Vol 4

THIS BOOK HAS BEEN A REALITY
ONLY BECAUSE OF MY FAMILY &

STUDENTS.
CA SURAJ AGRAWAL
PREFACE
Taxation is a dynamic subject, which is not only a vast subject but also difficult to
comprehend in view of frequent amendments. Yet it is the scoring subject of your
syllabus. In addition, practice in the field of Taxation is also highly remunerative.
My association with the students has helped me to bring this book in its present form –
simplified, comprehensive and easy to understand.
The present edition of this book is designed to bridge the gap between theory &
applications and incorporates the following:
Taxation of Non-Resident
DTAA
Advance Ruling, APA & GAAR
International Transactions including Transfer Pricing
Hope this book [Updated for June & Dec 2020 Exam] serves the purpose of the
students. I shall be thankful to the readers for their suggestions, criticism and feedback
if any.
Email: suraj.agrawal@hotmail.com
Contact: 8527230445 ; 01147542530
ACKNOWLEDGEMENT
This book is a result of sincere efforts of our family members, colleagues, associates,
well-wishers and students, whose contribution cannot go unacknowledged.
Master Reyaan, my wife CA Monika Agrawal and my mother deserve special mention
for the time (on which they had the first right) they allowed me for this book.
I dedicate this book to my beloved late grandparents & Papa.
CA Suraj Agrawal
Updated as on 10.03.2020 (10th Edition - 1st Print)
“One more step towards success”

PROFILE – CA SURAJ AGRAWAL
CA Suraj Agrawal is a Commerce Graduate [B.Com (H)] from Kolkata University and has
qualified CA in November 2005 in First Attempt from Kolkata. He has also secured All India 27th
Rank in CA-Foundation – 1st level (First Attempt – 70% marks).
Besides CA, he has completed Certification Course of International Taxation of the ICAI in
2009. He has also qualified CPA (Certified Public Accountant) examination from AICPA
(USA) in 2009 with more than 90 Marks in each of four papers in First Attempt [Presently, he is
inspired to complete CIMA, London as well as LLM in International Taxation (UK) by Year
2024]
He has started his career by joining Direct Tax Department of Reliance Industries Limited,
Mumbai and worked for near 2 years in core tax team. He has also worked in Taxation Division
of Chaturvedi & Shah (Chartered Accountants), Delhi followed by Tax Division of Ernst &
Young, Gurgaon, India (A Leading Big 4 Firm having International Presence). During the
working tenure of more than 4 years, he is exposed to in-depth theoretical and practical
knowledge of Direct Taxation & has a consultancy exposure in various industries including
Energy - Oil & Gas, Airlines, Retail, Infrastructure and Shipping Industries.
With the above academic and practical knowledge, he is in teaching profession since 2010 to
serve professional students (taught 15,000 CA/CMAs Students till date). His in-depth
coverage of legal provisions in Tax with practical approach is very well recognized
among the students. He is also an associate member of ICAI and is also providing services as
Tax Consultant to various organisations.
He was also a member in WTO, FEMA & International Tax Study Group of the NIRC of the
ICAI for the year 2011-12 and was member of International Taxation & FEMA Research
Study Group of NIRC of the ICAI for the year 2010-11. He is regularly contributing tax articles
and various opinions on subjects of Direct Taxation including International Taxation in various
leading magazines [Taxmann] and professional forums.
CA Suraj Agrawal
“CA Rank Holder, Qualified CPA (USA), B.Com(H)”
Email: suraj.agrawal@hotmail.com
Contact: +91 85272 30445 / 011 4754 2530
Subjects: CA Inter / CMA Inter / CMA Final - DT & IDT
FB: http://www.facebook.com/suraj.agrawal.564
https://www.youtube.com/channel/UCv-ybxFp_X9EWiei7YhZQmw
https://www.facebook.com/Surajagrawaltaxationclasses.satc
“Thanks to all of you for making us proud”
Congratulations to all of you
CMA FINAL DT & IDT RESULT – DEC 2019 EXAM
SATC – 01147542530 / 8527230445
(NO FACE TO FACE CLASS IN CMA FINAL)
S. No. Name IDT DT Status Remarks
1 Varun Khattar (BOTH) 66 40 now CMA A.I.R. - 30
2 Deepesh Hoiyani 80 - now CMA IDT Highest in 4 Paper
IDT 2nd Highest in 4
3 Satish Jhangra 72 - now CMA Paper
4 Pranshu Singhal 72 - now CMA IDT Highest in 4 Paper
5 Poonam Khemka 68 - now CMA IDT Highest in 4 Paper
6 Garima 68 - now CMA IDT Highest in 4 Paper
7 Tushar Khattar (BOTH) 63 43 now CMA IDT Highest in all 8 Paper
8 Rahul Kumar Ojha 62 - Now in Group 3 -
9 Amita Negi 60 - Now in Group 3 IDT Highest in 4 Paper
10 Rohit Saini (BOTH) 60 58 now CMA IDT Highest in all 8 Paper
11 Pooja Negi - 59 now CMA DT Highest in 4 Paper
12 Brijesh Kumar 54 - Now in Group 3 -
13 Rinku Kumar Bind - 54 Now in Group 4 DT Highest in 4 Paper
14 Apoorv Jaiswal - 54 now CMA -
15 Vikas Kumar Jha 53 - now CMA -
16 Shivcharan Singh S. 53 - Now in Group 3 -
17 Prateek Kumar Masih 49 - Now in Group 3 -
18 Shivam Garg (BOTH) 49 52 now CMA -
19 Sachin Sharma (BOTH) 48 - now CMA -
20 Ashmeet 47 - Now in Group 3 -
21 Mayank Garg - 40 Now in Group 4 -
NOTICE: ALL ABOVE STUDENTS ARE REGISTERED STUDENTS OF SATC IN REGULAR
CMA FINAL DT/IDT/BOTH PENDRIVE/VIDEO CLASS & NOT ONLY A YOUTUBE OR
TELEGRAM CHANNEL SUBSCRIBER OR MERELY REFERRED OUR BOOKS.
CONGRATULATIONS
CMA FINAL INDIRECT TAX/GST RESULT FROM SATC
S. NO. NAME OF STUDENTS REGISTRATION NUMBER MARKS IN IDT EXAM
1 PARAS JAIN (AIR 42) 4141009584 84 Jun-19
2 AMARDEEP 4151002203 79 Dec-18
3 SHREY GUPTA 4151004191 77 Dec-18
4 VASUDEVAN KALASHASTHY 4161004499 75 Jun-19
5 ASHISH SINGH 4142005774 74 Dec-18
6 PANKAJ TRIVEDI 14092006037 68 Jun-19
7 RAVI GUPTA 4132003787 65 Dec-18
8 SHUBHAM GUPTA 4151001994 64 Dec-18
9 KETAN JAIN 4112022182 64 Dec-17
10 JAVED AKHTAR 4122012930 63 Dec-18
11 KAPIL SHARMA 4152003027 63 Jun-19
12 MD. SAIF 4142003895 63 Dec-17
13 MOHD. ADIL 4142010375 61 Jun-18
14 MANISHA BHATIA 4162001141 61 Jun-19
15 RAHUL YADAV 4151003566 60 Jun-19
16 SYED SHABAD ALAM 3151001485 60 Jun-19
17 SHIVEK MADAAN 4152000047 59 Jun-19
18 ANKITA NAGPURKAR 4151008311 58 Jun-18
19 NIKHIL 4152006069 58 Jun-19
20 VISHAL CHAUHAN 4122005659 57 Dec-18
21 NAVEEN GOSWAMI 414100550 56 Jun-19
22 ANURAG PANT 4132012214 56 Dec-17
23 NISHTHA AGRAWAL 4121009440 55 Jun-18
24 HIMANSHU TYAGI 4132000652 55 Jun-18
25 APOORV JAISWAL 4142003143 55 Jun-19
26 SHILPA AGGARWAL 4151003054 54 Jun-18
27 HIMANSHU JAIN 4142010175 54 Jun-18
28 ANUP 4121013398 53 Dec-18
29 MD. SHAHNAWAZ HUSSAIN 4132009413 53 Dec-17
30 AMIT KR KASHYAP 4142005646 52 Dec-18
31 SUMIT 4131008313 49 Jun-19
32 AMIT YADAV 4121000259 44 Jun-19
SURAJ AGRAWAL TAX CLASSES

LAXMINAGAR I 8527230445 , 01147542530
SURAJ AGRAWAL TAX CLASSES, LAXMINAGAR, NEW DELHI
GST BATCH RESULTS FROM SATC IN LAST 2 ATTEMPTS AT CMA INTER
60 students have got 60+ marks in these 2 attempts
S.NO NAME REG. NO IDT MATKS
1 PREETI RAWAT `04171007477 79
2 ASHISH SHIYANI `04151005102 76
3 RAJNESH GUPTA `04151004925 74
4 GAURANG RAJPAL `04152005198 73
5 MAYANK BATRA `04171010401 73
6 ATUL JAYANT `04132002741 71
7 MD.SHAHBAZ IDDRISI `04161000406 71
8 AMIT SHARMA `04161001090 70
9 ROHAN HEERA `04152006198 70
10 PRADEEP SINGH KANDARI `04171006214 69
11 ABHINAV PANNU `04152006249 69
12 SOUVAGYA GERU `04162003079 69
13 DEEPANJALI `04181035932 69
14 MAHIMA THREJA `04171007005 68
15 HITESHEE SHARMA `04162000658 68
16 VIABHAV SRIVASTAVA `04152003904 68
17 RAHUL KR. SONI `04171006939 68
18 ANKUSH GUPTA `04162003134 67
19 PRIYA AGRAWAL `04152002867 67
20 SNEHA `04152003288 66
21 NEELABH SRIVASTAVA `04151002871 66
22 SANJOLI JAIN `04151004777 65
23 MOHIT UPADHYAY `04171011775 65
24 NANCY JAIN `04171012943 65
25 KARTIK BHATT `04162003301 64
26 HIMANI AGGARWAL `04171009548 64
27 SHIVAM SINGH `04171006774 64
28 SWADHA CHITRANSH `04162000395 64
29 KARAN PANESHAR `04171013462 64
30 RAHUL NEGI `04142001226 64
31 AVINASH KUMAR `04132003466 64
32 ANURAG `04171013969 63
33 SALONI MITTAL `04171007814 63
34 ANKIT SINGH `04131000362 63
35 AMRITA VIDWAN `04161001976 63
36 PANKAJ `04162002704 63
37 ANKIT SINGH `04131000362 63
38 PANKAJ RAWAT `04162002704 63
39 ABHISHEK PARASHAR `04171008310 63
40 AMAN GUPTA `04171011461 63
41 ROHIT SATI `04141004707 62
42 SHOBHIT KR. YADAV `04162002512 62
43 DINESH SINGH `04152004116 62
44 NEHA SHARMA `04162003239 62
45 KULDEEP RAWAT `04152004253 62
46 SAURABH JAIN `04151006110 62
47 NANDINI ANAND `04171015462 61
48 MAYANK GARG `04162003405 61
49 FARHEEN NAAZ `04171015009 61
50 KRATIKA KIRAR `01142009362 61
51 OMKAR SINGH `04112018993 61
52 FAHREEN NAAZ `04171015009 61
53 RAM SHARMA `04151007483 61
54 VINAY SHARMA `04162000208 60
55 PARVEJ ALAM `04162000312 60
56 VIVEK UPADHYAY `04171006249 60
57 BHARTI `04171014248 60
58 ANAND VALLABH OLI `04161004350 60
59 PRINCE GOYAL `04152006085 59
60 VIKALP KUMAR `04161000373 59
61 NEHA SURATIYA `04142001231 59
62 NISHA KUMARI `04142001150 58
63 ANURADHA MISHRA `03162004159 58
64 KAMINI `04161000149 57
65 DEEPAK KR KAMAT `04142006457 55
66 VIVEK PRASAD `04171009533 54
67 SIMRAN SINHA `04171006940 54
68 MOHINI AGRAWAL `04152005687 53
69 VIKRANT JHA `04162002126 52
70 KAVITA RAWAT `04171006492 52
71 MOHIT ARYA `04172018239 52
72 BUNTI/VINAY `04171007024 52
73 PUNEET TIWARI `04162005106 51
74 SAURAV KUMAR `04161001645 51
75 KAVITA `04151000769 51
76 VISHAL KESARWANI `04171014398 51
77 VARUN MOR `01172016485 50
78 SHALENDER SEMWAL `04142005213 49
79 PRIYA RAHI `04162003080 48
80 NEHA KASHYAP `04161002757 48
81 YOGESH `04172018166 48
82 JAYED SAIFI `04171011777 47
83 GUNDEEP SINGH GILL `04161006711 46
84 RAHUL `04151000891 45
85 NISHTHA JAIN `04181030186 42
86 SHIVANGI BISHT `04171008407 41
87 MOHAMMAD MOMIN `04142002305 40
THANK YOU
SURAJ AGRAWAL TAX CLASS
LAXMINAGAR / 01147542530 / 9953006445
CONGRATULATIONS
CMA INTER RESULT AT SATC IN DEC 2018 EXAM ALONE
List A : Students cleared Both Group of CMA Inter & Now in CMA FINAL
1 DEEPANJALI `04181035932 NOW IN CMA FINAL
2 ABHISHEK PANDEY `04162003486 NOW IN CMA FINAL
3 AMRITA VIDWAN `04161001976 NOW IN CMA FINAL
4 ISHIKA KHANDELWAL `04181033400 NOW IN CMA FINAL
5 JAYED SAIFI `04171011777 NOW IN CMA FINAL
6 KAJAL NEGI `04161002549 NOW IN CMA FINAL
7 KAVITA RAWAT `04171006492 NOW IN CMA FINAL
8 MIHIR KUMAR `04172020200 NOW IN CMA FINAL
9 MOHIT ARYA `04172018239 NOW IN CMA FINAL
10 NEHA RANA `04181031694 NOW IN CMA FINAL
11 NEHA SHARMA `04162003239 NOW IN CMA FINAL
12 OMPRAKASH KUMAR `04151004795 NOW IN CMA FINAL
13 PRIYA RAHI `04162003080 NOW IN CMA FINAL
14 PUNEET TIWARI `04162005106 NOW IN CMA FINAL
15 RAHUL `04151000891 NOW IN CMA FINAL
16 SAMARJEET SINGH `04181027869 NOW IN CMA FINAL
17 VIVEK PRASAD `04171009533 NOW IN CMA FINAL
List B : Students cleared 1st or 2nd Group & Now in CMA FINAL
18 ANAND VALLABH OLI `04161004350 NOW IN CMA FINAL

19 ANKIT SINGH `04131000362 NOW IN CMA FINAL
20 ANURADHA MISHRA `03162004159 NOW IN CMA FINAL
21 RAHUL NEGI `04142001226 NOW IN CMA FINAL
22 AYUSH DHONDIYAL `04172018516 NOW IN CMA FINAL
23 BHARTI `04171014248 NOW IN CMA FINAL
24 BUNTI/VINAY `04171007024 NOW IN CMA FINAL
25 DEEPAK KR KAMAT `04142006457 NOW IN CMA FINAL
26 FAHREEN NAAZ `04171015009 NOW IN CMA FINAL
27 GUNDEEP SINGH GILL `04161006711 NOW IN CMA FINAL
28 KAMINI `04161000149 NOW IN CMA FINAL
29 KARAN PANESHAR `04171013462 NOW IN CMA FINAL
30 KAVITA `04151000769 NOW IN CMA FINAL
31 KIRAN `04152006169 NOW IN CMA FINAL
32 KULDEEP RAWAT `04152004253 NOW IN CMA FINAL
33 MADHURI KUMARI `04171014151 NOW IN CMA FINAL
LAXMINAGAR / 01147542530 / 9953006445
CONGRATULATIONS
List B : Students cleared 1st or 2nd Group & Now in CMA FINAL
34 MAYANK BATRA `04171010401 NOW IN CMA FINAL
35 MOHD. SHAHBAZ `04161000406 NOW IN CMA FINAL
36 MOHINI AGRAWAL `04152005687 NOW IN CMA FINAL
37 MOHIT UPADHYAY `04171011775 NOW IN CMA FINAL
38 NEELABH SRIVASTAVA `04151002871 NOW IN CMA FINAL
39 NEHA KASHYAP `04161002757 NOW IN CMA FINAL
40 NEHA SURATIYA `04142001231 NOW IN CMA FINAL
41 NIKHIL KUMAR `04142001898 NOW IN CMA FINAL
42 OMKAR SINGH `04151007144 NOW IN CMA FINAL
43 OMKAR SINGH `04112018993 NOW IN CMA FINAL
44 OWAIS `04142011578 NOW IN CMA FINAL
45 PANKAJ `04162002704 NOW IN CMA FINAL
46 PANKAJ RAWAT `04162002704 NOW IN CMA FINAL
47 PRINCE GOYAL `04152006085 NOW IN CMA FINAL
48 PRIYA AGRAWAL `04152002867 NOW IN CMA FINAL
49 PUNIT KUMAR `14092007508 NOW IN CMA FINAL
50 PURUSHOTAM KUMAR `03152004176 NOW IN CMA FINAL
51 RAHUL NEGI `04142001226 NOW IN CMA FINAL
52 SAURABH JAIN `04151006110 NOW IN CMA FINAL
53 SAURAV KUMAR `04161001645 NOW IN CMA FINAL
54 SHALENDER SEMWAL `04142005213 NOW IN CMA FINAL
55 SHIVAM GUPTA `01142006142 NOW IN CMA FINAL
56 SHIVAM SINGH `04171006774 NOW IN CMA FINAL
57 SHIVANGI BISHT `04171008407 NOW IN CMA FINAL
58 SIMRAN SINHA `04171006940 NOW IN CMA FINAL
59 SONALI `04151008330 NOW IN CMA FINAL
60 SWADHA CHITRANSH `04162000395 NOW IN CMA FINAL
61 UMESH `04161001647 NOW IN CMA FINAL
62 VARUN MOR `01172016485 NOW IN CMA FINAL
63 VIDYA P - NOW IN CMA FINAL
64 VIKALP KUMAR `04161000373 NOW IN CMA FINAL
65 VIPIN `04151006112 NOW IN CMA FINAL
66 VISHAL CHAUHAN `04172021373 NOW IN CMA FINAL
67 VISHAL KESARWANI `04171014398 NOW IN CMA FINAL
68 YOGESH `04172018166 NOW IN CMA FINAL
LAXMINAGAR / 01147542530 / 9953006445
CONGRATULATIONS
List C : Students cleared First OR Second Group of CMA Inter

69 ABHISHEK PARASHAR `04171008310 NOW IN GROUP - 1
70 AMAN GUPTA `04171011461 NOW IN GROUP - 1
71 AVINASH KUMAR `04132003466 NOW IN GROUP - 1
72 NANCY JAIN `04171012943 NOW IN GROUP - 1
73 NISHTHA JAIN `04181030186 NOW IN GROUP - 1
74 RAM SHARMA `04151007483 NOW IN GROUP - 1
75 ANKIT SHARMA `04152003376 NOW IN GROUP - 2
76 DHARMESH SHARMA `04152004215 NOW IN GROUP - 2
77 GAGAN CHAUHAN `04112021154 NOW IN GROUP - 2
78 HIMANSHU SINGH BASNAL `04181023904 NOW IN GROUP - 2
79 MD. ZAYAUL HAQUE `03151008179 NOW IN GROUP - 2
80 MOHAMMAD ZOHAIB `04181033459 NOW IN GROUP - 2
81 RAHUL MAITHANI `04151000047 NOW IN GROUP - 2
82 RIDHI SINGH `01452001869 NOW IN GROUP - 2
83 SHIVAM CHAUHAN `04181033342 NOW IN GROUP - 2
84 SURAJ BISHT `04181025181 NOW IN GROUP - 2
85 VAISHALI CHAUHAN `04171009980 NOW IN GROUP - 2
86 VARSHA `04141006563 NOW IN GROUP - 2
THANK YOU TO ALL OF YOU

CONGRATULATIONS
CA INTERMEDIATE/IPCC RESULT AT SATC
Students Successfully Completed Group 1 or Both Group
S.NO NAME ROLL NUMBER MARKS IN TAX
MEGHA KUMARI SINGHAL
1 (All India Rank 13) 341001 77
2 VAIBHAV SAINI 817284 70
3 OSIM AKHTAR 328098 70
4 RAGHAV MANGLA 651375 69
5 PUNEET 325987 67
6 SUJIT KUMAR SHAH 508842 65
7 SURYANSH RASTOGI 804115 65
8 SAMIKSHA PANDEY 637869 65
9 RAJNISH PANDEY 345099 64
10 FATIMA 635666 64
11 SUNIL KUMAR 635526 64
12 VARUN MUNJAL 729537 64
13 MUSKAN MOURYA 336951 63
14 MUDASSIR 815904 63
15 NAVENDU SHARMA 815548 63
16 SHUBHAM GUPTA 343489 62
17 AKASH KUMAR 815849 62
18 DEVENDER 635594 62
19 ABHISHEK PANT 328056 62
20 KISHAN 520305 62
21 PRATEEK GUPTA 399180 62
22 PRINCE TYAGI 344697 61
23 POOLKIT 815940 61
24 NIRAJ KR SINGH 636316 61
25 RAHUL SINGH 635669 61
26 SALMAN AHMED 326069 60
27 PARAS KHURANA 813333 58
28 SANJAY KHADKA 520344 58
29 NIDHI UTREJA 352431 57
30 PRABIN GUPTA 344472 57
31 VIKASH KUMAR 336504 57
32 MUNNA KUMAR KAPOOR 343467 57
33 AJAY KUMAR 639946 57
34 FAISAL SAHID 639261 57
35 ANJAN KUMAR BHARTIA 344271 56
36 RADHIKA MODI 510990 56
VINEET KUMAR
37 (All India Rank 36) 337925 56
38 DEEPANSHU GUPTA 346496 56
39 RAJAT GOYAL 814758 55
40 SUPRIYA CHAUHAN 330769 55
41 PRAMOD KUMAR 431053 54
42 DIKSHA AGRAWAL 635923 54
43 FAIZ 328101 54
44 ASHUTOSH DIXIT 344503 53
45 ABHISHEK AWASTHI 339998 53
46 LALIT MOHAN JOSHI 816589 53
47 AMBIKA GARG 816052 53
48 AGAMLEEN KAUR 509284 52
49 SIDDHARTH JOSHI 344311 52
50 NIRAJAN KUMAR SHAH 346548 52
51 VIVEK KUMAR 346220 51
52 LAV KUMAR PATHAK 345956 51
53 KUNAL GARG 343966 49
54 PRAKHAR GARG 346213 49
55 RIYA BHALLA 424268 49
56 KAMLESH MEHRA 636192 49
57 ADITYA KR JHA 643454 49
58 KRITI AWASTHI 341017 48
59 DEEPAK TIWARI 346638 48
60 RAJNISH DUBEY 330946 47
61 AMAN BANSAL 501643 46
62 KAMAL PRAJAPATI 360459 44
63 JAI KUMAR 816631 43
THANKS TO ALL OF YOU
SURAJ AGRAWAL TAX CLASSES

8527230445, 01147542530
INDEX
S. No. Particulars Page No.
1. Non-Resident Taxation A.1 – A.56
2. Place of Effective Management AA.1 – AA.18
3. Explanation 5, 6 & 7 to Section 9(1)(i) & Section 9A AB.1 – AB.08
Question & Answer - NR AC.1 – AC.14
4. Double Taxation Relief B.1 – B.16
BA.1 – BA.12
5. Foreign Tax Credit BB.1 – BB.4
6. AAR C.1 – C.12
7. GAAR D.1 – D.8
8. APA DD.1 – DD.14
9. International Transaction E.1 – E.14
EE.1 – EE.2
10. Associated Enterprises & Deemed AE F.1 – F.10
11. Specified Domestic Transactions G.1 – G.6
12. ALP & Methods H.1 – H.14
13. TPO & AO (including Secondary Adjustments) I.1 – I.14
14. CUP J.1 – J.12
15. RPM K.1 – K.4
16. CPM L.1 – L.6
17. PSM M.1 – M.4
18. TNMM N.1 – N.6
19. Notified Jurisdictional Area O.1 – O.10
20. Tax Havens P.1 – P.4
21. Key Issues Q.1 – Q.2

NON-RESIDENT SATC A.1
ASSESSMENT OF NON-RESIDENTS
RESIDENT STATUS OF AN INDIVIDUAL [Section 6(1)]
Under section 6(1), an individual is said to be Resident in India in any previous year, if he satisfies
any one of the following BASIC conditions:
1. He has been in India during the previous year for a total period of 182 days or more,
OR
2. He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more AND has been in India for at least 60 days in the relevant PY.
NOTE: IF BOTH THE ABOVE CONDITIONS ARE NOT SATISFIED, THE INDIVIDUAL IS A
NON-RESIDENT.
Exceptions:
The following categories of individuals will be treated as Residents only if the period of their stay
during the relevant previous year amounts to 182 days or more.
[In other words even if such persons were in India for 365 days during the 4 preceding years and 60
days in the relevant previous year, they will not be treated as resident.]
1. Indian Citizen who leaves India as a member of the crew of an Indian ship,
2. Indian Citizen who leaves India for the purpose of employment outside India OR
3. Indian Citizen or Person of Indian origin engaged outside India coming on a visit to India.
Note:
A person is said to be of Indian origin if he or either of his parents or either of his grandparents were
born in undivided India.
ADDITIONAL CONDITION [Section 6(6)]: ROR

An Individual has to satisfy the both additional conditions in order to become Ordinarily Resident (ROR)
in India:-
I. Resident in India in any 2 out of the last 10 previous years immediately preceding the relevant
previous year
AND
II. Total stay in India for 730 days or more during 7 previous years immediately preceding the
relevant previous year.
Period of stay of Crew Member (Indian Citizen) of Foreign Bound Ship
Finance Act 2015 [May 2016]

“In case of an Individual, being a citizen of India and a member of the crew of a foreign bound ship
leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in
the prescribed manner and subject to the prescribed conditions”
By CA Suraj Agrawal [8527230445] Suraj Agrawal Tax Classes: 011-47542530

Rules notified are as follows
For the purposes of Section 6(1), in case of an individual, being a citizen of India and a member of the crew of a
ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period
beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship.
"Eligible voyage" shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where
i. For the voyage having originated from any port in India, has as its destination any port outside India; and
ii. For the voyage having originated from any port outside India, has as its destination any port in India.'
Question
Mr. Anand is an Indian Citizen and a member of the crew of a Singapore bound Indian Ship engaged in
carriage of passengers in international traffic departing from Chennai Port on 6th June, 2019. From the
following details for the PY 2019-20, determine the residential status of Mr. Anand for A.Y. 2020-21,
assuming that his stay in India in the last 4 previous years (preceding P.Y. 2019-20) is 400 days and last
seven previous years (preceding P.Y. 2019-20) is 750 days:
Particulars Date
Date entered into the Continuous Discharge Certificate in respect of 6th June, 2019
Joining the ship by Mr. Anand
th
Date entered into the Continuous Discharge Certificate in respect of 9 December, 2019
Signing off the ship by Mr. Anand
Answer
As per Section 6, an individual is treated as resident if he has stayed for 182 days in India during the previous
year or if he has stayed for 60 days in the current previous year and 365 days in total during the four preceding
previous years. However, where an Indian citizen leaves India as a member of crew of an Indian ship or for the
purpose of employment outside India, he will be resident only if he stayed for atleast 182 days during the previous
year.
Further, For the purposes of Section 6(1), in case of an individual, being a citizen of India and a member of the
crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period
beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the
said individual and ending on the date entered into the Continuous Discharge Certificate in respect of
signing off by that individual from the ship
In this case, the voyage is undertaken by an Indian ship engaged in the carriage of passengers in international
traffic at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible voyage for the purposes of
th th
Section 6(1). Therefore, the period beginning from 6 June, 2019 and ending on 9 December, 2019, being the
dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from the ship
by Mr. Anand , an Indian citizen who is a member of the crew of the crew of the ship, has to be excluded for
computing the period of his stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded
from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the P.Y. 2019-20
would be 179 days [i.e., 366 days – 187 days]. Since his period of stay in India during the P.Y. 2019-20 is less
than 182 days, he is a non-resident for AY 2020-21.

RESIDENT STATUS OF HINDU UNDIVIDED FAMILY (HUF) [Section 6(2)]
A HUF would be Resident in India if the control and management of its affairs is situated wholly or
partly in India. If the control and management of the affairs is situated wholly outside India it would
become a non-resident.
STATUS
If Control & Management of its affairs is wholly / partly situated in India - Resident
If Control & Management of its affairs is wholly situated outside India - Non-Resident
Resident but Not-Ordinarily Resident (HUF)

If the HUF is Resident, then the status of the Karta determines whether it is ROR or RNOR. If the
Karta/Manager satisfies the conditions of Section 6(6), then the HUF is said to be ROR.
RESIDENT STATUS OF A COMPANY [Section 6(3)]

IF PERSON IS: STATUS
An Indian Company [as defined under section 2(26)] - Resident
Company other than Indian Company will be Resident in India in any previous year if its Place of
Effective Management [POEM], in that year, is in India. NEW – effective from AY 17-18
“POEM” to mean 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.
RESIDENT STATUS OF PERSONS OTHER THAN ABOVE [Section 6(4)]

(FIRMS/AOP/BOI/Local Authority/Artificial Judicial Persons)
STATUS
If Control & Management of its affairs is wholly / partly situated in India - Resident
If Control & Management of its affairs is wholly situated outside India - Non-Resident

SCOPE OF TOTAL INCOME [Section 5] – Tax Incidence vs Residential Status
Section 5 provides the scope of total income in terms of the residential status of the assessee because
the incidence of tax on any person depends upon his residential status.
A Tabular Presentation:
NATURE OF INCOME R & OR RNOR NR
a) Income received or deemed to be received in Taxable Taxable Taxable

India during the year
(whether accrues in India or not)
[Indian Income]
b) Income accrues/arises or deemed to accrue/ Taxable Taxable Taxable

arise in India during year - whether received
in India or not
[Indian Income]
(c) Income accrues/arises and received outside

India and derived from:
[Foreign Income]
- A business / Profession controlled/ Taxable Taxable Not Taxable

setup in India
- A business / Profession controlled/ Taxable Not Taxable Not Taxable

setup from outside India
(d) Past income (earned and received abroad) Not Not Taxable Not Taxable
remitted to India in Previous year Taxable

INCOME DEEMED TO ACCURE OR ARISE IN INDIA [Section 9]
Section 9 applies to all assesses irrespective of their residential status and place of business. The
categories of income which are deemed to accrue or arise in India are as under:
Income Accruing/Arising [Section 9(1)(i)]

All income accruing or arising, whether directly or indirectly,
through or from any Business Connection (including Professional connection) in India, or
through or from any property, asset or source of Income, or
through the transfer of a capital asset situated in India i.e. if the source of income is in India.
shall be deemed to accrue or arise in India
Business Connection in India shall include

Explanation 2 to Clause (i) of Sub-section (1) of Section 9
Any business activity carried out through a person acting on behalf of the non-resident and such person
a) [FA 2018] - has and habitually exercises in India, an authority to conclude contracts on
behalf of the non-resident or habitually concludes contracts or habitually plays the
principal role leading to conclusion of contracts by that non-resident and the contracts
are-
(i) in the name of the non-resident; or
(ii) 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
(iii) for the provision of services by the non-resident;
has and habitually exercises in India, an authority to conclude contracts on behalf of the non-
resident unless his activities are limited to the purchase of goods or merchandise for the non-
resident
b) maintains in India a stock of goods from which he delivers goods on behalf of the non-
resident or
c) secures orders in India, mainly or wholly
for the non-resident or

for that non-resident and other non-residents
under the same common control & managements
however, Business Connection shall not include the cases where the non-resident carries on
business through a broker, general commission agent or any other agent of an independent
status.
Independent status: Where a broker, general commission agent or any other agent not works
mainly or wholly on behalf of a NR or other non-residents under the same common control &
management.
Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause
(c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall
be deemed to accrue or arise in India.

Explanation 1 to Section 9(1)(i)
1) In the case of a business of which all the operations are not carried out in India, the income of the
business deemed under this clause to accrue or arise in India shall be only such part of the income
as is reasonably attributable to the operations carried out in India
2) No income shall be deemed to accrue or arise in India to NR, through or from operations, which are
confined (limited) to the purchase of goods in India for the purpose of export.
3) No income shall be deemed to accrue or arise in India to NR, engaged in the business of
running a news agency or publishing newspapers, magazines or journals, through or from
activities which are confined to the collection of news and views in India for transmission out
of India.
4) No income shall be deemed to accrue or arise in India to a non-resident if the operations is

confined to shooting of cinematography films in India but if NR is
(i) An Individual - He should not be citizen of India.
(ii) A Firm- No partner should be citizen of India or Resident in India.
(iii) A Company - None of the shareholder should be citizen of India or Resident in India.
5) In the case of a foreign company engaged in the business of mining of diamonds, no income
shall be deemed to accrue or arise in India to it through or from the activities which are confined
to the display of uncut and unassorted diamond in any special zone notified by the CG
Added by Finance Act 2018

Explanation 2A to Clause (i) of Sub-section (1) of Section 9
Significant economic presence of a non-resident in India shall constitute "business

connection" in India {Theory Question – 4 Marks}
Significant economic presence of a Non-Resident in India shall constitute "business
connection" in India and
"significant economic presence" for this purpose, shall mean-
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,—
i. the agreement for such transactions or activities is entered in India; or
ii. the non-resident has a residence or place of business in India; or
iii. 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.
Salaries Earned in India [Section 9(1)(ii)]
Any income under the head “Salaries”, for services rendered in India, whether such salary income
payable for the rest period or leave period and forms part of the service contract of employment shall be
deemed to accrue or arise in India. Salary includes pension.
Salaries Payable by Indian Govt. [Section 9(1)(iii)]

Any income chargeable under head “salaries” payable by the Indian Govt. to a citizen of
India for service rendered outside India shall be deemed to accrue or arise in India.
Foreign Allowances by the Govt. Employer - Section 10(7) –Exempted

Any allowance or perquisite paid or allowed outside India, by the Indian Govt. to a citizen of India, for
rendering service outside India is fully exempt.
INCOME FROM DIVIDEND [Section 9(1)(iv)]

All dividends paid by an Indian company must be deemed to accrue or arise in India.
Under section 10(34), income from dividends referred to in section 115-O are exempt from tax in the
hands of the shareholder [Except dividend covered u/s 115BBDA]
It may be noted that dividend distribution tax under section 115-O is now applicable to
deemed dividend under section 2(22)(e), which is fully exempt u/s 10(34) in the hands of
shareholder.
INTEREST [Section 9(1)(v)]

Under section 9(1)(v), an interest is deemed to accrue or arise in India [Taxable in the
hands of recipient] if it is payable by:
1) the Government; or
2) a person resident in India except where it is payable
a) in respect of any money borrowed and used for the purposes of a business or profession carried
on by him outside India OR
b) for the purposes of making or earning any income from any source outside India) ; or
3) a Non-Resident when it is payable in respect of any debt incurred or moneys borrowed and used
for the purpose of a business or profession carried on in India by him. (Only Business
purpose)

Explanation Inserted by FA 2015:
Interest Payable by the PE (engaged in Banking Business in India) of a NR to HO
(a) In the case of a non-resident, being a person engaged in the business of banking, any interest
payable by the permanent establishment in India of such non-resident to the head office or any
permanent establishment or any other part of such non-resident outside India shall be deemed
to accrue or arise in India.
(b) Such Interest shall be chargeable to tax in addition to any income attributable to the PE in
India
(c) The PE in India shall be deemed to be a person separate and independent of the non-resident
person of which it is a PE and the provisions of the Act relating to computation of total income,
determination of tax and collection and recovery shall apply accordingly;
(d) The PE in India has to deduct tax at source on any Interest payable. Non deduction would result
in disallowance of Interest expenses & may attract interest & penalty.
(e) PE includes a fixed place of Business through which the business of the enterprise is wholly or
partly carried on.
ROYALTY [Section 9(1)(vi)]

Royalty will be will be deemed to accrue or arise in India when it is payable by –
2) a person who is a resident in India except in cases where it is payable
a) for the transfer of any right or the use of any property or information or for the utilization of
services for the purposes of a business or profession carried on by such person outside India
OR
b) for the purposes of making or earning any income from any source outside India; or
3) a non-resident only when the royalty is payable

a) in respect of any right, property or information used or services utilised for purposes of a
business or profession carried on in India OR
b) for the purposes of making or earning any income from any source in India.

FEES FOR TECHNICAL SERVICES [Section 9(1)(vii)]
Any fees for technical services will be deemed to accrue or arise in India if they are payable by:
3) a person who is resident in India, except in cases where the fees are payable
a) in respect of technical services utilised in a business or profession carried on by such person
outside India OR
b) for the purpose of making or earning any income from any source outside India; or
4) a person who is a non-resident, only where the fees are payable in respect of
a) services utilised in a business or profession carried on by the non-resident in India OR
b) where such services are utilised for the purpose of making or earning any income from
any source in India.
Explanation to Section 9
Explanation to section 9 clarifies that income by way of interest, royalty or fee for technical services
which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be
included in the total income of the non -resident, whether or not:
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.
Section 9(1)(viii) - Deemed income in respect of Gift

[w.e.f. 05 July 2019 as inserted by Finance (No. 2) Act 2019]
Income arising outside India, being any sum of money (Only money) as referred to in Section
56(2)(x), paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident, not
being a company, or to a foreign company.
Example: Gift of ` 60,000 received on 10th July 2019 by Non-resident outside India from a Resident
person is now an income deemed to accrue or arise in India and thus taxable.

Questions
1) Mr. David, a Government employee serving in the Ministry of External Affairs, left India for the first
time on 31.03.2019 due to his transfer to High Commission of Canada. He did not visit India any time
during the previous year 2019-20. He has received the following income for the Financial Year 2019-
20:
S.No. Particulars (`
`)
(i) Salary 5,00,000
(ii) Foreign Allowance 4,00,000
(iii) Interest on fixed deposit from bank in India 1,00,000
(iv) Income from agriculture in Pakistan 2,00,000
(v) Income from house property in Pakistan 2,50,000
Compute his gross total income.
Answer
As per section 6(1), Mr. David is a non-resident for the PY 2019-20, since he was not present in India at any
time during the previous year 2019-20.
As per section 5(2), a non-resident is chargeable to tax in India only in respect of following incomes:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions, income from agriculture in Pakistan and income from house property in
Pakistan would not be chargeable to tax in the hands of David, assuming that the same were received in
Pakistan. Income from ‘Salaries’ payable by the Government to a citizen of India for services rendered outside
India is deemed to accrue or arise in India as per section 9(1)(iii). Hence, such income is taxable in the hands
of Mr. David, even though he is a non-resident. It has been assumed that Mr. David is a citizen of India.
However, allowances or perquisites paid or allowed as such outside India by the Government to a citizen of
India for rendering service outside India is exempt under section 10(7). Hence, foreign allowance of `
4,00,000 is exempt under section 10(7).
Gross Total Income for P.Y. 2019-20
Particulars `
Salaries 5,00,000
Income from other sources (Interest on fixed deposit in India) 1,00,000
Gross Total Income 6,00,000
2) Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practicing in
Colombo, specializing in project financing. The payment was made in Colombo. Mr. Kulasekhara is a
non-resident. The consultancy is related to a project in India with possible Ceylonese collaboration. Is
this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since the services were used
in India?
Answer
A non-resident is chargeable to tax in respect of income received outside India only if such income accrues or
arises or is deemed to accrue or arise to him in India.
The income deemed to accrue or arise in India under section 9 comprises, inter alia, income by way of fees
for technical services, which includes any consideration for rendering of any managerial, technical or
consultancy services. Therefore, payment to a management consultant relating to project financing is covered
within the scope of “fees for technical services”.
The Explanation below section 9(2) has been substituted to clarify that income by way of, inter alia, fees for
technical services, from services utilized in India would be deemed to accrue or arise in India in case of a non-
resident and be included in his total income, whether or not such services were rendered in India or whether
or not the non-resident has a residence or place of business or business connection in India.
In the instant case, since the services were utilized in India, the payment received by Mr. Kulasekhara, a non-
resident, in Colombo is chargeable to tax in his hands in India, as it is deemed to accrue or arise in India.

3) Determine the taxability of income of US based company Heli Ltd., in India on entering into the
following transactions during the financial year 2019-20:
(i) ` 5 lacs received from an Indian domestic company for providing technical knowhow in India.
(ii) ` 6 lacs from an Indian firm for conducting the feasibility study for the new project in Finland. The
payment for the same was made in Finland.
(iii) ` 4 lacs from a non-resident for use of patent for a business in India.
(iv) ` 8 lacs from a non-resident Indian for use of know-how for a business in Singapore. Such
amount was received in U.S.
(v) ` 10 lacs for supply of manuals and designs for the business to be established in Singapore. No
payment for the same was made in India.
Answer
A non-resident is chargeable to tax in India in respect of following incomes:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions, taxability of income is determined in following manner:

Particulars ` (in lacs)
(i) Amount received from an Indian domestic company for providing technical knowhow in 5
India is deemed to accrue or arise in India and is, therefore, taxable in India.
(ii) Conducting the feasibility study for the new project in Finland for the Indian firm is not Nil
taxable in India as the income accrues outside India since such study is done for a
business outside India.
(iii) Income received from a non-resident for use of patent for a business in India is taxable in
India as it is deemed to accrue or arise in India. 4
(iv) Income received from a non-resident Indian for use of knowhow for a business in
Singapore. It is not taxable in India since it does not accrue or arise in India nor is it Nil
deemed to accrue or arise in India,
(v) Income received for supply of manuals and designs for the business to be established in
Singapore is not taxable in India, since it does not accrue or arise in India nor is it
deemed to accrue or arise in India. Nil
Total Income 9
4) X furnished the following particulars of his income earned during the previous year relevant
to the assessment year 2020-21: `
i) Interest on German Development Bonds (two-fifths is received in India) 60,000
ii) Income from agriculture in Bangladesh, received there but later on ` 50,000 is
remitted to India (agricultural activity is controlled from Bangladesh) 1,81,000
iii) Income from property in Canada received outside India (` 76,000 is used in
Canada for meeting educational expenses of X’s daughter in USA and ` 10,000
is later on remitted to India) 86,000
iv) Income earned from business in Kampala (Uganda) which is controlled from Delhi
(` 15,000 is received in India) 65,000
v) Dividend paid by a foreign company but received in India on April 10, 2019 46,500
vi) Past untaxed profit of 2003-04 brought to India in PY 2019-20 10,43,000
vii) Profits from a business in Madras and managed from outside India 27,000
viii) Profit on sale of a building in India but received in Sri Lanka 14,80,000
ix) Pension from a former employer in India, received in Rangoon 86,000
x) Gift in foreign currency from a friend received in India on January 20, 2020 80,000
Find out the gross total income of X, if he is (i) ROR, (ii) RNOR, or (iii) NR in India for the
assessment year 2020-21.

Answer
ROR RNOR NR
` ` ` Reasons
Interest on German Development Bonds :
• Two-fifths is taxable on receipt basis 24,000 24,000 24,000 See Note 1
• Three-fifths is taxable in the case of resident
and ordinarily resident on accrual basis 36,000 — — See Note 2
Income from agriculture in Bangladesh :
• Income accrued and received outside India 1,81,000 — — See Note 3
Income from property in Canada received outside India :
• Income accruing and arising outside India 86,000 — — See Note 2
Income earned from a business in Kampala, controlled from Delhi :
• ` 15,000 is taxable on receipt basis 15,000 15,000 15,000 See Note 1
• Balance is not taxable in the case of non
resident 50,000 50,000 — See Note 4
• Dividend paid by a foreign company :
• Income received in India 46,500 46,500 46,500 See Note 1
Past untaxed profit brought to India :
• Not an income of the previous year 2019-20
relevant for the assessment year 2020-21, hence not taxable— — — See Note 5
Profits from a business in Madras and managed from outside India :
Income accrued in India 27,000 27,000 27,000 See Note 6
Profit on sale of a building in India but received in Sri Lanka:

• Income deemed to accrue or arise in India 14,80,000 14,80,00014,80,000 See Note 7
Pension from an Indian former employer received in Rangoon:
• Income deemed to accrue or arise in India 36,000 36,000 36,000 See Note 8
Gift from a friend
• It is taken as an income 80,000 80,000 80,000 See Note 9

Total 20,61,500 17,58,500 17,08,500
Notes —
1) It is Indian income. It is always taxable.
2) It is received as well as accrued outside India, It is foreign income. It is not business income or
income from profession. It is taxable only in the case of resident and ordinarily resident
taxpayer.
3) It is received outside India (remittance of ` 50,000 to India is not "receipt" of income in India). It
is accrued outside India. It is foreign income from a business, which is controlled from outside
India. It is, therefore, taxable in India only in the case of resident and ordinarily resident
taxpayer.
4) It is accrued outside India. It is received outside India. It is foreign income. It is taxable in the
case of resident and ordinarily resident taxpayer. It is not taxable in the case of non-resident.
Since it is business income and business is controlled from India, it is taxable in the hands of
resident but not ordinarily resident taxpayer.
5) It is income of the previous year 2003-04. It cannot be taxed at the time of remittance in 2019-
20.
6) As the income is accrued in India, it is Indian income. It is, therefore, taxable in all cases.
7) As the building is situated in India, income is deemed to be accrued in India. Consequently, it is
Indian income and is chargeable to tax in all cases.
8) Service was rendered in India. Pension income is deemed to accrue in India. It is Indian income
and is chargeable to tax in all cases. Deduction u/s 16(ia) – 50,000 is avialble.
9) If the aggregate amount of gift(s) received by an individual/HUF from all persons (not being
relatives) during a financial year exceeds ` 50,000, it is taxable as income.

5) XY Pvt. Ltd., a company having registered head office in Singapore, for the first time had carried out
operations during the year 2019-20 of purchase of goods in India on four occasions. Immediately after
purchase, the company exported the same to China. The total value of such exports was ` 100 Lacs,
on which it earned profits of ` 20 Lacs, before the expenses of ` 12 Lacs, which were directly paid by
H.O. The company seeks your advice regarding its tax liability in India. How much of income for the
A.Y. 2020-21 shall be subjected to tax?
Answer
Section 2(26) defines an “Indian Company”. The proviso to section 2(26) states that for a company to be an
Indian company, the registered or principal office should be in India. In this case, since the registered office is
in Singapore, XY Pvt. Ltd. is not an Indian company. A company, other than an Indian company, would be
considered as resident in India only if the POEM of the company is in India in that year. In this case, POEM is
not in India and therefore, XY Pvt. Ltd. is not a Resident in India.
XY Pvt. Ltd. is a non-resident assessee during the previous year relevant to assessment year 2020-21. As per
Explanation 1(b) of section 9(1)(i), no income shall be deemed to accrue or arise in India to a non-resident
through or from operations which are confined to purchase of goods in India for the purpose of export. XY Pvt.
Ltd. had purchased the goods in India and thereafter exported the same in total to China and accordingly no
income of the non-resident company shall be subject to tax for assessment year 2020-21.
6) An assessee rendered certain services from abroad without parting with technology. The assessee
does not have any permanent establishment in India. He claims that he is not liable to pay tax on
income from rendering such services.
Answer:
As per section 9(1)(vii) if any services are rendered without parting with technology the same falls under "fees
for technical services". The fees for technical services for services utilized in India are deemed to accrue or
arise in India. The Income of a non-resident shall be deemed to accrue or arise in India under section 9(1)(vii)
and shall he included in the total income of the non-resident, whether or not,-
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.
Hence, in this case, assuming that the services are utilized in India, the assessee is liable to tax in India.
7) ABC Ltd. paid a sum of 12,000 USD to Kiwi Consultants, based only at Singapore, relating to
consultation involving the installation of play-back facilities to be used in the cricket stadium in
Bangalore. The payment was made in Singapore and the entire consultation took place in Singapore.
Can this amount be taxed in India on the ground that the payment related to services of a product
used in India?
Answer:
In the hands of a non-resident, income accruing or arising in India alone is chargeable to tax. Income
accruing or arising outside India is not chargeable to tax, unless the same is deemed to accrue or arise in
India.
As per section 9, certain incomes are deemed to accrue or arise in India. This section, inter alia, covers fees
for technical services. "Fees for technical services" means any consideration (including any lump sum
consideration) for the rendering of any managerial, technical or consultancy services (including the provision
of services of technical or other personnel) but does not include consideration for any construction,
assembly, mining or like project undertaken by the recipient or consideration which would be income of the
recipient chargeable under the head "Salaries".
The payment mentioned in the problem is covered by this definition. As per the retrospective amendment
effected by the Finance Act, 2010 w.e.f. 1st April, 1976, income by way of fees for technical services relating
to services utilized in India is deemed to accrue or arise in India, in the hands of a non-resident.
Since the services were utilized in India in the instant case, the payment received by Kiwi Consultants is
chargeable to tax in India, since it is deemed to accrue or arise in India.

