident or Foreign Co. At the rates in
force
196B Income from units of a MF or UTI purchased in FC (including LTCG on transfer of such units)
10
payable to an Offshore Fund
196C Income by way of interest on bonds of an Indian Co. or public sector Co. sold by the Govt.
and purchased by a NR in FC or dividend on GDRs referred to u/s 115AC (including LTCG on 10
transfer of such bonds or GDRs) payable to a NR
196D Income of FII from securities referred u/s 115AD(1) (not being income by way of interest u/s
20
194LD, dividend u/s 115-O or capital gain arising from such securities)
Notes –
(i) In all the above cases, the rate of tax would be increased by surcharge, wherever applicable, and health and education cess @4%.
(ii) The rates in force are specified in the Finance Act, 2018 or in the DTAA entered into u/s 90 or 90A, as the case may be.
Fig 2.2
DT Relief under the IT Act, 1961
OBJECTIVE APPLICABILITY
The CG may enter into an agrmt with the Govt of any Assessee, who is a resident in India during the PY
country outside India or specified territory or specified
assn outside India,—
• for the granting of relief in respect of doubly taxed income CONDITIONS
• for the avoidance of DT of income • The income accrues or arises to him outside India.
• for exchange of information for the prevention of evasion • The income is not deemed to accrue or arise in India
or avoidance of income-tax during the PY.
• for recovery of income-tax • The income in question has been subjected to
income-tax in the foreign country in the hands of
the assessee.
TAXABILITY
• The assessee has paid tax on the income in the
Taxability of income would be detd based on DTAA or the IT foreign country.
Act, 1961, whichever is more beneficial. • There is no agrmt for relief from DT between
India and the other country where the income has
accrued or arisen.
CHARGE OF TAX ON FOREIGN CO.
The charge of tax in respect of a foreign Co. at a rate higher
than the rate at which a domestic Co. is chargeable, shall not COMPUTATION OF RELIEF
be regarded as less favourable charge or levy of tax in respect Doubly taxed income x Indian rate of tax or Rate of tax
of such foreign Co. in the said country, whichever is lower
Multinational Companies (MNC) operating in more than one country transfer physical goods and intangible
property or provides services to their associated enterprises (AEs) in another country. Two enterprises are “AEs” if
one of the enterprises participates directly or indirectly in the management, control or capital of the other or if both
enterprises are under common control. While doing so, the MNC concerned has in mind the goal of minimising
tax burden and maximising profits but the two tax jurisdictions have also the consideration of maximising their
revenue while making laws that govern such transactions (transns.) It is an internationally accepted practice that
such ‘transfer pricing’ should be governed by the Arm’s Length Principle (ALP) and the transfer price should be
the price applicable in case of a transaction of arm’s length. In other words, the transaction between associates
should be priced in the same way as a transaction between independent enterprises to avoid loss of revenue to the
concerned tax jurisdictions.
Fig 3.1
Chapter X: Special provisions relating to Avoidance of Tax [Transfer Pricing provisions]
Income should arise from Income to be computed Computation of income as per ALP
having regard to ALP should have the effect of ing taxa-
ble income or ing loss computed
Fig 3.2
X Ltd. Y Ltd.
In this situation, since Mr. A directly holds 40% of shareholding in both X Ltd. and Y
Ltd., X Ltd. & Y Ltd. will be deemed AEs.
Condition Situation
Example
Appointment of One Entr appoints more than X Ltd. has 15 directors on its Board. Out of that, Y Ltd. has appointed
majority directors half of the BoD or members of 8 directors. In such case, X Ltd. and Y Ltd. would be deemed AEs.
of OE the governing board (GB), or one
or more executive directors (EDs)
or executive members (EMs) of
the GB of OE.
Dependence on The manufacture (mfre) or processing of goods or articles or business carried out by one entr is wholly
intangibles w.r.t dependent (i.e. 100%) on the know-how, patents, copyrights etc., or any data, documentation, drawing or
which OE has specification relating to any patent, invention, model etc. of which the OE is the owner or in respect of which
exclusive rights the OE has exclusive rights.
Dependence on 90% or more of RMs and consumables required for the mfre or processing of goods or articles or business
RM supplied by carried out by one entr, are supplied by the OE, or by persons specified by the OE, where the prices and other
OE conditions relating to the supply are influenced by such OE.