8) ERR Ltd., a foreign company, owns a property in Chennai. It is given on rent (rent being 5,000 US$ per
month) to Deter Ltd., another foreign company. The two companies are non-residents in India. The
agreement is made outside India. Rent is payable in foreign currency outside India. As per agreement,
rent is accrued outside India. Discuss whether the rental income of ERR Ltd. is chargeable to tax in
India under the Income-tax Act, 1961.
Answer:
As per section 9(1) of the Act, any income arising through or from any business connection in India or
property or asset or source of income in India is deemed to accrue or arise in India. Since, in this case, the
property from which rent is earned is located in India, the rental income will be taxable in India.
However, if any DTAA provides that such income shall be accrued outside India and shall not be deemed to
accrue or arise in India, then, the provision of the DTAA shall prevail.
9) ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent establishment in
India, has set up a liaison office in Mumbai in April, 2019 in compliance with RBI guidelines to look
after its day to day business operations in India, spread awareness about the company's products
and explore further opportunities. The liaison office takes decisions relating to day to day routine
operations and performs support functions that are preparatory and auxiliary in nature. The
significant management and commercial decisions are, however, in substance made by the Board of
Directors at Sweden. Determine the residential status of ABC Inc. for A. Y. 2020-21.
Answer:
Section 6(3) provides that a company would be resident in India in any previous year, if
i. it is an Indian company; or
ii. its place of effective management, in that year, is in India.
In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for P.Y. 2019-20 only if
its place of effective management, in that year, is in India.
Explanation to Section 6(3) defines "place of effective management" to mean 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.
In the case of ABC Inc., its place of effective management for P.Y. 2019-20 is not in India, since the
significant management and commercial decisions are, in substance, made by the Board of Directors outside
India in Sweden.
ABC Inc. has only a liaison office in India through which it looks after its routine day to day business
operations in India. The place where decisions relating to day to day routine operations are taken and
support functions that are preparatory or auxiliary in nature are performed are not relevant in determining the
place of effective management.
Hence, ABC Inc., being a foreign company is a non-resident for A.Y. 2020-21, since its place of effective
management is outside India in the P.Y. 2019-20.

Interest from NRE Account [Section 10(4)(ii)]
Sec. Exempt Incomes Conditions/Remarks

10(4)(ii) Interest on moneys standing to the credit Individual is 'person resident outside India''
in Non-Resident (External) A/c in any under FEMA or is a person who has been
Indian Bank will be exempt from Income permitted by RBI to maintain the aforesaid
Tax. Account.
CBDT Circular: CBDT has clarified that salary accrued to a non-resident seafarer for services
rendered outside India on a foreign going ship (with Indian Flag or foreign flag) shall not be included in
the Total Income merely because the said salary has been credited in the NRE account maintained
with an Indian bank by the seafarer.
Exemptions in respect of income received by certain foreign companies [Sec. 10(48)]
Any income of a foreign company received in India in Indian currency on account of sale of crude oil
or on account of sale of any other goods or rendering of services to any person in India is exempt
u/s 10(48) subject to the following conditions:
a) The receipt of money is under an agreement or an arrangement which is either entered into by
the CG or approved by it.
b) The foreign company and such arrangement/agreement has been notified by the CG.
c) The receipt of the money is the only activity carried out by the foreign company in India.
(Ex: National Iranian Oil Company is notified as Foreign Company)
Exemptions in respect of income received by certain foreign companies [Sec. 10(48A)]
Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in
India and sale of crude oil therefrom to any person resident in India:
Provided that
i. the storage and sale by the foreign company is pursuant to an agreement or an arrangement
entered into by the Central Government or approved by the Central Government; and
ii. having regard to the national interest, the foreign company and the agreement or
arrangement are notified by the Central Government in this behalf;
Section 10(48B)
Any income accruing or arising to a foreign company on account of sale of leftover stock of crude
oil, if any, from the facility in India after the expiry of the agreement or the arrangement referred to
in clause (48A) or on termination of the said agreement or the arrangement, in accordance with
the terms mentioned therein, as the case may be, subject to such conditions as may be notified by
the Central Government in this behalf

SEC 115BBA – Non Resident Sportsmen or Sports Association
Where the total income of an assessee,—
a. being a sportsman (including an athlete), who is not a citizen of India and is a non-resident,
includes any income received or receivable by way of—
i. participation in India in any game (other than a game the winnings wherefrom are taxable
under section 115BB) or sport; or
ii. advertisement; or
iii. contribution of articles relating to any game or sport in India in newspapers, magazines or
journals; or
b. being a non-resident sports association or institution, includes any amount guaranteed to be paid
or payable to such association or institution in relation to any game (other than a game the winnings
wherefrom are taxable under section 115BB) or sport played in India; or
c. being an entertainer, who is not a citizen of India and is a non-resident, includes any income received
or receivable from his performance in India,
the income-tax payable by the assessee shall be 20% of such income;
Provided that no deduction in respect of any expenditure or allowance shall be allowed under any
provision of this Act in computing the income referred above.
It shall not be necessary for the assessee to furnish u/s 139(1), a return of his income if—
a. his total income consisted only of income referred in this Section and
b. the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.
Section – 194E - Payments to Non-Resident Sportsmen etc

Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an
athlete) or an entertainer who is not a citizen of India or a non-resident sports association or institution,
the person responsible for making the payment shall,
at the time of credit of such income or at the time of payment thereof, whichever is earlier,
deduct income-tax thereon at the rate of 20% (plus applicable surcharge & cess).

Section 172 - Profits of non-residents from occasional shipping business
1. The provisions of this section shall, notwithstanding anything contained in the other provisions of this
Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered
by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India.
2. Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, seven and a
half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or
to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be
income accruing in India to the owner or charterer on account of such carriage.
3. Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish
to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any
person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at that
port since the last arrival of the ship thereat:
Provided that where the Assessing Officer is satisfied that it is not possible for the master of the ship to
furnish the return required by this sub-section before the departure of the ship from the port and provided
the master of the ship has made satisfactory arrangements for the filing of the return and payment of
the tax by any other person on his behalf, the Assessing Officer may, if the return is filed within thirty days
of the departure of the ship, deem the filing of the return by the person so authorised by the master as
sufficient compliance with this sub-section.
4. On receipt of the return, the Assessing Officer shall assess the income referred to in sub-section (2) and
determine the sum payable as tax thereon at the rate or rates in force applicable to the total income of a
company and such sum shall be payable by the master of the ship.
5. No order assessing the income and determining the sum of tax payable thereon shall be made after the
expiry of nine months from the end of the financial year in which the return is furnished.
6. A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duly
authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or
that satisfactory arrangements have been made for the payment thereof.
7. Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming
before the expiry of the assessment year relevant to the previous year in which the date of departure of the
ship from the Indian port falls, that an assessment be made of his total income of the previous year and
the tax payable on the basis thereof be determined in accordance with the other provisions of this
Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail
or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the
tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax
found payable by him on such assessment shall be paid by him or refunded to him, as the case may be.
8. For the purposes of this section, the amount paid for carriage shall include the amount paid or payable by
way of demurrage charge or handling charge or any other amount of similar nature.
9. Judicial Decision - The ship which leaves the Indian port and only casually visits the Indian port is
covered by sec. 172 and those who do regular shipping business are covered by sec. 44B.

SPECIAL PROVISIONS FOR COMPUTING PROFITS AND GAINS IN CASE OF NON-
RESIDENTS ENGAGED IN CERTAIN BUSINESSES [SECTION 44B, 44BB, 44BBA & 44BBB]:
Section 44B Section 44BB Section 44BBA Section 44BBB
[Ships] [Minerals Oils] [Aircraft] [Power Projects]
This section Non-resident Non-resident engaged in Non-resident Foreign company
applies to- engaged in providing service/ facilities engaged in engaged in civil
operation of or supplying plant/ operation of construction or
ships. machinery for extraction aircraft. erection, testing or
or production of mineral commissioning of
oils (including petroleum plant or machinery
and natural gas) in connection with
an approved
turnkey power
project in India
Deemed 7.5% of Gross 10% of Gross Receipts 5% of Gross 10% of Gross
Income Receipts Receipts Receipts
(on account of (on account of
carriage of carriage of
passengers, passengers,
livestock, mail or livestock, mail or
goods) goods)
Other Conditions:
1) Gross Receipts: The gross receipts of the business consist of the following -
a) Amounts paid or payable anywhere for business carried on in India. In case of business of
ships/ aircrafts, such amounts for ships/aircrafts starting from any port in India will be
considered; and
b) Amounts received or deemed to be received in India for business carried on outside India.
In case of business of ships/ aircrafts, such amounts for ships/aircrafts starting from any
port outside India will be considered.
However, in case of section 44BBB, only amounts for business carried on in India will be
taxable (whether received in or outside India).
2) Claiming Lower Profits: In case of assessees falling u/s 44BB and 44BBB, the assessee
may claim lower profits and gains than the profits as deemed above, if he -
a) keeps and maintains books of account and other documents as per section 44AA; and
b) gets his accounts audited and furnishes a report thereof as per section 44AB.
FA 18: For the removal of doubts, it is hereby clarified that the provisions of Section 115JB
(MAT) shall not be applicable and shall be deemed never to have been applicable to an
assessee, being a foreign company, where its total income comprises solely of profits and
gains from business referred to in section 44B or section 44BB or section 44BBA or section
44BBB and such income has been offered to tax at the rates specified in those sections.

QUESTIONS
1. Write a note on profits and gains of shipping business in case of Non-Residents.
Answer:
Profits and gains of shipping business in the case of non-residents [Section 44B]:
(A) Section applies to: A Non-Resident assessee engaged in the business of operation of ships.
(B) Deemed profits and gains of business or profession:
7.5 %of the aggregate of the following -
(i) Amount paid/payable in or outside India to assessee or any person on his behalf for carriage of
goods, livestock, mail or passengers shipped at any port in India; and
(ii) Amount received or deemed to be received in India by or on behalf of the assessee for any of the
above shipped at any port outside India.
Note: Demurrage and handling charges - The amount referred above shall include the amount paid or
payable or received or deemed to be received, as the case may be, by way of demurrage charges or
handling charges or any other amount of similar nature.
2. Write a note on profits and gains in connection with business of exploration, etc. of mineral oils.
Answer:
Profits and gains in connection with business of exploration, etc. of mineral oils [Section 44BB]
(A) Section applies to : A Non-Resident engaged in the business of providing services or facilities in
connection with, or supplying plant (including ships, aircraft, vehicles, drilling units, scientific apparatus
and equipment, used for the said business) and machinery on hire used, or to be used, in the
prospecting for, or extraction or production of, mineral oils (including petroleum and natural gas).
(B) Deemed profits and gains of business or profession: 10% of the aggregate of following
(i) Amount paid or payable in or outside India to the assessee or to any person on his behalf for any
of the above for prospecting for, or extraction or production of, mineral oils in India; and
(ii) Amount received or deemed to be received in India by or on behalf of the assessee for any of
the above for prospecting for or extraction or production of mineral oils outside India.
(C) Claim of lower profits:

The assessee may claim lower profits and gains than the profits as deemed above, if he (i) keeps and
maintains books of account and other documents as per Section 44AA; and (ii) gets his
accounts audited and furnishes a report thereof as per Section 44AB.
(D) Non-Applicability:
This section shall not apply in a case where the provisions of Sections 44DA/115A apply for computing
profits or gains or any other income referred therein.
3. Mr. B.A. Patel, a non-resident, operates an aircraft between London to Ahmedabad. For the Financial
year ended on 31st March, 2020, he received the amounts as under:
(i) For carrying passengers from Ahmedabad ` 50 lacs.
(ii) For carrying passengers from London ` 75 lacs received in India.
(iii) For carrying of goods from Ahmedabad ` 25 lacs.
The total expenditure incurred by Mr. B.A. Patel for the purposes of the business for the financial
year 2019-20 was ` 1.4 crores.
Compute the income of Mr. B.A. Patel under the head “Profits and Gains from business or
profession” for the financial year ended on 31st March 2020 relevant to assessment year 2020-21.

Solution:
Under section 44BBA, in case of an assessee, being a non-resident, engaged in the business of operation of
aircraft, a sum equal to 5% of the aggregate of the following amounts shall be deemed to be his business
income:
(a) the amount paid or payable, whether in or out of India, to the assessee on account of carriage of
passengers, goods etc. from any place in India; and
(b) the amount received or deemed to be received in India by the assessee on account of carriage of
passengers, goods etc. from any place outside India.
Hence, the income of Mr. B.A. Patel chargeable to tax in India under the head “Profits and Gains of business
or profession” is determined as under:
Particulars `
(i) For carrying passengers from Ahmedabad 50,00,000
(ii) For carrying passengers from London, amount received in India 75,00,000
(iii) For carrying goods from Ahmedabad 25,00,000
Total 1,50,00,000
Hence, income from business computed on presumptive basis as per section 44BBA is ` 7,50,000, being
5% of ` 1,50,00,000.
Note: No deduction is allowable in respect of any expenditure incurred for the purpose of the
business.
4. X Airlines incorporated as a company in USA operates its flights to India and vice versa during the
previous year 2019-20 and collects charges of ` 1,25,00,000 for carriage of passengers and cargo out
of which ` 65,00,000 were received in US dollars for the passenger fare booked from New York to
Mumbai. The total expenses for the year on operation of such flights were ` 1,95,00,000. Compute the
income chargeable to tax of the foreign airlines
Solution:
As per section 44BBA, in case of an Airlines the income is presumed to be 5% of the following:
(i) the amount paid or payable (whether' in or out of India) to the assessee or to any person on his behalf
on account of the carriage of passengers, livestock, mail or goods from any place in India, and
(ii) the amount 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 from any place outside India. Hence, the
taxable income will be determined as under:
(iii)
Passenger fare booked from Passenger fare booked
Mumbai to New York from New York to Mumbai if
whether paid in India or not received in India
` `
Fare 60,00,000 65,00,000
Taxable income 3,00,000 3,25,000
Note: If the passenger fare booked from New York to Mumbai in not received in India, then such fare shall not
be included for calculating presumptive income.
5. M/s. Airways Ltd. a non-resident company operates aircrafts between Newyork and New Delhi. During
the financial year 2019-20, an amount of ` 5 crores and ` 2 crores are received in India in course of
business operations of aircraft for passengers and goods respectively between Newyork and New
Delhi. Similarly an amount of ` 2 crores and ` 1 crore are also received for carriage of passengers
and goods from New Delhi to Newyork. Total expenditure incurred by the company for the purpose of
this business during the year ending 31.03.2020 was ` 8.5 crores. Compute the income chargeable to
tax in India under the head Profits and Cains of business or profession.
Answer:
M/s. Airways Ltd. is a foreign Airline. The computation of income from business or profession is to be made as
per the provisions of section 44BBA. Section 28 to 43A relating to deduction of expenditure of ` 8.5 Crores is
not applicable under this Section. Income from business of operation of Aircraft is calculated @ 5% of the
amount received during the year.
Total amount received from carriage of passengers & goods - ` 10 crores income from business of operation
of Air Craft @5% of total receipt - ` 50 lakhs.

6. Write a note on profits and gains of foreign companies engaged in the business of civil construction,
etc., in certain turnkey power projects.
Answer:
Profits and gains of foreign companies engaged in the business of civil construction, etc., in certain
turnkey power projects [Section 44BBB]
(A) Section applies to: A foreign company engaged in the business of civil construction or the business of
erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power
project approved by the Central Government in this behalf.
(B) Deemed profits and gains: 10% of the amount paid/payable in or outside India to the assessee or to any
person on his behalf on account of such civil construction, erection, testing or commissioning.
(C) Claim of lower profits: The assessee may claim lower profits than what deemed under this section by
maintaining proper books of account and getting its accounts audited.

Exemption in respect of income of an Infrastructure Debt Fund [Sec. 10(47)]
Income of any Infrastructure Debt Fund, as notified by CG, shall be exempt u/s 10(47).
TDS - Interest from Infrastructure Debt Fund [Section 194LB]
Person Responsible to deduct Infrastructure Debt Fund [Section 10(47)]

Tax
Payee Non-Resident not being a company or a foreign company.
TDS Rate 5% [plus applicable surcharge and cess]
Time for Deduction of Tax At the Time of Credit or payment, whichever is earlier.
TDS - Interest income under a Approved Loan Agreement [Sec 194LC]
Person Responsible to deduct Indian Company or a Business Trust

Tax
Payee A Non-Resident or a Foreign Company
Payments Covered Interest income (at approved rate) in respect of money borrowed
in foreign currency from a source outside India-
(a) Under a loan agreement at any time on or after 01/07/2012

but before 01/07/2020, or
(b) By way of issue of any Long-term bond including long-term

infrastructure bonds at any time on or after 01/10/2014 but
before 01/07/2020;
as approved by CG.
Interest Income (rate approved by CG) in respect of monies

borrowed from source outside India by way of issue of Rupee
Denominated Bond before 01/07/2020.
TDS - Interest income from rupee denominated bond or Govt. Securities [Sec 194LD]
Person Responsible to deduct Indian Company or Government

Tax
Payee A Foreign Institution Investor or a Qualified Foreign Investor
Payments Covered Interest payable on or after 01/06/2013 but before

01/07/2020 in respect of investment made by the payee in
Rupee Denominated Bond of an Indian company
(interest not to exceed notified rate of interest) or
Government Security.

Few Capital Gain Concepts related to Non-Resident
First Proviso to Section 48 [Capital Gain to NR]
In case of a Non-Resident (not being an assessee covered u/s 115AC and 115AD), the capital gains (long
term or short term) arising from the transfer of Shares or debentures held in an Indian company (not
applicable on Units) shall be computed as under:
Convert the COA, COT and sales consideration in to the same foreign currency as was initially utilized in the
purchase of such shares or debentures and then capital gains so computed (without indexation) in foreign
currency shall be converted into Indian currency (It is mandatory).
Particulars Conversion rate What computation is done

Full Value of consideration Average exchange rate as on Sale consideration in Indian
date of transfer. currency is converted into
foreign currency.
Less: Expenses incurred Average exchange rate as on Expenditure in Indian currency to
wholly and exclusively on date of transfer. be converted into foreign
transfer currency.
Less: Cost of acquisition (No Average exchange rate as on Cost of acquisition in Indian
indexation benefit is date of acquisition. currency is converted into
available) foreign currency.
Resultant Capital Gains Telegraphic transfer buying Capital gains computed in
rate on date of transfer. foreign currency are
reconverted in Indian
currency.
Example:
Anthony, a non-resident Indian, acquired 1,000 shares in A Ltd. (an Indian Company) for ` 20,000 by
utilizing foreign currency ($) on 18/08/2019. On 16/09/2019, Anthony sold such shares for ` 45,000 and
utilized the proceeds in acquisition of 500 shares of B Ltd. (an Indian Company) after paying
expenditure on transfer on 13/8/2019 ` 5,000. Compute capital gain liability in the PY 2019-20.
Date $ Buying rate US $ Selling rate
18/08/2019 45 46
13/08/2019 48 50
16/09/2019 46 48
(CMA FINAL STUDY MODULE)
Solution:
Since the assessee is a non-resident and shares of an Indian company were acquired by utilizing foreign
currency, hence, first proviso to sec. 48 and Rule 115A shall be applicable on above transactions.
Computation of capital gain for the A.Y. 2020-21
Particulars Working Rate applied Amount Amount
Sale consideration ` 45,000/ ` 47 Av. rate as on 16/09/2019 $957.4
Less: Expenditure on transfer ` 5,000/ ` 47 Av. rate as on 16/09/2019 $106.4
Net Sale consideration $851.0
Less: Cost of acquisition ` 20,000/ ` 45.5 Av rate as on 18/08/2019 $439.6
Less: Cost of improvement Nil $439.6
Short term Capital Gain $411.4
Short term capital gain $411.4 × ` 46 Buying rate as on ` 18,924

16/09/2019

Second Proviso to Section 48 – Index Benefit
In Computing LTCG from transfer of LTCA as per Section 48, COA & COI will be replaced by ICOA & ICOI
respectively.
FA 18 - Nothing contained in the first and second provisos shall apply to the capital gains arising from the
transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented
fund or a unit of a business trust referred to in Section 112A
Third Proviso to Section 48
Nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer
of a long-term capital asset, being a bond or debenture other than-
(a) Capital Indexed Bonds issued by the Government; or
(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015
Fourth Proviso to Section 48

In case of Non-Resident assesee, any gains arising on account of appreciation of rupee against a foreign
currency at the time of redemption of Rupee Denominated Bond of an Indian company subscribed by him,
shall be ignored for the purposes of computation of full value of consideration under this section
Section 112(1)(c) - Special Tax Rate for Long Term Capital Gain in Some Cases
Applicable on Non-resident (not being a company) or a foreign company
Conditions to be satisfied
1. Long-term capital gains shall be arise from the transfer of a capital asset, being unlisted
securities or shares of a company in which the public are not substantially interested.
2. Capital gain in respect of such asset shall be computed without giving effect to the
- First proviso to sec. 48 (computation of capital gain in foreign currency) and
- second proviso to sec. 48 (index benefit).
Special Tax Rate

Such long term capital gain shall be taxable @ 10% (+ surcharge and cess, as applicable).

Section 47 - Exempted Transfer
Nothing contained in Section 45 shall apply to the following transfers:—
1. Any transfer of a capital asset, being bonds or Global Depository Receipts referred to in sub-section
(1) of Section 115AC, made outside India by a non-resident to another non-resident [Section
47(viia)]
2. Any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian
company issued outside India, by a non-resident to another non-resident [Section 47(viiaa)]
3. Any transfer of a capital asset, being—
a) bond or Global Depository Receipt referred to in sub-section (1) of Section 115AC; or

b) rupee denominated bond of an Indian company; or
c) derivative, or
d) other notified securities
made by a non-resident on a recognised stock exchange located in any International Financial
Services Centre and where the consideration for such transaction is paid or payable in foreign
currency [Section 47(viiab)]
4. Any transfer of a capital asset, being a Government Security carrying a periodic payment of
interest, made outside India through an intermediary dealing in settlement of securities, by a non-
resident to another non-resident. [Section 47(viib)]
5. Any transfer by way of conversion of bonds referred to in Section 115AC(1)(a) into shares or
debentures of any company; [Section 47(xa)]
NEW - Interest on Rupee Denominated Bond [Sec. 10(4C)] – W.r.e.f AY 2019-20

Interest payable to a non-resident, not being a company, or to a foreign company, is exempt if following
conditions are satisfied:
a) Interest is payable by any Indian company or business trust.
b) Such interest is payable in respect of monies borrowed from a source outside India by way of issue of
rupee denominated bond, as referred to in Section 194LC(2)(ia).
c) Such bond has been issued during 17-09-2018 and 31-03-2019.

TAX RATES FOR NON RESIDENTS u/s 115A
1. Dividend u/s 2(22)(e) – Now exempt -
2. Interest [Section 194LB] received from an Infrastructure Debt Fund [Section 10(37)] 5%
Interest of the nature and extent referred to in Section 194LC received from India
3. 5%
Company under a Loan Agreement/Long Term Bond/Rupee denominated Bond
Interest of the nature and extent referred to in Section 194LD received by FII/QFI
4. 5%
[Rupee denominated Bond of Indian Company or Govt Securities]
Distributed income being interest referred to in sub-section (2) of Section 194LBA

5. 5%
[Interest payable by Business Trust]
Interest received from Government or an Indian concern on monies borrowed or
6. Debt incurred by Government or the Indian concern in foreign currency (other than 20%
above)
Note:
(a) No Expenditure shall be allowed.
(b) No Deduction under Chapter VIA (except Units located in IFSC eligible for Deduction under Section
80LA).
(c) Setoff of losses (except Current Year Depreciation & Unabsorbed Depreciation) is Permissable.
(d) No need to furnish ROI u/s 139(1) if TI consists of only above Income & TDS deductible is deducted.
7. income by way of Royalty or Fees for technical services other than income
referred to in sub-section (1) of Section 44DA] received from Government or an
Indian concern in pursuance of an agreement made by the foreign company with
Government or the Indian concern after the 31st day of March, 1976, and where 10%
such agreement is with an Indian concern, the agreement is approved by the
Central Government
Approval is not required if it relates to a matter included in Industrial Policy.
Note:
a) No Expenditure shall be allowed.
b) Deduction under Chapter VIA & Setoff of losses (except Current Year Depreciation & Unabsorbed
Depreciation) is Permissable.

Definitions:
"Fees for Technical Services" means any consideration (including any lump sum consideration) for the
rendering of any managerial, technical or consultancy services (including the provision of services of technical
or other personnel) but does not include
(a) consideration for any construction, assembly, mining or like project undertaken by the recipient or
(b) consideration which would be income of the recipient chargeable under the head "Salaries".
"Royalty" means consideration (including any lump sum consideration but excluding any consideration
which would be the income of the recipient chargeable under the head "Capital gains") for—
a. the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention,
model, design, secret formula or process or trade mark or similar property ;
b. the imparting of any information concerning the working of, or the use of, a patent, invention, model,
design, secret formula or process or trade mark or similar property ;
c. the use of any patent, invention, model, design, secret formula or process or trade mark or similar property
d. the imparting of any information concerning technical, industrial, commercial or scientific knowledge,
experience or skill ;
e. the use or right to use any industrial, commercial or scientific equipment but not including the
amounts referred to in section 44BB;
f. the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary,
artistic or scientific work including films or video tapes for use in connection with television or tapes for use
in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition
of cinematographic films ; or
g. the rendering of any services in connection with the activities referred above
Note:
A. The transfer of all or any rights in respect of any right, property or information includes and has always
included transfer of all or any right for use or right to use a computer software (including granting of
a licence) irrespective of the medium through which such right is transferred.
B. Royalty includes and has always included consideration in respect of any right, property or
information, whether or not-
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
C. The expression "process" includes and shall be deemed to have always included transmission by
satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic
fibre or by any other similar technology, whether or not such process is secret;
Section 10(6A)
Where in the case of a foreign company deriving income by way of royalty or fees for technical services received
from Government or an Indian concern in pursuance of an agreement made by the foreign company with
Government or the Indian concern after the 31st day of March, 1976 but before the 1st day of June, 2002
and,—
(a) where the agreement relates to a matter included in the industrial policy, for the time being in force, of
the Government of India, such agreement is in accordance with that policy ; and
(b) in any other case, the agreement is approved by the Central Government,
the tax on such income is payable, under the terms of the agreement, by Government or the Indian concern to the
Central Government, the tax so paid will be exempt.
Questions on Section 115A & Section 10(6A)
1. A Foreign Company has entered into an agreement with an Indian Company on 1.6.2004 under which
industrial equipment belonging to the foreign company has been leased to the latter on an annual
lump sum payment. How will the lease rent be taxed in the hands of the foreign company in the
Assessment Year 2020-21?
Solution:
Under section 9(1)(vi) of the Income Tax Act, 1961, the expression “royalty” would include any lump sum
consideration for the use of or the right to use any industrial, commercial or scientific equipment but not
including the amount referred to in Section 44BB of the Income Tax Act, 1961.
Under Section 115A, any income by way of royalty or fees for technical services (FTS) other than income
referred to in section 44DA, received from Government or an Indian concern in pursuance of an agreement
made by the foreign company with Government or the Indian concern (the agreement is approved by the
Central Government or where it relates to the matter included in the industrial policy, for the time being in
force, of the Government of India, the agreement is in accordance with that policy) will be taxable @ 10%.
This will be subject to the provisions of the DTAA between India and the country in which the foreign
company is assessed.
2. Magneta Ltd., a foreign company, enters into an agreement with Joy Ltd.., an Indian company. The
agreement related to a matter included in the Industrial Policy of the current year and is in
accordance with the policy. During the year 2019-20, a royalty of ` 60,00,000 is paid by Joy Ltd. to
Magneta Ltd.. Magneta Ltd., has spend ` 15,00,000 on expenses covered under Section 28 to 44.
Compute the tax payable by Magneta Ltd. under the following situations:
i. Joy Ltd.. pays the Income-tax payable by Magneta Ltd., as per the terms of agreement entered
into before 1.6.2002.
ii. The agreement does not provides that Joy Ltd.., will bear the tax but it is mutually agreed by
the parties that royalty of ` 60,00,000 will be paid net of taxes. [PTP D14 – Set 2 – 5 Marks]
Solution:
Situation (i)
As per Section 10(6A) of the Income Tax Act, 1961, if as per the terms of the agreement, which is entered
into before 1.6.2002 tax on royalty is payable by the Government or Indian concern, the tax so paid will not
be included in the total income of the foreign company as such, it will be an exempt income in the hands
of the foreign company. Therefore, in the instant case, the total royalty income will not be grossed up and
income from royalty will be ` 60,00,000. No deduction is allowed in respect of any expenditure under Section
28 and 44C of the Income Tax Act, 1961.
Particulars Amount (``)

The total income of Magneta Ltd. 60,00,000
Tax payable @ 10.40 % (including H & EC) 6,24,000
Less: Tax paid by Joy Ltd. 6,24,000
Net tax payable Nil
Situation (ii)
Since Section 10(6A) is not applicable as the terms of agreement do not provide for payment of tax
by Joy Ltd., the total income will be computed as under:
Particulars Amount(``)
Net income 60,00,000
Gross Income = Net income x 100/100-TDS = ` 60,00,000 x 100/89.60 66,96,429
Tax payable by Magneta Ltd. @ 10.40% on ` 66,96,429 6,96,429
Less: Tax to be borne by Joy Ltd. 6,96,429
Balance Tax Payable Nil

CLASS NOTES

CLASS NOTES

SECTION 115AB – Overseas Financial Organisations
Tax on income from units purchased in foreign currency or capital gains arising from their
transfer.
1. Where the Total Income of an assessee, being an overseas financial organisation

(hereinafter referred to as Offshore Fund) includes—
a. income received in respect of units (units of mutual fund specified u/s 10(23D) or units
of UTI) purchased in foreign currency; or
b. income by way of LTCGs arising from the transfer of units purchased in foreign currency,
the income-tax payable shall be the aggregate of—
A. the amount of income-tax calculated at the rate of 10% on above Incomes; and
B. the amount of income-tax with which the Offshore Fund would have been chargeable had its
total income been reduced by the amount of income referred to in clause (a) and clause (b).
2. No Deduction of expenses u/h PGBP or IOS is available against above Income.
3. No Deduction under Chapter VI-A against above Income.
4. Setoff of losses under chapter VI is permissible.
5. Second provisos to Section 48 shall not apply for the computation of above LTCGs
6. Income from units is exempt u/s 10(35). Hence, this section is applicable only in case of
LTCGs.
7. "Overseas Financial Organisation" means any fund, institution, association or body, whether
incorporated or not, established under the laws of a country outside India, which has entered into
an arrangement for investment in India with any Public Sector Bank or Public Financial
Institution or a Mutual Fund specified under Section 10(23D) and such arrangement is
approved by the SEBI.
Section 196B
Where any income in respect of units referred to in section 115AB or by way of long-term capital gains
arising from the transfer of such units is payable to an Offshore Fund, the person responsible for
making the payment shall, at the time of credit of such income to the account of the payee or at the time
of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is
earlier, deduct income-tax thereon at the rate of 10%.
Section 49(2ABB)
Where the capital asset being share or shares of a company, is acquired by a Non-resident assessee on
redemption of GDR referred in Section 115AC(1)(b) held by such assessee, the COA of the share or
shares shall be the price of such share/shares prevailing on any recognized stock exchange on the date
on which a request for redemption was made.
[POH will also be reckoned from such date of request]

SECTION 115AC - Tax on income from Bonds/GDRs purchased in foreign currency or
CGs arising from their transfer
1. Where the TI of an assessee, being a NR, includes—

a. Income by way of interest on bonds of an Indian company issued in accordance with such scheme as
the Central Government may notify in this behalf, or on Bonds of a Public Sector Company sold by
the Government, and purchased by him in foreign currency; or
b. Income by way of dividends, other than dividends referred to in section 115-O, on GDRs
(purchased in foreign currency through an approved intermediary)-
i. issued in accordance with such scheme as the CG may notify in this behalf, against the initial
issue of shares of an Indian Company; or
ii. issued against the shares of a Public Sector Company sold by the Government; or
iii. issued or re-issued in accordance with such scheme as the CG may notify in this behalf, against
the existing shares of an Indian Company; or
c. LTCGs arising from the transfer of above Bonds or GDRs,
the income-tax payable shall be the aggregate of-

i. the amount of income-tax calculated at the rate of 10% on the Interest/Dividend income by way of
interest or dividends
ii. the amount of income-tax calculated at the rate of 10% on LTCGs and
iii. the amount of income-tax with which the non-resident would have been chargeable had his total income
been reduced by the amount of income referred to in clauses (a), (b) and (c).
2. No Deduction of expenses u/h PGBP or IOS is available against above Interest or Dividend Income.
3. First & Second provisos to Section 48 shall not apply for the computation of above LTCGs
4. No Deduction under Chapter VI-A against above Interest or Dividend Income.
5. Setoff of losses under Chapter VI is permissible
6. It shall not be necessary for a NR to furnish ROI u/s 139(1) if-

a. his total income in respect of which he is assessable under this Act during the previous year consisted
only of income referred to in clauses (a) and (b) of sub-section (1); and
b. the TDS has been deducted from such income.
7. Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company
by virtue of his holding Global Depository Receipts or bonds in the amalgamating or demerged company, as
the case may be, in accordance with the provisions of sub-section (1), the provisions of that sub-section
shall apply to such Global Depository Receipts or bonds
8. "Global Depository Receipts" means any instrument in the form of a depository receipt or certificate
(by whatever name called) created by the Overseas Depository Bank outside India and issued to investors
against the issue of-
a. Ordinary Shares of issuing company, being a listed company; or
b. Foreign Currency Convertible Bonds of issuing company.
Note:
If these GDRs are transferred by a NR to another NR outside India, Transfer will be exempt u/s 47.
Section 196C - Where any income by way of interest or dividends in respect of bonds or Global Depository
Receipts referred to in section 115AC or by way of long-term capital gains arising from the transfer of such bonds
or Global Depository Receipts is payable to a non-resident, the person responsible for making the payment shall,
at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the
issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon @ 10 %.

SECTION 115ACA - Tax on income from Global Depository Receipts purchased in
foreign currency or capital gains arising from their transfer
1. Where the total income of an assessee, being an individual, who is a resident and an employee of an
Indian company engaged in specified knowledge based industry or service, or an employee of its
subsidiary engaged in specified knowledge based industry or service (hereafter in this section referred
to as the resident employee), includes—
a. income by way of dividends, other than dividends referred to in Section 115-O, on Global Depository
Receipts of an Indian company engaged in specified knowledge based industry or service, issued in
accordance with such Employees' Stock Option Scheme as the Central Government may, by notification
in the Official Gazette, specify in this behalf and purchased by him in foreign currency; or
b. income by way of long-term capital gains arising from the transfer of Global Depository Receipts
referred to in clause (a),
the income-tax payable shall be the aggregate of—
i. the amount of income-tax calculated on the income by way of dividends, other than dividends referred to
in Section 115-O, in respect of Global Depository Receipts referred to in clause (a), if any, included in
the total income, at the rate of ten per cent;
ii. the amount of income-tax calculated on the income by way of long-term capital gains referred to in
clause (b), if any, at the rate of ten per cent; and
iii. the amount of income-tax with which the resident employee would have been chargeable had his total
income been reduced by the amount of income referred to in clauses (a) and (b).
"Specified knowledge based industry or service" means—

i. information technology software;
ii. information technology service;
iii. entertainment service;
iv. pharmaceutical industry;
v. bio-technology industry; and
vi. any other industry or service, as may be specified by the Central Government, by notification in the
Official Gazette;
2. Where the gross total income of the resident employee-

a. consists only of income by way of dividends, other than dividends referred to in Section 115-O, in
respect of Global Depository Receipts referred to in clause (a) of sub-section (1), no deduction shall
be allowed to him under any other provision of this Act;
b. includes any income referred to in clause (a) or clause (b) of sub-section (1), the gross total income
shall be reduced by the amount of such income and the deduction under any provision of this Act
shall be allowed as if the gross total income as so reduced were the gross total income of the
assessee.
3. Nothing contained in the first and second provisos to Section 48 shall apply for the computation of
long-term capital gains arising out of the transfer of long-term capital asset, being Global Depository
Receipts referred to in clause (b) of sub-section (1).

4. "Global Depository Receipts" means any instrument in the form of a depository receipt or certificate (by
whatever name called) created by the Overseas Depository Bank outside India and issued to investors
against the issue of,-
i. ordinary shares of issuing company, being a company listed on a recognised stock exchange in
India; or
ii. foreign currency convertible bonds of issuing company;
5. "Overseas Depository Bank" means a bank authorised by the issuing company to issue Global
Depository Receipts against issue of Foreign Currency Convertible Bonds or ordinary shares of the
issuing company.
SECTION 115AD - Tax incentives available to Foreign Institutional Investors
Discuss the tax incentives available to Foreign Institutional Investors (FIIs), under the provisions of
Section 115AD of the Income Tax Act, 1961.
Solution:
Section 115AD specifies special rates of Income Tax to Foreign Institutional Investors (FIIs), in respect of the
following incomes. The specified income and the applicable rate of tax has been specified in the following table:
Income INCOME
APPLICABLE
RATE OF TAX
Income (other than dividend covered under Section 115-O) in respect of securities 20%
(other than units referred in Section 115AB) listed in a recognized stock
exchange in India
Note:
Any Interest income referred in section 194LD (interest from Rupee
Denominated Bond of an Indian Company or Govt. Securities) shall be
taxable @5%.
Any short term capital gain arising on transfer of:

(i) securities covered under Section 111A 15%
(ii) other securities 30%
Any long term capital gain arising on transfer of such securities 10%
FA 18 - In case of long-term capital asset referred to in Section 112A,
income-tax @ 10% shall be calculated on such income exceeding ` 1 lakh
The following exceptions are applicable to the FIIs, for whom special rates have been prescribed under
Section 115AD of the Income Tax Act, 1961:
i. Deductions under Section 28 to Section 44C and Section 57 are not available to this class of
assessees.
ii. The benefit of computing Capital Gain in foreign currency, as provided by the first proviso to Section
48 and the benefit of indexation, as provided by the second proviso to Section 48 are not
applicable for this class of assessees, in respect of long term capital gain.
iii. Deductions under Section 80C to Section 80U are not applicable.
Note:
1. Depreciation & Unabsorbed Depreciation – No Deduction
2. Setoff of losses under chapter VI is permissible
3. No exemption from ROI filing.
4. Section 112A is applicable.

Surcharge Rate
In the case of individual or every association of persons or body of individuals, whether incorporated
or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of
the Income-tax Act having income under Section 115AD of the Income-tax Act:
Surcharge Rate on Income

Tax related to
S.No. Total Income STCG or Other
LTCG from Income
transfer of
Securities
1 Total Income exceeds ` 50 Lakhs but not exceeding ` 1 crores 10% 10%
2 Total Income exceeds ` 1 crores but not exceeding ` 2 crores 15% 15%
3 Total Income [including the income under the provisions of Section 15% 15%
115AD(1)(b)] exceeds ` 2 crores but not covered below
4 Total Income [excluding the income under the provisions of Section 15% 25%
115AD(1)(b)] exceeds ` 2 crores but not exceeding ` 5 crores
5 Total Income [excluding the income under the provisions of Section 15% 37%
115AD(1)(b)] exceeds ` 5 crores
Section 196D
1. Where any income in respect of securities referred to in Section 115AD(1)(a), not being income by
way of interest referred to in Section 194LD, is payable to a Foreign Institutional Investor, the
person responsible for making the payment shall, at the time of credit of such income to the
account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or
by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per
cent.
2. No deduction of tax shall be made from any income, by way of capital gains arising from the
transfer of securities referred to in Section 115AD, payable to a Foreign Institutional Investor.

TAXATION OF CERTAIN INCOME OF NRIs

[Section 115C to 115-I & Chapter XII-A]
SECTION 115D & 115E – Non-Resident Indians (Optional Scheme)
1. Assessee
Non Resident Indian is an Individual being Indian Citizen or Person of Indian Origin who is not a Resident.
2. Tax Rates
LTCGs from Foreign Exchange Assets 10%
Interest Income from Foreign Exchange Assets 20% (No Deduction of Expenses)
3. Other Conditions:
(a) Foreign Exchange Assets means specified assets purchased in convertible foreign exchange
(b) Specified Assets means
Shares in Indian Companies (public or private),
Debentures of Indian Public Companies or Company Deposits
CG Securities
(c) Indexation benefit is not available [Second Proviso to Section 48]
(d) First Proviso to Section 48 is applicable.
(e) Deduction under Chapter VIA – Not available.
4. It shall not be necessary for a NRI to furnish ROI u/s 139(1) if-
a. his total income in respect of which he is assessable under this Act during the previous year consisted
only of income referred above; and
b. the TDS has been deducted from such income.

Question: Sankhapid, a non-resident Indian furnishes you the following particulars of income in India
during the year ended 31st march 2020 [CMA FINAL PAST YEAR QUESTION]
Particulars ` `
Income from house property located in Bengaluru 1,90,000
(computed)
Dividend received from Indian companies 80,000
Interest on debentures in an Indian public company 2,20,000
(subscribed in convertible foreign currency)
Less: Interest on loan taken for purchase of Debentures 25,000 1,95,000
Long-term capital gains on sale of shares purchased in US
$. The sale was not through any stock exchange
Cost in 2005-06 3,50,000
Sale in 2019-20 7,50,000
4,00,000
Less: Commission 2,500 3,97,500
Cost Inflation Index : F.Y. 2005-06 = 117 F.Y. 2019-20 =289 Average of TT Buying Rate and TT Selling Rate
on the date of purchase of shares and the date of sale of shares are ` 45 and ` 60 respectively. TT Buying
Rate on the date of sale of shares is ` 62.50 for 1 US $.
Compute the tax payable by Sankhadip for Assessment Year 2020-21 if he opts for the provisions of
Chapter – XII-A of the Income –Tax Act.
Answer:
Particulars ` `
Income from house property located in Bengaluru 1,90,000
(computed)
Dividend received from Indian companies Exempt
Interest on debentures in an Indian public company 2,20,000
(subscribed in convertible foreign currency)
Long-term capital gains
Net consideration in US $ (7,47,500/60) US $ 12,458.33
Cost of acquisition in US $ (3,50,000 / 45) US $ 7,777.77
Long-term capital gain in US $ US $ 4,680.56
Long-term capital gain covered into Indian Rupee by 2,92,535
applying TT buy rate on the date of sale ($ 4680.56 x 62.50)
Total Income 7,02,535
Rounded off to 7,02,540
Tax on interest on debentures acquired in convertible 44,000
foreign exchange at 20% (2,20,000 x 20%)
Tax on long-term capital gain at 10% (2,92,535 x 10%) 29,254
Tax on balance ` 1,90,000 Nil
Tax 73,254
Education cess at 4% 2,930
Total tax liability 76,184
Note:
1. No expenditure is allowed as deduction from interest on debentures being investment income under section
115D. Hence, interest on loan is not deducted.
2. Under section 115D indexation benefit is not available for computing long-term capital gain as per Chapter
XII-A.

Exempted Capital Gain [Sec. 115F] - Applicable to Non-resident Indian (i.e. an
individual being a citizen of India or a person of Indian origin who is a non-resident)
Conditions
1. Assessee has transferred any of the following long term capital asset, acquired in convertible
foreign exchange (Original assets):
a) Shares in an Indian company
b) Debentures of an Indian public limited company
c) Deposits with an Indian public limited company
d) Central Government securities
2. Within 6 months of transfer of original asset, the taxpayer has invested the whole or any part of
net consideration in any of the following assets (hereinafter referred to as new asset)
a) Shares in an Indian company;
b) Debentures of an Indian public limited company
c) Deposit with an Indian public limited company
d) Central Government securities;
e) National Savings Certificate VI and VII issues.
Amount of exemption
Long term capital gain × Amount invested in the new asset
Net sale consideration on transfer of original asset
Withdrawal of exemption
When the new asset acquired by the assessee is transferred or converted into money within 3 years
from the date of its acquisition, the capital gains exempted earlier shall be revoked.
On revocation of exemption, benefit availed earlier under this section shall be taxed as long-term
capital gain in the previous year in which such new asset is transferred or converted into money.
Note: Sec. 115F is optional in nature and not mandatory, i.e. an assessee may or may not opt for sec.
115F by giving a declaration in return of income to this effect.

Section 44DA – Royalties/FTS to NR
Write a note on income by way of royalties, etc., in case of non-residents.
Answer:
A. Section applies to: This section applies if the following conditions are fulfilled -
(i) The assessee is a non-resident (not being a company) or a foreign company;
(ii) He is in receipt of income by way of royalty or fees for technical services from Government or an
Indian concern;
(iii) Such income is received in pursuance of an agreement made by the assessee with Government
or the Indian concern after 31-3-2003;
(iv) Assessee carries on business in India through a permanent establishment situated in
India, or performs professional services from a fixed place of profession situated in India;
and
(v) The right, property or contract in respect of which the royalties or fees for technical services are
paid is effectively connected with such permanent establishment/fixed place of profession.
B. Computation of income: The income of such assessee shall be computed under the head "Profits and
gains of business or profession" in accordance with the provisions of this Act. However, no deduction
is allowed in respect of -
(i) Any expenditure or allowance which is not wholly and exclusively incurred for the business of
such permanent establishment or fixed place of profession in India; or
(ii) Amounts paid (otherwise than towards reimbursement of actual expenses) by the permanent
establishment to its head office or to any of its other offices.
C. Accounts and audit: The assessee shall –

(i) Keep and maintain books of account and other documents as per Section 44AA;
(ii) Get his accounts audited by a Chartered Accountant; and
(iii) Furnish along with the return of income the report of such audit in prescribed form duly signed and
verified by such Chartered Accountant.
D. Provisions of Section 44BB not to apply:

The provisions of Section 44BB shall not apply in respect of the income referred to in this section.
Hence, even if royalty/fees for technical services received by non-resident relates to exploration
activity, the provisions of Section 44BB won't apply.
Note:
1. Deduction under Chapter VIA is allowable
2. Tax Rate will be 40% in case of Foreign Company
3. Compulsory Books/Audit is not required under Section 115A
4. Setoff of losses is permissible.

SECTION 44C – Head Office Expenses
Write a note on deduction of Head Office Expenditure in the case of Non-Residents.
Answer: Deduction of head office expenditure in the case of non-residents [Section 44C]:
(A) Deduction:
The expenditure in nature of HO expenditure is allowable to the extent of the lower of the following -
(a) 5% of adjusted total income, or
(b) The amount of so much of the expenditure in the nature of head office expenditure incurred by the
assessee as is attributable to the business or profession of the assessee in India.
Provided that in a case where the adjusted TI of the assessee is a loss, the amount under clause (a) shall be
computed at the rate of 5% of the average adjusted total income [Last 3 AYs] of the assessee.
(B) Meanings of :
1. "Adjusted total income" means total income computed under Act before deducting the following-
(i) Head office expenditure under section 44C;
(ii) Unabsorbed depreciation under section 32(2);
(iii) Unabsorbed Capital expenditure for promotion of family planning under section 36(1)(ix);
(iv) Brought forward losses;
(v) Deductions under Chapter VIA.
2. "Head Office Expenditure" means executive and general administration expenditure incurred by
the assessee outside India, including expenditure in respect of -
(i) rent, rates, taxes, repairs or insurance of any premises outside India used for business and
profession;
(ii) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or
in addition to salary, whether paid or allowed to any to any employee or other managing person
employed in any office outside India;
(iii) travelling by any employee or other person employed in, or managing the affairs or, any office outside
India; and
(iv) such other matters connected with executive and general administration as may be prescribed.
QUESTION: The net result of the business carried on by a branch of foreign company in India for the
year ended 31.03.2020 was a loss of ` 100 lacs after charge of head office expenses of ` 200 lacs
allocated to the branch. Explain with reasons the income to be declared by the branch in its return for
the assessment year 2020-21.
Answer: Section 44C restricts the allowability of the head office expenses to the extent of lower of an amount
equal to 5% of the adjusted total income or the amount actually incurred as is attributable to the business of
the assessee in India.
For the purpose of computing the adjusted total income, the head office expenses of ` 200 Lacs charged to
the profit and loss account have to be added back. The amount of income to be declared by the assessee for
A.Y. 2020-21 will be as under:
Particulars `
Net loss for the year ended on 31.03.2020 (100 lacs)
Add: Amount of head office expenses to be considered separately as per section 44C 200 lacs
Adjusted total income 100 lacs
Less: Head Office expenses allowable under section 44C is the lower of
(i) ` 5 lacs, being 5% of ` 100 lacs and
(ii) ` 200 lacs. 5 lacs
Income to be declared in return 95 lacs

AGENT u/s 163
As per section 160, agent of the non-resident, including a person who is treated as an agent u/s 163 is
considered as a representative assessee in respect of the income of a non-resident specified in
sec. 9(1).
As per Sec. 161, every representative assessee, as regards the income in respect of which he is a
representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the
income were income received by or accruing to or in favour of him beneficially, and shall be liable to
assessment in his own name in respect of that income; but any such assessment shall be deemed
to be made upon him in his representative capacity only, and the tax shall, subject to the other
provisions contained in this Chapter, be levied upon and recovered from him in like manner and to
the same extent as it would be leviable upon and recoverable from the person represented by
him.
Agent of a Non-resident [Sec. 163]

Where the person liable to tax under this Act resides outside India, then tax may be levied upon and
recovered from his agent. The agent shall be deemed to be the assessee in respect of such tax. The
Assessing Officer may serve a notice on the persons for his intention of treating him as the agent of non
resident.
No person shall be treated as the agent of a non-resident unless he has had an opportunity of being
heard by the Assessing Officer as to his liability to be treated as such.
Who may be treated as an Agent?

“Agent”, in relation to a non-resident, includes any person in India: (a) who is employed by or on behalf
of the non-resident; or (b) who has any business connection with the non-resident; or (c) from or
through whom the non-resident is in receipt of any income, whether directly or indirectly; or (d) who is
the trustee of the non-resident; and includes also any other person who, whether a resident or non-
resident, has acquired by means of a transfer, a capital asset in India.
Exception
A broker in India who, in respect of any transactions, does not deal directly with or on behalf of a non-
resident principal but deals with or through a non-resident broker shall not be deemed to be an
agent under this section in respect of such transactions, if the following conditions are fulfilled:
i. the transactions are carried on in the ordinary course of business through the first-mentioned
broker; and
ii. the non-resident broker is carrying on such transactions in the ordinary course of his
business and not as a principal.

Tax point:
An agent shall be entitled to a) recover any sum paid by him from the person on whose behalf
it is paid; or b) to retain out of any moneys that may be in his possession; or c) to retain out of
any moneys that may come to him in his capacity as such agent
Any agent or any person, who apprehends that he may be assessed as an agent, may retain
(equal to estimated liability) out of any money payable by him to the person residing outside India
on whose behalf he is liable to pay tax (hereinafter in this section referred to as the principal).
However, where there is any disagreement between the principal and such agent or person,
regarding amount to be so retained, such agent or person may secure from the Assessing
Officer a certificate stating the amount to be so retained pending final settlement of the
liability.
The amount recoverable from such agent or person at the time of final settlement shall not
exceed the amount specified in such certificate, except to the extent to which such agent or
person may at such time have in his hands additional assets of the principal.
Question:
Who can be treated as an agent of a Non-Resident foreign collaborator for the purpose of proceedings
and/or any other matters under the Income Tax Act?
Answer:
A. Section 2(7) defines the term 'assessee' to include a representative assessee within its scope. The
Assessing Officer is statutorily empowered to issue notice under section 163 to any person to deem him as
the agent of the non-resident foreign collaborator.
B. Who may be regarded as agent [Section 163]:

The term 'agent', in relation to a non-resident, includes any person in India:
(i) who is employed by or on behalf of the non-resident; or
(ii) who has any business connection with the non-resident within the meaning of Section 9(1)(i); or
(iii) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or
(iv) who is the trustee of the non-resident,
and includes also any other person who, whether a resident or non-resident, has acquired by means of a
transfer, a capital asset in India.
C. No Person shall be treated as the agent of a non-resident unless he has had an opportunity of being
heard by the AO as to his liability to be treated as such.

Foreign Collaboration Agreements
Why are Foreign Collaboration Agreement entered into? Give their types.
Answer:
Foreign Collaboration Agreements are entered into with an object of encouragement of financial and technological
advancement of Indian industries. To participate in Indian industries, the overseas investors may adopt any of the
following modes –
(i) Joint Ventures;
(ii) Technical Collaboration;
(iii) Setting up a branch or liaison office or project office;
(iv) Portfolio investment and Foreign Direct Investments including investments by non-resident Indians and
overseas corporate bodies.
Foreign Collaboration Agreements are of two types:
(a) Technical collaboration agreement:

Such agreements relate to transfer of technology to an Indian concern against agreed payments and are
only confined to transfer of technology. Nature of payments made under these agreements are as
follows –
(i) Initial lump sum for sale of patent, trademarks and technical Know-how; or
(ii) Initial lump sum for the transfer of right in any technology or imparting or information;
(iii) Royalty for use of patents, trademarks and technical Know-how; or
(iv) Fees for technical services i.e. the consideration for the rendering of any managerial, technical or
consultancy service.
(v) Payment for supply of drawings and designs;
(vi) Payment for supply of machinery and/ or other equipment.
(b) Financial and Technical collaboration Agreement:

In such agreements foreign collaborator makes investment in the capital of the Indian collaborator,
besides transfer of technology. The collaborator receives payments, aforesaid case, in respect of transfer
of technology. Besides, it receives dividend on shares allotted to the foreign participants in lieu of
technological transfers or as part of capital contribution, and also interest on money lent and/ or
balance remaining outstanding for any transfer of technology.
It must be noted that foreign collaboration proposals must comply with the policies of the
Government of India and such agreements are subject to the Indian laws.

SECTION 115JG
Conversion of an Indian branch of foreign company into subsidiary Indian company
1. Where a foreign company is engaged in the business of banking in India through its branch situated in India
and such branch is converted into a subsidiary company thereof, being an Indian company (hereafter
referred to as an Indian subsidiary company) in accordance with the scheme framed by the Reserve Bank of
India, then, notwithstanding anything contained in the Act and subject to the conditions as may be notified by
the Central Government in this behalf-
i. the capital gains arising from such conversion shall not be chargeable to tax in the assessment year
relevant to the previous year in which such conversion takes place;
ii. the provisions of this Act relating to treatment of unabsorbed depreciation, set off or carry forward
and set off of losses, tax credit in respect of tax paid on deemed income relating to certain
companies and the computation of income in the case of the foreign company and Indian subsidiary
company shall apply with such exceptions, modifications and adaptations as may be specified in
that notification.
2. In case of failure to comply with any of the conditions specified in the scheme or in the notification issued
under sub-section (1), all the provisions of this Act shall apply to the foreign company and the said Indian
subsidiary company without any benefit, exemption or relief under sub-section (1).
3. Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign
company or the Indian subsidiary company in accordance with the provisions of sub-section (1) and,
subsequently, there is failure to comply with any of the conditions specified in the scheme or in the
notification issued under sub-section (1), then,-
i. such benefit, exemption or relief shall be deemed to have been wrongly allowed;
ii. the Assessing Officer may, notwithstanding anything contained in this Act, re-compute the total income
of the assessee for the said previous year and make the necessary amendment; and
iii. the provisions of section 154 shall, so far as may be, apply thereto and the period of four years specified
in sub-section (7) of that section being reckoned from the end of the previous year in which the failure to
comply with the condition referred to in sub-section (1) takes place.
4. Every notification issued under this section shall be laid before each House of Parliament.

“Resident of Contracting State”.
Residence as defined in double taxation treaties is different from residence as defined for domestic tax
purposes. Tax treaties generally follow the OECD Model Convention.
For the purposes of this Convention, the term "resident of a Contracting State" means any person who,
under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of
management or any other criterion of a similar nature, and also includes that State and any political
subdivision or local authority thereof.
This term, however, does not include any person who is liable to tax in that State in respect only of
income from sources in that State or capital situated therein.
Where by reason of the provisions of aforesaid paragraph an individual is a resident of both

Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has a permanent home available
to him; if he has a permanent home available to him in both States, he shall be deemed to be a
resident only of the State with which his personal and economic relations are closer (centre of vital
interests);
b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a
permanent home available to him in either State, he shall be deemed to be a resident only of the
State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a

resident only of the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent authorities of the

Contracting States shall settle the question by mutual agreement.
Where by reason of the aforesaid provisions, a person other than an individual is a resident of both
Contracting States, then it shall be deemed to be a resident only of the State in which its place of
effective management is situated.

Permanent Establishment:
One of the important terms that occur in all the Double Taxation Avoidance Agreements is the term
'Permanent Establishment' (PE) which has not been defined in the Income Tax Act. However as per the
Double Taxation Avoidance Agreements, PE includes, a wide variety of arrangements i.e. a place of
management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield
etc.
Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is
computed by treating the PE as a distinct and independent enterprise. Generally, in Indian context, the
term “permanent establishment” means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.
The term “permanent establishment” shall also include:

a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. a workshop;
f. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
g. a warehouse in relation to a person providing storage facilities for others;
h. a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are
carried on;
i. premises used as a sales outlet or for receiving or soliciting orders;
j. an installation or structure, or plant or equipment, used for the exploration for or exploitation of
natural resources;
k. a building site or construction, installation or assembly project, or supervisory activities in
connection with such a site or project, where that site or project exists or those activities are carried
on (whether separately or together with other sites, projects or activities) for more than specified
months (generally 6 months).
Exclusion
An enterprise shall not be deemed to have a permanent establishment merely by reason of:
a. the use of facilities solely for the purpose of storage or display of goods or merchandise belonging
to the enterprise ;
b. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the
purpose of storage or display ;
c. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the
purpose of processing by another enterprise;
d. the maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise, or of collecting information, for the enterprise; or
e. the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of
information, for scientific research, or for similar activities which have a preparatory or auxiliary
character, for the enterprise.
An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment
in the other Contracting State merely because it carries on business in that other State through a
broker, a general commission agent or any other agent of an independent status, where that person is
acting in the ordinary course of the person‘s business as such a broker or agent.
However, when the activities of such a broker or agent are carried on wholly or principally on behalf of
that enterprise itself or on behalf of that enterprise and other enterprises controlling, or controlled by or
subject to the same common control as, that enterprise, the person will not be considered a broker
or agent of an independent status within the meaning of this paragraph.
TAXATION OF BUSINESS PROCESS OUTSOURCING UNITS IN INDIA
Taxation of IT-enabled Business Process Outsourcing Units in India as provided in the Circular
05/2004 dated 28-9-2004 are as under:
1. A non-resident entity may outsource certain services to a resident Indian entity. If there is no
business connection between the two, the resident entity may not be a Permanent Establishment
of the non-resident entity, and the resident entity would have to be assessed to income-tax as a
separate entity. In such a case, the non-resident entity will not be liable under the Income-tax
Act, 1961.
2. However, it is possible that the non-resident entity may have a business connection with the
resident Indian entity. In such a case, the resident Indian entity could be treated as the
Permanent Establishment of the non-resident entity. The tax treatment of the Permanent
Establishment in such a case is under consideration in this circular.
3. During the last decade or so, India has seen a steady growth of outsourcing of business processes
by non-residents or foreign companies to IT-enabled entities in India. Such entities are either
branches or associated enterprises of the foreign enterprise or an independent Indian enterprise.
Their activities range from mere procurement of orders for sale of goods or provision of services
and answering sales related queries to the provision of services itself like software maintenance
service, debt collection service, software development service, credit card/mobile telephone related
service, etc.
The non-resident entity or the foreign company will be liable to tax in India only if the IT-enabled
BPO unit in India constitutes its Permanent Establishment. The extent to which the profits of the
nonresident enterprise is to be attributed to the activities of such Permanent Establishment
in India has been under consideration of the Board.
4. A non-resident or a foreign company is treated as having a Permanent Establishment in India

under Article 5 of the Double Taxation Avoidance Agreements entered into by India with different
countries if the said non-resident or foreign company carries on business in India through a branch,
sales office etc. or through an agent (other than an independent agent) who habitually exercises an
authority to conclude contracts or regularly delivers goods or merchandise or habitually secures
orders on behalf of the non-resident principal.
In such a case, the profits of the non-resident or foreign company attributable to the
business activities carried out in India by the Permanent Establishment becomes taxable in
India under Article 7 of the Double Taxation Avoidance Agreements.
5. Paragraph 1 of Article 7 of Double Taxation Avoidance Agreements provides that if a foreign

enterprise carries on business in another country through a Permanent Establishment situated
therein, the profits of the enterprise may be taxed in the other country but only so much of them as
is attributable to the Permanent Establishment.
Paragraph 2 of the same Article provides that subject to the provisions of Paragraph 3, there shall
in each contracting state be attributed to that Permanent Establishment the profits which it might be
expected to make if it were a distinct and separate enterprise engaged in the same or similar
activities under the same or similar conditions and dealing wholly independently with the enterprise
of which it is a Permanent Establishment.

Paragraph 3 of the Article provides that in determining the profits of a Permanent Establishment
there shall be allowed as deductions expenses which are incurred for the purposes of the
Permanent Establishment including executive and general administrative expenses so incurred,
whether in the State in which the Permanent Establishment is situated or elsewhere.
What are the expenses that are deductible would have to be determined in accordance with the
accepted principles of accountancy and the provisions of the Income-tax Act, 1961.
6. Paragraph 2 contains the central directive on which the allocation of profits to a Permanent
Establishment is intended to be based. The paragraph incorporates the view that the profits to be
attributed to a Permanent Establishment are those which that Permanent Establishment would
have made if, instead of dealing with its Head Office, it had been dealing with an entirely separate
enterprise under conditions and at prices prevailing in the ordinary market.
This corresponds to the "arm’s length principle". Paragraph 3 only provides a rule applicable for the
determination of the profits of the Permanent Establishment, while paragraph 2 requires that the
profits so determined correspond to the profit that a separate and independent enterprise would
have made.
Hence, in determining the profits attributable to an IT-enabled BPO unit constituting a Permanent
Establishment, it will be necessary to determine the price of the services rendered by the
Permanent Establishment to the Head office or by the Head office to the Permanent
Establishment on the basis of "arm’s length principle".

TAXATION OF INCOME FROM AIR AND SHIPPING TRANSPORT UNDER DTAA
Income derived from the operation of Air transport in international traffic by an enterprise of one
contracting state will not be taxed in the other contracting state. In respect of an enterprise of
one contracting state, income earned in the other contracting state from the operation of ships
in international traffic, will be taxed in that contracting state wherein the place of effective
management of enterprise is situated.
However, some DTA agreement contains provisions to tax the income in the other contracting state
also, although at reduced rate. These provisions do not apply to coastal traffic. These agreements
follow a near uniform pattern in as much as India has guided itself by the UN model of double
taxation avoidance agreements.
The agreements allocate jurisdiction between the source and residence country. Wherever such
jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the
source country which is generally lower than the rate of tax under the domestic laws of that
country.
The double taxation in such cases are avoided by the residence country agreeing to give credit for
tax paid in the source country thereby reducing tax payable in the residence country by the amount
of tax paid in the source country.
These agreements give the right of taxation in respect of the income of the nature of interest, dividend,
royalty and fees for technical services to the country of residence.
However, the source country is also given the right but such taxation in the source country has to
be limited to the rates prescribed in the agreement. The rate of taxation is on gross receipts
without deduction of expenses.
The DTAA is based on four basic models of DTAA and they are
i. OECD Model Tax Convention (emphasis is on residence principle);
ii. UN Model (combination of residence and source principle but the emphasis is on source principle);
iii. US Model (required to be followed for entering into DTAAs with the US and its peculiar to the US); and
iv. Andean Model (being adopted by member States namely Bolivia, Chile, Ecuador, Columbia, Peru and
Venezuela)

Class Notes

TDS ON OTHER SUMS PAYABLE TO NON-RESIDENT [SEC 195]
1. Any person responsible for paying to a non-resident, not being a company, or to a foreign
company, any interest (not being interest referred to in section 194LB or section 194LC) or section
194LD or any other sum chargeable under the provisions of this Act (not being income
chargeable under the head "Salaries") shall, at the time of credit of such income to the account
of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any
other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
Explanation- It is hereby clarified that the obligation to comply with sub-section (1) and to make
deduction thereunder applies and shall be deemed to have always applied and extends and shall
be deemed to have always extended to all persons, resident or non-resident, whether or not
the non-resident person has-
i. a residence or place of business or business connection in India; or
ii. any other presence in any manner whatsoever in India.
2. Where the person responsible for paying any such sum chargeable under this Act (other than
salary) to a non-resident considers that the whole of such sum would not be income chargeable in
the case of the recipient, he may make an application in such form and manner to the
Assessing Officer, to determine in such manner, as may be prescribed, the appropriate
proportion of such sum so chargeable, and upon such determination, tax shall be deducted under
sub-section (1) only on that proportion of the sum which is so chargeable.
3. Subject to rules made under sub-section (5), any person entitled to receive any interest or
other sum on which income-tax has to be deducted under sub-section (1) may make an
application in the prescribed form to the Assessing Officer for the grant of a certificate authorising
him to receive such interest or other sum without deduction of tax under that sub-section, and
where any such certificate is granted, every person responsible for paying such interest or other
sum to the person to whom such certificate is granted shall, so long as the certificate is in force,
make payment of such interest or other sum without deducting tax thereon under sub-
section (1).
4. A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified
therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such
cancellation.
5. The Board may, having regard to the convenience of assessees and the interests of revenue, by
notification in the Official Gazette, make rules specifying the cases in which, and the circumstances
under which, an application may be made for the grant of a certificate under sub-section (3) and
the conditions subject to which such certificate may be granted and providing for all other matters
connected therewith.
6. The person responsible for paying to a non-resident, not being a company, or to a foreign
company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the
information relating to payment of such sum, in such form and manner, as may be
prescribed.
Section 271-I: If a person fails to furnish such information or furnishes inaccurate information,
the AO may direct that such person shall pay, by way of penalty, a sum of ` 1,00,000/-.
7. Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by
notification in the Official Gazette, specify a class of persons or cases, where the person
responsible for paying to a non-resident, not being a company, or to a foreign company, any sum,
whether or not chargeable under the provisions of this Act, shall make an application in such
form and manner to the Assessing Officer, to determine in such manner, as may be
prescribed, the appropriate proportion of sum chargeable, and upon such determination, tax shall
be deducted under sub-section (1) on that proportion of the sum which is so chargeable
Online filing of application seeking determination of tax to be deducted at source on

payment to non-residents
Under Sec. 195(2), if a person who is responsible for paying any sum to a non-resident which
is chargeable to tax under the Act (other than salary) considers that the whole of such sum
would not be income chargeable in the case of the recipient, he can make an application to the
Assessing Officer to determine the appropriate proportion of such sum chargeable. This
provision is used by a person making payment to a non-resident to obtain certificate/order
from the Assessing Officer for lower or nil withholding-tax. However, the process was
manual.
In order to use technology to streamline the process, which will not only reduce the time for
processing of such applications, but shall also help tax administration in monitoring such
payments, it has been amended so as to allow for prescribing the form and manner of
application to the Assessing Officer and also for the manner of determination of
appropriate portion of sum chargable to tax by the Assessing Officer.
Similar amendment has also been made in sec. 195(7) which are applicable to specified class
of persons or cases.
Income payable "net of tax" – SECTION 195A
In a case other than that referred to in sub-section (1A) of Section 192, where under an agreement or
other arrangement, the tax chargeable on any income (liable for TDS) is to be borne by the person by
whom the income is payable, then, for the purposes of deduction of tax under those provisions such
income shall be increased to such amount as would, after deduction of tax thereon at the rates
in force for the financial year in which such income is payable, be equal to the net amount
payable under such agreement or arrangement.

Section 206AA - Requirement to furnish Permanent Account Number.
1. Notwithstanding anything contained in any other provisions of this Act, any person entitled to
receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter
referred to as deductee) shall furnish his Permanent Account Number to the person responsible for
deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the
higher of the following rates, namely:—
i. at the rate specified in the relevant provision of this Act; or
ii. at the rate or rates in force; or
iii. at the rate of twenty per cent.
2. No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of Section 197A shall
be valid unless the person furnishes his Permanent Account Number in such declaration.
3. In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at
source in accordance with the provisions of sub-section (1).
4. No certificate under Section 197 shall be granted unless the application made under that section
contains the Permanent Account Number of the applicant.
5. The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate
the same in all the correspondence, bills, vouchers and other documents which are sent to each
other.
6. Where the Permanent Account Number provided to the deductor is invalid or does not belong to
the deductee, it shall be deemed that the deductee has not furnished his Permanent Account
Number to the deductor and the provisions of sub-section (1) shall apply accordingly.
7. The provisions of this section shall not apply to a non-resident, not being a company, or to
a foreign company, in respect of—
(i) payment of interest on long-term bonds as referred to in Section 194LC; and
(ii) any other payment subject to such conditions as may be prescribed.
Rule 37BC - Relaxation from deduction of tax at higher rate under Section 206AA.
1. In the case of a non-resident, not being a company, or a foreign company (hereafter referred to as
'deductee') and not having permanent account number the provisions of Section 206AA shall not
apply in respect of payments in the nature of interest, royalty, fees for technical services and
payments on transfer of any capital asset, if the deductee furnishes the details and the
documents specified in sub-rule (2) to the deductor.
2. The deductee referred to in sub-rule (1), shall in respect of payments specified therein,
furnish the following details and documents to the deductor, namely:—
(i) name, e-mail id, contact number;
(ii) address in the country or specified territory outside India of which the deductee is a
resident;
(iii) a certificate of his being resident in any country or specified territory outside India from
the Government of that country or specified territory if the law of that country or
specified territory provides for issuance of such certificate;
(iv) Tax Identification Number of the deductee in the country or specified territory of his
residence and in case no such number is available, then a unique number on the basis
of which the deductee is identified by the Government of that country or the specified
territory of which he claims to be a resident.]

NEW - Income received by specified fund [Sec. 10(4D)] - W.e.f AY 2020-21
Any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset
referred to in sec. 47(viiab), on a recognised stock exchange located in any International Financial
Services Centre and where the consideration for such transaction is paid or payable in convertible
foreign exchange, to the extent such income accrued or arisen to, or is received in respect of units held
by a non-resident.
Specified fund means a fund established or incorporated in India in the form of a trust or a company or
a limited liability partnership or a body corporate:
i. which has been granted a certificate of registration as a Category III Alternative Investment Fund
and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund)
Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992;
ii. which is located in any International Financial Services Centre;
iii. of which all the units are held by non-residents other than units held by a sponsor or manager;
Interest on Securities [Sec. 10(15)]
Sec. 10(15) states that interest on various securities are exempt from tax. Now in the list following is
also inserted to facilitate external borrowing by the units located in IFSC:
“Interest payable to a non-resident by a unit located in an International Financial Services Centre in

respect of monies borrowed by it on or after 01-09-2019”

Class Notes

Class Notes

POEM SATC AA.1
Place of Effective Management (POEM)

POEM Guidelines shall not apply to a company having turnover or gross receipts of ` 50 crores or less in
a financial year. [Circular 8/2017 dated 23.02.2017]
Guiding Principles for determination of Place of Effective Management

(POEM) of a Company
Circular 6/2017 dated 24.01.2017

1. Section 6(3) of the Income-tax Act, 1961 (the Act), prior to its amendment by the Finance Act, 2015,
provided that a company is said to be resident in India in any previous year, if it is an Indian company or if
during that year, the control and management of its affairs is situated wholly in India.
This allowed tax avoidance opportunities for companies to artificially escape the residential status under
these provisions by shifting insignificant or isolated events related with control and management outside
India.
To address these concerns, the existing provisions of Section 6(3) of the Act were amended vide Finance
Act, 2015, with effect from 1st April, 2016 to provide that a company is said to be resident in India in any
previous year, if- (i) it is an Indian company; or (ii) its place of effective management in that year is in India
2. "Place of effective management" is defined in the Act to mean 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.
3. The Finance Act, 2016 has changed the effectivity of the said amendment to Section 6(3) of the Act.
Therefore, the amended provision would now be effective from 1st April 2017 and will apply to
Assessment Year 2017-18 and subsequent assessment years.
4. 'Place of effective management' (POEM) is an internationally recognised test for determination of residence
of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises
the concept of 'place of effective management' for determination of residence of a company as a tie-
breaker rule for avoidance of double taxation. The guiding principles to be followed for determination of
POEM are enumerated in the following paragraphs.
5. For the purposes of these guidelines

(i) A company shall be said to be engaged in “active business outside India” if
i. the passive income is not more than 50% of its total income; and
ii. less than 50% of its total assets are situated in India; and
iii. less than 50% of total number of employees are situated in India or are resident in India;
and
iv. the payroll expenses incurred on such employees is less than 50% of its total payroll
expenditure.

POEM SATC AA.2
Explanation: For the aforesaid purpose, -
a. the income shall be, - (a) as computed for tax purpose in accordance with the laws of the
country of incorporation; or (b) as per books of account, where the laws of the country of
incorporation does not require such a computation.
b. the value of assets, - (a) In case of an individually depreciable asset, shall be the average
of its value for tax purposes in the country of incorporation of the company at the
beginning and at end of the previous year; and (b) In case of pool of a fixed assets being
treated as a block for depreciation, shall be the average of its value for tax purposes in
the country of incorporation of the company at the beginning and at end of the year; (c) In
case of any other asset, shall be its value as per books of account;
c. the number of employees shall be the average of the number of employees as at the
beginning and at the end of the year and shall include persons, who though not employed
directly by the company, perform tasks similar to those performed by the employees;
d. the term “pay roll” shall include the cost of salaries, wages, bonus and all other employee
compensation including related pension and social costs borne by the employer.
(ii) “Head Office” of a company would be the place where the company's senior management and
their direct support staff are located or, if they are located at more than one location, the place
where they are primarily or predominantly located.
A company’s head office is not necessarily the same as the place where the majority of its
employees work or where its board typically meets;
(iii) “Passive income” of a company shall be aggregate of, -

a) income from the transactions where both the purchase and sale of goods is from / to
its associated enterprises; and
b) income by way of royalty, dividend, capital gains, interest or rental income;
However, any income by way of interest shall not be considered to be passive income in case
of a company which is engaged in the business of banking or is a public financial
institution, and its activities are regulated as such under the applicable laws of the country of
incorporation.
(iv) “Senior Management” in respect of a company means the person or persons who are
generally responsible for developing and formulating key strategies and policies for the
company and for ensuring or overseeing the execution and implementation of those strategies
on a regular and on-going basis.
While designation may vary, these persons may include:

a) Managing Director or Chief Executive Officer;
b) Financial Director or Chief Financial Officer;
c) Chief Operating Officer; and
d) The heads of various divisions or departments (for example, Chief Information or
Technology Officer, Director for Sales or Marketing).
POEM SATC AA.3
6. Any determination of the POEM will depend upon the facts and circumstances of a given case. The
POEM concept is one of substance over form. It may be noted that an entity may have more than
one place of management, but it can have only one place of effective management at any point of
time. Since “residence” is to be determined for each year, POEM will also be required to be
determined on year to year basis. The process of determination of POEM would be primarily based
on the fact as to whether or not the company is engaged in active business outside India.
7. The place of effective management in case of a company engaged in active business outside
India shall be presumed to be outside India if the majority meetings of the board of directors of
the company are held outside India.
However, if on the basis of facts and circumstances it is established that the Board of directors of
the company are standing aside and not exercising their powers of management and such
powers are being exercised by either the holding company or any other person (s) resident in
India, then the place of effective management shall be considered to be in India.
For this purpose, merely because the Board of Directors (BOD) follows general and objective
principles of global policy of the group laid down by the parent entity which may be in the field of
Pay roll functions, Accounting, Human resource (HR) functions, IT infrastructure and network
platforms, Supply chain functions, Routine banking operational procedures, and not being specific
to any entity or group of entities per se; would not constitute a case of BoD of companies standing
aside.
For the purpose of determining whether the company is engaged in active business outside India,
the average of the data of the previous year and two years prior to that shall be taken into
account. In case the company has been in existence for a shorter period, then data of such period
shall be considered. Where the accounting year for tax purposes, in accordance with laws of
country of incorporation of the company, is different from the previous year, then, data of the
accounting year that ends during the relevant previous year and two accounting years preceding it
shall be considered.
8. In cases of companies other than those that are engaged in active business outside India referred
to in para 7, the determination of POEM would be a two stage process, namely:-
 First stage would be identification or ascertaining the person or persons who actually
make the key management and commercial decision for conduct of the company’s business
as a whole.
 Second stage would be determination of place where these decisions are in fact being
made.
The place where these management decisions are taken would be more important than the
place where such decisions are implemented. For the purpose of determination of POEM it is the
substance which would be conclusive rather than the form.

POEM SATC AA.4
Some of the guiding principles which may be taken into account for determining the POEM are
as follows:
a. Location where the Board of Directors meet and makes decisions: The location where a
company’s Board regularly meets and makes decisions may be the company’s place of effective
management provided, the Board-
i. retains and exercises its authority to govern the company; and
ii. does, in substance, make the key management and commercial decisions necessary for the
conduct of the company’s business as a whole.
It may be mentioned that mere formal holding of board meetings at a place would by itself not
be conclusive for determination of POEM being located at that place. If the key decisions by
the directors are in fact being taken in a place other than the place where the formal
meetings are held then such other place would be relevant for POEM. As an example this
may be the case where the board meetings are held in a location distinct from the place where
head office of the company is located or such location is unconnected with the place where the
predominant activity of the company is being carried out.
If a board has de facto delegated the authority to make the key management and commercial
decisions for the company to the senior management or any other person including a
shareholder, promoter, strategic or legal or financial advisor etc. and does nothing more than
routinely ratifying the decisions that have been made, the company’s place of effective
management will ordinarily be the place where these senior managers or the other person
make those decisions.
b. Location of Executive Committee, in case powers are delegated by the Board: A company’s
board may delegate some or all of its authority to one or more committees such as an
executive committee consisting of key members of senior management. In these situations, the
location where the members of the executive committee are based and where that committee
develops and formulates the key strategies and policies for mere formal approval by the full
board will often be considered to be the company’s place of effective management.
The delegation of authority may be either de jure (by means of a formal resolution or
Shareholder Agreement) or de facto (based upon the actual conduct of the board and the
executive committee).
c. Location of Head Office: The location of a company’s head office will be a very important
factor in the determination of the company’s place of effective management because it often
represents the place where key company decisions are made. The following points need to be
considered for determining the location of the head office of the company:-
If the company’s senior management and their support staff are based in a single location and
that location is held out to the public as the company’s principal place of business or
headquarters then that location is the place where head office is located.

POEM SATC AA.5
If the company is more decentralized (for example where various members of senior
management may operate, from time to time, at offices located in the various countries) then
the company’s head office would be the location where these senior managers,-
i. are primarily or predominantly based; or

ii. normally return to following travel to other locations; or
iii. meet when formulating or deciding key strategies and policies for the company as a
whole.
Members of the senior management may operate from different locations on a more or less
permanent basis and the members may participate in various meetings via telephone or video
conferencing rather than by being physically present at meetings in a particular location.
In such situation the head office would normally be the location, if any, where the highest level
of management (for example, the Managing Director and Financial Director) and their direct
support staff are located. In situations where the senior management is so decentralised
that it is not possible to determine the company’s head office with a reasonable degree of
certainty, the location of a company’s head office would not be of much relevance in
determining that company’s place of effective management.
d. Use of modern technology: The use of modern technology impacts the place of effective
management in many ways. It is no longer necessary for the persons taking decision to be
physically present at a particular location. Therefore physical location of board meeting or
executive committee meeting or meeting of senior management may not be where the key
decisions are in substance being made. In such cases the place where the directors or the
persons taking the decisions or majority of them usually reside may also be a relevant factor.
e. Decision via circular resolution or round robin voting: In case of circular resolution or round
robin voting the factors like, the frequency with which it is used, the type of decisions made in
that manner and where the parties involved in those decisions are located etc. are to be
considered. It cannot be said that proposer of decision alone would be relevant but based on
past practices and general conduct; it would be required to determine the person who has the
authority and who exercises the authority to take decisions. The place of location of such
person would be more important
f. Decisions made by Shareholders are not relevant factor in determination of POEM: The
decisions made by shareholder on matters which are reserved for shareholder decision under
the company laws are not relevant for determination of a company’s place of effective
management. Such decisions may include sale of all or substantially all of the company’s
assets, the dissolution, liquidation or deregistration of the company, the modification of the
rights attaching to various classes of shares or the issue of a new class of shares etc. These
decisions typically affect the existence of the company itself or the rights of the shareholders as
such, rather than the conduct of the company’s business from a management or commercial
perspective and are therefore, generally not relevant for the determination of a company’s
place of effective management.

POEM SATC AA.6
However, the shareholder’s involvement can, in certain situations, turn into that of effective
management. This may happen through a formal arrangement by way of shareholder
agreement etc. or may also happen by way of actual conduct. As an example if the
shareholders limit the authority of board and senior managers of a company and thereby
remove the company’s real authority to make decision then the shareholder guidance
transforms into usurpation and such undue influence may result in effective management
being exercised by the shareholder.
Therefore, whether the shareholder involvement is crossing the line into that of effective
management is one of fact and has to be determined on case-to case basis only.
g. Day to day routine operational decisions are not relevant for determination of POEM: It may
be clarified that day to day routine operational decisions undertaken by junior and middle
management shall not be relevant for the purpose of determination of POEM. The operational
decisions relate to the oversight of the day-to-day business operations and activities of a
company whereas the key management and commercial decision are concerned with broader
strategic and policy decision. For example, a decision to open a major new manufacturing
facility or to discontinue a major product line would be examples of key commercial decisions
affecting the company’s business as a whole. By contrast, decisions by the plant manager
appointed by senior management to run that facility, concerning repairs and maintenance, the
implementation of companywide quality controls and human resources policies, would be
examples of routine operational decisions. In certain situations it may happen that person
responsible for operational decision is the same person who is responsible for the key
management and commercial decision. In such cases it will be necessary to distinguish the two
type of decisions and thereafter assess the location where the key management and
commercial decisions are taken.
If the above factors do not lead to clear identification of POEM then the following secondary
factors can be considered :-
Place where main and substantial activity of the company is carried out; or
Place where the accounting records of the company are kept.

POEM SATC AA.7
9. It needs to be emphasized that the determination of POEM is to be based on all relevant facts
related to the management and control of the company, and is not to be determined on the basis
of isolated facts that by itself do not establish effective management, as illustrated by the
following examples:
i. The fact that a foreign company is completely owned by an Indian company will not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
ii. The fact that there exists a Permanent Establishment of a foreign entity in India would itself
not be conclusive evidence that the conditions for establishing POEM in India have been
satisfied.
iii. The fact that one or some of the Directors of a foreign company reside in India will not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
iv. The fact of, local management being situated in India in respect of activities carried out by a
foreign company in India will not , by itself, be conclusive evidence that the conditions for
establishing POEM have been satisfied.
v. The existence in India of support functions that are preparatory and auxiliary in character will
not be conclusive evidence that the conditions for establishing POEM in India have been
satisfied.
10. It is reiterated that the above principles for determining the POEM are for guidance only. No single
principle will be decisive in itself. The above principles are not to be seen with reference to any
particular moment in time rather activities performed over a period of time, during the previous
year, need to be considered.
In other words a “snapshot” approach is not to be adopted. Further, based on the facts and
circumstances if it is determined that during the previous year the POEM is in India and also
outside India then POEM shall be presumed to be in India if it has been mainly /predominantly in
India
11. The Assessing Officer (AO) shall, before initiating any proceedings for holding a company
incorporated outside India, on the basis of its POEM, as being resident in India, seek prior approval
of the Principal Commissioner or the Commissioner, as the case may be.
Further, in case the AO proposes to hold a company incorporated outside India, on the basis of its
POEM, as being resident in India then any such finding shall be given by the AO after seeking prior
approval of the collegiums of three members consisting of the Principal Commissioners or the
Commissioners, as the case may be, to be constituted by the Principal Chief Commissioner of the
region concerned, in this regard. The collegium so constituted shall provide an opportunity of being
heard to the company before issuing any directions in the matter.

POEM SATC AA.8
12. Illustrations:
The following are certain illustrations intended to highlight applicability of certain principles
enumerated in the foregoing paragraphs of the guidelines. The facts assumed have been
simplified to highlight the principle. Actual determination of POEM of a company shall depend
on all relevant facts.
Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in
country X and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are
the only assets of the company and are located in country X. All the employees of the company are
also in country X. The average income wise breakup of the company’s total income for three years
is, -
a) 30% of income is from transaction where purchases are made from parties which are non-
associated enterprises and sold to associated enterprises;
b) 30% of income is from transaction where purchases are made from associated enterprises
and sold to associated enterprises;
c) 30% of income is from transaction where purchases are made from associated enterprises
and sold to non-associated enterprises; and
d) 10% of the income is by way of interest.
Interpretation: In this case passive income is 40% of the total income of the company. The passive
income consists of, - (i) 30% income from the transaction where both purchase and sale is from/to
associated enterprises; and (ii) 10% income from interest.
The A Co. satisfies the first requirement of the test of active business outside India. Since no
assets or employees of A Co. are in India the other requirements of the test is also satisfied.
Therefore company is engaged in active business outside India.
Example 2: The other facts remain same as that in Example 1 with the variation that A Co. has a
total of 50 employees. 47 employees, managing the warehouse, storekeeping and accounts of the
company, are located in country X. The Managing Director (MD), Chief Executive Officer (CEO)
and sales head are resident in India. The total annual payroll expenditure on these 50 employees
is of Rs. 5 crore. The annual payroll expenditure in respect of MD, CEO and sales head is of Rs. 3
crore.
Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of its
total income is passive in nature. Further, more than 50% of the employees are also situated
outside India. All the assets are situated outside India. However, the payroll expenditure in
respect of the MD, the CEO and the sales head being employees resident in India exceeds 50% of
the total payroll expenditure.
Therefore, A Co. is not engaged in active business outside India.

POEM SATC AA.9
Example 3: The basic facts are same as in Example 1. Further facts are that all the directors of the
A Co. are Indian residents. During the relevant previous year 5 meetings of the Board of Directors is
held of which two were held in India and 3 outside India with two in country X and one in country
Y.
Interpretation: The A Co. is engaged in active business outside India as the facts indicated in
Example 1 establish. The majority of board meetings have been held outside India. Therefore, the
POEM of A Co. shall be presumed to be outside India.
Example 4: The facts are same as in Example 3 but it is established by the Assessing Officer that
although A Co.’s senior management team signs all the contracts, for all the contracts above Rs. 10
lakh the A Co. must submit its recommendation to B Co. and B Co. makes the decision whether or
not the contract may be accepted. It is also seen that during the previous year more than 99% of
the contracts are above ` 10 lakh and over past years also the same trend in respect of value
contribution of contracts above ` 10 lakh is seen.
Interpretation: These facts suggest that the effective management of the A Co. may have been
usurped by the parent company B Co. Therefore, POEM of A Co. may in such cases be not
presumed to be outside India even though A Co. is engaged in active business outside India and
majority of board meeting are held outside India.
Example 5: An Indian multinational group has a local holding company A Co. in country X. The A
Co. also has 100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y. The
A Co. has income only by way of dividend and interest from investments made in its subsidiaries.
The Place of Effective Management of A Co. is in India and is exercised by ultimate parent company
of the group.
The subsidiaries B, C and D are engaged in active business outside India. The meetings of Board of
Director of B Co., C Co. and D Co. are held in country X and Y respectively.
Interpretation:
Merely because the POEM of an intermediate holding company is in India, the POEM of its
subsidiaries shall not be taken to be in India. Each subsidiary has to be examined separately.
As indicated in the facts since B Co., C Co., and D Co. are independently engaged in active business
outside India and majority of Board meetings of these companies are also held outside India. The
POEM of B Co., C Co., and D Co. shall be presumed to be outside India.

POEM SATC AA.10
Clarification related to guidelines for establishing 'Place of Effective Management' (PoEM) in India
[Circular 25/2017 dated 23-10-2017])
The concept of “Place of Effective Management” (POEM) for deciding residency status of a company,
other than an Indian company, was introduced in the Income-tax Act, 1961 which has become effective
from 1st April, 2017, i.e. Assessment Year 2017-18 onwards.
Guiding Principles for determination of POEM of a company were issued on 24th January, 2017 vide
Circular No. 06 of 2017. Further, vide Circular No. 08 of 2017 dated 23rd February, 2017, it has been
clarified that the POEM provisions shall not apply to a company having turnover or gross receipts of
₹ 50 crore or less in a financial year.
The stakeholders have been raised concern that as per the extant guidelines, POEM may be triggered in
cases of certain multinational companies with regional headquarter structure merely on the ground
that certain employees having multi-country responsibility or oversight over the operations in other
countries of the region are working from India, and consequently, their income from operations outside
India may be taxed in India.
In this regard, it may be mentioned that Para 7 of the guidelines provides that the place of effective
management in case of a company engaged in active business outside India (ABOI) shall be
presumed to be outside India if the majority meetings of the board of directors (BOD) of the
company are held outside India.
However, Para 7.1 of the guidelines provides that if on the basis of facts and circumstances it is
established that the Board of directors of the company are standing aside and not exercising their
powers of management and such powers are being exercised by either the holding company or any
other person(s) resident in India, then the POEM shall be considered to be in India.
It has also been provided that for this purpose, merely because the BOD follows general and objective
principles of global policy of the group laid down by the parent entity which may be in the field of Pay
roll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms,
Supply chain functions, Routine banking Operational procedures, and not being specific to any entity
or group of entities per se; would not constitute a case of BOD of companies standing aside.
In view of the above, it is clarified that so long as the Regional Headquarter Operates for subsidiaries/
group companies in a region within the general and objective principles of global policy of the group
laid down by the parent entity in the field of Pay roll functions, Accounting, HR functions, IT
infrastructure and network platforms, Supply chain functions, Routine banking operational procedures,
and not being specific to any entity or group of entities per se; it would, in itself, not constitute a case
of BoD of companies standing aside and such activities of Regional Headquarter in India alone will
not be a basis for establishment of PoEM for such subsidiaries/ group companies.
It is further clarified that the provisions of General Anti-Avoidance Rule contained in Chapter X-A of the
Income-tax Act, 1961 may get triggered in such cases where the above clarification is found to be
used for abusive/ aggressive tax planning.

POEM SATC AA.11
Section 115JH - Foreign company said to be resident in India
1. Where a foreign company is said to be resident in India in any previous year and such foreign
company has not been resident in India in any of the previous years preceding the said previous
year, then, notwithstanding anything contained in this Act and subject to the conditions as may be
notified by the Central Government in this behalf, the provisions of this Act relating to the
computation of total income, treatment of unabsorbed depreciation, set off or carry forward
and set off of losses, collection and recovery and special provisions relating to avoidance
of tax shall apply with such exceptions, modifications and adaptations as may be specified in that
notification for the said previous year:
Provided that where the determination regarding foreign company to be resident in India has been
made in the assessment proceedings relevant to any previous year, then, the provisions of this
sub-section shall also apply in respect of any other previous year, succeeding such previous year,
if the foreign company is resident in India in that previous year and the previous year ends on or
before the date on which such assessment proceeding is completed.
2. Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the
foreign company in accordance with the provisions of sub-section (1), and, subsequently, there is
failure to comply with any of the conditions specified in the notification issued under sub-
section (1), then,-
a. such benefit, exemption or relief shall be deemed to have been wrongly allowed;
b. the Assessing Officer may, notwithstanding anything contained in this Act, re-compute the
total income of the assessee for the said previous year and make the necessary amendment
as if the exceptions, modifications and adaptations referred to in sub-section (1) did not
apply; and
c. the provisions of section 154 shall, so far as may be, apply thereto and the period of four
years specified in sub-section (7) of that section being reckoned from the end of the
previous year in which the failure to comply with the conditions referred to in sub-
section (1) takes place.

POEM SATC AA.12
Class Notes

POEM SATC AA.13
QUESTION & ANSWER
1. Singtel Ltd. is a company incorporated in Singapore and 55% of its shares are held by Godavari (P)
Ltd., an Indian company. Singtel Ltd. has its presence in India also. The details relating to Singtel
Ltd. for the P.Y. 2019-20, are as under:
(`
` in crores)
Particulars India Singapore
Fixed assets at depreciated values for tax purposes 120 80
Intangible assets (`
` in crores) 50 200
Other assets (value as per books of account) (`` in crores) 40 120
Income from trading operations (`` in crores) 25 50
The above figure includes:
(i) Income from transactions where purchases are from associated 2 4
enterprises
(ii) Income from transactions where sales are to associated 3 5
enterprises
(iii) Income from transactions where both purchases and sales are 5 10
from/to associated enterprises
Interest and dividend from investments (`` in crores) 20 15
Number of employees (Residents in respective countries) 70 90
Payroll expenses on employees (` ` in crores) 8 12
Determine the residential status of Singtel Ltd. for A.Y. 2020-21, if during the F.Y. 2019-20, seven
board meetings were held – 3 in India and 4 in Singapore.
[CA FINAL RTP MAY 2020 EXAM]
Solution:
The residential status of a foreign company is determined on the basis of place of effective management
(POEM) of the company.
For determining the POEM of a foreign company, the important criteria is whether the company is engaged in
active business outside India or not.
A company shall be said to be engaged in “Active Business Outside India” (ABOI) for POEM, if
the passive income is not more than 50% of its total income; and
less than 50% of its total assets are situated in India; and
less than 50% of total number of employees are situated in India or are resident in India; and
the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.
Singtel Ltd. shall be regarded as a company engaged in active business outside India for P.Y. 2019-20 for
POEM purpose only if it satisfies all the four conditions cumulatively.
Condition 1: The passive income of Singtel Ltd. should not be more than 50% of its total income
Total income of Singtel Ltd. during the P.Y. 2019-20 is ` 110 crores [(`
` 25 crores + ` 50 crores) + (`
` 20
crores + ` 15 crores)]
Passive income is the aggregate of, -

(i) income from the transactions where both the purchase and sale of goods is from/to its associated
enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental income;
Passive Income of Singtel Ltd. is ` 50 crores, being sum total of :
(i) ` 15 crores, income from transactions where both purchases and sales are from/to associated
enterprises (`` 5 crores in India and ` 10 crores in Singapore)
(ii) ` 35 crores, being interest and dividend from investment (` ` 20 crores in India and ` 15 crores in
Singapore)
Percentage of passive income to total income = ` 50 crore/ ` 110 crore x 100 = 45.45%
Since passive income of Singtel Ltd. is 45.45%, which is not more than 50% of its total income, the first
condition is satisfied.
POEM SATC AA.14
Condition 2: Singtel Ltd. should have less than 50% of its total assets situated in India
Value of total assets of Singtel Ltd. during the P.Y. 2019-20 is ` 610 crores [`
` 210 crores, in India + ` 400
crores, in Singapore]
Value of total assets of Singtel Ltd. in India during the P.Y. 2019-20 is ` 210 crores
Percentage of assets situated in India to total assets = ` 210 crores/`

` 610 crores x 100 = 34.43%
Since the value of assets of Singtel Ltd. situated in India is less than 50% of its total assets, the second
condition for ABOI test is satisfied.
Condition 3: Less than 50% of the total number of employees of Singtel Ltd. should be situated in
India or should be resident in India
Number of employees situated in India or are resident in India is 70 Total number of employees of Singtel Ltd.
is 160 [70 + 90]
Percentage of employees situated in India or are resident in India to total number of employees is 70/160 x
100 = 43.75%
Since employees situated in India or are residents in India of Singtel Ltd. are less than 50% of its total
employees, the third condition for ABOI test is satisfied.
Condition 4: The payroll expenses incurred on employees situated in India or resident in India should
be less than 50% of its total payroll expenditure
Payroll expenses on employees employed in and resident of India = ` 8 crores. Total payroll expenses =
` 20 crores (`
` 8 crores + ` 12 crores)
Percentage of payroll expenses of employees situated in India or are resident in India to the total
payroll expenses = 8 x 100/20 = 40%
Since the payroll expenses incurred on employees situated in India or resident in India is less than 50% of
its total payroll expenditure, the fourth condition for ABOI test is also satisfied.
Thus, since Singtel Ltd. has satisfied all the four conditions, the company would be said to be engaged in
“active business outside India” during the P.Y. 2019-20.
POEM of a company engaged in active business outside India shall be presumed to be outside India, if the
majority of the board meetings are held outside India.
Since Singtel Ltd. is engaged in active business outside India in P.Y. 2019--20 and majority of its board
meetings i.e., 4 out of 7, were held outside India, POEM of Singtel Ltd. would be outside India.
Therefore, Singtel Ltd. would be non-resident in India for the P.Y. 2019-20.