Dependence on The goods or articles mfrd or processed by one entr, are sold to the OE or to persons specified by the OE,
sale and the prices and other conditions relating thereto are influenced by such OE.
Interest in a firm, Where one entr is a firm, AOPs or BOls, the OE holds 10% or more interest in firm/HUF/BOI.
AOPs or BOIs
Mutual interest There exists b/w the two entrs, any relationship of mutual interest, as may be prescribed.
relationship
Resale Price Cost Plus Method Profit Split Method Transactional Net
CUP Method Margin Method (TNMM)
Method(RPM) (CPM) (PSM)
This method is This method is This method is This method is Compute NP margin of
applied where applied where item generally applied applied where there the entr from InTn with
there are similar obtained from AE is where semi-finished is transfer of unique AE having regard to cost
transaction(s) b/w resold to unrelated goods are sold to AEs intangibles or in incurred/sales effected/
unconnected parties party multiple InTns assets employed
Identify the RP at Identify direct & Determine combined Compute the NP margin
Identify price which the item is indirect COP incurred NP of the AEs arising realised by the Entr or
in a comparable resold to unrelated for property trfd or out of InTn unrelated entr in a CUCT
uncontrolled party services provided to AE by applying the same base
transaction (CUCT)
Reduce the RP by the Determine normal Evaluate the relative Adjust NP margin realised
normal GP margin on GP mark up to such contribution of each entr from CUCT to a/c for
CUCT & exp incurred costs by an unrelated to the earning of combined differences affecting NP
(customs duty) w.r.t. entr in CUCTs NP on the basis of FAR margin in the OM
purchase
Adjust the price for Adjust the price for Adjust the normal GP Split the combined Compare NP margin
material diffr. in functional & other mark-up for functional NP amongst the entrs relative to costs/sales/
terms of contract, diffr. materially and other diffr in proportion to mkt assets of the AE with NP
credit, transport etc. affecting GP margin materially affecting GP returns; & residual pfts margin of uncontrolled
in open market (OM) mark-up in OM in prop. to their relative party in comparable
contribution transactions
Adjusted price is ALP Adjusted price is ALP Total Costs ↑d by adjusted ALP to be detd on the Adjusted NP margin taken
mark up = ALP basis of profit apportioned. into A/c to arrive at ALP
Fig 3.4
Advance Pricing Agreements [Section 92CC]
An Advance Pricing Agreement (APA) is an agrmt between a taxpayer and a taxing authority on an appropriate TP methodology for a
set of transns. over a fixed period of time in future for not exceeding 5 consecutive PYs.
APA may also provide for determination of ALP or for specifying the manner in which ALP is to be determined in relation to an InTn
entered into by a person during the rollback year. Rollback year is the PY, falling within the period not exceeding four PYs preceding
the first of the PYs for which the APA applies in respect of the InTn to be undertaken.
Purpose of APA Detrmination (dtrmn) of ALP or specifying the manner for dtrmn of ALP for an InTn to be entered into.
Manner of dtrmn
The manner for dtrmn of ALP ref. above may include methods ref. to u/s 92C(1) or any other
of ALP in APA
method with necessary adjustments or variations.
Non-applicability of
Where an APA has been entered for an InTn, then, computation of ALP as per the methods specified u/s
sec 92C & sec 92CA
92C and reference to TPO would not apply for such InTn.
Validity of APA For the period specified in the agrmt which shall not exceed five consecutive PYs. In case of
rollback, the total period shall not exceed 9 PYs [4 PY + maximum 5 consecutive PY]
Consqs. where • Where APA obtained by way of fraud or misrepresantation of facts, the Board with the approval of CG can
declare APA void ab initio.
APA is • All the prov of the Act shall apply to such person, as if such APA had never been entered into.
obtained by • The period beginning with the date of such APA and ending on the date of order declaring the APA as void
fraud: ab initio, shall be excluded for the purpose of compting any period of limitation (POL) under this Act.
• In case the PoL after exclusion of the above period is less than 60 days, such remaining PoL shall be
extended to 60 days.