POEM SATC AA.15
2. John Butler Tex. Inc., is a company incorporated in Colombo, Sri Lanka. 60% of its shares are held by I
Pvt. Ltd., a domestic company. John Butler Tex. Inc. has its presence in India also. The data relating to
John Butler Tex. Inc., are as under:
Particulars India Sri Lanka

Fixed assets at depreciated values for tax purposes (`
` in crores) 90 70
Intangible assets (`
` in crores) 40 180
Other assets (`
` in crores) 30 90
Income from trading operations (`
` in crores) 15 42
Income from investments (`
` in crores) 30 13
Number of employees
40 60
(Residents in respective countries)
For POEM purposes, state whether,
(i) The company shall be said to be engaged in 'active business outside India'.
(ii) Because of increased operations in India, more manpower is needed. 30 more employees may be
required in this regard. The company can either take these employees directly in its roll or can
outsource the increased operation to an external agency which will engage the 15 employees in
its roll and finish the work for the company. Which choice will be better?
Note: If for any test, average figures are needed, the same may be ignored and the data as given
above to the applicant may be used.
[CA FINAL EXAM QUESTIONs – Nov 2018]
Solution:
(i) For determining the POEM of a company, the important criteria is whether the company is
engaged in active business outside India or not.
A company shall be said to be engaged in “Active Business Outside India” (ABOI) for POEM, if
the passive income is not more than 50% of its total income; and
less than 50% of its total assets are situated in India; and
less than 50% of total number of employees are situated in India or are resident in India; and
the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.
John Butler Tex. Inc. shall be regarded as a company engaged in active business outside India for
P.Y. 2019-20 for POEM purpose only if it satisfies all the four conditions cumulatively.
Condition 1: The passive income of John Butler Tex. Inc. should not be more than 50% of its total
income Total income of John Butler Tex. Inc. during the P.Y. 2019-20 is ` 100 crores [(`
` 15 crores + `
30 crores) + (`
` 42 crores + ` 13 crores)]
Passive income is the aggregate of, -

(i) income from the transactions where both the purchase and sale of goods is from/to its associated
enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental income;
Passive Income of John Butler Tex. Inc. is ` 43 crores, being income from investment of ` 30
Crores in India and ` 13 crores in Sri Lanka.
Percentage of passive income to total income = ` 43 crore/ ` 100 crore x 100 = 43%
Since passive income of John Butler Tex. Inc. is 43% i.e., is not more than 50% of its total income,
the first condition is satisfied.
Condition 2: John Butler Tex. Inc. should have less than 50% of its total assets situated in India
Value of total assets of John Butler Tex. Inc. during the P.Y. 2019-20 is ` 500 crores [`
` 160 crores, in India
+ ` 340 crores, in Sri Lanka].
POEM SATC AA.16
Value of total assets of John Butler Tex. Inc. in India during the P.Y. 2019-20 is ` 160 crores.
Percentage of assets situated in India to total assets = ` 160 crores/`
` 500 crores x 100 = 32%
Since the value of assets of John Butler Tex. Inc. situated in India is less than 50% of its total assets, the
second condition for ABOI test is satisfied.
Condition 3: Less than 50% of the total number of employees of John Butler Tex. Inc. should be
situated in India or should be resident in India
Number of employees situated in India or are resident in India is 40 Total number of employees of John
Butler Tex. Inc. is 100 [ 40 + 60]
Percentage of employees situated in India or are resident in India to total number of employees is 40/100
x 100 = 40%.
Since employees situated in India or are residents in India of John Butler Tex. Inc. are less than 50% of
its total employees, the third condition for ABOI test is satisfied.
Condition 4: The payroll expenses incurred on employees situated in India or residents in India
should be less than 50% of its total payroll expenditure
Since the information pertaining to payroll expenditure of employees situated in India and situated outside
India is not given in the question it is assumed that the condition pertaining to payroll expenditure is also
satisfied by John Butler Tex. Inc.
Thus, since the John Butler Tex. Inc. has satisfied all the four conditions, the company would be
said to be engaged in “active business outside India”.
Note – Since the information pertaining to payroll expenditure of employees situated in India and situated
outside India is not given in the question it is also possible to assume that the condition pertaining to
payroll expenditure is not satisfied by John Butler Tex. Inc.
In such case, the company would not be said to be engaged in “active business outside India”, since John
Butler Tex. Inc. has not satisfied one of condition i.e., payroll expenditure out of the specified four
conditions.
(ii) Option 1: 30 more employees employed in India for the increased operations
In case John Butler Tex. Inc. employed 30 more employees in India, then Percentage of employees
situated in India or are resident in India to total number of employees would be 70/130 x 100 = 53.85%.
In such a case, one of the four conditions would not be satisfied and therefore, John Butler Tex. Inc.
would not be considered to be engaged in ABOI.
It may be noted that place of effective management of a company passing the ABOI test would be
presumed to be outside India, if majority of the board meetings are held outside India. Consequently,
the global income of the company would not be subject to tax in India. However, such a presumption
cannot be made if the company does not fulfil any of the four conditions for ABOI.
Option 2: Increased operations outsourced to external agency which will get the work done by
engaging 15 employees in India
For the purpose of ABOI, employees shall include persons, who though not employed directly by
the company, perform tasks similar to those performed by the employees.
Thus, 15 employees engaged by external agency have also to be included while determining the
percentage of employees situated in India or are resident in India to the total number of employees.
In such a case, the percentage of employees situated in India or are resident in India to total number of
employees would be 55/115 x 100 = 47.83%
In such a case, John Butler would continue to satisfy the four conditions for ABOI. Thus, it would
be better to outsource the increased operation to an external agency.

POEM SATC AA.17
Class Notes

POEM SATC AA.18
Class Notes

NON-RESIDENT SATC AB.1
Income deemed to accrue or arise in India – Section 9
Section 9(1)(i)
All income accruing or arising, whether directly or indirectly,
through or from any business connection in India, or
through or from any property in India, or
through or from any asset or source of income in India, or
through the transfer of a capital asset situate in India;
shall be deemed to accrue or arise in India
Explanation 5, 6 & 7 to Section 9(1)(i)

Explanation 5:
It is hereby clarified that an asset or a capital asset being any share or interest in a company or entity
registered or incorporated outside India shall be deemed to be and shall always be deemed to have
been situated in India, if the share or interest derives, directly or indirectly, its value substantially
from the assets located in India
Provided further that nothing contained in this Explanation shall apply to an asset or capital asset,
which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-
II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio
Investors) Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992.
Explanation 6:
For the purposes of this clause, it is hereby declared that-
a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially
from the assets (whether tangible or intangible) located in India, if, on the specified date, the
value of such assets—
i. exceeds the amount of ten crore rupees; and
ii. represents at least fifty per cent of the value of all the assets owned by the company or
entity, as the case may be;
b) the value of an asset shall be the fair market value as on the specified date, of such asset without
reduction of liabilities, if any, in respect of the asset, determined in such manner as may be
prescribed;
c) "specified date" means the—
i. date on which the accounting period of the company or, as the case may be, the entity ends
preceding the date of transfer of a share or an interest; or
ii. date of transfer, if the book value of the assets of the company or, as the case may be, the
entity on the date of transfer exceeds the book value of the assets as on the date referred
to in sub-clause (i), by 15%.
Explanation 7:
a) no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of
any share of, or interest in, a company or an entity, registered or incorporated outside India,
referred to in the Explanation 5,-
i. if such company or entity directly owns the assets situated in India and the transferor (whether
individually or along with its associated enterprises), at any time in the twelve months
preceding the date of transfer, neither holds the right of management or control in relation to
such company or entity, nor holds voting power or share capital or interest exceeding five per
cent of the total voting power or total share capital or total interest, as the case may be, of
such company or entity; or
ii. if such company or entity indirectly owns the assets situated in India and the transferor
(whether individually or along with its associated enterprises), at any time in the twelve
months preceding the date of transfer, neither holds the right of management or control in
relation to such company or entity, nor holds any right in, or in relation to, such company or
entity which would entitle him to the right of management or control in the company or
entity that directly owns the assets situated in India, nor holds such percentage of voting
power or share capital or interest in such company or entity which results in holding of (either
individually or along with associated enterprises) a voting power or share capital or interest
exceeding five per cent of the total voting power or total share capital or total interest, as
the case may be, of the company or entity that directly owns the assets situated in India;
b) in a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an
entity referred to in the Explanation 5, are not located in India, the income of the non-resident
transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed
to accrue or arise in India under this clause, shall be only such part of the income as is reasonably
attributable to assets located in India and determined in such manner as may be prescribed;

Circular 28/2017 dated 07/11/2017 - Clarification on Indirect Transfer provisions in case of redemption
of share or interest outside India under the Income-tax Act, 1961
A. Under the provisions contained in Section 9(1)(i) of the Income-tax Act, 1961 ('Act'), all income
accruing or arising, whether directly or indirectly, through or from any business connection in India,
or through or from any property in India, or through or from any asset or source of income in India
or through the transfer of a capital asset situate in India, shall be deemed to accrue or arise in
India. Explanations 5, 6 and 7 of section 9(1)(i) further define the scope of said provision.
B. Concerns have been expressed by investment funds, including private equity funds and venture
capital funds that on account of the extant indirect transfer provisions in the Act, non-resident
investment funds investing in India, which are set up as multi-tier investment structures, suffer
multiple taxation of the same income at the time of subsequent redemption or buyback.
Such taxability arises firstly at the level of the fund in India on its short term capital gain / business
income and then at every upper level of investment in the fund chain on subsequent redemption or
buyback.
C. The Board has received representations to exclude investors above the level of the direct investor
who is already chargeable to tax in India on such income from the ambit of indirect transfer
provisions of the Act.
D. Addressing such concerns in his Budget speech on 1st February, 2017, the Finance Minister had
stated that Category I and Category II Foreign Portfolio Investors (FPI) will be exempted from
indirect transfer provisions.
It was also stated that a clarification will be issued that indirect transfer provisions shall not apply
in case of redemption of shares or interests outside India as a result of or arising out of
redemption or sale of investment in India which is chargeable to tax in India
E. Vide Finance Act, 2017, Category I and Category II FPls have already been exempted from indirect
transfer provisions of the Act through insertion of proviso to Explanation 5 to section 9(1)(i) of the
Act, with effect from 01 .04.2015.
F. There could be situations in multi-tiered investment structures, where interest or share held
indirectly by a non-resident in an Investment Fund or a Venture Capital Company or a Venture
Capital Fund (hereinafter referred to as 'specified funds'), is redeemed in an upstream entity
outside India in consequence of transfer of shares or securities held in India by the specified funds,
the income of which have been subject to tax in India.
G. In such cases, application of indirect transfer provisions on redemption of share or interest in the
upstream entity may lead to multiple taxation of the same income.

H. In respect of Category I and Category II FPls though, such multiple taxation will not take place on
account of the insertion of proviso to Explanation 5 to section 9(1)(i) of the Act, vide Finance Act,
2017.
I. The matter has been examined by the Board and it has been decided that the provisions of section
9(1)(i) of the Act read with Explanation 5 thereof shall not apply in respect of income accruing or
arising to a non-resident on account of redemption or buyback of its share or interest held
indirectly (i.e. through upstream entities registered or incorporated outside India) in the specified
funds if such income accrues or arises from or in consequence of transfer of shares or securities
held in India by the specified funds and such income is chargeable to tax in India.
J. However, the above benefit shall be applicable only in those cases where the proceeds of
redemption or buyback arising to the nonresident do not exceed the pro-rata share of the non-
resident in the total consideration realized by the specified funds from the said transfer of shares
or securities in India.
K. It is further clarified that a non-resident investing directly in the specified funds shall continue to
be taxed as per the extant provisions of the Act.
Section 285A - Furnishing of information or documents by an Indian concern in certain cases.

Where any share of, or interest in, a company or an entity registered or incorporated outside India
derives, directly or indirectly, its value substantially from the assets located in India, as referred to
in Explanation 5 to clause (i) of sub-section (1) of Section 9, and such company or, as the case may be,
entity, holds, directly or indirectly, such assets in India through, or in, an Indian concern, then, such
Indian concern shall, for the purposes of determination of any income accruing or arising in India under
clause (i) of sub-section (1) of Section 9, furnish within the prescribed period to the prescribed income-
tax authority the information or documents, in such manner, as may be prescribed.
Section 285 - Submission of statement by a non-resident having liaison office.

Every person, being a non-resident having a liaison office in India set up in accordance with the
guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act, 1999
shall, in respect of its activities in a financial year, prepare and deliver or cause to be delivered to the
Assessing Officer having jurisdiction, within sixty days from the end of such financial year, a statement
in such form and containing such particulars as may be prescribed.

Section 9A - Certain activities not to constitute business connection in India.
1. Notwithstanding anything contained in sub-section (1) of Section 9 and subject to the provisions of
this section, in the case of an eligible investment fund, the fund management activity carried out
through an eligible fund manager acting on behalf of such fund shall not constitute business
connection in India of the said fund.
2. Notwithstanding anything contained in Section 6, an eligible investment fund shall not be said to be
resident in India for the purpose of that section merely because the eligible fund manager,
undertaking fund management activities on its behalf, is situated in India.
3. The eligible investment fund referred to in sub-section (1), means a fund established or
incorporated or registered outside India, which collects funds from its members for investing it for
their benefit and fulfils the following conditions, namely:—
a. the fund is not a person resident in India;
b. the fund is a resident of a country or a specified territory with which an agreement referred to
in sub-section (1) of section 90 or sub-section (1) of section 90A has been entered into or is
established or incorporated or registered in a country or a specified territory notified by the
Central Government in this behalf;
c. the aggregate participation or investment in the fund, directly or indirectly, by persons resident
in India does not exceed five per cent of the corpus of the fund;
d. the fund and its activities are subject to applicable investor protection regulations in the
country or specified territory where it is established or incorporated or is a resident;
e. the fund has a minimum of twenty-five members who are, directly or indirectly, not connected
persons;
f. any member of the fund along with connected persons shall not have any participation
interest, directly or indirectly, in the fund exceeding ten per cent;
g. the aggregate participation interest, directly or indirectly, of ten or less members along with
their connected persons in the fund, shall be less than fifty per cent;
h. the fund shall not invest more than twenty per cent of its corpus in any entity;
i. the fund shall not make any investment in its associate entity;
j. the monthly average of the corpus of the fund shall not be less than one hundred crore
rupees
Provided that if the fund has been established or incorporated in the previous year, the corpus
of fund shall not be less than one hundred crore rupees at the end of a period of six months
from the last day of the month of its establishment or incorporation, or at the end of such
previous year, whichever is later:

Provided further that nothing contained in this clause shall apply to a fund which has been
wound up in the previous year;
k. the fund shall not carry on or control and manage, directly or indirectly, any business in India;
l. the fund is neither engaged in any activity which constitutes a business connection in India nor
has any person acting on its behalf whose activities constitute a business connection in India
other than the activities undertaken by the eligible fund manager on its behalf;
m. the remuneration paid by the fund to an eligible fund manager in respect of fund
management activity undertaken by him on its behalf is not less than the arm's length price of
the said activity the amount calculated in such manner as may be prescribed
Provided that the conditions specified in clauses (e), (f) and (g) shall not apply in case of an
investment fund set up by the Government or the Central Bank of a foreign State or a sovereign
fund, or such other fund as the Central Government may subject to conditions, if any, by
notification in the Official Gazette, specify in this behalf.
4. The eligible fund manager, in respect of an eligible investment fund, means any person who is
engaged in the activity of fund management and fulfils the following conditions, namely:—
a. the person is not an employee of the eligible investment fund or a connected person of the
fund;
b. the person is registered as a fund manager or an investment advisor in accordance with the
specified regulations;
c. the person is acting in the ordinary course of his business as a fund manager;
d. the person along with his connected persons shall not be entitled, directly or indirectly, to
more than twenty per cent of the profits accruing or arising to the eligible investment fund
from the transactions carried out by the fund through the fund manager.
5. Every eligible investment fund shall, in respect of its activities in a financial year, furnish within
ninety days from the end of the financial year, a statement in the prescribed form, to the
prescribed income-tax authority containing information relating to the fulfilment of the conditions
specified in this section and also provide such other relevant information or documents as may be
prescribed.
6. Nothing contained in this section shall apply to exclude any income from the total income of the
eligible investment fund, which would have been so included irrespective of whether the activity of
the eligible fund manager constituted the business connection in India of such fund or not.
7. Nothing contained in this section shall have any effect on the scope of total income or
determination of total income in the case of the eligible fund manager.

8. For the purposes of this section,—
a. "associate" means an entity in which a director or a trustee or a partner or a member or a fund
manager of the investment fund or a director or a trustee or a partner or a member of the fund
manager of such fund, holds, either individually or collectively, share or interest, being more
than fifteen per cent of its share capital or interest, as the case may be;
b. "specified regulations" means the Securities and Exchange Board of India (Portfolio Managers)
Regulations, 1993 or the Securities and Exchange Board of India (Investment Advisers)
Regulations, 2013, or such other regulations made under the Securities and Exchange Board of
India Act, 1992, which may be notified by the Central Government under this clause.
Section 271FAB - Penalty for failure to furnish statement or information or document by an eligible
investment fund.
If any eligible investment fund which is required to furnish a statement or any information or document,
as required under sub-section (5) of section 9A fails to furnish such statement or information or
document within the time prescribed under that sub-section, the income-tax authority prescribed under
the said sub-section may direct that such fund shall pay, by way of penalty, a sum of five hundred
thousand rupees.

Class Notes

NON-RESIDENT SATC AC.1
QUESTION & ANSWER - SET A
1. Significance of the PE in transactions governed by the Double Taxation Avoidance Agreements
(DTAA)
[CMA FINAL DT - JUNE 2019 EXAM]
Answer:
Significance of the PE in transactions governed by the Double Taxation Avoidance Agreements

(DTAA):
Double Taxation Avoidance Agreements (DTAAs) generally contain an Article providing that business income
is taxable in the country of residence, unless the enterprise has a permanent establishment (PE) in the
country of source, and such income can be attributed to the PE.
Section 92F (iiia) defines the term “Permanent Establishment” to include a fixed place of business
through which the business of an enterprise is wholly or partly carried on.
PE includes, a wide variety of arrangements shall also include:
1. a place of management;
2. a branch;
3. an office;
4. a factory;
5. a workshop;
6. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
7. a warehouse in relation to a person providing storage facilities for others;
8. a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are carried
on;
9. premises used as a sales outlet or for receiving or soliciting orders;
10. an installation or structure, or plant or equipment, used for the exploration for or exploitation of natural
resources;
11. a building site or construction, installation or assembly project, or supervisory activities in connection
with such a site or project, where that site or project exists or those activities are carried on (whether
separately or together with other sites, projects or activities) for more than specified months (generally 6
months).
An enterprise shall not be deemed to have a permanent establishment merely by reason of :

1. the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the
enterprise;
2. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose
of storage or display ;
3. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose
of processing by another enterprise;
4. the maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise, or of collecting information, for the enterprise; or
5. the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of
information, for scientific research, or for similar activities which have a preparatory or auxiliary
character, for the enterprise.
Section 9(1) (i) requires existence of business connection for deeming business income to accrue or arise in
India. DTAAs however provide that business income is taxable only if there is a PE in India. It is well
established that the beneficial provisions of the DTAA will prevail over the provisions of the Act.
Therefore, in cases where transactions are covered by DTAAs, where there is no PE in India, business
income cannot be brought to tax due to existence of business connection as per section 9(1)(i).
2. State whether ‘business connection’ is established as envisaged by Section 9 of the Income-tax Act,
1961, in the under-mentioned situations:
(i) Jupier Pty Ltd., London (JPL), a non-resident company, has set up a liaison office at Kolkata,
with the permission of the RBI. Indian customers, who are briefed of the products of JPL by the
liaison office, interact directly with JPL for placing and processing of their orders.
(ii) Madan & Co. (MC), is acting on behalf of Nelson Inc., Sydney, a non-resident company. MC can
accept the order, negotiate the price and coordinate with Nelson Inc. for delivery of product to
the Indian clients. MC is paid commission in this regard.
Solution:
Business connection:
(i) When a liaison Office is maintained solely for the purpose of carrying out activities which are
preparatory or auxiliary in character, and such activities are approved by the Reserve Bank of India,
then, no business connection is established.
Indian customers, who are briefed of the products of JPL by the liaison office, interact directly with JPL
for placing and processing of their orders. The liaison office does not procure orders or process them.
Hence there is no business connection, as envisaged by section 9.
(ii) „Business connection‟ shall include any business activity carried out through a person acting on behalf of
the non-resident. For a business connection to be established, the person acting on behalf of the non-
resident-
must have an authority which is habitually exercised in India to conclude contracts on behalf of the
non-resident or;
in a case where he has no such authority, but habitually maintains in India a stock of goods or
merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident,
or
habitually secures orders in India, mainly or wholly for the non-resident.
Here, MC can accept the order, negotiate the price and coordinate with MC for delivery of product to the
Indian clients. Hence there exists a business connection in this situation.

3. Assessment of persons leaving India.
[CMA FINAL DT - DEC 2018 EXAM]
Answer:
Assessment of persons leaving India
Section 174 deals with persons leaving India.

Where it appears to the Assessing Officer that any individual may leave India during the current assessment
year or shortly after its expiry and that he has no present intention of returning to India, the total income of
such individual for the period from the expiry of the previous year for the assessment year up to the probable
date of his departure from India shall be chargeable to tax in that assessment year.
The total income of each completed previous year or part of any previous year included in such period shall
be chargeable to tax at the rate or rates in force in that assessment year. Separate assessments shall be
made in respect of each such completed previous year or part of any previous year.
The AO may estimate the income of such individual for such period or any part thereof, where it cannot be
readily determined in the manner provided in the Act.
For the purpose of making an assessment, the AO may serve a notice upon such individual requiring him to
furnish, within such time, not being less than 7 days, as may be specified in the notice, a return in the same
form and verified in the same manner as a return under section 142(1), setting forth his total income for each
previous year and his estimated total income for any part of the previous year and the provisions of the Act
shall, so far as may be, and subject to the provision of this section, apply as if the notice was a notice issued
under section 142(1).
4. IMP: Neptune Inc, a notified Foreign Institutional Investor (FII), derived the following incomes for the
financial year 2019-20:-
1. Interest received on investment in Rupee Denominated Bonds of ABC Ltd., an Indian company
(investment was made in the F.Y. 2018-19) - ` 8,50,000
2. Dividend from listed shares of Indian companies – ` 6,20,000
3. Interest on securities – ` 17,32,000 (Expenses of ` 26,000 has been incurred to earn such income)
4. Income from sale of securities and shares:
(i) Bonds of Jupiter Ltd.
[Date of purchase 5 May 2015; Date of sale 7 March 2020]
Sale proceeds: ` 47,00,000
Cost of purchase:
Cost Inflation Index: F.Y. 2015-16: 254; F.Y. 2018-19: 289 ` 32,00,000
(ii) Listed Shares of Earth Ltd.

[Date of purchase – 2 May, 2019; Date of sale – 9 February, 2020]
Sale Consideration ` 12,40,000
Purchase cost ` 7,80,000
[STT paid both at the time of purchase and sale]
(iii) Unlisted equity shares of Mars Ltd.

[Date of purchase – 1 July, 2019; Date of sale – 7 March, 2020]
Sale Consideration ` 8,40,000
Purchase cost ` 3,72,000
Compute the total income and tax liability of the FII, Neptune Inc., for the A.Y. 2020-21, assuming
that no other income is derived by Neptune Inc. during the F.Y. 2019-20.
[CA FINAL RTP – NOV 2019 EXAM]

Solution:
Computation of total income of Neptune Inc., a notified FII, for A.Y. 2020-21
Particulars ` `
Interest on Rupee Denominated Bonds 8,50,000
Dividend income of ` 6,20,000 [Exempt under section 10(34)] Nil
Interest on securities [No deduction is allowable in respect of expenses
incurred in respect thereof] 17,32,000 25,82,000
Long-term capital gains on sale of bonds of Jupiter Ltd.
Sale consideration 47,00,000

Less: Cost of acquisition 32,00,000
[Benefit of indexation is not allowable] 15,00,000
Short-term capital gains on sale of STT paid equity shares of Earth

Ltd.
Less: Cost of acquisition 7,80,000 4,60,000
Short-term capital gains on sale on unlisted equity shares of Mars
Ltd.
Computation of tax liability of Neptune Inc. for
Particulars `
Tax@5% on interest of ` 8,50,000 received from an Indian company on investment in 42,500
rupee denominated bonds = 5% x ` 8,50,000
Tax@20% on interest on securities of ` 17,32,000 =20% x ` 17,32,000 3,46,400
Tax@10% on long-term capital gains on sale of bonds of Jupiter Ltd. = 10% x 1,50,000
` 15,00,000
Tax@15% on short-term capital gains on sale of listed equity shares of Earth Ltd., in
respect of which STT has been paid = 15% of ` 4,60,000 69,000
Tax@30% on short-term capital gains on sale of unlisted equity shares of Mars Ltd. =
30% of ` 4,68,000 1,40,400
7,48,300
Add: HEC@4% 29,932
Tax Liability 7,78,232
Tax Liability (rounded off) 7,78,230

5. ABC Inc., a company incorporated in London has entered into an agreement with XYZ Limited, an
Indian company for rendering technical services to the latter for setting up a steel plant in Madhya
Pradesh. As per the agreement, ABC Inc. rendered both off-shore services and on-shore services to
XYZ Limited at fee of ` 75 lakhs and ` 90 lakhs, respectively. ABC Inc. is of the view that it is not liable
to tax in India in respect of fee of ` 75 lakhs as it is for rendering services outside India. Discuss the
correctness of the view of ABC Inc.
Solution:
The Explanation to section 9(1) clarifies that income by way of, inter alia, fees for technical services from
services utilized in India would be deemed to accrue or arise in India under section 9(1)(vii) in case of a non -
resident and be included in his total income, whether or not such services were rendered in India.
In this case, the technical services rendered by the foreign company, ABC Inc., were for setting up a steel
plant in Madhya Pradesh. Therefore, the services were utilized in India. Consequently, as per section 9(1)(vii)
read with the above Explanation, the fee of ` 1.65 crore for technical services rendered by ABC Inc (both off-
shore and on-shore services) to XYZ Ltd. is deemed to accrue or arise in India and includible in the total
income of ABC Inc.
Therefore, the view of ABC Inc. that it is not liable to tax in India in respect of fee of ` 75 lakh (as it is for
rendering services outside India) is not correct.
6. The details given hereunder for the A.Y. 2020-21 relate to two foreign nationals (who are non-
residents in India) - Mr. William Jones, an English cricket player and his brother, Mr. Frederick Jones,
a singer:
Particulars Mr. William Mr. Frederick
Jones Jones
(1) Participation in cricket tournaments in India ` 45 lakhs
(2) Winnings from lotteries (net) ` 69,100

(3) Contribution of an article relating to the sport ` 10,000
of cricket in a sports magazine in India
(4) Performance in a music show in India ` 3 lakhs
With reference to the provisions of the Income -tax Act, 1961, you are required to –
(i) Compute their tax liability for the A.Y. 2020-21.
(ii) Examine whether the above income are subject to deduction of tax at source.
(iii) Decide whether it is necessary for them to file their return of income for A.Y. 2020-21.
[CA FINAL RTP – MAY 2018 EXAM]

Solution
Computation of tax liability of Mr. William Jones for the A.Y. 2020-21
Particulars ` `
Income taxable u/s 115BBA
Income from participation in cricket tournaments in India 45,00,000
Contribution of article in a magazine in India 10,000
Income taxable u/s 115BB
Winnings from lotteries [` 69,100 / (100 - 30.9%)] 1,00,000
Tax@20% u/s 115BBA on ` 45,10,000 9,02,000
Tax@30% u/s 115BB on income of ` 1,00,000 by way 30,000
of winnings from lotteries
9,32,000
Add: Health & Education cess@4% 37,280
Total tax liability of Mr. William Jones 9,69,280
Mr. Frederick Jones is a non-resident entertainer, whose income of ` 3 lakh from a music show in India is
taxable@20% under section 115BBA. Therefore, his tax liability is ` 62,400 (being 20% of ` 3 lakh plus
health & education cess@4%)

(i) Yes, the above income are subject to deduction of tax at source.
Income referred to in section 115BBA is subject to deduction of tax at source@20% under section 194E.
Income referred to in section 115BB (i.e., winnings from lotteries) is subject to deduction of tax at
source@30% under section 194B.
Since Mr. William Jones and Mr. Frederick Jones are non-residents, the amount of tax to be deducted
calculated at the prescribed rates mentioned above, would be increased by cess@4%.
(ii) Section 115BBA provides that if the total income of the non-resident sportsman or non-resident entertainer
comprises of only income referred to in that section and tax deductible at source has been fully deducted, it
shall not be necessary for him to file his return of income.
In this case, although Mr. William Jones is a non-resident sportsman, he has winnings from lotteries as well.
Therefore, he cannot avail the benefit of exemption from filing of return of income as contained in section
115BBA. Hence, he has to file his return of income for A.Y. 2020-21.
However, since Mr. Frederick Jones’s income comprises of only income referred to in section 115BBA, in
respect of which tax is deductible under section 194E, he need not file his return of income for A.Y. 2020-21, if
tax has been so deducted.
7. SOL Inc, a notified Foreign Institutional Investor (FII), derived the following incomes from various
sources for the financial year 2019-20:-
(1) Income in respect of securities:
` 28,50,000 Expenses incurred in respect there of: ` 50,000
(The above income includes an interest of ` 16,00,000 received from an Indian Company on the
investment in rupee denominated bonds and dividend income of ` 3,50,000 from a domestic
company referred to in section 115-O)
(2) Capital Gains:
(i) Long Term :

Sale proceeds on sale of securities on 15.01.2020: ` 52,00,000
Purchase cost of securities on 25.05.2014: ` 28,00,000
Cost Inflation Index: 2014-15 : 240; 2019-20: 289
(ii) Short Term:
Sale proceeds of equity shares of Company A (January 2020): ` 13,50,000
(STT paid on Company A shares)
Cost of acquisition (August, 2019) : ` 5,50,000
Sale proceeds of equity shares of Company B (December, 2019) ` 9,25,000
Cost of acquisition (April, 2019) : (STT not paid on Company B Shares) ` 4,85,000
Compute the taxable income of SOL Inc and tax liability for the assessment year 2020-21 as per
applicable provisions of the Income-tax Act, 1961, assuming that no other income is derived by
SOL Inc (FII) during the financial year 2019-20.
[CA FINAL EXAM QUESTIONs – NOV 2018]

Solution:
Computation of total income of SOL Inc., a notified FII, for A.Y. 2020-21
Particulars ` `
Investment Income
Dividend income of ` 3,50,000 [Exempt under section 10(34)] Nil
Income in respect of securities [` 28,50,000 – Dividend `3,50,000] 25,00,000 25,00,000
[No deduction is allowable in respect of expenses incurred in respect thereof]
Long-term capital gains on sale of securities

[Benefit of indexation is not allowable] 24,00,000
Short-term capital gains on sale of STT paid equity shares of Company
A
Short-term capital gains on sale on equity shares of Company B in
respect of which STT is not paid
4,40,000
Computation of tax liability of SOL Inc. for A.Y.2020-21
Particulars `
Tax@5% on interest on ` 16,00,000 received from an Indian company on investment in 80,000
rupee denominated bonds = 5% of `16,00,000
Tax@20% on balance investment income of ` 9,00,000 [` 25,00,000 – 1,80,000
` 16,00,000]
Tax@10% on long-term capital gains = 10% of ` 24,00,000 2,40,000
Tax@15% on STT paid short-term capital gains on sale of listed equity shares of Company
A = 15% of ` 8,00,000 1,20,000
Tax@30% on short-term capital gains on sale of listed equity shares of Company B on which
STT is not paid = 30% of ` 4,40,000 1,32,000
7,52,000
Add: health & EC@4% 30,080
Note - The computation of total income and tax liability of an FII, whose income comprises solely of
investment income and capital gains on sale of securities is governed by the provisions of section 115AD, as
per which
no deduction is allowable in respect of expenditure to earn investment income and

benefit of indexation is not allowable in respect of long-term capital gains.
The rates at which tax is to be calculated in respect of investment income and capital gains are also
provided in section 115AD.

8. Examine in the context of provisions contained under the Income-tax Act, 1961, each of the following
independent cases and state in brief whether there exists business connection in each of the cases in
India so as to bring the income earned, if any, to tax net in India :-
(i) ABC Ltd., a company resident in Dubai, had set-up a liaison office at Mumbai to receive trade
inquiries from customers in India. The work of the liaison office is not only restricted to forwarding
of the trade inquiries to ABC Ltd. but the liaison office also negotiates and enters into the
contracts on behalf of ABC Ltd. with the customers in India.
(ii) XYZ Inc. a resident of USA, has set up a branch at Hyderabad for the purpose of purchase of raw
materials for manufacturing its products. The branch office is also engaged in selling the
products manufactured by XYZ Inc. and in providing sales related services to customers in India
on behalf of XYZ Inc.
(iii) Mr. Rajesh, a resident in India and based at Delhi, is appointed as an agent by PQR Inc. a
company incorporated in UK for tracking the Indian markets. He was canvassing the orders and
then communicating to PQR Inc. in UK. He had no authority to accept the orders. All the orders
were directly received, accepted and after receipt of the price/value, the delivery of goods was
given by PQR Inc. outside India. No purchase of raw material or manufacturing of finished goods
took place in India. The agent was entitled to receive the commission on the sales so concluded
by PQR Inc.
Answer
(i) If a Liaison Office is maintained solely for the purpose of carrying out activities which are preparatory or
auxiliary in character, and such activities are approved by the Reserve Bank of India, then, no business
connection is established.
In this case, had the liaison office’s activities been restricted to forwarding of trade inquiries to ABC Ltd., a
Dubai based company, its activities would not have constituted business connection. However, the
activities of the liaison office extends to also negotiating and entering into contracts on behalf of ABC Ltd.
with the customers in India, on account of which business connection is established.
(ii) As per the opening sentence in Explanation 2, to section 9(1)(i) “business connection” shall include any
business activity carried out through a person in India acting on behalf of the non-resident. Accordingly,
in this case, since the branch office is carrying out a business activity by purchasing raw materials in
India for XYZ Inc. and selling finished product manufactured by XYZ Inc. to customers in India and
providing sales related services to them on behalf of XYZ Inc., business connection is established.
It may be noted that as per clause (a) of Explanation 2, in the case of a non- resident, no business
connection would be established if the activities of the person acting on behalf of the non-resident were
limited to the purchase of goods or merchandise for the non-resident.
In the present case, however, business connection would be established, since the branch set up at
Hyderabad by XYZ Inc. is not solely engaged in purchase of raw materials for XYZ Inc. for manufacturing
its products but is also engaged in selling such manufactured products to customers in India and
providing sales related services to them on behalf of XYZ Inc.
(iii) ‘Business connection’ shall include any business activity carried out through a person acting on
behalf of the non-resident. For a business connection to be established, the person acting on
behalf of the non-resident –
(a) must have an authority which is habitually exercised in India to conclude contracts on behalf of the
non-resident or;
(b) in a case where he has no such authority, but habitually maintains in India a stock of goods or
merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident,
or
(c) habitually secures orders in India, mainly or wholly for the non-resident.
In the present case, business connection would not be established, since Mr. Rajesh does not
have the authority to accept or conclude orders in India on behalf of PQR Inc. Moreover, all the
orders were directly received, accepted and after receipt of the price/value, the delivery of goods was
also given by PQR Inc. outside India. Hence, no business connection is established in this case.

9. Pranab, a non-resident Indian (aged 41) has furnished the following particulars of income relating to
financial year 2019-20:
Particulars `
Loss from house property located in India 2,50,000
Income from business carried on in India 7,50,000
Income from mutual funds specified in section 10(23D) 65,000
Interest on debentures of Indian company subscribed in US$ 1,50,000
Interest on loan taken for purchase of above debentures 20,000
Long-term capital gains on sale of debentures subscribed in US $ in the year 2008-
09 for ` 5,00,000 and sold in the year 2019-20 for ` 8,00,000.
Cost Inflation Index-
Financial Year 2008-09: 137;
Financial Year 2019-20: 289
Brokerage on sale of debentures 12,000
Compute tax payable by Pranab for Assessment Year 2020-21, assuming that he opts for provisions
of Chapter XII-A of the Income- tax Act, 1961.
Answer:
Computation of tax payable by Mr. Pranab for A.Y. 2020-21
Particulars ` `
Profit and gains of business or profession
Less: Loss from house property of ` 2,50,000, restricted to ` 2,00,000 by virtue
of section 71(3A) 2,00,000 5,50,000
Balance loss of ` 50,000 [` 2,50,000 – ` 2,00,000] from house property to be
carried forward to A.Y.2021-22
Capital Gains
Long term capital gains
Sale Consideration 8,00,000
Less: Brokerage on sale of debentures __12,000
Net sale consideration 7,88,000
Less: Cost of acquisition [Indexation benefit would not be available for
calculating cost of acquisition while computing long term capital gains under
Chapter XII-A] 5,00,000 2,88,000
Income from Other Sources
Income from mutual fund specified in section 10(23D) [Exempt under section Nil
10(35)]
Interest on debentures of Indian company [No deduction is allowed under any
provision of the Act in respect of any expenditure or allowance while computing
the interest on debentures applying the provisions under Chapter XII-A.
Therefore, interest on loan taken for purchase of debentures is not deductible].
1,50,000 1,50,000
Gross Total Income/ Total Income 9,88,000
Tax liability [as per provisions of Chapter XII-A]
Tax on long term capital gains (` 2,88,000 x 10%) 28,800
Tax on interest on debentures, being investment income 30,000
(` 1,50,000 x 20%)
Tax on balance income of ` 5,50,000 as per the normal provisions of the Act
Upto ` 2,50,000 Nil

` 2,50,001 – `5,00,000 @5% 12,500
` 5,00,001 – `5,50,000@20% 10,000 22,500 81,300

Add: HEC@4% 3,252
Tax liability 84,552
Tax liability (rounded off) 84,550
Note: It is assumed that the Indian company is not a private company.
10. Red Ltd., a non-resident foreign company, had entered into a collaboration agreement, approved by
the Central Government, with Blue Ltd., an Indian company on February 21, 2003 and is in receipt of
following payments during the previous year ending on March 31, 2020:
(i) Interest on 8% debentures for ` 40 lakhs issued by Blue Ltd. on July 1, 2019 in consideration of
providing of technical know-how, manufacturing process and designs (date of payment of interest
being March 31 every year).
(ii) Service charges @2.5% of the value of plant and machinery for ` 500 Lakhs leased out to Blue Ltd.
payable each year before March 31.
(iii) Apart from the above incomes, Red Ltd. received a long term capital gain amounting to ` 1.90
Lakhs on sale of debentures of Green Ltd., an Indian company, subscribed in US$.
Compute the Total Income of Red Ltd. and determine its tax liability for the assessment year 2020-
21.
Solution:
Computation of total income of Red Ltd., a foreign company, for A.Y. 2020-21
Particulars `
Fees for technical services 40,00,000
Debentures issued by Blue Ltd. in consideration for provision of technical know-how by Red
Ltd., a foreign company, is in the nature of fee for technical services, deemed to accrue or
arise in India to Red Ltd., a foreign company
Royalty 12,50,000
Service charges for leased out plant and machinery [` ` 500 lakhs x 2.5%] [Service charges
paid by Blue Ltd. for leased out plant and machinery is in the nature of royalty, which is
deemed to accrue or arise in India to Red Ltd., a foreign company]
Capital Gains
Long term capital gain on sale of debentures of Green Ltd. an Indian company 1,90,000
Interest on debentures
Interest on debentures [`` 40 lakhs x 8% x 9/12] [Interest on debentures of Blue Ltd., an 2,40,000
Indian company, is deemed to accrue or arise in India, since the debt incurred is not used for
a business outside India or for earning income from a source outside India]
Computation of tax liability of Red Ltd. for A.Y. 2020-21
Particulars `
Tax@10% on royalty of ` 12.50 lakhs and fees for technical services of 5,25,000
` 40 lakhs
Tax @20% on long term capital gains of ` 1,90,000, assuming debentures are listed on 38,000
recognised stock exchange
Tax @40% on interest on debentures of ` 2,40,000 since debt is not incurred by Blue Ltd.
in foreign currency 96,000
6,59,000
Add: HEC@4% 26,360

Note – The above answer is based on the assumption that debentures of Green Ltd. are listed on a
recognized stock exchange. However, question can also be answered on the basis of the assumption that the
debentures are not listed on recognized stock exchange. In such case, long term capital gains on sale of
debentures would be subject to tax @10% and tax thereon shall be ` 19,000/-.
11. Alpha Inc., a non-resident company has an IT enabled business process outsourcing Unit in India
(BPO) and it provides certain outsourcing services to a resident Indian entity.
Discuss, the tax implications, in the hand of Alpha Inc. due to presence of BPO unit in India.
Solution:
The CBDT had, vide Circular No.5/2004 dated 28.9.2004, clarified that the non-resident entity or the foreign
company will be liable to tax in India only if the IT enabled BPO unit in India constitutes its Permanent
Establishment.
In the present case, since Alpha Inc. has an IT enabled Business Process Outsourcing unit in India (BPO)
which provides certain outsourcing services to a resident Indian entity, such BPO would be considered as PE
of Alpha Inc., as it carries on business in India through the BPO Unit.
In such a case, the profits of Alpha Inc., attributable to the business activities carried out in India by the
Permanent Establishment would become taxable in India.
Profits are to be attributed to the Permanent Establishment as if it were a distinct and separate enterprise
engaged in the same or similar activities under the same or similar conditions and dealing wholly
independently with the enterprise of which it is a Permanent Establishment.
In determining the profits of a Permanent Establishment, there shall be allowed as deduction, expenses
which are incurred for the purposes of the Permanent Establishment including executive and general
administrative expenses so incurred, whether in the State in which the Permanent Establishment is situated
or elsewhere.
12. State with reasons whether the following transactions are subject to tax as deemed income.
(i) XYZ Ltd. is a broadcaster of News Channel in India. It had made payments to a Malaysian
company having no PE in India for downlinking Television Channels into India and international
footprint through a channel.
(ii) Mr. A, a foreign citizen and a diamond merchant from US, has earned income of ` 10 crores from
display of uncut and unassorted diamonds in the Bharat Diamond Bourse, a notified special zone
in Surat.
[CA FINAL EXAM QUESTIONs – May 2018]
Answer
(i) As per section 9(1)(vi)(b), any income by way of royalty payable by a person who is a resident would be
deemed to accrue or arise in India in the hands of the recipient, except where the royalty is payable in
respect of any right, property or information or services utilised for the purposes of business or profession
carried on by such person outside India or for the purposes of making or earning any income from any
source outside India.
Explanation 2 to section 9(1)(vi) defines “royalty” to mean consideration for the transfer of any right in
respect of, inter alia, a process. Explanation 6 to section 9(1)(vi) clarifies that “process” includes
transmission by satellite (including conversion for down-linking of any signal).
Accordingly, the payment made by XYZ Ltd., a resident in India (since it is an Indian company), for
downlinking television channels into India and international footprint through the channel, would constitute
“royalty”.
Such royalty income would be deemed to accrue or arise in India in the hands of the Malaysian company
not having a PE in India, since it is paid by XYZ Ltd., a company resident in India in relation to its
business in India.

(ii) As per section 9(1)(i)(e), in the case of a foreign company engaged in the business of mining of
diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which
are confined to display of uncut and unassorted diamonds in any notified special zone.
Since this benefit is available only in case of a foreign company engaged in the business of mining of
diamonds, Mr. A, a foreign citizen and a diamond merchant from US, cannot avail of such benefit.
The income of ` 10 crores from display of uncut and unassorted diamonds would, accordingly, be
deemed to accrue or arise in the hands of Mr. A by virtue of business connection in India.
13. Ricky, a foreign national and a cricketer came to India as a member of South African Cricket Team in
the year ended 31st March 2020. He received ` 4 lakhs for participation in matches in India. He also
received ` 1.5 lakhs for an advertisement of a product on Radio. He wrote an article for a local
newspaper and received ` 20,000 for it. During his stay in India, he also won a prize of ` 25,000 from
horse racing in Kolkata. He has no other income in India during the year. You are required to do the
following:
(i) Compute his tax liability in India for A.Y. 2020-21.
(ii) Comment whether these incomes are subject to deduction of tax at source.
(iii) Comment whether he is liable to file return of income in India for A.Y. 2020-21.
(iv) What would have been his tax liability, had he been a match referee instead of cricketer?
Answer
(i) Computation of tax liability of Ricky for the A.Y. 2020-21
Particulars ` `
Income taxable under section 115BBA
Income from participation in matches in India 4,00,000
Advertisement of product on Radio 1,50,000
Contribution of an article in local newspaper 20,000
5,70,000
Income taxable under section 115BB
Income from horse races 25,000
Total income 5,95,000
Tax @ 20% under section 115BBA on ` 5,70,000 1,14,000
Tax @30% under section 115BB on income of
` 25,000 from horse races 7,500
1,21,500
Add: HEC@1% 4,860

Total tax liability 1,26,360
Total tax liability (rounded off) u/s 288B 1,26,360
(ii) Yes, the above income is subject to tax deduction at source. Income referred to in section 115BBA (i.e.,
` 5,70,000, in this case) is subject to tax deduction at source @ 20% under section 194E. Income referred
to in section 115BB (i.e., Winnings of ` 25,000 from horse racing, in this case) is subject to tax deduction
at source @30% under section194BB.
Since Ricky is a non-resident, the amount of tax to be deducted calculated at the prescribed rates
mentioned above, would be increased by health & education cess@4%
(iii) Section 115BBA provides that if the total income of the non-resident sportsman comprises of only income
referred to in that section and tax deductible at source has been fully deducted, it shall not be necessary
for him to file his return of income.

However, in this case, Mr. Ricky has income from horse races as well. Therefore, he cannot avail the
benefit of exemption from filing of return of income as contained in section 115BBA. Hence, he would be
liable to file his return of income for A.Y. 2020-21
(iv) ‘Match referee’ would not fall within the meaning of “sportsmen” to attract the provisions of section
115BBA. Therefore, although the payments made to non-resident ‘match referee’ are “income” which has
accrued and arisen in India, the same are not taxable under the provisions of section 115BBA. They are
subject to the normal rates of tax.
Particulars `
Tax @ 30% under section 115BB on winnings of ` 25,000 7,500

from horse races
Tax on ` 5,70,000 at the rates in force `
Upto ` 2,50,000 Nil
` 2,50,000 – ` 5,00,000 [` 2,50,000@5%] 12,500
` 5,00,000 – ` 5,70,000[` 70,000@20%] 14,000
26,500
34,000
Add: H&EC@1% 1,360
35,360
14. M/s. Fly Airlines incorporated as a company in UK operated its flights to India and vice versa during
the financial year 2019-20 and collected charges of ` 95 lakhs for carriage of passengers and cargo
out of which, ` 45 lakhs were received in London in Pounds for the passenger fare booked from
London to Delhi. The total expenses for the year on operation of such flights were ` 165 lakhs.
Compute the income chargeable to tax of the foreign airlines.
Solution:
Computation of Income chargeable to tax of M/s Fly Airlines
Particulars Fare booked from India to Fare booked from

London, whether received London to Delhi (`)
in India or not (`)
Fare 50,00,000 45,00,000
(95,00,000 – 45,00,000)
Deemed income @5% 2,50,000 Nil (since the amount is

under section 44BBA [50,00,000 × 5%] not received in India)
Thus, ` 2,50,000 would be chargeable to tax in India for F.Y. 2019-20 in the hands of M/s Fly Airlines under
the head "Profits and gains of business or profession".
15. LLM Bank Ltd. carrying on banking business is incorporated in Melbourne, Australia. It has branches
in different countries including India. During the financial year 2019-20, the Indian branch of the bank
paid interest of ` 20 lakhs and ` 15 lakhs, respectively, to its head office in Melbourne and to the
branch office in California. State with reasons whether interest so paid shall be liable to tax in India in
the hands of head office and California branch.

Solution:
As per section 5(2), the total income of a non-resident would include all income which is, inter alia, deemed to
accrue or arise to him in India in that year.
In the case of a non-resident, being a person engaged in the business of banking, any interest payable by the
Permanent Establishment (PE) in India of such non-resident to the head office or any PE or any other part of
such non-resident outside India, shall be deemed to accrue or arise in India [Explanation to section 9(1)(v)].
In the present case, the Indian branch, being a fixed place of business, is the PE in India of LLM Bank Ltd.,
being a non-resident engaged in the banking business, since such business is carried on in India through the
Indian branch [Clause (iiia) of section 92F].
Accordingly, the interest of ` 20 lakhs paid to its head office in Melbourne and ` 15 lakhs paid to the other
branch office in California by the Indian branch [being the PE in India of LLM Bank Ltd, a non-resident
engaged in the business of banking] shall be deemed to accrue or arise in India and shall be liable to tax in
India in the hands of head office and California branch, respectively, in addition to any income attributable to
the PE in India.
16. Explain the significance of the PE, when such transactions are governed by the Double Taxation
Avoidance Agreements (DTAA).
Solution
Double Taxation Avoidance Agreements (DTAAs) generally contain an Article providing that business income
is taxable in the country of residence, unless the enterprise has a permanent establishment (PE) in the
country of source, and such income can be attributed to the PE.
Section 92F(iiia) defines the term “Permanent Establishment” to include a fixed place of business through
which the business of an enterprise is wholly or partly carried on.
As per this definition, to constitute a permanent establishment, there must be a place of business which is
fixed and the business of the enterprise must be carried out wholly or partly through this place.
Section 9(1)(i) requires existence of business connection for deeming business income to accrue or arise in
India. DTAAs however provide that business income is taxable only if there is a PE in India.
It is well established that the beneficial provisions of the DTAA will prevail over the provisions of the Act.
Therefore, in cases where transactions are covered by DTAAs, where there is no PE in India, business
income cannot be brought to tax due to existence of business connection as per section 9(1)(i).

DTAA SATC B.1
DOUBLE TAXATION RELIEF

Generally, income is taxable on two basis:
A. Source of income basis and
B. Residential Status Basis,
which results into double taxation of same income of the person. Firstly, such income is taxed in the
country in which such income is generated and again, the same income may be taxed on the basis of
residential status of the person in another country.
For instance, Mr. X, an ordinarily resident in India, earned bank interest of ` 1,00,000 on his money
deposited into a bank located in US. In that case, such income is taxable in US on Source of income
basis and again in India as he is a ordinarily resident India. In times when economies are going global
and borders fading, double taxation is still one of the major obstacles to the development of inter-country
economic relations.
In order to prevent this hardship or to avoid double taxation, relief is provided to the tax-payer.
Such relief is provided by two ways:
A. Bilateral Relief
B. Unilateral Relief
Bilateral Relief
In this, government of two countries enters into an agreement (known as ‘treaties’) to provide relief
against double taxation of same income. The relief is granted on the basis of terms of such agreement.
Generally, such agreement provides relief through following methods:

Exemption Method: In this method, one country provides exemption to such type of income. Generally,
residence country gave up its right and the country of source is then given exclusive right to tax such
incomes.
Credit Method: In this method resident remains liable in the country of residence on its global income,
however as far the quantum of tax liabilities is concerned credit or deduction for tax paid in the source
country is given by the residence country against its domestic tax as if the foreign tax were paid to the
country of residence itself.
Unilateral Relief
The aforesaid method is depending on bilateral activity of both the countries. However, no country will
have such an agreement with every country in the world. In order to avoid double taxation in such
cases, country of residence itself may provide relief on unilateral basis.
In India, relief for avoidance of double taxation is provided in both ways.

DTAA SATC B.2
CLASS NOTES
Section 228A- Recovery of tax in pursuance of agreements with foreign countries.
1. Where an agreement is entered into by the Central Government with the Government of any country outside
India for recovery of income-tax under this Act and the corresponding law in force in that country and the
Government of that country or any authority under that Government which is specified in this behalf in such
agreement sends to the Board a certificate for the recovery of any tax due under such corresponding law
from a resident, or a person having any property in India, the Board may forward such certificate to any Tax
Recovery Officer having jurisdiction over the resident, or within whose jurisdiction such property is
situated and thereupon such Tax Recovery Officer shall-
a. proceed to recover the amount specified in the certificate in the manner in which he would proceed to
recover the amount specified in a certificate drawn up by him under Section 222; and
b. remit any sum so recovered by him to the Board after deducting his expenses in connection with the
recovery proceedings.
2. Where an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery
Officer may, if the assessee is a resident of a country (being a country with which the Central Government
has entered into an agreement for the recovery of income-tax under this Act and the corresponding law in
force in that country), or has any property in that country, forward to the Board a certificate drawn up by
him under Section 222 and the Board may take such action thereon as it may deem appropriate having
regard to the terms of the agreement with such country.

DTAA SATC B.3
AGREEMENT WITH FOREIGN COUNTRIES [Sec 90] -Bilateral Relief
(1) The CG may enter into an agreement with the Government of any country outside India
(a) for the granting of relief in respect of
(i) Income on which tax has been paid under this Act and income-tax in that country; or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to
promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax, or
(d) for recovery of income-tax.
(2) Where the CG has entered into an agreement with the Government of any country outside India as above,
then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to
the extent they are more beneficial to that assessee.
(3) W.e.f. AY 2018-19, the provisions of this Act [Chapter X-A] related to “General Anti- Avoidance Rule”
shall apply to the assessee even if such provisions are not beneficial to him.
(4) Relief u/s 90 is not available if Tax Residency Certificate is not obtained from government of that country to
which such person is resident.
Explanation 1 - For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign
company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as
less favourable charge or levy of tax in respect of such foreign company.
COUNTRIES WITH WHICH NO AGREEMENT EXISTS [Sec. 91]
Where section 90 does not apply, unilateral relief u/s 91 will be available, if the following conditions are
satisfied:
(i) The assessee is resident in India in the previous year.
(ii) Income must have accrued or arisen to him outside India during the previous year & it should also be
received outside India. Such income must not be deemed to accrue or arise in India.
(iii) The income should be taxed in India & in a foreign country & there should be no reciprocal arrangements
for relief or avoidance on double taxation with the other country.
(iv) In respect of that income, the assessee must have paid tax in the foreign country in which the income
has arisen.
If all the above conditions are satisfied, such person shall be entitled to deduction from the Indian Income-tax
payable by him of a sum calculated on such doubly taxed income-
(a) at the average Indian rate of tax or the average of tax of the said country, whichever is lower, or
(b) at the Indian rate of tax if both the rates are equal.
Average rate of tax means the tax payable on total income, after deduction of any relief due under the
provision of this act but before deduction of any relief due under this chapter, divided by the total income.

DTAA SATC B.4
PRACTICAL QUESTIONS
1. Question:
R a resident Indian, has derived the following income for the previous year relevant to the AY 2020-21
Particulars `
(1) Income from profession 3,00,000
(2) Share income from a partnership in country X (tax paid in country X for this 2,00,000
income in equivalent Indian rupees ` 40,000)
(3) Commission income from a concern in country Y (tax paid in country Y 40,000
at 20%) converted in Indian rupee.
(4) FD Interest from schedule banks. 20,000
R wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India does not have
any Double Taxation Avoidance Agreement with countries X and Y.
Solution: (a) Computation of Total Income
Particulars ` `
(a) Income from business:
a. Income from profession 3,00,000
b. Share income in partnership firm in country X 2,00,000 5,00,000
(b) Income from other sources:
a. Interest from schedule bank 20,000
b. Commission earned in country Y, assumed from other sources 40,000 60,000
(b) Computation of tax liability:
Tax on total income of ` 5,60,000 24,500
Add : Health & Education cess @ 4% 980
25,480
Less : Double taxation relief : (2,00,000 + 40,000) = 2,40,000 × 4.55% 10,920
Tax payable 14,560
Tax payable to be rounded off to the nearest multiple of ` 10 (Sec. 288B) 14,560
Note:
(i) Average rate of tax in the foreign country 20%
.
(ii) Average rate of tax in India:
25,480/5,60,000 x 100 = 4.55%
Whichever is less, is applicable
2. Question:
Mr. Prasad, ordinarily resident in India, furnished the following particulars of his income/savings during
the PY 2019-20
`
(i) Income from foreign business (Including ` 2,00,000 from business 12,00,000
connection in India) accruing outside India
(ii) Loss from Indian business (-) 2,00,000
(iii) Income from house property 4,00,000
(iv) Dividends gross from Indian companies 60,000
(v) Deposit in Public Provident Fund 70,000
(vi) Tax paid in foreign country 2,50,000
There is no double taxation avoidance treaty.
Compute the tax liability

DTAA SATC B.5
Solution: (a) Computation of Total Income for the AY 2020-21
Particulars ` `
1. Income from House Property 4,00,000
2. Income from Business:
(a) Income from Indian business (-) 2,00,000
(b) (i) Income from foreign business accruing or (+) 10,00,000
arising outside India
(ii) Income from foreign business deemed to accrue or (+) 2,00,000 10,00,000
arise in India
3. Income from other sources
Dividends from Indian companies exempt [Sec 10(34)] Nil
Less : Deduction for approved savings (Sec 80C): 70,000
PPF Deposits
Tax liability on total income:
Income-tax on slab rates 2,11,500
Add: Health & Education cess : 4% 8,460
Tax liability 2,19,960
Less: Double taxation relief on foreign business profits, 1,65,380
not deemed to accrue or arise in India (Sec. 91) 10,00,000 × 16.538%
Tax Payable 54,580
Note: 1. Relief is allowed on the doubly taxed income either at average rate of Indian tax or average rate of
foreign income tax, whichever is lower;
(a) Average rate of Indian income tax : 2,19,960 / 13,30,000 × 100 = 16.538%
(b) Average rate of foreign income tax: (2,50,000/12,00,000) × 100 = 20.833%
3. Question: Explain briefly the proposition of law in case of any conflict between the provisions of the
Double Taxation Avoidance Agreement (DTAA) and the Income-tax Act, 1961.
Answer: Where there is conflict between the provision as contained in the tax treaty and the provisions of
Income Tax Act, a payer can take advantage of those provisions which are more beneficial to him. Thus,
tax treaties override the provisions of Income Tax Act which can be enforced by the appellate
authorities/courts.
4. Question: Arif, a resident both in India and Malaysia in previous year 2019-20, owns immoveable
properties (including residential house) at Malaysia and India. He has earned income of ` 50 lakh from
rubber estates in Malaysia during the previous year 2019-20. He also sold some property in Malaysia
resulting in short-term capital gain of ` 10 lakh during the year. Arif has no permanent establishment of
business in India. However, he has derived rental income of ` 6 lakh from property let out in India and he
has a house in Lucknow where he stays during his visit to India. The Article 4 of the Double Taxation
Avoidance agreement between India and Malaysia provides that where an individual is a resident of both
the contracting States, he shall be deemed to be resident of the Contracting State in which he has
permanent home available to him. If he has permanent home in both the Contracting States, he shall be
deemed to be a resident of the Contracting State with which his personal and economic relations are
closer (centre of vital interests).
You are required to state with reasons whether the business income of Arif arising in Malaysia and the
capital gains in respect of sale of the property situated in Malaysia can be taxed in India.
Answer:
Where the Central Government has entered into an agreement with the government of any other country for
granting relief to tax or for avoidance of double taxation, the provisions of the Income-tax Act, 1961 are
applicable in such case to the extent they are more beneficial to the assessee.
Arif has a residential house both in Malaysia and India. Thus, he has a permanent home in both the countries.
However, he has no permanent establishment of business in India. The Double Taxation Avoidance Agreement
(DTAA) with Malaysia provides that where an individual is a resident of both countries, he is deemed to be
resident of that country in which he has a permanent home and if he has a permanent home in both the
countries, he is deemed to be resident of that country, which is the centre of his vital interests, i.e. the country
with which he has closer personal and economic relations.
Arif owns rubber estates in Malaysia from which he derives business income. However, Arif has no permanent

DTAA SATC B.6
establishment of his business in India.
Therefore, his personal and economic relations with Malaysia are closer, since Malaysia is the place where—(a)
the property is located and (b) the permanent establishment (PE) has been set-up. Therefore, he is deemed to
be resident of Malaysia for AY 2020-21.
So, in this case, Arif is not liable to income tax in India for AY 2020-21 in respect of business income and
capital gains arising in Malaysia.
5. Question: Mr. B is a musician deriving income from foreign concerts performed outside India, ` 50,000.
Tax of ` 10,000 was deducted at source in the country where the concerts were given. India does not
have any agreement with that country for avoidance of double taxation. Assuming that Indian income of
B is ` 4,80,000, what is the relief due to him under Sec. 91 for the AY 2020-21.
Solution: Computation of Total Income for the AY 2020-21

Computation of Total Income: `
a. Indian Income 4,80,000
b. Foreign Income 50,000
Gross Total Income or Total Income 5,30,000
Computation of Tax Liability:
Income tax on total income: 18,500
Less: Rebate u/s 87A NIL
Tax after Rebate: 18,500
Add: Health & Education cess @ 4% 740
Total: 19,240
Less: Double taxation relief under Sec. 91: ` 50,000 × 3.63% 1,815
Tax payable 17,425 or 17,430
Note 1: Average rate of Indian income tax: = 19,240 / 5,30,000 x 100 = 3.63%
Relief is allowed either at the average rate of Indian income tax or the average rate of foreign income
tax (10,000 / 50,000 x 100 = 20%) whichever is lower.
Accordingly, the relief has been allowed at the average rate of Indian income tax.
6. Question: A resident assessee, earned foreign exchange of ` 78,800. The foreign income was also
subjected to tax deduction of ` 8,800 at source in the foreign country with which India had no
agreement for avoidance of double taxation. The assessee claimed relief under Sec. 91 of the
Income-tax Act in respect of the whole foreign income. Discuss his contention with reference to
decided case laws.
Solution: Where any income is taxed outside India as well as in India, a resident assessee is entitled to
claim double taxation relief on such doubly taxed income provided such income is not deemed to accrue or
arise in India. If any income arising outside India, is not subjected to tax in India, such foreign income does
not form part of doubly taxed income for the purposes of Sec. 91. The expression “doubly taxed income”
refers to foreign income which also suffered tax in India.
Where any foreign income, taxed outside India, is also eligible to deduction in computing total income in
India, double taxation relief would be allowed only on such income as forms part of total income.
On the amount of doubly taxed income, Income-tax is calculated at the Indian rate of tax and rate of tax of
the foreign country. The foreign tax rate has to be calculated separately for each country – CIT vs.
Bombay Burmah Trading Corpn. Ltd. [2003] 126 Taxman 403 (Bom.)
Double taxation relief will be allowed on such doubly taxed income either at the average rate of Foreign
Income Tax or Indian Income Tax, whichever is lower out of the two.

DTAA SATC B.7
7. Explain the term “Bilateral Relief” in the context of Double Taxation Avoidance Agreement.
Answer
Where a tax payer is resident in one country but has a source of income in another country, it gives rise to
possible double taxation. The Governments of two countries can enter into a mutual agreement to provide
relief to the tax payer against double taxation of the income by working out the basis on which the relief is to
be granted. This is called bilateral relief. Bilateral Relief may be granted by way of the following methods:
(a) Exemption Method: - Under this method, the relief is provided to the assessee by taxing a particular
income in only one of the two countries, which would otherwise have been taxed in both the countries.
(b) Tax Relief Method: - Under this method, the income of the assessee is taxable in both countries in
accordance with their respective tax laws/DTAAs. However, the country of which the tax payer is a
resident, allows him credit for the tax charged on the doubly taxed income in the other country.
Note: In India, double taxation relief is provided for in sections 90 and 90A, either by way of granting relief in
respect of income-tax paid in India and the other country or specified territory or by way of avoidance of
double taxation of income in India and the other country or specified territory.
8. Explain in the context of provisions of the Act:

(i) The underlying idea behind DTAA.
(ii) Rate of tax in other country
Answer
I. The underlying idea behind Double Taxation Avoidance Agreement entered between two countries
is to promote mutual economic relations by relieving the tax payers from the burden of paying tax
twice on the same income in two different countries.
II. Rate of tax in the other country means income tax actually paid in that country in accordance with
the corresponding laws in force in that country after deduction of all relief due, but before deduction
of any relief due in the said country on account of double taxation, divided by the whole amount of
income as assessed in that country.
9. Nandita, an individual resident retired employee of the Prasar Bharati aged 60 years, is a well known
dramatist deriving income of ` 1,10,000 from theatrical works played abroad. Tax of ` 11,000 was
deducted in the country where the plays were performed. India does not have any Double Tax
Avoidance Agreement under section 90 of the Income-tax Act, 1961, with that country. Her income in
India amounted to ` 6,30,000. In view of tax planning, she has deposited `1,50,000 in Public Provident
Fund and paid contribution to approved Pension Fund of LIC ` 32,000. She also contributed ` 28,000
to Central Government Health Scheme during the previous year and gave payment of medical
insurance premium of ` 31,000 to insure the health of her father, a non-resident aged 84 years, who is
not dependent on her.
Compute the tax liability of Nandita for the Assessment year 2020-21.
Answer:
Computation of Tax liability of Nandita for the A.Y. 2020-21
Particulars `
Indian Income 6,30,000
Foreign Income 1,10,000
Less: Deduction under section 80C
Deposit in PPF 1,50,000
Under section 80CCC
Contribution to approved Pension Fund of LIC 32,000
1,82,000
Under section 80CCE
The aggregate deduction under section 80C, 80CCC
and 80CCD(1) has to be restricted to ` 1,50,000 1,50,000
Under section 80D
Contribution to Central Government Health Scheme
` 28,000 is also allowable as deduction under section
80D. Since she is a senior citizen, the deduction is
DTAA SATC B.8
allowable to a maximum of ` 50,000 (See Note 1) 28,000
Medical insurance premium of ` 31,000 paid for father aged 84 years.

Since the father is a non-resident in India, he will not be entitled for the
higher deduction of ` 50,000 eligible for a senior citizen, who is resident
in India. Hence, the deduction will be restricted to maximum of ` 25,000. 25,000 2,03,000
Tax on Total Income
Income-tax (See Note below) 17,400
Less: Rebate u/s 87A NIL
Tax after rebate 17,400
Add: Health & education cess @ 4% 696 18,096
Average rate of tax in India
(i.e. ` 18,096/ ` 5,37,000 × 100) 3.37%
Average rate of tax in foreign country
(i.e. ` 11,000/ ` 1,10,000 ×100) 10%
Relief under section 91 on ` 1,10,000 @
3.85% (lower of average Indian-tax rate or average foreign tax rate) 3,707
Tax payable in India 14,389/14,390
Notes:
1. Section 80D allows a higher deduction of up to ` 50,000 in respect of the medical premium paid to insure
the heath of a senior citizen. Therefore, Nandita will be allowed deduction of ` 28,000 under section 80D,
since she is a resident Indian of the age of 60 years.
2. The basic exemption limit for senior citizens is ` 3,00,000 and the age criterion for qualifying as a “senior
citizen” for availing the higher basic exemption limit is 60 years. Accordingly, Nandita is eligible for the
higher basic exemption limit of ` 3,00,000, since she is 60 years old.
3. An assessee shall be allowed deduction under section 91 provided all the following conditions
are fulfilled:-
(a) The assessee is a resident in India during the relevant previous year.
(b) The income accrues or arises to him outside India during that previous year.
(c) Such income is not deemed to accrue or arise in India during the previous year.
(d) The income in question has been subjected to income-tax in the foreign country in the hands of the
assessee and the assessee has paid tax on such income in the foreign country.
(e) There is no agreement under section 90 for the relief or avoidance of double taxation between India
and the other country where the income has accrued or arisen.
In this case, since all the above conditions are satisfied, Nandita is eligible for deduction under sec 91.
10. Cosmos Limited, a company incorporated in Mauritius, has a branch office in Hyderabad opened in
April, 2019. The Indian branch has filed return of income for assessment year 2020-21 disclosing
income of ` 50 lacs. It paid tax at the rate applicable to domestic company i.e. 30% plus education
cess on the basis of paragraph 2 of Article 24 (Non-Discrimination) of the Double Taxation Avoidance
Agreement between India and Mauritius, which reads as follows: "The taxation on a permanent
establishment which an enterprise of a Contracting State has in the other Contracting State shall not
be less favourably levied in that other State than the taxation levied on enterprises of that other State
carrying on the same activities in the same circumstances."
However, the Assessing Officer computed tax on the Indian branch at the rate applicable to a foreign
company i.e. 40% plus education cess.
Is the action of the Assessing Officer in accordance with law?
Answer
Under section 90(2), where the Central Government has entered into an agreement for avoidance of double
taxation with the Government of any country outside India or specified territory outside India, as the case
may be, then, in relation to the assessee to whom such agreement applies, the provisions of the Income-tax
Act, 1961 shall apply to the extent they are more beneficial to the assessee.
Thus, in view of paragraph 2 of the Article 24 (Non- Discrimination) of the Double Taxation Avoidance
Agreement (DTAA), it appears that the Indian branch of Cosmos Limited, incorporated in Mauritius, is liable
to tax in India at the rate applicable to domestic company (30%), which is lower than the rate of tax
applicable to a foreign company (40%).
However, Explanation 1 to section 90 clarifies that the charge of tax in respect of a foreign company at a rate
higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable

DTAA SATC B.9
charge or levy of tax in respect of such foreign company. Therefore, in view of this Explanation, the action of
the Assessing Officer in levying tax @40% on the Indian branch of Cosmos Ltd. is in accordance with law.
11. Kalpesh Kumar, a resident individual, is a musician deriving income of ` 75,000 from concerts
performed outside India. Tax of ` 10,000 was deducted at source in the country where the concerts
were performed. India does not have any double tax avoidance agreement with that country. His
income in India amounted to ` 5,00,000. Compute tax liability of Kalpesh Kumar for the assessment
year 2020-21 assuming he has deposited ` 10,000 in Public Provident Fund and paid medical
insurance premium in respect of his father, aged 65 years, ` 20,000.
Answer
Computation of tax liability of Mr. Kalpesh for A.Y. 2020-21
Particulars ` `
Foreign Income 75,000
Less: Deduction under section 80C
PPF Contribution 10,000
Deduction under section 80D
Medical insurance premium of father being a senior citizen 20,000 30,000
Tax on total income 21,500
Less: Rebate under section 87A NIL
21,500
Add: health & Education cess @ 4% 860
22,360
Average rate of tax in India [i.e. ` 22,360/` 5,45,000 x 100] 4.103%
[i.e. ` 10,000/ ` 75,000 x 100] 13.33%
Doubly taxed income 75,000
Rebate under section 91 on `75,000 @4.103%
(lower of average Indian tax rate and foreign tax rate] 3077
Tax payable in India [`22,360 – `3,077] 19,283/19,280
Note: An assessee shall be allowed deduction under section 91 provided all the conditions of Section 91 are
fulfilled:-
12. Explain the purposes for which the Central Government as per section 90 of the Income-tax Act,
1961, can enter into an agreement with any foreign country.
Answer
Section 90(1) empowers the Central Government to enter into an agreement with the Government of any
country outside India or specified territory outside India for any of the following purposes -
(a) granting of relief in respect of
(i) income on which income tax has been paid both in India and in the other country or specified territory;
or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or
specified territory, to promote mutual economic relations, trade and investment.
(b) the avoidance of double taxation of income under the Income-tax Act, 1961 and under the corresponding
law in force in the other country or specified territory;
(c) exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this
Act or under the corresponding law in force in that country or specified territory or investigation of cases
of such evasion or avoidance; and
(d) recovery of income tax under the Income-tax Act, 1961, of India and under the corresponding law in
force in the other country or specified territory, as the case may be.
This section also empowers the Central Government to make much provisions as may be necessary for
implementing the agreement, by notification in the Official Gazette.

DTAA SATC B.10
13. An individual resident in India, having income earned outside India in a country with which no
agreement under section 90 exists, asks you to explain whether the credit for the tax paid on the
foreign income will be allowed against his income-tax liability in India.
Answer:
The assessee is a resident in India and accordingly, the income accruing or arising to him globally is
chargeable to tax in India. However, section 91 specifies that if a person resident in India has paid tax in any
country with which no agreement under section 90 exists, then, for the purpose of relief or avoidance of
double taxation, a deduction is allowed from the Indian income-tax payable by him, of a sum
calculated on such doubly taxed income at Indian rate of tax or the rate of tax of such foreign
country, whichever is lower, or at the Indian rate of tax, if both the rates are equal. Accordingly, the
assessee shall not be given any credit of the tax paid on the income in other country, but shall be allowed a
deduction from the Indian income-tax payable by him as per the scheme of section 91.
14. Arif is a resident of both India and another foreign country in the previous year 2019-20. He owns
immovable properties (including residential house) in both the countries. He earned income of ` 50
lacs from rubber estates in the foreign country during the financial year 2019-20. He also sold some
house property situated in foreign country resulting in short-term capital gain of ` 10 lacs during the
year. Arif has no permanent establishment of business in India. However, he has derived rental
income of ` 6 lacs from property let out in India and he has a house in Lucknow where he stays
during his visit to India.
Article 4 of the Double Taxation Avoidance Agreement between India and the foreign country where
Arif is a resident, provides that “where an individual is a resident of both the Contracting States, then
he shall be deemed to be resident of the Contracting State in which he has permanent home available
to him. If he has permanent home in both the Contracting States, he shall be deemed to be a resident
of the Contracting State with which his personal and economic relations are closer (centre of vital
interests)”.
You are required to state with reasons whether the business income of Arif arising in foreign country
and the capital gains in respect of sale of the property situated in foreign country can be taxed in
India.
Answer: Section 90(1) of the Income-tax Act, 1961 empowers the Central Government to enter into an
agreement with the Government of any country outside India for avoidance of double taxation of income
under the Indian law and the corresponding law of that country. Section 90(2) provides that where the
Central Government has entered into an agreement with the Government of any other country for granting
relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement
applies, the provisions of the Income-tax Act, 1961 shall apply to the extent they are more beneficial to that
assessee.
Arif has residential houses both in India and foreign country. Thus, he has a permanent home in both the
countries. However, he has no permanent establishment of business in India. The Double Taxation
Avoidance Agreement (DTAA) with foreign country provides that where an individual is a resident of both the
countries, he shall be deemed to be resident of that country in which he has a permanent home and if he has
a permanent home in both the countries, he shall be deemed to be resident of that country, which is the
centre of his vital interests i.e. the country with which he has closer personal and economic relations.
Arif owns rubber estates in a foreign country from which he derives business income. However, Arif has no
permanent establishment of his business in India. Therefore his personal and economic relations with foreign
country are closer, since foreign country is the place where –
(a) the property is located and
(b) the permanent establishment (PE) has been set-up
Therefore, he shall be deemed to be resident of the foreign country for A.Y. 2020-21.
The fact of the case and issues arising therefrom are similar to that of CIT vs. P.V.A.L. Kulandagan Chettiar
(2004) 267 ITR 654, where the Supreme Court held that if an assessee is deemed to be a resident of a
contracting State where his personal and economic relations are closer, then in such a case, the fact that he
is a resident in India to be taxed in terms of sections 4 and 5 would become irrelevant, since the DTAA
prevails over sections 4 and 5.
However, as per section 90(4), in order to claim relief under the agreement, Arif has to obtain a certificate
[Tax Residency Certificate (TRC)] declaring his residence of the country outside India from the Government
of that country. Further, he also has to provide such other documents and information, as may be prescribed.
DTAA SATC B.11
Therefore, in this case, Arif is not liable to income tax in India for assessment year 2020-21 in respect of
business income and capital gains arising in the foreign country provided he furnishes the Tax Residency
Certificate and provides such other documents and information as may be prescribed.
15. Retails India Ltd. is an Indian company. The following incomes are noted from its books of account:
Income from a business in India — ` 7,60,000
Income from a business in a foreign country with whom India has ADT agreement — ` 4,32,000
According to the ADT agreement, ` 4,32,000 is taxable in India. However, it can also be taxed in the
foreign country @ 11.85% which can be set off against Indian tax liability. Find out the Indian tax
liability.
Solution:
Computation of Indian Tax liability of Retails India Ltd. (amounts in ` ) –
Income from a business in a foreign country with whom Indian has ADT agreement 4,32,000
Income from business in India 7,60,000
Total tax payable in India (11,92,000 × 31.2%) 3,71,904
Less: Tax paid in foreign country @11.85% of ` 4,32,000 (as per ADT agreement) 51,192
Net Indian tax liability (rounded off to nearest ` 10) 3,20,710
16. Ravi, aged 56 years and ordinarily resident in India, is a professional. He has earned ` 4,00,000 from
services provided outside India. His foreign income was taxed at 20% in that country where services
were rendered. India does not have any tax treaty with that country. Assuming that Indian income of
Ravi is ` 3,00,000, what relief of tax under section 91 of the Income-tax Act, 1961 will be allowed to
him? Ravi has contributed ` 32,000 towards public provident fund.
Solution:
Computation of total income, tax payable and relief under section 91 (amounts in ` ) –
Income from services provided outside India 4,00,000
Less: Deduction under section 80C (PPF ` 32,000) 32,000
Income Tax on total income (age: 56 years; Basic Exemption: 2,50,000) 46,100
Add: HEC @ 4% 1,844
Total Tax 47,944
Indian Rate of Tax (Average Rate of Tax) [Total Tax ÷ Total Income] 7.18%
Foreign Rate of Tax (given) 20.00%
Doubly Taxed Income 4,00,000
Less: Relief under section 91 to the extent of the lower of —
(i) Doubly taxed Income × Indian Rate of Tax 28,720
(ii) Doubly Taxed Income × Foreign Rate of Tax 80,000 28,720
Tax payable (rounded off to nearest ` 10) 19,220
17. Md. Aslam, a resident both in India and Malaysia in Previous Year 2019-20, owns immoveable
properties (including residential house) at Malaysia and India. He has earned income of ` 60 lakh
from rubber estates in Malaysia during the Previous Year 2019-20. He also sold some property in
Malaysia resulting in short-term capital gain of ` 30 lakh during the year. Aslam has no permanent
establishment of business in India. However, he has derived rental income of ` 8 lakh from property
let out in India and he has a house in Lucknow where he stays during his visit to India. The Article 4
of the Double Taxation Avoidance Agreement between India and Malaysia provides that where an
individual is a resident of both the Contracting States, he shall be deemed to be resident of the
Contracting State in which he has permanent home available to him. If he has permanent home in
both the Contracting States, he shall be deemed to be a resident of the Contracting State with which
his personal and economic relations are closer (centre of vital interests). You are required to state
with reasons whether the business income of Aslam arising in Malaysia and the capital gains in
respect of sale of the property situated in Malaysia can be taxed in India.
Answer:
Where the Central Government has entered into an agreement with the Government of any other country for
granting relief to tax or for avoidance of double taxation, the provisions of the Income-tax Act, 1961 are
applicable in such case to the extent they are more beneficial to the assessee.

DTAA SATC B.12
Aslam has a residential house both in Malaysia and India. Thus, he has a permanent home in both the
countries. However, he has no permanent establishment of business in India. The Double Taxation
Avoidance Agreement (DTAA) with Malaysia provides that where an individual is a resident of both countries,
he is deemed to be resident of that country in which he has a permanent home and if he has a permanent
home in both the countries, he is deemed to be resident of that country, which is the centre of his vital
interests, i.e. the country with which he has closer personal and economic relations.
Aslam owns rubber estates in Malaysia from which he derives business income. However, Aslam has no
permanent establishment of his business in India. Therefore, his personal and economic relations with
Malaysia are closer, since Malaysia is the place where:– (i) the property is located ; and (ii) the permanent
establishment (PE) has been set-up.
Therefore, he is deemed to be resident of Malaysia for A.Y. 2020-21. So, in this case, Aslam is not liable to
Income tax in India for AY 2020-21 in respect of business income and capital gains arising in Malaysia.
18. Mr. Iyer, ordinarily resident in India, furnished the following particulars of his income/savings during
the Previous Year 2019-20.
(i) Income from foreign business (Including ` 4,00,000 from business 24,00,000
connection in India) accruing outside India
(ii) Loss from Indian business (–) 4,00,000
(iii) Income from house property 8,50,000
(iv) Dividends gross from Indian companies 1,20,000
(v) Deposit in Public Provident Fund , 70,000
(vi) Tax paid in foreign country 5,00,000
There is no double taxation avoidance treaty. Compute the tax liability
Answer:
(1) Computation of Total Income for the Assessment Year 2020-21
Particulars Amount (`
`) Amount (`
`)
Income from House Property 8,50,000
Income from Business:
a) Loss from Indian Business (4,00,000)
b) Income from foreign business accruing or arising outside India 20,00,000
c) income from foreign business deemed to accrue or arise in India 4,00,000 20,00,000
Income from other sources
Dividends from Indian Companies- exempted u/s 10(34) Nil
Less: Deduction for approved savings u/s 80C – PPF deposits 70,000
(2) Computation of Tax liability on Total Income for the Assessment Year 2020-21
Tax on Total Income of ` 27,80,000 6,46,500
Add: Surcharge on Income Tax (total income is less than 50 lakhs) Nil
Add: Health & Education Cess @ 4% 25,860
Tax after cess 6,72,360
Less: Double taxation relief : 20,00,000 x 20.833% 4,16,660
Tax Payable 2,55,700
Note: 1. Relief is allowed on the doubly taxed income either at average rate of Indian tax or average rate of
foreign income tax, whichever is lower:-
(a) Average rate of Indian income tax: 6,72,360/27,30,000 × 100 = 24.63%
(b) Average rate of foreign income tax: (5,00,000/24,00,000) × 100 = 20.833%
2. The amount of doubly taxed income has been worked out as under:
Income from foreign business, accruing outside India 24,00,000
Less: Income from business connection deemed to accrue or
arise in India which is not entitled to double taxation relief. 4,00,000
Doubly taxed income 20,00,000
3. Loss from Indian business has been set-off against profits from foreign business which is deemed to
accrue or arise in India. The mode of set-off increases the amount of double taxation relief.

DTAA SATC B.13
19. Rahim, a resident Indian, has derived the following incomes for the previous year relevant to the
assessment year 2020-21
Sl. No. Particulars `
1. Income from profession 2,84,000
2. Rent from house property in Country X ` 10,000 p.m. received there,
municipal tax paid in that country ` 20,000 (Tax paid in Country X for his
income in equivalent Indian rupees 10,000 on the net income of ` 1,00,000)
3. Royalty on books from foreign country Y (eligible for deduction under
section 80QQB) (Tax paid in country Y @ 20%) converted in Indian rupees
4. The expenses incurred for earning royalty 10,00,000
5. Interest from scheduled banks [FD] 1,00,000
18,000
Rahim wishes to know whether he is eligible to any double taxation relief and if so, its quantum. India
does not have any Double Taxation Avoidance Agreement with Countries X and Y.
Solution: Computation of relief u/s 91 of Rahim for AY 2020-21

` `
Income from house property in country X
Gross Annual value 10,000 x 12 1,20,000
Less: Municipal tax paid in country X 20,000
1,00,000
Less: Standard deduction @ 30% 30,000 70,000
Profits and Gains of Business or Profession
Income from professions 2,84,000
Royalty on books from country Y (` 10,00,000 - ` 1,00,000) 9,00,000 11,84,000
Income from other sources
Interest from Schedule Banks 18,000
Gross total income 12,72,000
Less: Deduction under Chapter VIA (Section 80QQB) 3,00,000
Tax on total income of ` 9,72,000 1,06,900
Add: health & Education cess @ 4% 4,276
Total tax payable 1,11,176
Average rate of income tax (` 1,11,176/` 9,72,000) 11.438%
Average rate of tax of country × 10,000/1,00,000 10%
Average rate of foreign tax of country Y (` 2,00,000/` 10,00,000) 20%
Less: Relief under section 91 @ 10% on foreign income of ` 70,000 7,000
Less: Relief under section 91@ 11.438% on Foreign Income of ` 68,628 75,628
6,00,000 (After Deduction)
Balance tax payable (rounded off) 35,548
Notes:
The Rajasthan High Court in CIT v. Dr. R.N. Jhanji [1990] 185 ITR 586 (Raj.) has held that where a
part of foreign income is eligible for deduction under Chapter VI-A, then only that part of income shall
be eligible for relief under section 91 which is included in total income that is income after availing
deduction under Chapter V1-A.
The Bombay High Court in CIT v. Bombay Burmah Trading Corporation Ltd. [2003] 259 ITR 423
(Bom.) has held that relief under section 91 is calculated on the income country-wise and not
on the basis of aggregation or amalgamation of income from all foreign sources.
20. ERR Ltd., a foreign company, owns a property in Chennai. It is given on rent (rent being 5,000 US$
per month) to Deter Ltd., another foreign company. The two companies are non-residents in India.
The agreement is made outside India. Rent is payable in foreign currency outside India. As per
agreement, rent is accrued outside India. Discuss whether the rental income of ERR Ltd. is
chargeable to tax in India under the Income-tax Act, 1961.
Answer:
As per section 9(1) of the Act, any income arising through or from any business connection in India or
property or asset or source of income in India is deemed to accrue or arise in India. Since, in this case, the
property from which rent is earned is located in India, the rental income will be taxable in India. However, if
any DTAA provides that such income shall be accrued outside India and shall not be deemed to accrue or
arise in India, then, the provision of the DTAA shall prevail.

DTAA SATC B.14
21. Legend India Ltd. is an Indian company. The following incomes are noted from its books of account:
Income from a business in India ` 3,80,000 Income from a business in a foreign country with whom
India has ADT agreement 3,32,000 According to the ADT agreement, ` 3,32,000 is taxable in India.
However, it can also be taxed in the foreign country @ 16.65% which can be set off against Indian tax
liability. Find out the Indian tax liability.
Answer: Computation of Indian Tax liability of Legend India Ltd. (Amount in ` )

Income from a business in a foreign country with whom India has ADT agreement 3,32,000
Total Tax payable in India (7,12,000 x 31.2%) 2,22,144
Less: Tax paid in foreign country @ 16.65% of ` 3,32,000 (as per ADT agreement) 55,278
Net Indian tax Liability (rounded off to nearest ` 10) 1,66,870
22. Sunil, aged 64 years, is resident in India. His income is ` 33,60,000 from a business in India and
8,90,000 from a business in a foreign country with whom India has agreement for avoidance of
double taxation (ADT). According to the ADT agreement, income is taxable in the country in which it
is earned and not in other country. However, in the other country, such income can be included for
computation of tax rate. According to the tax laws of the foreign country, Sunil has paid ` 44,500 as
tax in that country. During the previous year, Sunil has paid ` 48,000 as tuition fee for his daughter in
India and ` 2,00,000 as tuition fee for his son outside India for full time education. Sunil has also
received an interest of ` 64,000 on Government securities. Find out the tax Iiability of Sunil.
Answer:
The relevant computation are (Amount in ` )
Business income in India 33,60,000
Interest on Government Securities 64,000
Less: Deduction u/s 80C [WN] 48,000
Add: Foreign income to be included for rate purposes 8,90,000
Total income for tax purposes [A] 42,66,000
Income tax on [A] 10,92,300
Add: H&EC @4% 43,692
Total Tax [B] 11,35,992
Average Rate of Tax (` 11,35,992 ÷ ` 42,66,000 x 100 ) 26.63%
Indian Tax liability [` 33,76,000 x 26.63%] (rounded off to nearest ` 10) 8,99,030
Working Note: Deduction under section 80C is not available for tuition fee paid outside India.
23. Amit, an Indian resident, has paid tax in a foreign country in respect of his income which accrued in
that country. India has no double taxation avoidance agreement with that country. Such income is
also taxable in India. Is there any relief available to him in respect of the tax paid by him? Explain.
Answer:
Relief where no double taxation avoidance agreement exists [Section 91]: The assessee shall be allowed
relief in respect of such income under section 91 provided all the following conditions are fulfilled -
(a) The assessee is a resident in India during the relevant previous year.
(b) The income accrues or arises to him outside India during that previous year.
(c) Such income is not deemed to accrue or arise in India during the previous year.
(d) The income in question has been subjected to income-tax in the foreign country in the hands of the
(e) There is no agreement under section 90 for the relief or avoidance of double taxation between India and
the other country where the income has accrued or arisen.
Double Taxation Relief (DTR): In such a case, the assessee shall be entitled to a deduction from the Indian
income-tax payable by hum. The deduction would be a sum calculated on such doubly taxed income at the
Indian rate of tax or the rate of tax in the said country, whichever is lower, or at the Indian rate of tax if both
the rates are equal.
In other words, lower of the following sums shall be deductible from Indian income tax-
(a) Doubly taxed income x Indian rate of tax.
(b) Doubly taxed income x Rate of tax paid in other country.

DTAA SATC B.15
Indian rate of tax: “Indian rate of tax" means the rate determined by dividing the amount of Indian income-
tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due
under this Chapter, by the total income.
Rate of tax of the said country: “Rate of tax of the said country" means income-tax and super-tax actually
paid in the said country in accordance with the corresponding laws in force in the said country after
deduction of all relief due, but before deduction of any relief due in the said country in respect of double
taxation, divided by the whole amount of the income as assessed in the said country.
Notes:
The Rajasthan High Court in CIT v. Dr. R.N. Jhanji [1990] 185 ITR 586 (Raj.) has held that where a
part of foreign income is eligible for deduction under Chapter VI-A, then only that part of income shall
be eligible for relief under section 91 which is included in total income that is income after availing
deduction under Chapter V1-A.
The Bombay High Court in CIT v. Bombay Burmah Trading Corporation Ltd. [2003] 259 ITR 423
(Bom.) has held that relief under section 91 is calculated on the income country-wise and not on the
basis of aggregation or amalgamation of income from all foreign sources.
24. If a taxpayer is entitled to double tax relief in India, though assessable under Indian Law, could such
relief be denied merely because such income is exempt from tax in the other country?
Answer:
No. There can be double non-taxation. It was so pointed out in CIT vs. Laxmi Textile Exporters Ltd. (2000)
245 ITR 521 (Mad.), in the similar situation, where income was eligible for exemption under Srilankan Law,
though not taxable in India under the DTAA, it was held that relief cannot be denied. The High Court found
that the DTAA is binding on the Government even [CIT vs. Visakhapatnam Port Trust (1983) 144 ITR 146
(AP)].
25. Ms. Anandi, a resident in India and Singapore in previous year 2019-20, owns residential properties
at Singapore and India. He has earned income of ` 40 lacs from business carried on in Singapore
during PY 2019-20. She also transferred certain capital asset in Singapore and derived a short-term
capital gain of ` 12 lacs from such transfer. M/s. Anandi has no permanent establishment of
business in India. However, she received rent of ` 7.20 lacs from letting out one house property in
Kolkata. She also owns a house in Jaipur where she stays as and when she visits India.
The Article 4 of the Double Taxation Avoidance Agreement between India and Singapore inter alia
reads as follows :
1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person
who is a resident of a Contracting State in accordance with the taxation laws of that State.
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting
States, then his status shall be determined as follows : -
“he shall be deemed to be a resident of the State in which he has a permanent home available to
him; if he has a permanent home available to him in both States, he shall be deemed to be a resident
of the State with which his personal and economic relations are closer (centre of vital interests");”
State with reasons whether the business income of Ms. Anandi earned in India and capital gain from
transfer of capital asset situated in Singapore be liable to income tax in India.
Answer: As per section 5(1) of the Income-tax Act, a resident is chargeable to tax in respect of his global
income. In the given case, Anandi is a resident both in India and Singapore as per the law of both the
countries for the previous year 2019-20. In such case it is necessary to examine the relevant clause of the
DTAA between India and Singapore to ascertain his residential status. The Article 4 of the DTAA provides
that where an individual is a resident of both the Contracting States, then he shall be deemed to be resident
of the Contracting State in which he has permanent home available to him. Anandi stays in her house in
Jaipur during her visits. So it can be said that she has a permanent home in India. Next rule for determination
of residential status is the existence of permanent establishment. If she has permanent home in both the
Contracting States, she shall be deemed to be the resident of the Contracting State with which her personal
and economic relations are closer (centre of vital interests). Anandi has no permanent establishment of
business in India. Hence, applying the Clause 4 of the DTAA, she shall be deemed to be resident of
Singapore. Since she is a non-resident in India based on the principle laid down in the DTAA, income earned
outside India does not form part of total income under section 5(2). Hence, her business income and capital
gain of ` 40 lacs and ` 12 lacs respectively in Singapore are not chargeable to tax in India.

DTAA SATC B.16
26. Briefly discuss the legal propositions in case of any conflict between the provisions of the Double
Tax Avoidance Agreement (DTAA) and the Income-tax Act, 1961.
[MTP JUNE 2019 (SET 2) - 8 Marks]
Answer:
Section 90(2) of the Income-tax Act, 1961 makes it clear that in case of conflict between the provisions of
Double Taxation Avoidance Agreement (DTAA) and the Income-tax Act, the provision of DTAA would
prevail over the provisions of the Act.
In fact, tax treaties themselves provide that the laws in force in either country will continue to govern the
assessment and taxation of income in the respective country except where provisions to the contrary have
been made in the tax treaty.
Therefore, we can say that where there is conflict between the provisions as contained in the tax treaty and
the provisions of the Income-tax Act, a taxpayer can take advantage of those provisions, which are more
beneficial to him. Thus, tax treaties override the Income-tax Act and can be enforced by the appellate
authorities and the courts.