Prescribed The Board has prescribed rules 10F to 10T specifying an APA scheme. [For details, refer Study
scheme for APA Material]
Adj. in BOA of the assessee and its AE to reflect actual allocation of pfts b/w
assessee and its AE in line with TP detd in PA
Excess Money (i.e., diff. b/w ALP detd. in PA and actual TP) to be repatriated
within 90 days
From due date of filing of ROI u/s 139(1) From date of order
Interest to be computed
Where the InTn is denominated in Indian Rupee Where the InTn is denominated in FC
At one year marginal cost of fund lending rate of At six month LIBOR as on 30 th Sep of the
SBI as on 1 st April of the relevant PY + 3.25% relevant PY + 3%
Any allowance for TP prov would ALP and income Persons Reference can Penalty
an exp. or interest not apply if of a SDT to be entering into be made to TPO provisions
or allocation of any income or allow. comptd in the a SDT to for computation would also apply
cost or exp. or any for exp. or same manner as maintain info of ALP of SDT to SDT as they
income in relation interest has the applicable to an and docs & apply to an InTn
to the SDT to be effect of ↓ing InTn furnish report
computed w.r.t. income or ↑ing of accountant
ALP loss
SDT means any of the following transactions, not being an International Transaction
Any transn ref. u/s 80A Any tfr of g & s Any business Any transn ref. to Any other
i.e., inter-unit transfer(tfr) ref. u/s 80-IA(8) transacted b/w the in any other sec transn as may be
of goods or services (g & s) i.e., inter unit tfr of assessee carrying on under Chap VI-A prescribed
by an unit/entr. or eligible g&s b/w EB & OB EB & other person or sec 10AA, to
business (EB) to other or vice versa for as ref. u/s 80-IA(10) which prov of
business (OB) or vice versa, consdn not equal sec 80-IA(8)/(10)
for consdn not equal to FMV to FMV apply
Note: However, where aggregate value of above transactions entered into by the assessee ≤ R 20 crore in the PY, then, such
transactions would not be treated as SDT , and consequently TP provisions would not be applicable.
Fig 3.7
For the purpose of saving the high cost and significant time involved in extensive litigations relating to
determination of tax liability of a non-resident or tax liability of a resident arising out of high value transactions,
an independent quasi-judicial authority, namely, the Authority for Advance Rulings (AAR) has been given the
power to pronounce advance ruling in respect thereof relating to a specific question of law or fact. This will help
ensure certainty and at the same time will be expeditious and cost effective.
S.No. Applicant u/s 245N(b) Advance Ruling u/s 245N(a) means determination by the AAR in relation to
(i) NR a transn which has been undertaken (u/t) or is proposed to be u/t by him.
(ii) Resident the tax liability of a NR arising out of a transn which has been u/t or is proposed to be u/t by him
with such NR and such determination (detmn) shall incl the detmn of any question of law or of
fact specified in the application.
(iii) Resident of class or category of the tax liability of a resident applicant, arising out of a transn which has been u/t or is proposed
persons notified by CG to be u/t by such applicant and such detmn shall incl the detmn of any question of law or of fact
specified in the application.
Note: CG has notified a resident, in relation to his tax liability arising out of one or more transns. valuing ≥ R 100 crore in total.
(iv) Resident of class or category an issue relating to computation of TI which is pending before any IT Authority or the ITAT and
of persons notified by CG such detmn or decision shall incl the detmn or decision of any question of law or fact w.r.t. such
computation of TI specified in the application.
Note: A Public sector undertaking has been notified by the CG
(v) Resident or NR whether an arrangement, which is proposed to be u/t by such applicant, is an impermissible
avoidance arrangement as referred to in Chapter X-A or not.
Fig 4.2
No
Cannot make an application for Is the applicant an eligible applicant falling u/s 245N(b)?
advance ruling
Yes
Entitled to make an application for advance ruling
Yes
No further processing Is the application withdrawn by the applicant within 30 days?
No
Whether the question raised in the application
Yes • is already pending before income-tax authorities/ITAT/ Court
AAR shall not allow the [except in case of (iv) of Fig. 4.1]?
application • involves determination of FMV of any property?
• relates to a transn designed prima facie for avoidance of income-tax
[except in cases (iv) and (v) of Fig. 4.1]?
• Opportunity of being
heard to be given to No
No
the applicant Whether application accepted?
• Reasons for rejection Yes
to be given in the Copy of application f/w to PC or Commissioner
order. requiring him to furnish records, if required
Fig 5.1