DTAA SATC BA.1
QUESTION & ANSWER - SET A
1. Tax Residency Certificate (TRC)
Solution:
Tax Residency Certificate (TRC):
If a tax treaty (double taxation avoidance agreement under Section 90 & 90A), is applicable to a nonresident
then the provisions of the Indian Income-tax Act, 1961 are applicable only to the extent they are more
st
beneficial to it. With effect from 1 April 2013, treaty benefits shall be allowed to the non-residents subject to
furnishing of a valid tax residency certificate (TRC) and information in Form 10F. The certificate referred to in
Section 90(4) and Section 90A(4) to be obtained by an assessee, not being a resident in India, from the
Government of the country or the specified territory and shall contain the following particulars, namely:-
(i) Name of the assessee,
(ii) Status (individual, company, firm etc.) of the assessee,
(iii) Nationality (in case of individual),
(iv) Country or specified territory of incorporation or registration (in case of others);
(v) Assessee’s tax identification number in the country or specified territory of residence or in case no such
number, then, a unique number on the basis of which the person is identified by the Government of the
country or the specified territory,
(vi) Residential status for the purposes of tax,
(vii) Period for which the certificate is applicable, and
(viii) Address of the assessee in the country or specified territory outside India, during the period for which the
certificate is applicable.
However the above information in Form No.10F is not required if such report is available in TRC. TRC
containing above facts shall be duly verified by the Government of the country or the specified territory of
which the assessee, claims to be a resident for the purposes of tax.
The assessee shall also keep and maintain such documents that are necessary to substantiate the
information provided in Form No. 10F and an income tax authority may require the assessee to provide the
said documents in relation to a claim by the said assessee of any relief under a double taxation avoidance
agreement.
2. Ramesh (age 61) an individual resident in India furnishes you particulars of income for the previous
year 2019-20. He earned income in country M and India has not entered into double taxation
avoidance agreement with that country.
Income from house property in country M ` 2,50,000

Business income in India ` 8,00,000
Dividend from company in country M ` 1,00,000
Royalty income country M (see note below) ` 4,00,000
Business income in country M ` 2,00,000
Income from house property in India ` 5,00,000
Donation to Prime Minister‘s National Relief Fund ` 50,000
Incurred medical expenses for his mother aged 85 ` 60,000
Rate of tax in country M (no basic exemption limit) 20%
Note : Ramesh disputed royalty income in country M but paid the tax on that income in June, 2020
after the appeal was decided by the appellate authority. The royalty income is charged to tax at
concessional rate of 15% in country M.

DTAA SATC BA.2
Solution:
Computation of Total Income of Ramesh for the Asst. Year 2020-21
`
Income from house property - in country M 2,50,000
Income from house property - in India 5,00,000
Income from business - in India 8,00,000
Income from business - in country M 2,00,000
Dividend income - country M 1,00,000
Royalty income in country M 4,00,000
Less: Deduction U/s 80D in respect of medical expenditure, for mother being 50,000
very senior citizen ` 60,000 but limited to
Deduction U/s 80G in respect of donation paid Prime Minister’s 50,000
National Relief Fund ` 50,000 @ 100%
1,00,000
Tax thereon 4,55,000
Add: Cess @ 4% 18,200
4,73,200
Less: Relief U/s 91 1,70,000
Tax payable 3,03,200
In Round Figures 3,03,200
Average rate of income-tax in India ` 4,73,200×100/21,50,000 22%
Doubly tax income in country M
Royalty income ` 4,00,000 × 15% ` 60,000
Other income ` 5,50,000 × 20% ` 1,10,000
(`
` 2,50,000 + ` 2,00,000 + ` 1,00,000)
` 1,70,000
Average rate of tax = ` 1,70,000×100/9,50,000 17.89%
Rebate U/s 91 @ 17.89% on ` 9,50,000 1,70,000
3. Mr. Amin, a resident individual in India (age 42) furnishes you the following particulars of income for
the previous year 2019-20:
Particulars `
(i) Income from business in India (computed) 11,00,000
(ii) Dividend received from Company incorporated in Country X (gross) 2,00,000
(iii) Royalty income from writing text book for schools in Country Y (gross) 6,00,000
(iv) Expenditure incurred for authoring text book 50,000
(v) Business loss in Country Y (gross) 2,50,000
(vi) Health insurance premium paid by credit card for his father (age
67) a resident in India (His father is not dependent on Mr. Amin) 31,000
The business loss in Country Y is eligible for set off against other income as per the Income-tax law of
that country.
Note: There is no DTAA between India and Country “X” and Country “Y” given above. The rate of tax
in Country “X” and Country “Y” may be taken as 10% and 25% respectively (without any threshold
exemption limit).
Compute the total income and tax payable by Mr. Amin in India for the Assessment Year 2020-21.
DTAA SATC BA.3
Answer:
Computation of Total Income of Mr. Amin for A.Y. 2020-21
Particulars ` `
Profits and gains of Business or profession
Loss from business in Country “Y” 2,50,000
Less : Set off against royalty income 2,50,000 NIL
Income from other Sources:
Dividend from companies in Country “X” 2,00,000
Royalty income from Country “Y” 6,00,000
Less: Expenditure thereon 50,000
5,50,000
Loss from business in Country “Y” 2,50,000 3,00,000 5,00,000
Less: Deduction under Chapter VI-A
Section 80D
Health insurance premium for father, senior citizen is deductible even though he is not 30,000
dependent on the assessee.
Section 80 QQB: NIL
As the assessee has authored text-book for schools in Country ‘Y’ hence it is not eligible for
deduction.
Tax thereon
On ` 15,70,000 2,83,500
Add: Cess @ 4% 11,340
2,94,840
Less : Rebate U/s. 91 (See working note) 76,340
Total tax liability 2,18,500
` 2,94,840 x 100 / ` 15,70,000 = 18.78%
Average rate of tax in country x = 10%
Doubly taxed income of country x = 2,00,000
Rebate u/s. 91 would be 10% or average rate @ 18.78% - whichever is less.
10% on ` 2 lakhs = ` 20,000
20,000
Doubly taxed income of country Y (after set off of business loss) = 3,00,000
Rate of tax country Y = 25%
Rebate u/s. 91 would be @ 18.78% or 25% whichever is less.
Rebate @18.78% on ` 3 lakhs = ` 56,340 56,340
Total rebate under section 91 76,340
4. Mr. Anil, aged 49 years, a resident individual furnishes the following particulars of income earned
by him in India and Country N for the previous year 2019-20. India does not have a double taxation
avoidance agreement (DTAA) with Country N.
Income from profession carried on in Mumbai 8,50,000
Agricultural Income in Country N 1,30,000
Dividend from a company incorporated in Country N 85,000
Royalty income from a literary book from Country N 6,25,000
Expenses incurred for earning royalty 75,000
Business loss in Country N 1,10,000
The domestic tax laws of Country N does not permit set-off of business loss against any other
income. The rate of income-tax in Country N is 18%. Compute total income and tax payable by Mr.
Anil in India for A.Y. 2020-21, assuming that he satisfies all conditions for the purpose of section 91.

DTAA SATC BA.4
Solution:
Computation of total income of Mr. Anil for A.Y. 2020-21
Particulars ` `
Income from profession carried on in India 8,50,000
Less: Business loss in Country N 1,10,000 7,40,000
Agricultural income in Country N [Not exempt u/s 10(1)] 1,30,000
Dividend received from a company incorporated in Country N [Not exempt u/s 85,000
10(34)]
Royalty income from a literary book in Country N (after deducting expenses of 5,50,000 7,65,000
` 75,000)
Less: Deduction under Chapter VIA
Under section 80QQB – Royalty income of a resident from a literary book 3,00,000
Computation of tax liability of Mr. Anil for A.Y. 2020-21
Particulars `
Tax on total income [30% of ` 2,05,000 plus ` 1,12,500] 1,74,000
Add: Health and education cess @4% 6,960
Calculation of Rebate under section 91:
Average rate of tax in India [i.e., ` 1,80,960 / ` 12,05,000 x 100] 15.0174%
Average rate of tax in Country N 18%

Doubly taxed income pertaining to Country N `
Agricultural Income 1,30,000
Royalty Income [`
` 6,25,000 – ` 75,000 (Expenses) – 2,50,000
` 3,00,000 (deduction under section 80QQB)]
Dividend income 85,000
4,65,000
Less: Business Loss set off 1,10,000
3,55,000
Rebate under section 91 on ` 3,55,000 @ 15.0174% [being the lower of average Indian
tax rate (15.0174%) and foreign tax rate (18%)] 53,312
Tax Payable 1,27,648
Tax Payable (Rounded off) 1,27,650
5. IMP: Mr. Gopal, aged 50 years, is a resident individual having income from the following sources:
(i) Income from a sole-proprietary business in Pune ` 75 lakhs.
(ii) Share of profit from a partnership firm in Mumbai ` 25 lakhs.
(iii) Agricultural Income (gross) from tea gardens in Country G, a foreign country with which India has
no DTAA, CGD 45000. Withholding Tax on the above income CGD 9,000
(iv) Brought forward business loss of F.Y. 2015-16 in Country G was CGD 5,000 which is not permitted
to be set off against other income as per the laws of that country.
(v) Mr. Gopal has deposited ` 1,50,000 in public provident fund and paid medical insurance premium
of ` 28,000 by account payee cheque to insure the health of himself and his wife.
Compute total income and tax liability of Mr. Gopal for the A.Y. 2020-21, assuming that 1 CGD = ` 70.
[CA FINAL RTP NOV 2019 EXAM]

DTAA SATC BA.5
Solution:
Computation of total income and tax liability of Mr. Gopal for A.Y. 2020-21
Particulars ` `
Profits and gains from business and profession
Income from sole proprietary concern in India 75,00,000
Share of profit from a partnership firm in India of ` 25 lakhs, is
exempt Nil
Business profit 75,00,000

Less: Business Loss in Country G (CGD 5000 x ` 70/CGD) 3,50,000 71,50,000

Agricultural income from tea gardens in Country G, is taxable in India
(CGD 45000 x ` 70/CGD) 31,50,000
Gross Total Income 1,03,00,000

Less: Deductions under Chapter VI-A
Under section 80C [deposit in PPF] 1,50,000
Under section 80D 25,000
[Medi-claim premium paid ` 28,000, restricted to 1,75,000
Total Income 1,01,25,000

Tax on total income
Tax on ` 1,01,25,000 [(30% x ` 91,25,000) plus ` 1,12,500] 28,50,000
Add: Surcharge@15%, since total income exceeds ` 1 crore 4,27,500
32,77,500
Less: Marginal Relief (See Working Note below) 58,750
32,18,750
Add: HEC@4% 1,28,750
33,47,500
Average rate of tax in India 33.06%
[i.e., ` 33,47,500/`
` 1,01,25,000 x 100]
Average rate of tax in Country G [i.e., CGD 9000/CGD 45000] 20%
Doubly taxed income [` ` 31,50,000 – ` 3,50,000] 28,00,000
Rebate under section 91 on ` 28,00,000 @20%
(lower of average Indian tax rate and rate of tax in Country G)
5,60,000
Tax payable in India [`
` 33,47,500 – ` 5,60,000] 27,87,500
Note: Since Mr. Gopal is resident in India for the P.Y. 2019-20, his global income would be subject to tax
in India. He is eligible for deduction under section 91 since the following conditions are fulfilled:-
He is a resident in India during the relevant previous year.

Agricultural income accrues or arises to him outside India during that previous year.
Such agricultural income is not deemed to accrue or arise in India during the previous year.
The income in question i.e., agricultural income, has been subjected to income-tax in Country G in his
hands and he has paid tax on such income in Country G.
There is no agreement under section 90 for the relief or avoidance of double taxation between India
and Country G, where the income has accrued or arisen.

DTAA SATC BA.6
Working Note : Computation of Marginal Relief
(A) Tax payable including surcharge on total income of ` 1,01,25,000
` 2,50,000 – ` 5,00,000@5% ` 12,500
` 5,00,000 – ` 10,00,000@20% ` 1,00,000
` 10,00,000 – ` 1,01,25,000@30% ` 27,37,500
Total ` 28,50,000
Add: Surcharge @ 15% ` 4,27,500 ` 32,77,500
(B) Tax payable on total income of Rs 1 crore [(`

` 12,500 plus
` 1,00,000 plus ` 27,00,000) plus surcharge@10%] ` 30,93,750
(C) Excess tax payable (A)-(B) ` 1,83,750

(D) Marginal Relief (`
` 1,83,750 – ` 1,25,000, being the amount
of income in excess of ` 1,00,00,000) ` 58,750
6. Mr. Hari, an individual resident in India aged 59 years, furnishes you the following particulars of
income earned in India, Foreign Countries "P" and "Q" for the previous year 2019-20. Compute the
total income and tax payable by Mr. Hari in India for A.Y. 2020-21 assuming that India has not entered
into double taxation avoidance agreement with countries P & Q.
Particulars `
Indian Income:
Income from business carried on in Calcutta 4,40,000
Interest on savings bank with HDFC Bank 42,000
Income earned in Foreign Country “P” [Rate of tax – 16%]:
Agricultural income in Country "P" 94,000
Royalty income from a book on art from Country "P" (Gross) 7,80,000
Income earned in Foreign Country “Q” [Rate of tax – 20%]:
Dividend received from a company incorporated in Country "Q" 2,65,000
Rent from a house situated in Country "Q" (gross) 3,30,000
Municipal tax paid in respect of the above house (not allowed as deduction in
Country “Q”) 10,000
Solution:
Computation of total income of Mr. Hari for A.Y.2020-21
Particulars ` `
Income from House Property [House situated in Country Q]
Gross Annual Value 3,30,000
Less: Municipal taxes paid in Country Q 10,000
Net Annual Value 3,20,000
Less: Deduction under section 24 – 30% of NAV 96,000 2,24,000


DTAA SATC BA.7
Interest on savings bank with HDFC Bank 42,000
Agricultural income in Country P [Not exempt] 94,000
Dividend received from a company in Country Q 2,65,000
Royalty income from a book of art in Country P (after 7,30,000
deducting expenses of ` 50,000) 11,31,000

Under section 80QQB – Royalty income of a 3,00,000
resident from a work of art
Under section 80TTA – Interest on savings bank
account, subject to a maximum of ` 10,000. 10,000
Computation of tax liability of Mr. Hari for A.Y. 2020-21
Particulars `
Tax on total income [30% of ` 4,85,000 + ` 1,12,500] 2,58,000
Add: Health and education cess @4% 10,320
2,68,320
Less: Rebate under section 91 (See Working Note below) 1,72,197
Tax Payable 96,123
Tax payable (rounded off) 96,120

Average rate of tax in India [i.e., ` 2,68,320 / ` 14,85,000 x 100] 18.069%
Average rate of tax in country P 16%
Doubly taxed income pertaining to country P `

Agricultural Income 94,000
Royalty Income [`` 7,80,000 – ` 50,000 (Expenses) – 4,30,000
` 3,00,000 (deduction under section 80QQB)]
5,24,000
Rebate under section 91 on ` 5,24,000 @16% [being the 83,840
lower of average Indian tax rate (18.069%) and foreign tax rate (16%)]
Average rate of tax in country Q 20%

Doubly taxed income pertaining to country Q
Income from house property 2,24,000
Dividend 2,65,000
4,89,000
Rebate under section 91 on ` 4,89,000 @18.069% (being
the lower of average Indian tax rate (18.069%) and foreign tax rate (20%)] 88,357
Total rebate under section 91 (Country A + Country B) 1,72,197
1. It is assumed that the royalty earned outside India has been brought into India in convertible foreign
exchange within a period of six months from the end of the previous year.
2. Doubly taxed income includes only that part of income which is included in the assessees total income.
The amount deducted under Chapter VIA is not doubly taxed and hence, no relief is allowable in respect
of such amount.

DTAA SATC BA.8
Note: Mr. Hari shall be allowed deduction under section 91, since the following conditions are
fulfilled:-
(a) He is a resident in India during the relevant previous year i.e., P.Y. 2019-20.
(b) The income in question accrues or arises to him outside India in foreign countries P & Q during that
previous year and such income is not deemed to accrue or arise in India during the previous year.
(c) The income in question has been subjected to income -tax in the foreign countries “P” and “Q” in his
hands and it is presumed thaThe has paid tax on such income in those countries.
(d) There is no agreement under section 90 for the relief or avoidance of double taxation between India and
Countries P and Q where the income has accrued or arisen.
7. Anuradha, a resident individual aged 60 years and a retired employee of the Prasar Bharati, is a
reputed singer deriving income of ` 1,00,000 from music concerts performed abroad. Tax of ` 10,000
was deducted in the country where the concerts were performed. India does not have any Double
Taxation Avoidance Agreement under Section 90 of the Income-tax Act, 1961, with that country. Her
income in India amounted to ` 6,50,000. In view of tax planning, she has deposited ` 1,50,000 in
Public Provident Fund and paid contribution to approved Pension Fund of LIC ` 25,000. She also paid
` 32,000 as mediclaim premium to insure her health and ` 31,000 to insure the health of her mother, a
non-resident aged 79 years, who is not dependent on her. Compute the tax liability of Anuradha for
the Assessment year 2020-21.
[CA FINAL RTP NOV 2017 EXAM]
Solution:
Computation of tax liability of Anuradha for the A.Y. 2020-21
Particulars ` `
Foreign Income 1,00,000
Less: Deduction under Chapter VI-A

Under section 80C
Deposit in PPF 1,50,000
Under section 80CCC

Contribution to approved Pension Fund of LIC 25,000
1,75,000
Under section 80CCE
The aggregate deduction under section 80C, 80CCC and 80CCD(1)
has to be restricted to ` 1,50,000 1,50,000
Under section 80D
Medical insurance premium is allowable as deduction under section
80D. Since she is a resident senior citizen, the deduction is allowable to 30,000
a maximum of`` 30,000 (See Note 1)
Medical insurance premium of ` 31,000 paid for mother aged 79 years.

Since her mother is nonresident in India, she will not be entitled for the
higher deduction of ` 30,000 eligible for a senior citizen, who is resident
in India. Hence, the deduction will be restricted to maximum of 25,000
` 25,000. 2,05,000
5,45,000
Total Income

DTAA SATC BA.9
Tax on Total Income 19,000
Income-tax (See Note below) NIL
Less: Rebate u/s 87A 19,000
Add: Health & Education cess@4% 760 19,760

(i.e. ` 19,760/ ` 5,45,000 × 100) =3.63%
(i.e. ` 10,000/ ` 1,00,000 ×100)=10%
Rebate under section 91 on ` 1,00,000 @
3.63% (lower of average Indian-tax rate or average foreign tax rate) 3,630
Tax payable in India (` ` 19,760 -`
` 3,630) 16,130
Notes:
1. Section 80D allows a higher deduction of up to ` 30,000 in respect of the medical premium paid to insure
the heath of a senior citizen. Therefore, Anuradha will be allowed deduction of ` 30,000 under section
80D, since she is a resident Indian of the age of 60 years.
2. The basic exemption limit for senior citizens is ` 3,00,000 and the age criterion for qualifying as a “senior
citizen” for availing the higher basic exemption limit is 60 years. Accordingly, Anuradha is eligible for the
higher basic exemption limit of ` 3,00,000, since she is 60 years old.
3. An assessee shall be allowed deduction under section 91 provided all the following conditions are
fulfilled:
(b) The assessee is a resident in India during the relevant previous year.
(c) The income accrues or arises to him outside India during that previous year.
(d) Such income is not deemed to accrue or arise in India during the previous year.
(e) The income in question has been subjected to income-tax in the foreign country in the hands of the
(f) There is no agreement under section 90 for the relief or avoidance of double taxation between India
and the other country where the income has accrued or arisen.
In this case, since all the above conditions are satisfied, Anuradha is eligible for deduction under section
91.
8. Mr. Kalpesh, aged 56 years, a resident individual furnishes the following particulars of income earned
by him in India and country ''T" for the previous year 2019-20. India has not entered into double
taxation avoidance agreement with country "T".

Agricultural Income in Country "T" 75,000
Dividend from a company incorporated in Country ''T" 1,20,000
Royalty income from a literary book from Country ''T" 4,00,000
Business loss in Country "T" 75,000
As per income-tax law of Country ''T" Business loss is not eligible for set off against any other
incomes. The rate of income-tax in country ''T" is 20%.
Compute total income and tax payable by Mr. Kalpesh in India for A.Y. 2020-21 assuming that he
satisfies all conditions for the purpose of section 91.
[CA FINAL EXAM QUESTIONs May 2019 – 6 Marks]

DTAA SATC BA.10
Solution:
Particulars ` `
Less: Business loss in Country T 75,000 5,25,000
Agricultural income in Country T [Not exempt u/s 10(1)] 75,000
Dividend received from a company incorporated in 1,20,000
Country T
Royalty income from a literary book in Country T (after
deducting expenses of ` 60,000) 3,40,000 5,35,000
Under section 80QQB – Royalty income of a
resident from a literary book 3,00,000
Computation of tax liability of Mr. Kalpesh for A.Y. 2020-21

Particulars `
Tax on total income [20% of ` 2,60,000 plus ` 12,500] 64,500
Add: Health and education cess @ 4% 2,580
Tax Liability 67,080
Average rate of tax in India [i.e., ` 67,080 / ` 7,60,000 x 8.826%
100]
Average rate of tax in Country T 20%
Doubly taxed income pertaining to Country T Rs
Agricultural Income 75,000
Royalty Income [` ` 4,00,000 – ` 60,000 (Expenses) – 40,000
Rs 3,00,000 (deduction under section 80QQB)]
Dividend income 1,20,000
2,35,000
Less: Business Loss set off 75,000
1,60,000
Rebate under section 91 on ` 1,60,000 @ 8.826% [being the lower of
average Indian tax rate (8.826%) and foreign tax rate (20%)] 14,122
Tax Payable 52,958
Tax Payable (Rounded off) 52,960
Notes:
1. It is assumed that the royalty earned outside India has been brought into India in convertible foreign
exchange within a period of six months from the end of the previous year.
2. Doubly taxed income includes only that part of income which is included in the assessees total income.
The amount deducted under Chapter VIA is not doubly taxed and hence, no relief is allowable in respect
of such amount.
9. "Every jurisdiction, in the domestic law, prescribes the mechanism to determine residential status of a
person. In case, a person is considered to be resident of both contracting states, it becomes
necessary to apply the tie-breaker rule."
Discuss the manner for application of the tie-breaker rule.

[CA FINAL EXAM QUESTIONs Nov 2018 – 6 Marks]
DTAA SATC BA.11
Solution:
The tie-breaker rule would be applied in the following manner:
(i) The first test is based on where the individual has a permanent home i.e., a dwelling place available to
him at all times continuously and not occasionally.
(ii) If 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.
(iii) In a 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; and in a case where the
individual has a permanent home available to him in neither Contracting State, preference is given to
the Contracting State where the individual has an habitual abode.
(iv) 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.
(v) 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.
10. T Inc., a non-resident entity incorporated in Mauritius, has permanent Establishment (PE) in India. The
PE filed its return of income for the assessment year 2020-21 disclosing income of ` 100 lakhs and
paid tax at the rate applicable to the domestic company i.e. 30% plus applicable surcharge and cess
on the basis of paragraph 2 of Article 24 of Double Tax Avoidance Agreement (non-discrimination)
between India and Mauritius, which reads as follows:
"The taxation on PE which is an enterprise of a contracting state has in the other contracting state
shall not be less favourably levied in that other state than the taxation levied on enterprise of that
other state carrying on the same activities in the same circumstances."
However, the Assessing Officer computed the Tax on the PE at the rate applicable to a foreign
company (40%). Is the action of AO in accordance with law?
[CA FINAL EXAM QUESTIONs Nov 2018 – 3 Marks]

Solution:
Under Section 90(2), where the Central Government has entered into an agreement for avoidance of double
taxation with the Government of any country outside India or specified territory outside India, as the case may
be, then, in relation to the assessee to whom such agreement applies, the provisions of the Income-tax Act,
1961 shall apply to the extent they are more beneficial to the assessee.
Thus, in view of paragraph 2 of the Article 24 (Non-discrimination of the Double Taxation Avoidance
Agreement (DTAA), it appears that the PE of T Inc. a non-resident entity, incorporated in Mauritius, is liable to
tax in India at the rate applicable to domestic company (30%), which is lower than the rate of tax applicable
to a foreign company (40%).
However, Explanation 1 to section 90 clarifies that the charge of tax in respect of a foreign company at a rate
higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable
charge or levy of tax in respect of such foreign company.
Therefore, in view of this Explanation, the action of the Assessing Officer in levying tax@40% on the PE of T
Inc. a non-resident entity, incorporated in Mauritius is in accordance with law.

DTAA SATC BA.12
11. Mr. A is taxable in case of certain income as per the Income-tax Act, 1961. The DTAA, which is
applicable to him excludes the income earned by him from the purview of tax. Is Mr. A liable to pay
tax on the income earned by him under Income-tax Act, 1961?
Answer
As per Section 90(2), where the Central Government has entered into a Double Taxation Avoidance
Agreement with a country outside India, then, in respect of an assessee to whom such agreement applies, the
provisions of the Income-tax Act, 1961 shall apply to the extent they are more beneficial to the assessee.
Thus, where the provisions of DTAA are more favourable than the provisions of the Income-tax Act, 1961, the
former will prevail over the latter.
In the given problem, as per the provisions of the Income-tax Act, 1961, certain income is taxable in Mr. A’s
hands; however, as per the DTAA, the same is excluded from the purview of tax in India.
Since the provisions of the DTAA, which are more favourable to Mr. A will prevail, he is not required to pay tax
in India on the said income earned by him under the Income -tax Act, 1961.
However, the onus is on Mr. A to furnish necessary evidence to show that the income is covered by the
clauses of DTAA to avail the benefit . Mr. A also has to submit the Tax Residence Certificate obtained from
the Government of the other country and provide such other information and documents as may be
prescribed.
Note – The above answer is based on the assumption that Mr. A is a resident of another country and he has
earned income in India. As per the DTAA with that country, the income is chargeable to tax in the country of
residence, and therefore, in order to avail exemption of such income or credit in India in respect of tax paid on
such income in the other country, the tax residence certificate is required.
It is also possible to answer this question on the assumption that Mr. A is resident in India and he has earned
income outside India, which is subject to tax in the country of source on the basis of India’s DTAA with that
country. In such a case, there would be no requirement for submission of tax residence certificate in India for
availing exemption in respect of such income or availing credit in India respect of tax paid in that country on
such income.

FOREIGN TAX CREDIT SATC BB.1
Foreign Tax Credit – Rule 128
Rule 128 - Foreign Tax Credit

1. An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by
him in a country or specified territory outside India, by way of deduction or otherwise, in the
year in which the income corresponding to such tax has been offered to tax or assessed to tax
in India, in the manner and to the extent as specified in this rule.
Further, in a case where income on which foreign tax has been paid or deducted, is offered
to tax in more than one year, credit of foreign tax shall be allowed across those years in the
same proportion in which the income is offered to tax or assessed to tax in India.
2. Meaning of Foreign Tax: The foreign tax referred to in sub-rule (1) shall mean,—
(a) in respect of a country or specified territory outside India with which India has entered into an
agreement for the relief or avoidance of double taxation of income in terms of section 90 or
section 90A, the tax covered under the said agreement;
(b) in respect of any other country or specified territory outside India, the tax payable under the
law in force in that country or specified territory in the nature of income-tax referred to in
clause (iv) of the Explanation to section 91.
3. No Credit for Interest, Fee and Penalty: The credit under sub-rule (1) shall be available
against the amount of tax, surcharge and cess payable under the Act but not in respect of
any sum payable by way of interest, fee or penalty.
4. No Credit for Disputed Tax: No credit under sub-rule (1) shall be available in respect of any
amount of foreign tax or part thereof which is disputed in any manner by the assessee
However, the credit of such disputed tax shall be allowed for the year in which such income is
offered to tax or assessed to tax in India if the assessee within 6 months from the end of the
month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an
evidence to the effect that the liability for payment of such foreign tax has been discharged by him
and furnishes an undertaking that no refund in respect of such amount has directly or
indirectly been claimed or shall be claimed.
5. The credit of foreign tax shall be the aggregate of the amounts of credit computed separately
for each source of income arising from a particular country or specified territory outside India
and shall be given effect to in the following manner:—
(i) the credit shall be the lower of the tax payable under the Act on such income and the
foreign tax paid on such income :
Where the foreign tax paid exceeds the amount of tax payable in accordance with the
provisions of the agreement for relief or avoidance of double taxation, such excess shall be
ignored for the purposes of this clause;
(ii) the credit shall be determined by conversion of the currency of payment of foreign tax at the
telegraphic transfer buying rate on the last day of the month immediately preceding the
month in which such tax has been paid or deducted.

6. Tax Payable under MAT or AMT: In a case where any tax is payable under the provisions of
section 115JB or section 115JC, the credit of foreign tax shall be allowed against such tax in
the same manner as is allowable against any tax payable under the provisions of the Act
other than the provisions of the said sections (hereafter referred to as the "normal provisions").
Where the amount of foreign tax credit available against the tax payable under the provisions of
section 115JB or section 115JC exceeds the amount of tax credit available against the normal
provisions, then while computing the amount of credit under section 115JAA or section 115JD in
respect of the taxes paid under section 115JB or section 115JC, as the case may be, such
excess shall be ignored. [This point is also covered in AMT Class with example]
7. Documents required for Credit: Credit of any foreign tax shall be allowed on furnishing the
following documents by the assessee, namely:—
(i) a statement of income from the country or specified territory outside India offered for tax for
the previous year and of foreign tax deducted or paid on such income in Form No. 67 and
verified in the manner specified therein;
(ii) certificate or statement specifying the nature of income and the amount of tax deducted
therefrom or paid by the assessee,—
(a) from the tax authority of the country or the specified territory outside India; or
(b) from the person responsible for deduction of such tax; or
(c) signed by the assessee:
Provided that the statement furnished by the assessee in clause (c) shall be
valid if it is accompanied by,—
(A) an acknowledgement of online payment or bank counter foil or challan for
payment of tax where the payment has been made by the assessee;
(B) proof of deduction where the tax has been deducted.
8. The statement in Form No. 67 shall be furnished on or before the due date specified for
furnishing the return of income under sub-section (1) of section 139, in the manner specified
for furnishing such return of income.

PRACTICAL QUESTIONS & CASE STUDY
Question 1
A. Under the provisions of the Income-tax Act, 1961 read with the Income-tax Rules, 1962, what is the
meaning of Foreign Tax Credit (FTC)?
B. To whom is FTC allowed and in which year?
C. An assessee has to pay income-tax of ` 92 lakhs, surcharge of ` 9.2 lakhs, Education Cess
` 3,03,600 and interest under section 234B of ` 9,78,700. Against which of these item/amounts is
FTC available?
[CMA FINAL DEC 2018 – EXAM Question – 8 Marks]
Answer:
A. Meaning of foreign Tax Credit.
The foreign tax credit means:
a) In respect of a country or specified territory outside India with which India has entered into double
taxation of income in terms of section 90 or section 90A, the tax covered under the said agreement
;
b) In respect of any other country or specified territory outside India, the tax payable under the law in
force in that country or specified territory in the nature of income-tax referred to in clause (iv) of the
Explanation to section 91.
B. Eligible assessee and year of credit.

An assessee, being a resident, shall be allowed a credit;
Same shall be for the amount of any foreign tax paid by him in a country or specified territory
outside India, by way of deduction or otherwise ;
Same is allowed in the year in which the income corresponding to such tax has been offered to
tax or assessed to tax in India.
In a case where income on which foreign tax has been paid or deducted, is offered to tax in more
than one year, credit of foreign tax shall be allowed across those years in the same proportion in
which the income is offered to tax or assessed to tax in India.
C. Eligible items for set off of FTC

FTC shall be available against the amount of tax, surcharge and cess payable under the Act but not in
respect of any sum payable by way of interest, fee or penalty.
Thus FTC can be used against IT, SC and education Cess. ` 104.236 lakhs in total.

Question 2
Critically comment with the help of a case law-
“Foreign Taxes not being entitled to the benefit of DTAA relief shall be allowed as expenses”.
[MTP Set 2 – June 2018 – 8 Marks]
Answer: Reliance Infrastructure Ltd. -vs.- CIT (2016) (Bom.)

Foreign Taxes not being entitled to the benefit of DTAA relief, shall be allowed as expenses
The assessee has executed some projects in Saudi Arabia and paid taxes in Soudi Arabia for the income earned
there. While filing return, benefit u/s 91 of the Act for relief from double taxation on the same income was claimed
which was rejected by the AO on ground that the benefit is available when the amount of tax paid under foreign
income is again included in the taxable income earned in India i.e. the same income must be taxed in both the
countries.
On the contrary, an alternative claim was put forth by the company, that, if benefit of section 91 was not
given, then the tax paid in Saudi Arabia were to be allowed as a deduction to the company.
The applicant assessee illustrated its claim by a hypothetical illustration, which is as under:
a) In respect of the project in Saudi Arabia, income which is taxable is ` 1,000/-. The tax payable in Saudi Arabia
is 10% of income. This amount of ` 1,000/- includes an amount of ` 150/ which has accrued in India and,
therefore, outside the scope of doubly taxed income for the benefit of Sec. 91 of the Act.
b) Nevertheless, the assessee paid the tax on ` 1,000/- in Saudi Arabia @ 10% i.e. ` 100/-. The credit which
would be given to the assessee u/s 91 of the Act is to extent of ` 85/- i.e. doubly taxed income amounting to
` 850/-. However, as no credit is given for the tax of ` 15/- paid in Saudi Arabia on income which is accrued in
India, the deduction of ` 15/- should be given as an expenditure from the income of ` 150/- which has accrued
/ arising of in India.
The High Court has held that the tax which has been paid abroad would not be covered within the meaning of
Section 40(a)(ii) in view of the definition of the word 'tax' in sec. 2(43) of the Act. To be covered by Sec. 40(a)(ii) of
the Act, it has to be payable under the Act.
We are conscious of the fact that sec. 2 of the Act, while defining the various terms used in the Act, qualifies it by
preceding the definition with the word ―In this Act, unless the context otherwise requiresǁ the meaning of the word
'tax' as found in Section 2(43) of the Act would apply wherever it occurs in the Act.
However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides / clarifies that
whenever an Assessee is otherwise entitled to the benefit of double income tax relief u/s 90 or 91 of the Act, then the
tax paid abroad would be governed by Sec. 40(a)(ii) of the Act.
The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled
to obtain necessary credit to the extent of the tax paid abroad u/s 90 or 91 of the Act and also claim the benefit of tax
paid abroad as expenditure on account of not being covered by Section 40(a)(ii).
The tax paid in Saudi Arabia on income which has accrued and / or arisen in India is not eligible to deduction under
Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes
income which is deemed to accrue or arise in India.
Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of
tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of
computing the income on which tax is payable in India. This is so as it is a tax which has been paid abroad for
the purpose of arriving global income on which the tax payable in India.
Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen / accrued in India has to be
considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section
40(a)(ii) of the Act.
AAR SATC C.1
Authority of Advance Ruling [Sec 245N to 245V]

1. Explain as to what the term 'Advance Ruling' means under the Income-tax Act 1961.
Answer
The term ‘Advance Ruling’ has been defined in Section 245N(a) to mean :-
(i) a determination by the Authority in relation to a transaction which has been undertaken or is proposed
to be undertaken by a Non-Resident applicant and such determination shall include the determination
of any question of law or of fact specified in the application; or
[Here Applicant is Non-Resident & falling in Section 245N(b)]
(ii) a determination by the Authority in relation to the tax liability of a Non-Resident arising out of a
transaction which has been undertaken or is proposed to be undertaken by a Resident applicant with
such Non-Resident and such determination shall include the determination of any question of law or
of fact specified in the application; or
[Here Applicant is Resident]
(iia) a determination by the Authority in relation to the tax liability of a Resident applicant, arising out of a
transaction which has been undertaken or is proposed to be undertaken by such applicant, and such
determination shall include the determination of any question of law or of fact specified in the
application.
[CG has notified that a resident can move application for advance ruling, in relation to his tax
liability arising out of one or more transactions valuing ` 100 cr or more in total which have been
undertaken or proposed to be undertaken]
(iii) a determination or decision by the Authority in respect of an issue relating to Computation of Total
Income which is pending before any income-tax authority or the Appellate Tribunal (not court)
and such determination or decision shall include the determination or decision on any question of law
or of fact relating to such computation of total income specified in the application.
[Notified Resident applicant (Public Sector Company)]
(iv) A determination or decision by the Authority 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.
CA Suraj Agrawal [8527230445] Suraj Agrawal Tax Classes: 011-47542530

AAR SATC C.2
2. [Section 245N(b)] "Applicant" means—
(A) any person who—
(I) is a non-resident referred to in sub-clause (i) of clause (a); or
(II) is a resident referred to in sub-clause (ii) of clause (a); or
(III) is a resident referred to in sub-clause (iia) of clause (a) falling within any such class or
category of persons as the Central Government may, by notification in the Official Gazette,
specify; or
(IV) is a resident falling within any such class or category of persons as the Central Government
may, by notification in the Official Gazette, specify in this behalf; or
(V) is referred to in sub-clause (iv) of clause (a),
and makes an application under section 245Q;
(B) an applicant as defined in clause (c) of section 28E of the Customs Act, 1962
(C) an applicant as defined in clause (c) of section 23A of the Central Excise Act, 1944
(D) an applicant as defined in clause (b) of section 96A of the Finance Act, 1994
3. Application for advance ruling [Section 245Q]

A. An applicant desirous of obtaining an advance ruling under the Income Tax Act or under the
Customs Act, 1962 or under the Central Excise Act, 1944 or under the Finance Act, 1994 may
make an application in such form and in such manner as may be prescribed, stating the question on
which the advance ruling is sought.
B. The application shall be made in quadruplicate and be accompanied by a fee of ` 10,000 or such fee
as may be prescribed in this behalf, whichever is higher.
C. An applicant may withdraw an application within 30 days from the date of the application.
4. Procedure on receipt of application [Section 245R]

A. On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the Principal
Commissioner or Commissioner and, if necessary, call upon him to furnish the relevant records :
Provided that where any records have been called for by the Authority in any case, such records shall,
as soon as possible, be returned to the Principal Commissioner or Commissioner.
B. The Authority may, after examining the application and the records called for, by order, either allow or
reject the application
i. The Authority shall not allow the application where the question raised in the application:
a. is already pending before any income-tax authority or Appellate Tribunal [except in the
case of a resident applicant being Public Sector Company] or any court;
b. involves determination of FMV of any property;
c. relates to a transaction or issue which is designed prima facie for the avoidance of
income-tax [except in the case of a Public Sector Company applicant or in the case of an
applicant related to GAAR applicability]
ii. No application shall be rejected unless an opportunity has been given to the applicant of being
heard:
iii. In case the application is rejected, reasons for such rejection shall be given in the order.
AAR SATC C.3
C. A copy of every order shall be sent to the applicant and to the Principal Commissioner or
Commissioner.
D. Where an application is allowed, the Authority shall, after examining such further material as may be
placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the
question specified in the application.
E. On a request received from the applicant, the Authority shall, before pronouncing its advance
ruling, provide an opportunity to the applicant of being heard, either in person or through a duly
authorised representative.
F. The Authority shall pronounce its advance ruling in writing within 6 months of the receipt of
application.
G. A copy of the advance ruling pronounced by the Authority, duly signed by the Members and certified in
the prescribed manner shall be sent to the applicant and to the Principal Commissioner or
Commissioner, as soon as may be, after such pronouncement.
5. No income-tax authority or the Appellate Tribunal shall proceed to decide any issue in respect to which
an application has been made by an applicant, being a resident, under section 245Q(1). [Section 245RR]
6. Applicability of Advance Ruling [Section 245S]

A. The advance ruling pronounced by the Authority under section 245R shall be binding only—
a) on the applicant who had sought it;
b) in respect of the transaction in relation to which the ruling had been sought; and
c) on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him,
in respect of the applicant and the said transaction.
B. The advance ruling shall be binding as aforesaid unless there is a change in law or facts on the basis
of which the advance ruling has been pronounced.
7. Q, a non-resident, made an application to the Authority for Advance Rulings on 2.7.2019 in relation to
a transaction proposed to be undertaken by him. On 31.8.2019, he decides to withdraw the said
application. Can he withdraw the application on 31.8.2019?
Answer:
The Income-tax Act, 1961 provides that an applicant, who has sought for an advance ruling, may withdraw
the application within 30 days from the date of the application [Section 245Q(3)]. Since more than 30
days have elapsed since the date of application by Q to the Authority for Advance Rulings, he cannot
withdraw the application.
However, the Authority for Advance Rulings (AAR), has observed that though Act provides that an application
may be withdrawn by the applicant within 30 days from the date of the application, this, however, does not
preclude the AAR from permitting withdrawal of the application after the said period with the permission of the
AAR, if the circumstances of the case so justify.

AAR SATC C.4
8. Advantages of seeking advance rulings from the Authority are as under:
(i) The non-resident investor can be sure of its liability towards Income-tax even before the start of
investment in India. Hence, he can plan his investment accordingly and thus would be able to avoid
long-drawn litigation.
(ii) The Authority constituted as above, is best suited to sort out complex issues of Income-tax including
those concerning Double Taxation Avoidance Agreement (DTAA) which arise as a result of
differences of opinion between the tax collectors and the taxpayers.
(iii) The notified resident i.e. the Public Sector Companies can also take advantage of getting a ruling
on questions of facts or law pending before any Tax Authority [AO/CIT(A)/CIT] or Appellate Tribunal.
(iv) The rulings of the Authority are binding on the applicant as well as the Principal Commissioner or
Commissioner of Income tax and authorities below him, not only for one year but for all the years
unless the facts or the law change. Therefore, having obtained the ruling on a given set of facts the
taxpayer may be sure about his tax liability in future.
(v) The authority is to pronounce its rulings within 6 months of the receipt of the application. This
enables the investor to obtain the ruling and draw up the details of his transaction without undue
delay on this account and ensures full certainty regarding its tax implications.
9. State the circumstances under which the Authority for Advance Ruling (AAR) shall not allow the
application of a Non-resident for advance ruling and the duties of AAR in such case
Solution:
As per Section 245R, Authority for Advance Ruling shall not allow the application of a Non-Resident
for Advance Ruling in the following cases:
(i) where the question raised in the application is already pending before any income-tax authority or
Appellate Tribunal or Court
(ii) where the question raised in the application involves determination of Fair Market Value (example –
ALP) of any property.
(iii) where the question so raised relates to a transaction or issue which is designed prima facie for the
avoidance of income tax [Except GAAR]
Before rejecting the application the AAR is to give an opportunity to the applicant of being heard. AAR is
to give reasons for rejection in the order passed by it.
10. Refer Question No. 16 or 17 A foreign company entered into contracts with several Indian companies for
installation of mobile telephone system and made an application to the Authority for Advance Rulings for
advance ruling on the rate of withholding tax on receipts from Indian companies. One of the Indian companies
had also made an application to the Assessing Officer for determination of the rate at which tax is deductible
on payment to the said foreign company. The Authority for Advance Rulings rejected the application of the
foreign company on the ground that the question raised in the application is already pending before an
income tax authority. Is the rejection of the application of the foreign company justified in law?

AAR SATC C.5
11. Can a person Resident in India seek Advance Ruling from the Authority for Advance Ruling?
Answer:
A Resident can made an application to the Authority of Advance Ruling to seek an advance ruling in the
following cases:
(i) Notified Resident Applicant [CG] can seek ruling in relation to his tax liability arising out of a
transaction which has been undertaken or is proposed to be undertaken by such applicant, and such
determination shall include the determination of any question of law or of fact specified in the
application
“CG has notified that a resident can move application for advance ruling, in relation to his tax
liability arising out of one or more transactions valuing ` 100 cr or more in total which have been
undertaken or proposed to be undertaken”
(ii) Notified Resident Applicant can seek ruling in respect of issues relating to computation of total
income which is pending before any income-tax authority or the Appellate Tribunal. Such a
resident applicant can make an application to seek determination or decision by the AAR on a question
of law or a question of fact relating to such computation of total income specified in the application.
“Public Sector Companies” as defined in section 2(36A) of the Income-tax Act, 1961 have been
notified as applicant for this purpose.
(iii) A Resident can also make an application seeking advance ruling in relation to the tax liability of a Non-
Resident arising out of a transaction undertaken or proposed to be undertaken by him with such
non-resident.
12. When can an advance ruling pronounced by the Authority for Advance Rulings be declared void?
What is the consequence?
Answer:
As per section 245T, an advance ruling can be declared to be void ab initio by the Authority for Advance
Ruling if, on a representation made to it by the Principal Commissioner or Commissioner or otherwise, it
finds that the ruling has been obtained by fraud or misrepresentation of facts.
Thereafter, all the provisions of the Act will apply as if no such advance ruling has been made. A copy of such
order shall be sent to the applicant and the Principal Commissioner or Commissioner.
13. Mr. Balram is a non-resident. The appeal pertaining to the AY 2019-20 is pending before the Income-
tax Appellate Tribunal, the issue involved being computation of export profit and tax thereon. The
same issue persists for the AY 2020-21 as well. Mr. Balram’s brother Mr. Krishna has obtained an
advance ruling under Chapter XIX – B of Income-tax Act, 1961 from the Authority for Advance Ruling
on an identical issue. Mr. Balram proposes to use the said ruling for his assessment pertaining to the
assessment year 2020-21. Can he do so?
Answer:
The advance ruling pronounced under section 245R by the AAR shall be binding only on the applicant who
had sought it and in respect of the specific transaction in relation to which advance ruling was sought.
It shall also be binding on the Principal Commissioner/Commissioner or CIT(A) and the income-tax
authorities subordinate to him, in respect of the concerned applicant and the specific transaction.
In view of the above provision, Mr. Balram cannot use the advance ruling, obtained on an identical issue by
his brother, for his assessment pertaining to the AY 2020-21.

AAR SATC C.6
14. Authority for Advance Rulings [Section 245O] - Constitution
1. The Central Government shall constitute an Authority for giving advance rulings, to be known as
"Authority for Advance Rulings"
FA 18: Provided that the Authority shall cease to act as an Authority for Advance Rulings for the
purposes of Chapter V of the Customs Act, 1962 (52 of 1962) on and from the date of
appointment of the Customs Authority for Advance Rulings under section 28EA of that Act.
2. FA 18: On and from the date of appointment of the Customs Authority for Advance Rulings
referred to in the proviso to sub-section (1), the Authority shall act as an Appellate Authority, for
the purpose of Chapter V of the Customs Act, 1962.
Provided that the Authority shall not admit any appeal against any ruling or order passed earlier
by it in the capacity of the Authority for Advance Rulings in relation to any matter under Chapter
V of the Customs Act, 1962 (52 of 1962) after the date of such appointment of the Customs
Authority for Advance Rulings.
3. The Authority shall consist of a Chairman and such number of Vice-chairmen, revenue Members
and law Members as the Central Government may, by notification, appoint.
4. A person shall be qualified for appointment as—
a. Chairman, who has been a Judge of the Supreme Court or the Chief Justice of a High Court or
for at least seven years a Judge of a High Court;
b. Vice-chairman, who has been Judge of a High Court;
5. a revenue Member—
(i) from the Indian Revenue Service, who is, or is qualified to be, a Member of the Board; or
(ii) from the Indian Customs and Central Excise Service, who is, or is qualified to be, a Member
of the Central Board of Excise and Customs,
on the date of occurrence of vacancy
6. a law Member from the Indian Legal Service, who is, or is qualified to be, an Additional Secretary to
the Government of India on the date of occurrence of vacancy.
7. The powers and functions of the Authority may be discharged by its Benches as may be constituted
by the Chairman from amongst the Members thereof.
8. In the event of the occurrence of any vacancy in the office of the Chairman by reason of his death,
resignation or otherwise, the senior-most Vice-chairman shall act as the Chairman until the date on
which a new Chairman, appointed in accordance with the provisions of this Act to fill such vacancy,
enters upon his office.
9. In case the Chairman is unable to discharge his functions owing to absence, illness or any other cause,
the senior-most Vice-Chairman shall discharge the functions of the Chairman until the date on which the
Chairman resumes his duties.
10. A Bench shall consist of the Chairman or the Vice-chairman and one revenue Member and one law
Member.
FA 18: Provided that where the Authority is dealing with an application seeking advance ruling in
any matter relating to this Act, the revenue Member of the Bench shall be such Member as
referred above in Point 5(i).
11. The Authority shall be located in the National Capital Territory of Delhi and its Benches shall be located
at such places as the Central Government may, by notification specify.

AAR SATC C.7
15. Imp Points:
a) Applicant should be Non Resident in PY preceding the PY in which the application is made
b) Income Tax Authority / ITAT shall not proceed to decide any issue in respect of which as application is
made to AAR.
c) Decision of AAR is binding upon AO / CIT(A) but not on ITAT. ITAT may give contrary decision.
d) No Appeal can be filed against rejection of application by AAR.
e) No Appeal against order of AAR

AAR SATC C.8
16. Fried pepper Inc (FPI), a foreign company, is supplying frozen chicken to several Indian concerns,
including LMN & Co. FPI has made an application to the AAR for determination of the rate of tax to be
applied on its total income arising from the said operations in India.
LMN & Co, has made an application to the ITO, TDS Ward for determination of the rate of tax to be
deducted at source from payments to be made to FPI.
The AAR wants to reject the application of FPI on the ground that the matter is already pending before
the income-tax authority. Is this stand tenable in law?
[CMA FINAL JUNE 2018 – EXAM Question – 6 Marks]
Answer:
The issue involved is concerned with the admission or rejection of the application filed before the Advance
Ruling Authority on the grounds specified in clause (i) of the first proviso to sub section (2) of section
245R of the Income-tax Act, 1961.
Clause (i) of the first proviso of section 245R(2) provides that the AAR shall not allow the application where
the question raised in the application is already pending before any income-tax authority or Appellate
Tribunal or any Court, (except in case of resident falling in sub clause (iii) of clause (b) of section 245N)
In the above case, no application had been filed or contention urged by the applicant (foreign company)
before any income-tax authority/Appellate Tribunal/ court, raising the question raised in the application filed
with AAR. The question sought is with regard to the rate of tax applicable on the total income of the foreign
company.
One of the Indian companies, however, had raised the question before the Assessing Officer, not on the
applicant's behalf or with a view to benefit the applicant, but only to safeguard its own interest, as it had a
statutory duty to deduct the proper amount of tax from payments made to a non-resident. Although the
question raised pertains to one of the payments made or to be made to the non-resident applicant, it
was not one pending determination before any income-tax authority in the applicant's case.
Therefore, as held by the AAR in Ericsson Telephone Corporation India AB v. CIT (1997) 224 ITR 203, the
application filed by the Indian company before the ITO, TDS Ward cannot be treated to have been filed by
the non-resident.
Hence, it would not be proper to reject the application of the foreign company relying on clause (i) of
the proviso to sub-section (2) of section 245R of the Income tax Act, 1961.
ALTERNATIVE VIEW
The issue involved is concerned with the admission or rejection of the application filed before the Advance
Ruling Authority on the grounds specified in clause (i) of the first proviso to sub-section (2) of section 245R of
the Income-tax Act, 1961.
Clause (i) of the first proviso of section 245R (2) provides that the AAR shall not allow the application where
the question raised in the application is already pending before any income-tax authority or Appellate
Tribunal or any Court, (except in case of resident falling in sub-clause (iii) of clause (b) of section 245N)
W.e.f. 1-6-2000, the proviso to s. 245R(2) reads thus:

"Provided that the Authority shall not allow the application where the question raised in the
application is already pending before any income-tax authority or Appellate Tribunal or any court."
The words "in the applicant's case" have been omitted.
The AAR, in Nuclear Power Corporation of India Ltd., In Re, [2012] 343 ITR 220, held that an advance
ruling is not only applicant specific, but is also transaction specific. The advance ruling sought for from
the AAR is in respect of a specific transaction entered into by the applicant. It is for this reason that section
245S specifies that a ruling is binding on the applicant, the transaction and the Principal Commissioner of
Income-tax and those subordinate to him, and not only on the applicant.

AAR SATC C.9
What is barred by the proviso to section 245R(2) of the Act in the context of clause (i) thereof is the allowing
of an application under section 245R(2) of the Act where "the question raised in the application is already
pending before any Income-tax authority, or Appellate Tribunal or any court". The significance of the
dropping of the words, "in the applicant's case" with effect from June 1, 2000, cannot be totally lost
sight of.
On the basis of this view taken by the AAR in the aforesaid case, explaining the impact of the
dropping of the words "in the applicant's case" with effect from 1.6.2000, a view can be taken that the
AAR can reject the application filed before the AAR on the ground that in respect of the same
transaction, an issue is pending before the Assessing Officer.
17. Balmart Inc. of USA entered into the contract with three Indian startup companies operating in e-
commerce segment, namely Klipkart Ltd., Mozon Ltd., and Run Run Ltd. for supplying know-how to
develop an electronic retailer network.
Balmart Inc. made an application to the Authority for Advance Rulings (AAR) on the rate of
withholding tax on receipts applicable to it. Klipkart Ltd. also made an application .to the Assessing
Officer for determination of the rate at which tax is deductible on the payments made to the said non-
resident company. The Authority for Advance Rulings (AAR) rejected the application of Balmart Inc.
on the ground that the question raised in the application is already pending before an income-tax
authority.
Examine whether the rejection of application by the AAR is justified in law.

[Question No. 16 & 17 are same and conclusion discussed are also same. However, CMA Students
are advised to follow answer pattern given in Question No. 16]
Answer:
The issue under consideration is whether the Authority for Advance Rulings shall allow/reject an application
for advance ruling where the question raised in the application is already pending before any income-tax
authority or Appellate Tribunal or any Court.
An advance ruling is not only applicant specific, but is also transaction specific. The advance ruling is on a
transaction entered into or undertaken by the applicant. That is why section 245S specifies that a ruling is
binding (i) on the applicant, (ii) the transaction and (iii) the Principal Commissioner or Commissioner of
Income-tax and those subordinate to him.
Therefore, AAR can reject the application made by Balmart Inc. before the AAR on the ground that similar
issue is pending before the Assessing Officer in respect of the same transaction i.e., provision of technical
know in case of Klipkart Ltd.
Note- The facts of the case are similar to the facts in Nuclear Power Corporation of India Ltd. In Re, [2012]
343 ITR 220, wherein the above issue came up before the AAR. What is barred by the first proviso to section
245R(2) of the Act in the context of clause thereof is the allowing of an application under section 245R(2) of
the Act where “the question raised in the application is already pending before any Income-tax authority, or
Appellate Tribunal or any court”.
The significance of the dropping of the words, “in the applicant’s case” with effect from June 1, 2000, cannot
be wholly ignored. On the basis of this view expressed by the AAR in the above case, explaining the impact of
the dropping of the words “in the applicant’s case” with effect from 1.6.2000, a view can be taken that the AAR
can reject the application made by Balmart Inc. before the AAR on the ground that similar issue is pending
before the Assessing Officer in respect of the same transaction i.e., provision of technical know in case of
Klipkart Ltd. The above answer is based on these lines.
Alternate Answer - The issue relates to the admission or rejection of the application filed before the Advance
Rulings Authority on the grounds specified in clause (i) of the first proviso to sub-section (2) of section 245R of
the Income-tax Act, 1961.
AAR SATC C.10
The first proviso to section 245R(2) has been substituted by the Finance Act, 2000 with effect from 1.6.2000.
Clause (i) of the first proviso, prior to and post amendment, reads as follows:
Prior to 1.6.2000 On or After 1.6.2000

Provided that the Authority shall not allow the Provided that the Authority shall not allow the
application except in the case of a resident application where the question raised in the
applicant where the question raised in the application is already pending before any
application is already pending in the applicant’s income-tax authority or Appellate Tribunal or any
case before any income-tax authority, the Appellate court.
Tribunal or any court;
The words “except in the case of a resident applicant” and “in the applicant’s case” has been removed in
clause (i) of the first proviso with effect from 1.6.2000. However, the Explanatory Memorandum to the Finance
Act, 2000, explaining the impact of the substitution, reads as follows “It is proposed to substitute the proviso to
provide that the Authority shall not allow the application when the question raised is already pending in the
applicant’s case before any income-tax authority, Appellate Tribunal or any court in regard to a non-resident
applicant and resident applicant in relation to a transaction with a non-resident”.
Therefore, according to the intent expressed in the Explanatory Memorandum, the AAR shall not allow the
application both in the case of resident and non-resident applicant if the question raised is already pending in
the applicant’s case before any income-tax authority. Thus, as per the Explanatory Memorandum, it is
possible to take a view that even post-amendment, the Authority shall not allow the application only where a
question is pending in the applicant’s case before any income-tax authority.
Thus, an alternative view is possible on the basis of the AAR ruling in Ericsson Telephone Corporation India
AB v. CIT (1997) 224 ITR 203, which continues to hold good even after the amendment, if we consider the
intent expressed in the Explanatory Memorandum.
Accordingly, based on this view, the rejection of application by the AAR is not justified in law, since the
question raised in the application made by Balmart Inc. is pending before the Assessing Officer in Klipkart
Ltd.’s case, and not in the applicant’s case.
18. ECO & Co. filed an application for advance ruling for A.Ys. 2017-18, 2018-19 and 2019-20 with the
Authority for Advance Ruling (AAR). For the assessment years 2017-18 and 2018-19, notices under
section 143(2) were issued to the assessee and subsequently, before the date of filing application with
AAR, notice under section 142(1) along with questionnaire was issued. For the assessment year 2019-
20, notice under section 143(2) was issued before the date of filing of application with the AAR and
notice under section 142(1) along with questionnaire was served on the assessee after the date of
filing of application with the AAR.
Can the AAR reject the application on the ground that proceedings are already pending? (You may
assume that the provisions relating to Advance Ruling for the earlier assessment years were the same
as those prevailing for the A. Y. 2020-21)
Answer
(i) Issue Involved: The issue under consideration in this case is whether the Authority for Advance Rulings
can reject an application for advance ruling on the ground that proceedings are already pending before an
income-tax authority, where a notice under section 143(2) in pre-printed format has been served.
(ii) Provisions applicable: As per the proviso to section 245R(2), the Authority for Advance Rulings shall not
allow the application where the question raised in the application is already pending before any income-
tax authority
(iii) Analysis: The facts of the case are similar to the facts in Hyosung Corporation v. AAR (2016) 382 ITR
371, wherein the above issue came up before the Delhi High Court. The Court observed that mere
issue of notice under section 143(2) in pre-printed format will not amount to ‘proceedings
pending’ for the purpose of applying the proviso to section 245R(2). However, issue of notice
under section 142(1) accompanied by a questionnaire before filing of the application by the
AAR SATC C.11
assessee with the AAR would tantamount to ‘proceedings pending’ before an income-tax
authority.
(iv) Conclusion: Thus, applying the rationale of the Delhi High Court ruling to the case on hand, the
application for the assessment year 2019-20 cannot be rejected by the AAR since notice under section
142(1) issued for the assessment year 2019-20 after the date of filing of application will not result in the
proceedings being ‘already pending’ before an Income-tax authority.
However, for the assessment years 2017-18 and 2018-19, the rejection of the application by AAR is
tenable in law, since notice under section 142(1) along with detailed questionnaire was issued before the
date of filing of such application.

AAR SATC C.12
Class Notes

THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)
NEW DELHI
13th Day of December, 2013
A.A.R. No.1309 of 2012
PRESENT
Justice Dr. Arijit Pasayat (Chairman)
Mr. TBC Rozara (Member)
Name & address of the applicant Mitsubishi Corporation,

Japan
Present for the applicant Mr.Deepak Chopra, Advocate

Mr. Akhil Sambhar, FCA
Mr. Vinay Aggarwal, ACA
Present the Department Mr. RS Rawal, CIT-DR(AAR), New Delhi

Mr. Kanv Bali, DDIT (IT)3(1)
ORDER
The applicant is a company incorporated in Japan and is a tax
resident of Japan, as per Article 4 of the Agreement for Avoidance of
Double Taxation between India and Japan(India-Japan Tax Treaty). The
registered/principle office of the applicant is situated at Mitsubishi Shoji
Building, 3-1, Marunouchi 2-Chome, Chiyoda-ku, Tokyo, 100-8086, Japan.
2. The applicant established a Branch Office in India in April, 2008 after
obtaining the necessary approvals from the Reserve Bank of India. The
activities carried out by the Branch Office in India primarily relate to
provision of support services to the applicant.
1
3. The applicant received off-shore supplies contract from Power Grid
Corporation India Ltd. and entered into two separate contracts with the
Power Grid Corporation India Ltd., i.e. (i) Offshore supply contract and (ii)
Onshore service contract.
4. The applicant seeks ruling from the Authority for Advance Rulings on
the following questions:-
Que.1 On the facts and circumstances of the case, whether the

amounts received/receivable by Mitsubishi Corporation,
Japan (‘Applicant’ or ‘MC Japan’) from Power Grid
Corporation of India Limited (‘PGCIL’) under Contract
Agreement No.C-61912-LO79-7/G-10/CA-1/3170 dated
December 22, 2009 by PGCIL for Insulator Package 14-
420kN Antifog Disc Insulators for Islampur – Saharsa –
Gopalganj – Grakpur section of +/-800kV HVDC Bipole
Biswanath Chariyali-Agra Transmission Line associated with
North Eastern – Northern/Western Interconnector-I Project
by PGCIL, for offshore supply of all goods including
mandatory spares are liable to tax in India under the
provisions of the Income-tax Act, 1961 (‘Act’) and the
Agreement for Avoidance of Double Taxation between India
and Japan (‘India-Japan Tax Treaty’)?
Que.2 On the facts and in the circumstances of the case, whether

MC Japan and Allcargo Global Logistics Limited (‘Allcargo’
or ‘Assignee’), for the purpose of executing the Contract
Agreement No.C-61912-L079-7/G-10/CA-1/3171 dated
December 22, 2009 by PGCIL as the “On Shore Services
Contract” for all services to be performed in India inter-alia
including port handling, customs clearance, inland freight
and insurance, loading and transportation to site for delivery
at site in relation to the supply of goods, could be assessed
as independent companies under section 2(31)(iii) of the Act
in India or as an Association of Persons (‘AOP’) under
section 2(31)(v) of the Act?
2
5. The Revenue objected to the admissibility of the application stating
that return of income was filed before filing the application. Relying on the
decision by the AAR in the case of SEPCO III Electric Power Corporation
(AAR No.1009 of 2010) dated 25.8.2011 and the decision in the case of
NetApp B.V (AAR No.955 of 2010) dated 2.2.2005 that was confirmed by
the Hon’ble Delhi High Court reported in (W.P.(C) 3959/2012 dated
14.8.2012), Revenue submitted that when the return of income is filed it
should be treated as pending before the Income-tax Authority. In this case
the return of income was filed on 30.11.2011 and the application was filed
on 4.4.2012 before the Authority and therefore the matter is already
pending before the Income-tax Authority before filing the application and
the application is barred by proviso section 245R(2) of the Act.
6. The applicant on the other hand submitted that mere filing of return
does not attract the bar unless the question raised in the application for
Advance Ruling is an issue pending for adjudication before the Income Tax
Authorities. Reliance is placed on the decision of this Authority in the case
of Hyosung Corporation Korea in AAR/1138/2011.
7. We have considered rival submissions of the applicant and the
Revenue and also considered the facts and case decisions cited in their
submissions. When returns are filed under section 139 or in response to a
3
notice under sub-section (1) section 142, they are processed under section
143(1) of the Act. While processing the return under section 143(1) the total
income or loss are computed after making the following adjustments i.e. (i)
any arithmetical error in return; or (ii) an incorrect claim, if such incorrect
claim is apparent from any information in the return. It is also provided that
no intimation under that section shall be sent after the expiry of one year
from the end of the financial year in which the return is made. In
Explanation to section 143(1) of the Act, the expression “incorrect claim
apparent from any information in the return” is also defined. The Revenue
does not have any jurisdiction to examine or adjudicate any issue other
than those mentioned in Section 143(1) of the Act. There is no scope for
examining or adjudicating any debatable issue that requires long drawn
arguments. Again only in those cases where the Assessing Officer has
reason to believe that any claim of losses, exemption, deduction,
allowances or relief made in the return is inadmissible or if he considers it
necessary or expedient to ensure that the assessee has not under-stated
the income or has not computed excessive loss or has not under-paid the
tax in any manner, he can serve notice under section 143(2). Before or
without issuing notice under section 143(2) or notice under section 142(1)
4
in cases whether return is not filed, there is no jurisdiction to examine or
adjudicate debatable issue claimed or shown in the return of income.
8. The decision in the cases of SEPCO III Electric Power Construction
Corporation (supra) and NetApp BV (supra) are based on the premise that
by filing a return, an assessee invites adjudication of the question arising
out of the returns. It will be seen from analysis of provisions under section
143(2) and 142(1) of the Act, that this was not so. By issue of notice under
section 143(2) only, the Assessing Officer assumes jurisdiction to
adjudicate all the questions arising out of the return. In the case of Jagtar
Singh Purewal reported in (1995) 213 ITR 512, this Authority considered
the issue where though applicant declared amount in question in return, his
application for advance ruling was maintainable in as much as no dispute
was pending between applicant and department as return had been
processed under section 143(1) and refund had been granted and, further,
even in return, assessee had raised no dispute regarding assessability of
amount but only claimed refund of excess tax paid. It was held that there
was no pending dispute between the applicant and the Income-tax
Department because the return had been processed under section 143(1)
and the refund as prayed for by the applicant had been granted. Secondly,
even in the return the assessee raised no dispute regarding the
5
assessability of the amount. On the other hand, he voluntarily showed it
and paid tax thereon claiming refund of only the balance. There was,
therefore, no ground to reject the application on any of the grounds
mentioned in section 245R(2).
9. In the case of Hyosung Corporation Korea (supra) it was held that
mere filing of return does not attract bar on the admission of the application
as provided in section 245R(2) of the Act. We are of the view that only
when the issues are shown in the return and notice under section 143(2) is
issued, the question raised in the application will be considered as pending
for adjudication before the Income-tax Authorities. In the present case the
application was filed on 4.4.2012. Return of income was filed on
30.11.2011 i.e. before filing the application. However, notice under section
143(2) was issued on 8.8.2012 i.e. after the date of the application.
Following which ruling in Hyosung Corporation (supra) we hold that the
question raised by the applicant in the present case is not already pending
before the Income-tax Authorities and therefore, the application is admitted.
(Arijit Pasayat) (T.B.C.Rozara)

Chairman Member
6
GAAR SATC D.1
General Anti Avoidance Rule (GAAR)
Section 95 - Applicability of General Anti-Avoidance Rule. (FROM AY 2018-19)
1. Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be
declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising
therefrom may be determined subject to the provisions of this Chapter.
2. This Chapter shall apply in respect of any assessment year beginning on or after the 1st day of April,
2018.
It is hereby declared 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.
Section 96 - Impermissible Avoidance Arrangements
1. An impermissible avoidance arrangement means an arrangement, the main purpose of which is to

obtain a tax benefit, and it— (Four Test)
a. creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;
b. results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;
c. lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in
part; or
d. is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona
fide purposes.
2. An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been
entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step
in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose
of the whole arrangement is not to obtain a tax benefit.
NOTE:’
"Tax benefit" includes,—
a) a reduction or avoidance or deferral of tax or other amount payable under this Act; or
b) an increase in a refund of tax or other amount under this Act; or
c) a 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
d) an increase in a refund of tax or other amount under this Act as a result of a tax treaty; or
e) a reduction in total income; or
f) an increase in loss,
in the relevant previous year or any other previous year;
Section 97: Arrangement to lack commercial substance.

An arrangement shall be deemed to lack commercial substance, if—
a) 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; or
b) it involves or includes—
i. round trip financing;
ii. an accommodating party;
iii. elements that have effect of offsetting or cancelling each other; or
iv. 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

GAAR SATC D.2
c) 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
d) 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
Consequences of Impermissible Avoidance Arrangement - Section 98

If an arrangement is declared to be an impermissible avoidance arrangement, then, the consequences, in relation
to tax, of the arrangement, including denial of tax benefit or a benefit under a tax treaty, shall be determined, in
such manner as is deemed appropriate, in the circumstances of the case, including by way of but not limited to
the following, namely:—
(a) disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance
arrangement;
(b) treating the impermissible avoidance arrangement as if it had not been entered into or carried out;
(c) disregarding any accommodating party or treating any accommodating party and any other party as one
and the same person;
(d) 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;
(e) reallocating amongst the parties to the arrangement—
(i) any accrual, or receipt, of a capital nature or revenue nature; or
(ii) any expenditure, deduction, relief or rebate;
(f) treating—
(i) the place of residence of any party to the arrangement; or
(ii) 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
(g) considering or looking through any arrangement by disregarding any corporate structure.
Rule 10U - Application of General Anti Avoidance Rule
1. The provisions of Chapter X-A shall not apply to—

a) an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the
parties to the arrangement does not exceed a sum of rupees three crore;
b) a Foreign Institutional Investor,—
i. who is an assessee under the Act;
ii. who has not taken benefit of an agreement referred to in section 90 or section 90A as the case may
be; and
iii. who has invested in listed securities, or unlisted securities, with the prior permission of the
competent authority, in accordance with the Securities and Exchange Board of India (Foreign
Institutional Investor) Regulations, 1995 and such other regulations as may be applicable, in
relation to such investments;
c) a person, being a non-resident, in relation to investment made by him by way of offshore derivative
instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor;
d) any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be
st
received by, any person from transfer of investments made before the 1 day of April, 2017 by such
person.
2. Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to
any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit
st
obtained from the arrangement on or after the 1 day of April, 2017.

GAAR SATC D.3
Briefly describe the procedure for invoking GAAR – Section 144BA
Reference to Principal Commissioner or Commissioner in certain cases (Section 144BA)
(1) If, the Assessing Officer, at any stage of the assessment or reassessment proceedings before him
having regard to the material and evidence available, considers that it is necessary to declare an
arrangement as an impermissible avoidance arrangement and to determine the consequence of such an
arrangement, then, he may make a reference to the Principal Commissioner or Commissioner in this
regard.
(2) The Principal Commissioner or Commissioner shall, on receipt of a reference under sub-section (1), if he is
of the opinion that the provisions of GAAR are required to be invoked, issue a notice to the assessee,
setting out the reasons and basis of such opinion, for submitting objections, if any, and providing an
opportunity of being heard to the assessee within such period, not exceeding 60 days, as may be specified
in the notice.
(3) If the assessee does not furnish any objection to the notice within the time specified in the notice, the
Principal Commissioner or Commissioner shall issue such directions as he deems fit in respect of declaration
of the arrangement to be an impermissible avoidance arrangement.
(4) In case the assessee objects to the proposed action, and the Principal Commissioner or Commissioner after
hearing the assessee in the matter is not satisfied by the explanation of the assessee, then, he shall
make a reference in the matter to the Approving Panel for the purpose of declaration of the arrangement as
an impermissible avoidance arrangement.
(5) If the Principal Commissioner or Commissioner is satisfied, after having heard the assessee that the
provisions of GAAR are not to be invoked, he shall by an order in writing, communicate the same to the
Assessing Officer with a copy to the assessee.
(6) The Approving Panel, on receipt of a reference from the Principal Commissioner or Commissioner, shall
issue such directions, as it deems fit, in respect of the declaration of the arrangement as an impermissible
avoidance arrangement in accordance with the provisions of GAAR including specifying of the previous year
or years to which such declaration of an arrangement as an impermissible avoidance arrangement shall
apply.
(7) No such direction shall be issued unless an opportunity of being heard is given to the assessee and the
Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interests of
the revenue, as the case may be.
(8) The Approving Panel may, before issuing any direction-
a) if it is of the opinion that any further inquiry in the matter is necessary, direct the Principal Commissioner
or Commissioner to make such inquiry or cause the inquiry to be made by any other income-tax
authority and furnish a report containing the result of such inquiry to it; or
b) call for and examine such records relating to the matter as it deems fit; or
c) require the assessee to furnish such documents and evidence as it may direct.
(9) If the members of the Approving Panel differ in opinion on any point, such point shall be decided according to
the opinion of the majority of the members.

GAAR SATC D.4
(10) The Assessing Officer, on receipt of directions of the Principal Commissioner or Commissioner or of the
Approving Panel, shall proceed to complete the proceedings in accordance with such directions and the
provisions of Chapter X-A.
(11) If any direction issued by Approving panel specifies that declaration of the arrangement as impermissible
avoidance arrangement is applicable for any previous year other than the previous year to which the
proceedings pertains, then, the Assessing Officer while completing any assessment or reassessment
proceedings of the assessment year relevant to such other previous year shall do so in accordance with such
directions and the provisions of Chapter X-A and it shall not be necessary for him to seek fresh direction
on the issue for the relevant assessment year.
(12) No order of assessment or reassessment shall be passed by the Assessing Officer without the prior approval
of the Principal Commissioner or Commissioner, if any tax consequences have been determined in the order
under the provisions of Chapter X-A. [Order passed by AO is appealable to ITAT]
(13) The Approving Panel shall issue directions within a period of six months from the end of the month in which
the reference was received.
In computing the above period, the following shall be excluded-
a) the period commencing from the date on which the first direction is issued by the Approving Panel to the
Principal Commissioner or Commissioner for getting the inquiries conducted through the authority
competent under a DTAA agreement and ending with the date on which the information so requested is
last received by the Approving Panel or one year, whichever is less;
b) the period during which the proceeding of the Approving Panel is stayed by an order or injunction of
any court:
Provided that where immediately after the exclusion of the aforesaid time or period, the period available to
the Approving Panel for issue of directions is less than 60 days, such remaining period shall be extended to
sixty days and the aforesaid period of six months shall be deemed to have been extended accordingly.
(14) The directions issued by the Approving Panel shall be binding on-
a) the assessee; and
b) the Principal Commissioner or Commissioner and the income-tax authorities subordinate to him,
and no appeal under the Act shall lie against such directions.
(15) The Central Government shall, for the purposes of this section, constitute one or more Approving Panels as
may be necessary and each panel shall consist of three members including a Chairperson.
(16) The Chairperson of the Approving Panel shall be a person who is or has been a judge of a High Court,
and-
a. one member shall be a member of Indian Revenue Service not below the rank of Principal Chief
Commissioner or Chief Commissioner of Income-tax; and
b. one member shall be an academic or scholar having special knowledge of matters, such as direct
taxes, business accounts and international trade practices.
(17) The term of the Approving Panel shall ordinarily be for one year and may be extended from time to time
up to a period of three years.

GAAR SATC D.5
Rule 10UB - Notice, Forms for reference under Section 144BA
1. For the purposes of sub-section (1) of section 144BA, the Assessing Officer shall, before making a
reference to the Commissioner, issue a notice in writing to the assessee seeking objections, if any, to
the applicability of provisions of Chapter X-A in his case.
2. The notice referred to in sub-rule (1) shall contain the following:—

i. details of the arrangement to which the provisions of Chapter X-A are proposed to be applied;
ii. the tax benefit arising under the arrangement;
iii. the basis and reason for considering that the main purpose of the identified arrangement is to obtain
tax benefit;
iv. the basis and the reasons why the arrangement satisfies the condition provided in clause (a), (b),
(c) or (d) of sub-section (1) of section 96; and
v. the list of documents and evidence relied upon in respect of (iii) and (iv) above.
3. The reference by the Assessing Officer to the Commissioner under sub-section (1) of section 144BA shall be
in Form No. 3CEG.
4. Where the Commissioner is satisfied that the provisions of Chapter X-A are not required to be invoked with
reference to an arrangement after considering—
i. the reference received from the Assessing Officer under sub-section (1) of section 144BA; or
ii. the reply of the assessee in response to the notice issued under sub-section (2) of section 144BA,
he shall issue directions to the Assessing Officer in Form No. 3CEH.
5. Before a reference is made by the Commissioner to the Approving Panel under sub-section (4) of section
144BA, he shall record his satisfaction regarding the applicability of the provisions of Chapter X-A in
Form No. 3CEI and enclose the same with the reference.
Rule 10UC - Time limits.

For the purposes of Section 144BA-
i. No directions under sub-section (3) of section 144BA shall be issued by the Commissioner after the expiry
of 1 month from the end of the month in which the date of compliance of the notice issued under sub-section
(2) of section 144BA falls;
ii. No reference shall be made by the Commissioner to the Approving Panel under sub-section (4) of section
144BA after the expiry of 2 months from the end of the month in which the final submission of the assessee
in response to the notice issued under sub-section (2) of section 144BA is received;
iii. the Commissioner shall issue directions to the Assessing Officer in Form No.3CEH,—
a) in the case referred to in clause (i) of sub-rule (4) of rule 10UB, within a period of 1 month from the
end of month in which the reference is received by him; and
b) in the case referred to in clause (ii) of sub-rule (4) of rule 10UB, within a period of 2 months from the
end of month in which the final submission of the assessee in response to the notice issued under sub-
section (2) of section 144BA is received by him.

GAAR SATC D.6
QUESTION & ANSWER
1. Under the provisions of a tax treaty between India and Country V, if a resident of country V makes any
capital gains by selling the shares in any Indian Company, such capital gains will be taxable only in
Country V and it will be exempt from tax in India. However, as an exception it is also provided that,
such exemption is not available if the, transferor holds more than 10% interest in the equity capital of
the Indian Company.
VFX Ltd., a resident in Country V floated two wholly owned subsidiaries in country V. On 1.4.2019,
both the subsidiaries bought 9% shareholding in XYZ Co. Ltd., an Indian Company. These
subsidiaries do not have any other income. On 31.12.2019, both of them sold the investment in XYZ
Co. Ltd. Each of the subsidiaries claim exemption from Indian capital gains tax amounting to ` 2.5
crores from such sale, as each is holding less than 10% equity shares in the Indian Company. Can
GAAR be invoked in such case to deny the treaty benefit?
Will your answer be different if the capital gain tax on such sale is calculated at ` 1.2 crores each?
Solution:
The arrangement by VFX Ltd., a resident in Country V, of floating two wholly owned subsidiaries and splitting
the investment in equity shares of the Indian company through such subsidiaries appears to be with the
intention of obtaining tax benefit under the treaty between India and Country V, so that the individual
subsidiaries do not hold more than 10% interest in the equity capital of the Indian company.
Further, there appears to be no commercial substance in creating two subsidiaries as they do not change the
economic condition of investor VFX Ltd. in any manner (i.e. on business risks or cash flow), and reveals a
tainted element of abuse of tax laws.
Since the tax benefit in the P.Y. 2019-20 in aggregate is ` 5 crores (` ` 2.5 crores x 2), which exceeds the
specified threshold of ` 3 crores, the arrangement can be treated as an impermissible avoidance arrangement
and GAAR can be invoked. Consequently, treaty benefit would be denied by ignoring the two subsidiaries, or
by treating the two subsidiaries as one and the same company for tax computation purposes.
If the capital gains tax on such sale is calculated at ` 1.2 crores each, the tax benefit of ` 2.4 crores would be
less than the specified threshold of ` 3 crores. Hence, GAAR cannot be invoked in such case.
2. Examine whether General Anti-Avoidance Rules (GAAR) can be invoked to deny the treaty benefit in
the following case, assuming that all other conditions prescribed for application of GAAR are being
satisfied:-
X Pvt. Ltd., an Indian Company and Y Pvt. Ltd. (100% subsidiary of YAN Ltd.) located in country "A"
formed a joint venture company XY Pvt. Ltd. in India on 01.04.2019. As per the joint venture
agreement, 51% of shares are held by X Pvt. Ltd. and 49% are held by Y Pvt. Ltd in XY Pvt. Ltd. There
is no other business activity in Y Pvt. Ltd.
Y Pvt. Ltd. is designated as Permitted Transferee of YAN Ltd. Permitted Transferee means though
shares of XY Pvt. Ltd. are held by Y Pvt. Ltd. all rights of voting, management, right to sell etc. are
vested with YAN Ltd.
On 19.03.2020, the shares held by Y Pvt. Ltd. in XY Pvt. Ltd. are sold to P Pvt. Ltd. which is a group
company of X Pvt. Ltd. As per the tax-treaty between India and Country "A", there is no tax for capital
gains either in source country or in Country "A". Consequently, the capital gains arising to Y Pvt.
Ltd. are not taxable in India. [CA FINAL EXAM QUESTIONs – NOV 2018]

GAAR SATC D.7
Solution:
GAAR may, prima facie, apply, when the following twin conditions are satisfied:
Main purpose of the arrangement being tax benefit, and
Existence of tainted benefit.
As per the tax treaty between India and Country “A”, there is no tax on capital gains either in the Source
country or in Country “A”. Consequently, the capital gains arising to Y Pvt. Ltd. is not taxable in India.
The arrangement of routing investment through Country “A” would result in a tax benefit. Since there is no
business purpose in incorporating a company Y Pvt. Ltd. (100% subsidiary of YAN Ltd.) in Country “A”, it can
be said that the main purpose of the arrangement is to obtain a tax benefit.
On the question of whether the arrangement has any tainted element, it is evident that there is no
commercial substance in incorporating Y Pvt. Ltd. as it does not have any effect on the business risk of YAN
Ltd. or cash flow of YAN Ltd.
Additionally, the fact that all rights of shareholders of Y Pvt. Ltd. (designated as Permitted Transferee) are
being exercised by YAN Ltd. instead of Y Pvt. Ltd, indicates that Y Pvt. Ltd lacks commercial substance.
As the twin conditions of main purpose being tax benefit and existence of a tainted element are
satisfied, GAAR may be invoked in this case.

GAAR SATC D.8
CLASS NOTES

APA SATC DD.1
Advance Pricing Agreement Scheme (APA)

Section 92CC: Advance Pricing Agreement.
1. The Board, with the approval of the Central Government, may enter into an advance pricing
agreement with any person, determining the arm's length price or specifying the manner in which
arm's length price is to be determined, in relation to an international transaction to be entered
into by that person.
2. The manner of determination of arm's length price referred to in sub-section (1), may include the
methods referred to in sub-section (1) of section 92C or any other method, with such adjustments
or variations, as may be necessary or expedient so to do.
3. Notwithstanding anything contained in section 92C or section 92CA, the arm's length price of any
international transaction, in respect of which the advance pricing agreement has been entered into,
shall be determined in accordance with the advance pricing agreement so entered.
4. The agreement referred to in sub-section (1) shall be valid for such period not exceeding five
consecutive previous years as may be specified in the agreement.
5. The advance pricing agreement entered into shall be binding—

a. on the person in whose case, and in respect of the transaction in relation to which, the
agreement has been entered into; and
b. on the Principal Commissioner or Commissioner, and the income-tax authorities subordinate
to him, in respect of the said person and the said transaction.
6. The agreement referred to in sub-section (1) shall not be binding if there is a change in law or
facts having bearing on the agreement so entered.
7. The Board may, with the approval of the Central Government, by an order, declare an agreement
to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or
misrepresentation of facts.
8. Upon declaring the agreement void ab initio,—

a. all the provisions of the Act shall apply to the person as if such agreement had never been
entered into; and
b. notwithstanding anything contained in the Act, for the purpose of computing any period of
limitation under this Act, the period beginning with the date of such agreement and ending
on the date of order under sub-section (7) shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period, the period of
limitation, referred to in any provision of this Act, is less than sixty days, such remaining period
shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be
extended accordingly.

APA SATC DD.2
9. The Board may, for the purposes of this section, prescribe a scheme specifying therein the
manner, form, procedure and any other matter generally in respect of the advance pricing
agreement.
The agreement referred to in sub-section (1), may, subject to such conditions, procedure and
manner as may be prescribed, provide for determining the arm's length price or specify the manner
in which arm's length price shall be determined in relation to the international transaction entered
into by the person during any period not exceeding four previous years preceding the first of the
previous years referred to in sub-section (4), and the arm's length price of such international
transaction shall be determined in accordance with the said agreement.
10. Where an application is made by a person for entering into an agreement referred to in sub-section
(1), the proceeding shall be deemed to be pending in the case of the person for the purposes of
the Act
VARIOUS RULES
Rule 10F: Definitions:

(a) "agreement" means an advance pricing agreement entered into between the Board and the
applicant, with the approval of the Central Government, as referred to in sub-section (1) of
section 92CC of the Act;
(b) "application" means an application for advance pricing agreement made under rule 10-I;
(c) "unilateral agreement" means an agreement between the Board and the applicant which is
neither a bilateral nor multilateral agreement.
(d) "bilateral agreement" means an agreement between the Board and the applicant, subsequent
to, and based on, any agreement referred to in rule 44GA between the competent authority in
India with the competent authority in the other country regarding the most appropriate
transfer pricing method or the arms' length price;
(e) "multilateral agreement" means an agreement between the Board and the applicant,
subsequent to, and based on, any agreement referred to in rule 44GA between the competent
authority in India with the competent authorities in the other countries regarding the most
appropriate transfer pricing method or the arms' length price;
(f) "rollback year" means any previous year, falling within the period not exceeding four previous
years, preceding the first of the previous years referred to in sub-section (4) of section 92CC;
(g) "competent authority in India" means an officer authorised by the Central Government for the
purpose of discharging the functions as such for matters in respect of any agreement entered
into under section 90 or 90A of the Act;

APA SATC DD.3
Rule 10G - Persons eligible to apply
Any person who—
(i) has undertaken an international transaction; or
(ii) is contemplating to undertake an international transaction,
shall be eligible to enter into an agreement under these rules.
Rule 10H - Pre-filing Consultation - IMP

1. Any person proposing to enter into an agreement under these rules may, by an application in
writing, make a request for a pre-filing consultation.
2. The request for pre-filing consultation shall be made in Form No. 3CEC to the Director General of
Income-tax (International Taxation).
3. On receipt of the request in Form No. 3CEC, the team shall hold pre-filing consultation with the
person referred to in rule 10G.
4. The competent authority in India or his representative shall be associated in pre-filing consultation
involving bilateral or multilateral agreement.
5. The pre-filing consultation shall, among other things,—

(i) determine the scope of the agreement;
(ii) identify transfer pricing issues;
(iii) determine the suitability of international transaction for the agreement;
(iv) discuss broad terms of the agreement.
6. The pre-filing consultation shall—

(i) not bind the Board or the person to enter into an agreement or initiate the agreement
process;
(ii) not be deemed to mean that the person has applied for entering into an agreement.
Rule 10-I - Application for advance pricing agreement - IMP

1. Any person, [referred to in rule 10G] may, if desires to enter into an agreement furnish an
application in Form No. 3CED along with the requisite fee.
2. The application shall be furnished to Director General of Income-tax (International Taxation) in

case of unilateral agreement and to the competent authority in India in case of bilateral or
multilateral agreement.
3. Application in Form No. 3CED may be filed at any time—

(i) before the first day of the previous year relevant to the first assessment year for which
the application is made, in respect of transactions which are of a continuing nature
from dealings that are already occurring; or
(ii) before undertaking the transaction in respect of remaining transactions.

APA SATC DD.4
4. Every application in Form No. 3CED shall be accompanied by the proof of payment of fees
5. The fees payable shall be:

Amount of international transaction entered into or proposed to be Fee
undertaken in respect of which agreement is proposed during the
proposed period of agreement
Amount not exceeding ` 100 crores 10 lacs
Amount not exceeding ` 200 crores 15 lacs
Amount exceeding ` 200 crores 20 lacs
Rule 10J - Withdrawal of application for agreement

1. The applicant may withdraw the application for agreement at any time before the finalisation of
the terms of the agreement.
2. The application for withdrawal shall be in Form No. 3CEE.
3. The fee paid shall not be refunded on withdrawal of application by the applicant.
Rule 10K - Preliminary processing of application

1. Every application filed in Form No. 3CED shall be complete in all respects and accompanied by
requisite documents.
2. If any defect is noticed in the application in Form No. 3CED or if any relevant document is not
attached thereto or the application is not in accordance with understanding reached in [any] pre-
filing consultation referred to in rule 10H, the Director General of Income-tax (International
Taxation) (for unilateral agreement) and competent authority in India (for bilateral or multilateral
agreement) shall serve a deficiency letter on the applicant before the expiry of 1 month from the
date of receipt of the application.
3. The applicant shall remove the deficiency or modify the application within a period of 15 days
from the date of service of the deficiency letter or within such further period which, on an
application made in this behalf, may be extended, so however, that the total period of removal of
deficiency or modification does not exceed 30 days.
4. The Director General of Income-tax (International Taxation) or the competent authority in India, as
the case may be, on being satisfied, may pass an order providing that application shall not be
allowed to be proceeded with if the application is defective and defect is not removed by applicant
in accordance with sub-rule (3).
5. No order under sub-rule (4) shall be passed without providing an opportunity of being heard to the
applicant and if an application is not allowed to be proceeded with, the fee paid by the applicant
shall be refunded.

APA SATC DD.5
Rule 10L - Procedure
1. If the application referred to in rule 10K has been allowed to be proceeded with, the team or the
competent authority in India or his representative shall process the same in consultation and
discussion with the applicant in accordance with provisions of this rule.
2. For the purpose of sub-rule (1), it shall be competent for the team or the competent authority in
India or its representative to—
(i) hold meetings with the applicant on such time and date as it deem fit;
(ii) call for additional document or information or material from the applicant;
(iii) visit the applicant's business premises; or
(iv) make such inquiries as it deems fit in the circumstances of the case.
3. For the purpose of sub-rule (1), the applicant may, if he considers it necessary, provide further
document and information for consideration of the team or the competent authority in India or his
representative.
4. For bilateral or multilateral agreement, the competent authority shall forward the application to
Director General of Income-tax (International Taxation) who shall assign it to one of the teams.
5. The team, to whom the application has been assigned under sub-rule (4), shall carry out the
enquiry and prepare a draft report which shall be forwarded by the Director General of Income-
tax (International Taxation) to the competent authority in India.
6. If the applicant makes a request for bilateral or multilateral agreement in its application, the
competent authority in India shall in addition to the procedure provided in this rule invoke the
procedure provided in rule 44GA.
7. The Director General of Income-tax (International Taxation) (for unilateral agreement) or the
competent authority in India (for bilateral or multilateral agreement) and the applicant shall
prepare a proposed mutually agreed draft agreement enumerating the result of the process
referred to in sub-rule (1) including the effect of the arrangement referred to in sub-rule (5) of rule
44GA which has been accepted by the applicant in accordance with sub-rule (8) of the said rule.
8. The agreement shall be entered into by the Board with the applicant after its approval by the
Central Government.
9. Once an agreement has been entered into the Director General of Income-tax (International
Taxation) or the competent authority in India, as the case may be, shall cause a copy of the
agreement to be sent to the Commissioner of Income-tax having jurisdiction over the assessee.

APA SATC DD.6
Rule 10M - Terms of the agreement
1. An agreement may among other things, include—
(i) the international transactions covered by the agreement;
(ii) the agreed transfer pricing methodology, if any;
(iii) determination of arm's length price, if any;
(iv) definition of any relevant term to be used in item (ii) or (iii);
(v) critical assumptions;
(va) rollback provision referred to in rule 10MA;
(vi) the conditions if any other than provided in the Act or these rules.
2. The agreement shall not be binding on the Board or the assessee if there is a change in any of
critical assumptions or failure to meet conditions subject to which the agreement has been
entered into.
3. The binding effect of agreement shall cease only if any party has given due notice of the
concerned other party or parties.
4. In case there is a change in any of the critical assumptions or failure to meet the conditions
subject to which the agreement has been entered into, the agreement can be revised or
cancelled, as the case may be.
5. The assessee which has entered into an agreement shall give a notice in writing of such change in
any of the critical assumptions or failure to meet conditions to the Director General of Income-tax
(International Taxation) as soon as it is practicable to do so.
6. The Board shall give a notice in writing of such change in critical assumptions or failure to meet
conditions to the assessee, as soon as it comes to the knowledge of the Board.
Rule 10MA - Roll Back of the Agreement

1. Subject to the provisions of this rule, the agreement may provide for determining the arm's length
price or specify the manner in which arm's length price shall be determined in relation to the
international transaction entered into by the person during the rollback year (hereinafter
referred to as "rollback provision").
2. The agreement shall contain rollback provision in respect of an international transaction subject
to the following, namely:—
(i) the international transaction is same as the international transaction to which the
agreement (other than the rollback provision) applies;
(ii) the return of income for the relevant rollback year has been or is furnished by the
applicant before the due date specified in Explanation 2 to sub-section (1) of section
139;
(iii) the report in respect of the international transaction had been furnished in accordance
with section 92E;
(iv) the applicability of rollback provision, in respect of an international transaction, has been
requested by the applicant for all the rollback years in which the said international
transaction has been undertaken by the applicant; and
(v) the applicant has made an application seeking rollback in Form 3CEDA
APA SATC DD.7
3. Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in
respect of an international transaction for a rollback year, if,—
i. the determination of arm's length price of the said international transaction for the said year
has been subject matter of an appeal before the Appellate Tribunal and the Appellate
Tribunal has passed an order disposing of such appeal at any time before signing of the
agreement; or
ii. the application of rollback provision has the effect of reducing the total income or increasing
the loss, as the case may be, of the applicant as declared in the return of income of the said
year.
4. Where the rollback provision specifies the manner in which arm's length price shall be determined
in relation to an international transaction undertaken in any rollback year then such manner shall
be the same as the manner which has been agreed to be provided for determination of arm's
length price of the same international transaction to be undertaken in any previous year to which
the agreement applies, not being a rollback year.
5. The applicant may, if he desires to enter into an agreement with rollback provision, furnish along
with the application, the request for the same in Form No. 3 CEDA with proof of payment of an
additional fee of five lakh rupees:
Rule 10N - Amendments to Application

1. An applicant may request in writing for an amendment to an application at any stage, before the
finalisation of the terms of the agreement.
2. The Director General of Income-tax (International Taxation) (for unilateral agreement) or the
competent authority in India (for bilateral or multilateral agreement) may, allow the amendment
to the application, if such an amendment does not have effect of altering the nature of the
application as originally filed.
3. The amendment shall be given effect only if it is accompanied by the additional fee, if any,
necessitated by such amendment in accordance with fee as provided in rule 10-I.
Rule 10-O - Furnishing of Annual Compliance Report- IMP

1. The assessee shall furnish an annual compliance report to Director General of Income-tax
(International Taxation) for each year covered in the agreement.
2. The annual compliance report shall be in Form 3CEF.
3. The annual compliance report shall be furnished in quadruplicate, for each of the years covered in
the agreement, within thirty days of the due date of filing the income-tax return for that year, or
within ninety days of entering into an agreement, whichever is later.
4. The Director General of Income-tax (International Taxation) shall send one copy of annual
compliance report to the competent authority in India, one copy to the Commissioner of Income-
tax who has the jurisdiction over the income-tax assessment of the assessee and one copy to the
Transfer Pricing Officer having the jurisdiction over the assessee.

APA SATC DD.8
Rule 10P - Compliance Audit of the agreement- IMP
1. The Transfer Pricing Officer having the jurisdiction over the assessee shall carry out the
compliance audit of the agreement for each of the year covered in the agreement.
2. For the purposes of sub-rule (1), the Transfer Pricing Officer may require—
(i) the assessee to substantiate compliance with the terms of the agreement, including
satisfaction of the critical assumptions, correctness of the supporting data or
information and consistency of the application of the transfer pricing method;
(ii) the assessee to submit any information, or document, to establish that the terms of the
agreement has been complied with.
3. The Transfer Pricing Officer shall submit the compliance audit report, for each year covered in
the agreement, to the Director General of Income-tax (International Taxation) in case of
unilateral agreement and to the competent authority in India, in case of bilateral or multilateral
agreement, mentioning therein his findings as regards compliance by the assessee with terms of
the agreement.
4. The Director General of Income-tax (International Taxation) shall forward the report to the Board
in a case where there is finding of failure on part of assessee to comply with terms of agreement
and cancellation of the agreement is required.
5. The compliance audit report shall be furnished by the Transfer Pricing Officer within six months
from the end of the month in which the Annual Compliance Report referred to in rule 10-O is
received by the Transfer Pricing Officer.
6. The regular audit of the covered transactions shall not be undertaken by the Transfer Pricing
Officer if an agreement has been entered into under rule 10L except where the agreement has
been cancelled under rule 10R.
Rule 10Q - Revision of an agreement

1. An agreement, subsequent to it having been entered into, may be revised by the Board, if,—
(a) there is a change in critical assumptions or failure to meet a condition subject to which
the agreement has been entered into;
(b) there is a change in law that modifies any matter covered by the agreement but is not
of the nature which renders the agreement to be non-binding ; or
(c) there is a request from competent authority in the other country requesting revision of
agreement, in case of bilateral or multilateral agreement.
2. An agreement may be revised by the Board either suo motu or on request of the assessee or the
competent authority in India or the Director General of Income-tax (International Taxation).
3. Except when the agreement is proposed to be revised on the request of the assessee, the
agreement shall not be revised unless an opportunity of being heard has been provided to the
assessee and the assessee is in agreement with the proposed revision.
4. In case the assessee is not in agreement with the proposed revision the agreement may be
cancelled in accordance with rule 10R.

APA SATC DD.9
5. In case the Board is not in agreement with the request of the assessee for revision of the
agreement, the Board shall reject the request in writing giving reason for such rejection.
6. For the purpose of arriving at the agreement for the proposed revision, the procedure provided in
rule 10L may be followed so far as they apply.
7. The revised agreement shall include the date till which the original agreement is to apply and the
date from which the revised agreement is to apply.
Rule 10R - Cancellation of an agreement - IMP

1. An agreement shall be cancelled by the Board for any of the following reasons:
(i) the compliance audit referred to in rule 10P has resulted in the finding of failure on the
part of the assessee to comply with the terms of the agreement;
(ii) the assessee has failed to file the annual compliance report in time;
(iii) the annual compliance report furnished by the assessee contains material errors; or
(iv) the agreement is to be cancelled under sub-rule (4) of rule 10Q [or sub-rule (7) of rule
10RA].
2. The Board shall give an opportunity of being heard to the assessee, before proceeding to cancel an
application.
3. The competent authority in India shall communicate with the competent authority in the other
country or countries and provide reason for the proposed cancellation of the agreement in case of
bilateral or multilateral agreement.
4. The order of cancellation of the agreement shall be in writing and shall provide reasons for
cancellation and for non-acceptance of assessee's submission, if any.
5. The order of cancellation shall also specify the effective date of cancellation of the agreement,
where applicable.
6. The order under the Act, declaring the agreement as void ab initio, on account of fraud or
misrepresentation of facts, shall be in writing and shall provide reason for such declaration and for
non-acceptance of assessee's submission, if any.
7. The order of cancellation shall be intimated to the Assessing Officer and the Transfer Pricing
Officer, having jurisdiction over the assessee.

APA SATC DD.10
Rule 10RA - Procedure for giving effect to rollback provision of an Agreement
1. The effect to the rollback provisions of an agreement shall be given in accordance with this rule.
2. The applicant shall furnish modified return of income referred to in section 92CD in respect of a
rollback year to which the agreement applies along with the proof of payment of any additional
tax arising as a consequence of and computed in accordance with the rollback provision.
3. The modified return referred to in sub-rule(2) shall be furnished along with the modified return to
be furnished in respect of first of the previous years for which the agreement has been requested
for in the application.
4. If any appeal filed by the applicant is pending before the Commissioner (Appeals), Appellate
Tribunal or the High Court for a rollback year, on the issue which is the subject matter of the
rollback provision for that year, the said appeal to the extent of the subject covered under the
agreement shall be withdrawn by the applicant before furnishing the modified return for the
said year.
5. If any appeal filed by the Assessing Officer or the Principal Commissioner or Commissioner is
pending before the Appellate Tribunal or the High Court for a rollback year, on the issue which is
subject matter of the rollback provision for that year, the said appeal to the extent of the subject
covered under the agreement shall be withdrawn by the Assessing Officer or the Principal
Commissioner or the Commissioner, as the case may be, within three months of filing of modified
return by the applicant.
6. The applicant, the Assessing Officer or the Principal Commissioner or the Commissioner, shall
inform the Dispute Resolution Panel or the Commissioner (Appeals) or the Appellate Tribunal or
the High Court, as the case may be, the fact of an agreement containing rollback provision having
been entered into along with a copy of the same as soon as it is practicable to do so.
7. In case effect cannot be given to the rollback provision of an agreement in accordance with this
rule, for any rollback year to which it applies, on account of failure on the part of applicant, the
agreement shall be cancelled.
Rule 10S - Renewing an agreement

Request for renewal of an agreement may be made as a new application for agreement, using the
same procedure as outlined in these rules except pre-filing consultation.
Rule 10T - Miscellaneous

1. Mere filing of an application for an agreement under these rules shall not prevent the operation of
Chapter X of the Act for determination of arms' length price under that Chapter till the agreement
is entered into.
2. The negotiation between the competent authority in India and the competent authority in the
other country or countries, in case of bilateral or multilateral agreement, shall be carried out in
accordance with the provisions of the tax treaty between India and the other country or
countries.
APA SATC DD.11
Rule 44GA - Procedure to deal with requests for bilateral or multilateral advance pricing
agreements- IMP
1. Where a person has made request for a bilateral or multilateral advance pricing agreement in an
application filed in Form No. 3CED,, the request shall be dealt with subject to provisions of this
rule.
2. The process for bilateral or multilateral advance pricing agreement shall not be initiated unless the
associated enterprise situated outside India has initiated process of advance pricing agreement
with the competent authority in the other country.
3. The competent authority in India shall, on intimation of request of the applicant for a bilateral or
multilateral agreement, consult and ascertain willingness of the competent authority in other
country or countries, as the case may be, for initiation of negotiation for this purpose.
4. In case of willingness of the competent authority in other country or countries, as the case may be,
the competent authority in India shall enter into negotiation in this behalf and endeavour to
reach a set of terms which are acceptable to the competent authority in India and the
competent authority in the other country or countries, as the case may be.
5. In case of an agreement after consultation, the competent authority in India shall formalise a
mutual agreement procedure arrangement with the competent authority in other country or
countries, as the case may be, and intimate the same to the applicant.
6. In case of failure to reach agreement on such terms as are mutually acceptable to parties
mentioned in sub-rule (4), the applicant shall be informed of the failure to reach an agreement
with the competent authority in other country or countries.
7. The applicant shall not be entitled to be part of discussion between competent authority in India
and the competent authority in the other country or countries, as the case may be; however the
applicant can communicate or meet the competent authority in India for the purpose of entering
into an advance pricing agreement.
8. The applicant shall convey acceptance or otherwise of the agreement within thirty days of it being
communicated.
9. The applicant, in case the agreement is not acceptable may at its option continue with process of
entering into an advance pricing agreement without benefit of mutual agreement process or
withdraw application.

APA SATC DD.12
Section 92CD: Effect to advance pricing agreement
1. Notwithstanding anything to the contrary contained in Section 139, where any person has entered
into an agreement and prior to the date of entering into the agreement, any return of income has
been furnished under the provisions of Section 139 for any assessment year relevant to a previous
year to which such agreement applies, such person shall furnish, within a period of 3 months from
the end of the month in which the said agreement was entered into, a modified return in
accordance with and limited to the agreement.
2. Save as otherwise provided in this section, all other provisions of this Act shall apply accordingly as
if the modified return is a return furnished under section 139.
3. If the assessment or reassessment proceedings for an assessment year relevant to a previous year
to which the agreement applies have been completed before the expiry of period allowed for
furnishing of modified return under sub-section (1), the Assessing Officer shall, in a case where
modified return is filed in accordance with the provisions of sub-section (1), pass an order
modifying the total income of the relevant assessment year determined in such assessment or
reassessment, as the case may be (effective w.e.f. 01/09/2019) proceed to assess or reassess or
recompute the total income of the relevant assessment year having regard to and in accordance
with the agreement.
4. Where the assessment or reassessment proceedings for an assessment year relevant to the
previous year to which the agreement applies are pending on the date of filing of modified return
in accordance with the provisions of sub-section (1), the Assessing Officer shall proceed to
complete the assessment or reassessment proceedings in accordance with the agreement taking
into consideration the modified return so furnished.
5. Notwithstanding anything contained in section 153 or section 153B or section 144C,—

a. the order of assessment, reassessment or recomputation of total income under sub-section (3)
shall be passed within a period of one year from the end of the financial year in which the
modified return under sub-section (1) is furnished;
b. the period of limitation as provided in section 153 or section 153B or section 144C for
completion of pending assessment or reassessment proceedings referred to in sub-section (4)
shall be extended by a period of twelve months.

APA SATC DD.13
QUESTION & ANSWER
1. Binding effect of Advance Pricing Agreement (APA).

Solution:
Binding effect of Advance Pricing Agreement(APA) – Section 92CC:
Advance Pricing Agreement (APA) includes determination of Arm’s Length Price (ALP) or specifies the
manner in which ALP is to be determined. ALP can be determined as per any method prescribed under
section 92C for determination of ALP along with necessary adjustments and variations.
APA is binding on the person entering into international transaction (taxpayer) and the Commissioner of
Income Tax including income-tax authorities subordinate to him. APA is binding only in respect of transaction
in relation to which the APA has been entered into, not binding if there is change in law or facts having a
bearing on such APA.
CBDT is empowered to declare an APA as void ab initio if APA has been obtained by fraud or
misrepresentation of facts. Also as provided in the law, non compliance with terms of APA including ‘critical
assumptions’ may lead to cancellation of the APA. Transactions covered under APA are not subject to regular
audit by Transfer Pricing Officer.
APA is valid for a period specified in APA, but not to exceed 5 consecutive financial years. APA can be
extended/renewed for further period of up to 5 years. Application for APA can be withdrawn any time before
finalisation of terms of APA.
2. Impermissible Avoidance Arrangement.

Answer:
Impermissible Avoidance Arrangement
As per section 96, an impermissible avoidable arrangement means an arrangement, the main purpose
of which is to obtain a tax benefit.
It –
a) Creates rights or obligations, which are not ordinarily created between persons dealing at arm’s length ;
b) Results, directly or indirectly, in the misuse, or abuse, of the provisions of the Act;
c) Lacks commercial substance or is deemed to lack commercial substance under section 97 ;
d) Is entered into, or carried out, by means, or in a manner, which are not ordinarily employee for bona fide
purposes.
An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered
into, or carried out, for the main purpose of obtaining a tax benefit.

APA SATC DD.14
3. "Rule 10MA(2)(iv) of Income-tax Rules requires that the application for rollback provision, in respect
of an international transaction, has to be made by the applicant for all the rollback years in which the
said international transaction has been undertaken by the applicant.
You are required in this context to explain whether the rollback has to be requested for all the four
years or applicant can choose the years out of the block of four years.
Solution:
Subject to the provisions of Rule 10MA, the agreement may provide for determining the arm’s length price or
specifying the manner in which arm’s length price shall be determined in relation to the international
transaction entered into by the person during the rollback year.
The relevant limb of the rule mandates that the applicability of rollback provision, in respect of an international
transaction, has to be requested by the applicant for all the rollback years in which the said international
transaction has been undertaken by the applicant
As per Circular No.10/2015 dated 10.06.2015 issued by the CBDT, the applicant does not have the option to
choose the years for which it wants to apply for rollback in application filed under rule 10MA(2)(iv) of Income-
tax Rules, 1962.
The applicant has to either apply for all the four years or not apply at all.
However, if the covered international transaction(s) did not exist in a rollback year or there is some
disqualification in a rollback year, then, the applicant can apply for rollback for less than four years.
Accordingly, if the covered international transaction(s) were not in existence during any of the rollback years,
the applicant can apply for rollback for the remaining years.
Similarly, if in any of the rollback years for the covered international transaction(s), the applicant fails the test
of the rollback conditions contained in various provisions, then, it would be denied the benefit of rollback
for that rollback year.
However, for other rollback years, it can still apply for rollback.

TRANSFER PRICING SATC E.1
CHAPTER – X - TRANSFER PRICING

Section Particulars
92 Computation of Income from IT (including SDT) having regard to Arm’s Length Price
92A Meaning of Associated Enterprise (AE)
92B Meaning of International Transactions (ITs)
92BA Meaning of Specified Domestic Transactions (SDT)
92C Computation of Arm’s Length Price (ALP)
92CA Reference to Transfer Pricing Officer (TPO)
92CB Power of Board to Make Safe Harbour Rules [Rules 10TA to 10TG]
92CC Advance Pricing Agreement [APA]
92CD Effect to Advance Pricing Agreement
92CE Secondary Adjustments in certain cases
92D Maintenance and Keeping of information & document by Persons entering into an IT or SDT
92E Report from an Accountant – Form 3CEB
92F Various Definitions
94A Special measures in respect of transactions with persons located in Notified Jurisdictional
Area
94B Limitation on interest deduction in certain cases

Intro. & International Transactions

The Finance Act 2001 has introduced detailed provisions relating to transfer pricing, requiring all ‘International
Transactions’ between ‘Associated Enterprises’ to be at arm’s length. These provisions are applicable with effect
from 1 April 2001.
1. Section 92: Computation of income from international transaction having regard to arm’s length
price.
1) Any Income or allowances for any expenses or interest arising from an international transaction
or specified domestic transaction shall be computed having regard to the arm’s length price.
2) Where in an international transaction or specified domestic transaction, two or more associated
enterprises enter into a mutual agreement for the allocation or apportionment of, or any
contribution to, any cost or expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided to any one or more of such enterprises, the cost or
expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall
be determined having regard to the arm’s length price of such benefit, service or facility, as the
case may be.
3) Any allowance for an expenditure or interest or allocation of any cost or expense or any income
in relation to the specified domestic transaction shall be computed having regard to the arm's length
price.
4) The provisions of this section shall not apply in a case where the:
computation of income; or
determination of the allowance for any expense or interest; or
determination of any cost or expense allocated or apportioned,
has the effect of reducing the income chargeable to tax or increasing the loss.
2. With reference to the transfer pricing provisions of the Income Tax Act, 1961, answer the following
questions:
i. When shall a transaction be considered as an international transaction?
ii. In what circumstances shall, a transaction entered into with a person other than an associated
enterprise, be deemed as a transaction between two associated enterprises?
Solution:
i. As per Section 92B of the Income Tax Act, 1961 an international transaction is one which
satisfies the following criteria:
1. A transaction between two or more associated enterprise, either or both of whom are non-
residents;
2. It is in the nature of purchase, sale or lease of tangible or intangible property, or provision of
services, lending/borrowing money or any other transaction having a bearing on the profits,
income, losses or assets of such enterprise;
3. It includes a transaction in the nature of a mutual agreement, or arrangement between two or
more associated enterprise for the allocation or apportionment of any contribution, cost or
expense incurred (or to be incurred) in connection with a benefit, service or facility provided (or to
be provided) to any one or more of such enterprise
ii. As per the provisions of Section 92B(2) of the Income Tax Act, 1961 a transaction entered into by
an enterprise with a person other than the associated enterprise, shall for the purposes of sub-
Section (1), be deemed to be an international transaction entered into between two associated
enterprise if:
1. There exists a prior agreement in relation to the relevant transaction between such other person
and the associated enterprise; or
2. The terms of the relevant transaction are determined in substance between such other person
and the associated enterprise.
where the enterprise or the associated enterprises or both of them are non-residents irrespective
of whether such other person is a non-resident or not.

3. Specify the scope of international transaction. Also mention the elements which are included in the
Intangible property.
Solution
"International transaction" shall include-
i. the purchase, sale, transfer, lease or use of tangible property including building, transportation
vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing;
ii. the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership
or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences,
franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property
right, exterior design or practical and new design or any other business or commercial rights of similar
nature;
iii. capital financing, including any type of long-term or short-term borrowing, lending or guarantee,
purchase or sale of marketable securities or any type of advance, payments or deferred payment or
receivable or any other debt arising during the course of business;
iv. provision of services, including provision of market research, market development, marketing
management, administration, technical service, repairs, design, consultation, agency, scientific
research, legal or accounting service;
v. a transaction of business restructuring or reorganisation, entered into by an enterprise with an
associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or
assets of such enterprises at the time of the transaction or at any future date;
"Intangible property" shall include-

i. marketing related intangible assets, such as, trademarks, trade names, brand names, logos;
ii. technology related intangible assets, such as, process patents, patent applications, technical
documentation such as laboratory notebooks, technical know-how;
iii. artistic related intangible assets, such as, literary works and copyrights, musical compositions,
copyrights, maps, engravings;
iv. data processing related intangible assets, such as, proprietary computer software, software
copyrights, automated databases, and integrated circuit masks and masters;
v. engineering related intangible assets, such as, industrial design, product patents, trade secrets,
engineering drawing and schematics, blueprints, proprietary documentation;
vi. customer related intangible assets, such as, customer lists, customer contracts, customer
relationship, open purchase orders;
vii. contract related intangible assets, such as, favourable supplier, contracts, licence agreements,
franchise agreements, non-compete agreements;
viii. human capital related intangible assets, such as, trained and organised work force, employment
agreements, union contracts;
ix. location related intangible assets, such as, leasehold interest, mineral exploitation rights,
easements, air rights, water rights;
x. goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill,
personal goodwill of professional, celebrity goodwill, general business going concern value;
xi. methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates,
customer lists, or technical data;
xii. any other similar item that derives its value from its intellectual content rather than its physical
attributes.

4. A Ltd., an Indian company, engaged in the business of developing and manufacturing industrial
components. Its subsidiary, B Ltd., a US company supplies technical information and offers technical
support to A Ltd. for developing goods, for a consideration of $50,000 p.a. If B Ltd. normally charges
$75,000 p.a. for the same and the income of A Ltd. is ` 85,00,000 after deducting the payment made to
B Ltd., calculate taxable income of A Ltd.
Answer: Price charged for Comparable Uncontrolled Transaction is $75,000

Particulars Amount
Price actually paid by A Ltd. $50,000
Less: Price charged Normally $75,000
Decremental Profit on adopting Arm’s Length Price $25,000
Total Income before adjusting for differences due to Arm’s Length Price ` 85,00,000
Add: Difference on Account of adopting Arm’s Length Price Nil
Total Income of A Ltd. ` 85,00,000
Note: Section 92(3) provides that taxable income cannot be reduced on applying Arm’s Length Price. So,
difference on account of Arm’s Length Price is ignored.
5. When is an uncontrolled transaction comparable to an International Transaction?
Answer:
The comparability of an international transaction with an uncontrolled transaction shall be judged
with reference to the following:
a) Specific characteristics of the property transferred or services provided in either transaction,
b) Functions performed, taking into account assets employed and risks assumed by the respective
parties,
c) Contractual terms of the transactions which lay down the manner of division of responsibilities, risks
and benefits between the parties thereto, and
d) Market conditions including geographical location, size of the markets, regulations and laws of the
Government, costs of labour and capital in the markets, overall economic development, level of
competition and whether the markets are wholesale or retail.
An uncontrolled transaction shall be comparable to an international transaction if -

a) None of the differences, if any, between the transactions being compared, or between the enterprises
entering into such transactions are likely to materially affect the price or cost charged or paid in or the
profit arising from such transactions in the open market, or
b) Reasonably accurate adjustments can be made to eliminate the material effects of such
differences.
Time period of data compared:

a) The uncontrolled transaction and international transaction should pertain to the same financial year.
b) Data relating to the prior two years could be used, if such data reveals facts which could have an
influence on the determination of transfer prices in relation to the transactions being compared.
6. Briefly describe your understanding on Cross-Border Transactions.
Answer:
Cross border transaction means a transaction in an international or foreign security, or a transaction in a
domestic security in which at least one of the counterparties is located outside the home country of the
domestic security.
Cross Border Transaction services means services related to transaction which involve two or more
countries. In India there are two Acts which primarily seems to show concern when a person (Indian Resident
or Foreign Resident) undertakes cross border transactions viz.
a) Foreign Exchange Management Act, 1999
b) Income Tax Act, 1961
Therefore, it is imperative that a person needs to deal with both the above mentioned Acts to enter into a
cross-border transaction.

7. You are a tax consultant to an overseas manufacturing company which is going to start a permanent
establishment in India with manufacturing facility in Madurai District of Tamilnadu. Prepare a report
for the Chairman of the company highlighting latest transfer pricing provisions applicable in India.
[ICMAI WORK BOOK]
Answer:
The increasing participation of multinational groups in economic activities in the country has given rise to new
and complex issues emerging from transactions entered into between two or more enterprises belonging to
the same multinational group. The profits derived by such enterprises carrying on business in India can be
controlled by the multinational group, by manipulating the prices charged and paid in such intra-group
transactions, thereby, leading to erosion of tax revenues.
In other words, the course of business between a resident person and an associated non-resident or not
ordinarily resident person, is so arranged that the resident makes either no profit or less than the ordinary
profit in that business. Such an arrangement would deprive that Indian revenue of the tax which would
otherwise be payable by the resident.
With a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable
profits and tax in India, in case of such multinational enterprise, new set of special provisions relating to
avoidance of tax have been introduced under chapter X in the Income tax Act.
These provisions relate to computation of income from international transaction having regard to arm’s length
price, meaning of associated enterprises, meaning of international transaction, determination of arm’s length
price, keeping and maintaining of information and documents by persons entering into international
transaction, furnishing of a report from an accountant by persons entering into such transactions.
Transfer pricing provisions are enumerated here-in-below for your ready reference:
Computation of income from international transaction having regard to arm’s length price [Sec. 92]
The provisions are as under:
Any income arising from an international transaction shall be computed having regard to the arm’s
length price
The allowance for any expense or interest arising from an international transaction or specified domestic
transaction1 shall also be determined having regard to the arm’s length price.
Where in an international transaction or specified domestic transaction,

 two or more associated enterprises
 enter into a mutual agreement or arrangement for the apportionment of, or any contribution to,
any cost incurred
 in connection with a benefit, service or facility provided to any such enterprises,
the cost apportioned to (contributed by), any such enterprise shall be determined having regard to the
arm’s length price of such benefit, service or facility.
The provisions (in any of aforesaid situation) shall not apply in a case where the computation of income
or the determination of the allowance for any expense or interest or the determination of any cost or
expense allocated or contributed has the effect of reducing the income chargeable to tax or
increasing the loss, as the case may be, computed on the basis of entries made in the books of
account in respect of the previous year in which the international transaction or specified domestic
transaction was entered into.
Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to
the specified domestic transaction shall be computed having regard to the arm’s length price.

8. Explain the importance of provision for transfer pricing.
[ICMAI WORK BOOK]
Answer:
Transfer pricing mechanism is very important for following reasons:
1. Helpful in correct pricing of Product/Services:

An effective transfer pricing mechanism helps an organization in correctly pricing its product and
services. Since in any organization, transaction between associated parties occurs frequently, it is
necessary to value all transaction correctly so that the final product/ services may be priced correctly.
2. Helpful in Performance Evaluation:

For the performance evaluation of any entity, it is necessary that all economic transactions are
accounted. Calculation of correct transfer price is necessary for accounting of inter related transaction
between two Associated enterprises.
3. Helpful in complying Statutory Legislations:

Since related party transaction have a direct bearing on the profitability or cost of a company, the
effective transfer pricing mechanism is very necessary. For example, if the related party transactions are
measured at less value, one unit may incur loss and other unit may earn undue profit. This will result in
income tax imbalances at both parties end. Similarly, wrong transfer pricing may lead to wrong payment
of excise duty, custom duty /sales tax (if applicable) as well.
9. Define Arm’s length price
Answer:
Arm’s length price means a price which is applied or proposed to be applied in a transaction between
persons other than associated enterprises (i.e., unrelated person, resident or non-resident), in uncontrolled
conditions [Sec. 92F(ii)]
10. Define Enterprise

[ICMAI WORK BOOK]
Answer:
Enterprise means a person (including a permanent establishment of such person) who is, or has been, or is
proposed to be, engaged:
in any activity, relating to the production, storage, supply, distribution, acquisition or control of:
a. articles or goods; or
b. know-how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature; or
c. any data, documentation, drawing or specification relating to any patent, invention, model,
design, secret formula or process, of which the other enterprise is the owner or in respect of
which the other enterprise has exclusive rights; or
in the provision of services of any kind; or
in carrying out any work in pursuance of a contract; or
in investment, or providing loan; or
in the business of acquiring, holding, underwriting or dealing with shares, debentures or other
securities of any other body corporate,
whether such activity or business is carried on, directly or through one or more of its units or divisions
or subsidiaries; or whether such unit or division or subsidiary is located at the same place where the
enterprise is located or at a different place or places.
11. Define Permanent establishment
Answer:
Permanent establishment includes a fixed place of business through which the business of the enterprise
is wholly or partly carried on [Sec. 92F(iiia)]

Maintenance and keeping of information and document by persons entering into an
international transaction or specified domestic transaction [Section 92D]
Following Section 92D shall be substituted for the existing Section 92D by the Finance (No. 2) Act,
2019, w.e.f. AY 2020-21:
1) Every person,—
i. who has entered into an international transaction or specified domestic transaction shall
keep and maintain such information and document in respect thereof as may be prescribed;
ii. being a constituent entity of an international group, shall keep and maintain such
information and document in respect of an international group as may be prescribed.
Explanation.—For the purposes of this clause,-
A. "constituent entity" shall have the meaning assigned to it in clause (d) of sub-section (9)
of Section 286;
B. "international group" shall have the meaning assigned to it in clause (g) of sub-section (9)
of Section 286.
2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the
period for which the information and document shall be kept and maintained under the said sub-
section.
3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under
this Act, require any person referred to in clause (i) of sub-section (1) to furnish any information
or document referred therein, within a period of 30 days from the date of receipt of a notice
issued in this regard:
Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made
by such person, extend the period of 30 days by a further period not exceeding 30 days.
4) The person referred to in clause (ii) of sub-section (1) shall furnish the information and
document referred therein to the authority prescribed under sub-section (1) of Section 286, in
such manner, on or before such date, as may be prescribed.

List the duties of an assessee in respect of International Transactions.
Answer:
A. DOCUMENTS:
Under Rule 10D, every person who has entered into an international transaction shall keep and maintain
the following information and documents:
1. Ownership details: Description of the ownership structure of the assessee enterprise with details of
shares or other ownership interest held therein by other enterprises.
2. Group details: Profile of the multinational group of which the assessee enterprise is a part along with
the name, address, legal status and country of tax residence of each of the enterprises comprised in
the group with whom international transactions have been entered into by the assessee and
ownership linkages among them.
3. Business details: Broad description of the business of the assessee and the industry in which the
assessee operates and of the business of the associated enterprises with whom the assessee has
transacted.
4. International Transaction details: Nature and terms (including prices) of international transactions
entered into with each associated enterprises, details of property transferred or services provided and
the quantum and the value of each such transaction or class of such transaction.
5. Functional details: Description of the functions performed, risks assumed and assets employed or to
be employed by the assessee and by the associated enterprises involved in the international
transaction.
6. Details of factors influencing international transactions: Record of the economic and market
analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the
business as a whole and for each division of product separately, which may have a bearing on the
international transactions entered into by the assessee.
7. Uncontrolled transactions details: Record of uncontrolled transactions taken into account for
analysing their comparability with the international transactions entered into, including a record of the
nature, terms and conditions relating to any uncontrolled transaction with third parties which may be
of relevance to the pricing of the international transactions.
8. Comparability details: Record of the analysis performed to evaluate comparability of uncontrolled
transactions with the relevant international transaction.
9. Details of method selected for Arm’s Length Price: Description of the methods considered for
determining the Arm's Length Price in relation to each international transaction or class of transaction,
the method selected as the most appropriate method along with explanations as to why such method
was so selected and how such method was applied in each case.
10. Details of computation of Arm’s Length Price: Record of the actual working carried out for
determining the Arm's Length Price, including details of the comparable data and financial information
used in applying the most appropriate method and adjustments, if any, which were made to account
for differences between the international transaction and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions.
11. Assumptions: Assumptions, policies and price negotiations, if any, which have critically affected the
determination of the Arm's Length Price.
12. Adjustments: Details of the adjustments, if any, made to transfer price to align them with arm's
length prices determined under these rules and consequent adjustment made to the total income for
tax purposes.
13. Other relevant details: Any other information, data or document, including information or data
relating to the associated enterprise, which may be relevant for determination of the Arm's Length
Price.
B. FRESH DOCUMENTS:
1. No Significant Change: Where an international transaction continues to have effect for more than
one previous year, fresh documentation need not be maintained separately unless there is a
significant change in-
(a) Nature or terms of the international transaction,
(b) Assumptions made,
(c) Any other factor which could influence the transfer price.

2. Significant Change: In case of any significant change, fresh documents required to bring out the
impact of the change on the international transaction should also be maintained.
Non-applicability:
Documents as required above shall not apply in a case where the aggregate value, as recorded in the
books of account, of international transactions entered into by the assessee does not exceed one crore
rupees.
Provided that the assessee shall be required to substantiate, on the basis of material available with him,
that income arising from international transactions entered into by him has been computed in accordance
with section 92.
The information and documents specified above shall be kept and maintained for a period of eight years
from the end of the relevant assessment year.
Section 271AA: Penalty for failure to keep and maintain information and document, etc.,
in respect of certain transactions
Without prejudice to the provisions of Section 270A or Section 271 or Section 271BA, if any person in respect of
an international transaction or specified domestic transaction,-
a. fails to keep and maintain any such information and document as required by sub-section (1) or sub-section
(2) of section 92D;
b. fails to report such transaction which he is required to do so; or
c. maintains or furnishes an incorrect information or document,
the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum
equal to 2% of the value of each international transaction or specified domestic transaction entered into by
such person.
Further, If any person fails to furnish the information and the document as required under sub-section (4)
of section 92D, the prescribed income-tax authority referred to in the said sub-section may direct that such person
shall pay, by way of penalty, a sum of ` 500,000.
Penalty for failure to furnish information or document under section 92D [Section 271G]
If any person who has entered into an international transaction or specified domestic transaction fails to furnish
any such information or document as required by sub-section (3) of Section 92D, the Assessing Officer or the
Transfer Pricing Officer as referred to in Section 92CA or the Commissioner (Appeals) may direct that such
person shall pay, by way of penalty, a sum equal to 2% of the value of the international transaction or
specified domestic transaction for each such failure.
Report from an accountant to be furnished by persons entering into international

transaction or specified domestic transaction [Section 92E]
Every person who has entered into an international transaction or specified domestic transaction during a
previous year shall obtain a report from an accountant and furnish such report on or before the 30th November
of AY in the prescribed form [Form 3CEB] duly signed and verified in the prescribed manner by such
accountant and setting forth such particulars as may be prescribed
Penalty for failure to furnish report under section 92E [Section 271BA]
If any person fails to furnish a report from an accountant as required by Section 92E, the Assessing Officer may
direct that such person shall pay, by way of penalty, a sum of ` 100,000.

Section 286 - Furnishing of report in respect of international group
1. 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
(herein referred to as prescribed authority) in the form and manner, on or before such date, as may
be prescribed,—
a. whether it is the alternate reporting entity of the international group; or
b. the details of the parent entity or the alternate reporting entity, if any, of the
international group, and the country or territory of which the said entities are
resident.
[Director General of Income-tax (Risk Assessment) is the Prescribed Authority]
2. Every parent entity or the alternate reporting entity, resident in India, shall, for every reporting
accounting year, in respect of the international group of which it is a constituent, furnish a report,
to the prescribed authority within a period of 12 months from the end of the said reporting
accounting year (FA 18) on or before the due date specified under sub-section (1) of section 139,
for furnishing the return of income for the relevant accounting year, in the form and manner as may
be prescribed.
3. The report in respect of an international group shall include,—
a. the aggregate information in respect of the amount of revenue, profit or loss before income-tax,
amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated
earnings, number of employees and tangible assets not being cash or cash equivalents, with
regard to each country or territory in which the group operates;
b. the details of each constituent entity of the group including the country or territory in which
such constituent entity is incorporated or organised or established and the country or territory
where it is resident;
c. the nature and details of the main business activity or activities of each constituent entity;
and
d. any other information as may be prescribed.
4. A constituent entity of an international group, resident in India, other than the entity referred to in
sub-section (2), shall furnish the report referred to in the said sub-section, in respect of the
international group for a reporting accounting year within the period as may be prescribed, if the
parent entity is resident of a country or territory,—
a. where the parent entity is not obligated to file the report of the nature referred to in sub-
section (2);
b. with which India does not have an agreement providing for exchange of the report of the
nature referred to in sub-section (2); or

c. there has been a systemic failure of the country or territory and the said failure has been
intimated by the prescribed authority to such constituent entity:
Provided that where there are more than one such constituent entities of the group, resident
in India, the report shall be furnished by any one constituent entity, if,—
a. the international group has designated such entity to furnish the report in accordance with the
provisions of sub-section (2) on behalf of all the constituent entities resident in India; and
b. the information has been conveyed in writing on behalf of the group to the prescribed
authority.
5. Nothing contained in sub-section (4) shall apply, if, an alternate reporting entity of the
international group has furnished a report of the nature referred to in sub-section (2), with the tax
authority of the country or territory in which such entity is resident, on or before the date specified
by that country or territory and the following conditions are satisfied, namely:—
a. the report is required to be furnished under the law for the time being in force in the said
country or territory;
b. the said country or territory has entered into an agreement with India providing for exchange of
the said report;
c. the prescribed authority has not conveyed any systemic failure in respect of the said country or
territory to any constituent entity of the group that is resident in India;
d. the said country or territory has been informed in writing by the constituent entity that it is the
alternate reporting entity on behalf of the international group; and
e. the prescribed authority has been informed by the entity referred to in sub-section (4) in
accordance with sub-section (1).
6. The prescribed authority may, for the purposes of determining the accuracy of the report
furnished by any reporting entity, by issue of a notice in writing, require the entity to produce
such information and document as may be specified in the notice within thirty days of the date of
receipt of the notice:
Provided that the prescribed authority may, on an application made by such entity, extend the
period of thirty days by a further period not exceeding thirty days.
7. The provisions of this section shall not apply in respect of an international group for an
accounting year, if the total consolidated group revenue, as reflected in the consolidated financial
statement for the accounting year preceding such accounting year does not exceed the amount,
as may be prescribed [` 5,500 Crores].
8. The provisions of this section shall be applied in accordance with such guidelines and subject to
such conditions, as may be prescribed.
For the purposes of this section:
a. "Agreement" means a combination of all of the following agreements, namely:—
i. an agreement entered into under sub-section (1) of section 90 or sub-section (1) of section
90A; and
ii. an agreement for exchange of the report referred to in sub-section (2) and notified by the
Central Government;
b. "Alternate Reporting Entity" means any constituent entity of the international group that has
been designated by such group, in the place of the parent entity, to furnish the report of the
nature referred to in sub-section (2) in the country or territory in which the said constituent
entity is resident on behalf of such group;
c. "Constituent Entity" means,—
i. any separate entity of an international group that is included in the consolidated financial
statement of the said group for financial reporting purposes, or may be so included for the
said purpose, if the equity share of any entity of the international group were to be listed on a
stock exchange;
ii. any such entity that is excluded from the consolidated financial statement of the international
group solely on the basis of size or materiality; or
iii. any permanent establishment of any separate business entity of the international group
included in clause (i) or clause (ii), if such business unit prepares a separate financial
statement for such permanent establishment for financial reporting, regulatory, tax
reporting or internal management control purposes;
d. "consolidated financial statement" means the financial statement of an international group in

which the assets, liabilities, income, expenses and cash flows of the parent entity and the
constituent entities are presented as those of a single economic entity;
e. "international group" means any group that includes,—
i. two or more enterprises which are resident of different countries or territories; or
ii. an enterprise, being a resident of one country or territory, which carries on any business
through a permanent establishment in other countries or territories;

f. "parent entity" means a constituent entity, of an international group holding, directly or
indirectly, an interest in one or more of the other constituent entities of the international group,
such that,—
i. it is required to prepare a consolidated financial statement under any law for the time being in
force or the accounting standards of the country or territory of which the entity is resident;
or
ii. it would have been required to prepare a consolidated financial statement had the equity
shares of any of the enterprises were listed on a stock exchange,
and, there is no other constituent entity of such group which, due to ownership of any interest,
directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated
financial statement,
g. "reporting entity" means the constituent entity including the parent entity or the alternate
reporting entity, that is required to furnish a report of the nature referred to in sub-section (2);
h. "accounting year" means,-
i. a previous year, in a case where the parent entity or alternate reporting entity is resident in
India; or
ii. an annual accounting period, with respect to which the parent entity of the international group
prepares its financial statements under any law for the time being in force or the applicable
accounting standards of the country or territory of which such entity is resident, in any other
case;
Clarification regarding definition of the “accounting year” in section 286 of the Act
Section 286 of the Act contains provisions relating to specific reporting regime in the form of Country-
by-Country Report (CbCR) in respect of an international group. It provides that every parent entity or
the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect
of the international group of which it is a constituent, furnish a report, to the prescribed authority
within a period of 12 months from the end of the said reporting accounting year, in the form and
manner as may be prescribed. Several concerns have been expressed that in case of an alternate
reporting entity (ARE) resident in India whose ultimate parent entity is not resident in India, the
accounting year would always be the accounting year applicable in the country where such ultimate
parent entity is resident and cannot be the previous year of the entity resident in India.
Accordingly, it has been requested that this unintended anomaly as regards the interpretation of
accounting year in case of ARE, resident in India may be removed.
In order to address such concerns and to bring clarity in law, section 286 has been amend so as to
provide that the accounting year in case of the ARE of an international group, the parent entity of
which is not resident in India, the reporting accounting year shall be the one applicable to such
parent entity.

Penalty for failure to furnish report or for furnishing inaccurate report under section 286 in
respect of international group [Section 271GB]:
1) If any reporting entity referred to in section 286, which is required to furnish the report referred to
in sub-section (2) of the said section, in respect of a reporting accounting year, fails to do so, shall
pay, by way of penalty as under:
(a) ` 5,000 for every day for which the failure continues if the period of failure does not exceed
one month;
(b) ` 15,000 for every day for which the failure continues beyond the period of one month.
2) Where any reporting entity referred to in section 286 fails to produce the information and
documents within the period allowed under sub-section (6) of the said section, the prescribed
authority may direct that such entity shall pay, by way of penalty, a sum of ` 5,000 for every day
during which the failure continues, beginning from the day immediately following the day on
which the period for furnishing the information and document expires.
3) If the failure as aforesaid continues after an order has been served on the entity, directing it to
pay the penalty in (1) or (2) above, then, the prescribed authority may direct that such entity shall
pay, by way of penalty, a sum of ` 50,000 for every day for which such failure continues
beginning from the date of service of such order.
4) Where a reporting entity referred to in Section 286 provides inaccurate information in the
report furnished in accordance with sub-section (2) of the said section and where-
(i) the entity has knowledge of the inaccuracy at the time of furnishing the report but fails to
inform the prescribed authority; or
(ii) the entity discovers the inaccuracy after the report is furnished and fails to inform the
prescribed authority and furnish correct report within a period of fifteen days of such
discovery; or
(iii) the entity furnishes inaccurate information or document in response to the notice issued
under subsection (6) of section 286,
then, the prescribed authority may direct that such person shall pay, by way of penalty, a sum of
` 500,000.

TRANSFER PRICING SATC EE.1
QUESTION & ANSWER
1. When is transaction treated as an international transaction as per Section 92CB?
Answer:
International transaction
As per section 92B, an international transaction is one which satisfies the following Criteria -
(i) A transaction between two or more associated enterprises, either or both of whom are nonresidents;
(ii) It is in the nature of purchase, sale or lease of tangible or intangible property, or provision of services,
lending/borrowing money or any other transaction having a bearing on the profits, income, losses or
assets of such enterprises;
(iii) It includes a transaction in the nature of a mutual agreement, or arrangement between two or more
associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense
incurred (or to be incurred) in connection with a benefit, service or facility provided (to be provided) to any
one or more of such enterprises.
2. Outline the legislative objective of bringing into existence the provisions relating to transfer pricing in
relation to international transactions?
[CMA FINAL DT – JUN 2017 EXAM]
Solution:
The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by
controlling prices in intra-group transactions prompted the Government to set up an Expert Group to examine
the issues relating to transfer pricing.
There is a possibility that two or more entities belonging to the same multinational group can fix up their prices
for goods and services and allocate profits among the enterprises within the group in such a way that there
may be either no profit or negligible profit in the jurisdiction which taxes such profits and substantial profit in
the jurisdiction which is tax haven or where the tax liability is minimum. This may adversely affect-a country's
share of due revenue.
The increasing participation of multinational groups in economic activities in India has given rise to new and
complex issues emerging from transactions entered into between two or more enterprises belonging to the
same multinational group. The profits derived by such enterprises carrying on business in India can be
controlled by the multinational group, by manipulating the prices charged and paid in such intra- group
transactions, which may lead to erosion of tax revenue.
Therefore, transfer pricing provisions have been brought in by the Finance Act, 2001 with a view to provide a
statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in
the case of such multinational enterprises.

TRANSFER PRICING SATC EE.2
Class Notes

AE & DEEMED AE SATC F.1
ASSOCIATED ENTERPRISES & DEEMED AE
1. Define Associated Enterprises & Deemed Associated Enterprises.
Solution:
As per Section 92A of the Income Tax Act, 1961, Associated Enterprises, in relation to another enterprise,
means an enterprise:
i. which participates, directly or indirectly, or through one or more intermediaries, in the management or
control or capital of the other enterprise; or
ii. in respect of which one or more persons who participate, directly or indirectly, or through one or more
intermediaries, in its management or control or capital, are the same persons who participate, directly or
indirectly, or through one or more intermediaries, in the management or control or capital of the other
enterprise
Further, two enterprises shall be deemed to be associated enterprises, if, at any time during the
previous year, any of the following conditions are attracted –
A. Shareholding: One enterprise holds, directly or indirectly, shares carrying not less than 26% of
shares/voting power in the other enterprise.
B. Shareholding by same person: Any person or enterprise holds, directly or indirectly, shares carrying not
less than 26% of the voting power in each of such enterprises, or
C. Loans: A loan advanced by one enterprise to the other enterprise constitutes not less than 51% of the
book value of the total assets of the other enterprise, or
D. Guarantee: One enterprise guarantees not less than 10% of the total borrowings of the other enterprise,
or
E. Management Control: More than half of the board of directors or members of the governing board, or
one or more executive directors or executive members of the governing board of one enterprise, are
appointed by the other enterprise, or
F. Control by same person: More than half of the directors or members of the governing board, or one or
more of the executive directors or members of the governing board, of each of the two enterprises are
appointed by the same person or persons, or
G. Know-how relationship: The manufacture or processing of goods or articles or business carried out by
one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, or any data, documentation,
drawing or specification relating to any patent, invention, model, design, secret formula or process, of
which the other enterprise is the owner or holder of exclusive rights, or
H. Purchase relationship: 90% or more of the raw materials and consumables, required for the
manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other
enterprise, or by persons specified by the other enterprise and the prices and other conditions relating to
the supply are influenced by such other enterprise, or
I. Sale relationship: The goods or articles manufactured or processed by one enterprise, are sold to the
other enterprise or to persons specified by the other enterprise and the prices and other conditions
relating thereto are influenced by such other enterprise, or
J. Control through relatives of individual: Where one enterprise is controlled by an individual, the other
enterprise is also controlled by such individual or his relative or jointly by such individual and relative of
such individual, or
K. Control through members of HUF: Where one enterprise is controlled by HUF, the other enterprise is
controlled by a member of such HUF, or by a relative of a member of such HUF, or jointly by such
member and his relative, or
L. Control through Firms etc.: Where one enterprise is a Firm/AOP/BOI, the other enterprise holds not
less than 10% interest in such Firm /AOP/BOI, or
M. Other relationships: There exists between two enterprises, any relationship or mutual interest, as
prescribed.
2. The top management of a big multinational group of companies, in the context of framing global tax
planning strategy, wants to know whether transfer pricing provisions under the. Income-tax Act, 1961
will be attracted in respect of the following transactions:
(i) Provisions of scientific research services by foreign company to its Indian subsidiary, J Ltd.
(ii) Lease of equipment by K Ltd., an Indian company, from T Inc., a Singapore company. T Inc. is a
"specified foreign company" as defined in section 115BBD in relation to K Ltd.
Your considered opinion is sought on the above.
Answer:
International transactions
(i) The scope of term "international transaction" has been widened by the Finance Act, 2012 by insertion of
Explanation to section 92B. According to the said Explanation, international transaction includes, inter
alia, provision of scientific research services.
The foreign company and its Indian subsidiary are deemed to be associated enterprises, since the foreign
holding company of J Ltd., fulfils the condition of holding shares carrying not less than 26% of the voting
power in Indian subsidiary.
Since the provision of scientific research services by the foreign company to Indian company, is an
"international transaction" between associated enterprises, transfer pricing provisions are attracted in this
case.
(ii) Lease of tangible property fails within the scope of "international transaction". Tangible property includes
equipment. T Inc. is a specified foreign company in relation to K Ltd. Therefore, the condition of K Ltd.
holding shares carrying not less than 26% of the voting power in T Inc is satisfied. Hence, T inc, and K
Ltd. Are associated enterprises.
Therefore, lease of equipment by K Ltd., an Indian company, from T Inc., a foreign company is an
international transaction between associated enterprises, and consequently, the provisions of transfer
pricing are attracted in this case.
3. In the context of transfer pricing provisions, discuss whether the following are associated
enterprises of R Ltd. an Indian company:
(i) Goods are sold to N & Co., a firm based in Singapore; R Ltd. is a partner in this firm with 8%
share;
(ii) There are 8 directors in N Inc., a company at USA. R Ltd. holds enough clout to appoint five
directors; will your answer change if only 3 directors can be appointed?
Answer:
(i) To be treated as associated enterprise, R Ltd. should hold a minimum of 10% share in N & Co., a non-
resident entity. Since only 8% share is held, N & Co., it is not an associate enterprise of R Ltd.
(ii) R Ltd. and N Inc. are associated enterprises if more than half of the directors or members of the
governing board, or one or more of the executive directors or executive members of the governing board
of R Ltd. are appointed by N Inc. or vice versa.
Since 5 of the 8 directors can be appointed by R Ltd., N Inc. is its associated enterprise.
The answer will change since the above requirement is not met. If 4 or lesser number of directors alone can
be appointed, N Inc. and R Ltd. are not associated enterprises.
4. Anush Motors Ltd., an Indian company declared income of ` 300 crores computed in accordance with
Chapter IV-D but before making any adjustments in respect of the following transactions for the year
ended on 31.3.2020:
(i) 10,000 cars sold to Rida Ltd. which holds 30% shares in Anush Motors Ltd. at a price which is less
by $ 200 each car than the price charged from Shingto Ltd.
(ii) Royalty of $ 1,20,00,000 was paid to Kyoto Ltd. for use of technical know-how in the
manufacturing of car. However, Kyoto Ltd. had provided the same know-how to another Indian
company for $ 90,00,000.
(iii) Loan of Euro 1000 crores carrying interest @ 10% p.a. advanced by Dorf Ltd., a German company,
was outstanding on 31.3.2020. The total book value of assets of Anush Motors Ltd. on the date
was ` 90,000 crores. The said German company had also advanced a loan of similar amount to
another Indian company @ 9% p.a. Total interest paid for the year was EURO 100 crores.
Explain in brief the provisions of the Act affecting all these transactions and compute the income of
the company chargeable to tax for AY 2020-21 keeping in mind that the value of 1$ and of 1 EURO was
` 63 and ` 84, respectively, throughout the year.

Answer
Any income arising from an international transaction, where two or more “associated enterprises” enter into a
mutual agreement or arrangement, shall be computed having regard to arm’s length price as per the
provisions of Chapter X of the Act.
Section 92A defines an “associated enterprise” and sub-section (2) of this section speaks of the
situations when the two enterprises shall be deemed to associated enterprises. Applying the
provisions of section 92A(2) to the given facts, it is clear that “Anush Motors Ltd.” is associated with
:-
(i) Rida Ltd. as per section 92A(2)(a), because this company holds shares carrying more than 26% of the
voting power in Anush Motors Ltd.;
(ii) Kyoto Ltd. as per section 92A(2)(g), since this company is the sole owner of the technology used by
Anush Motors Ltd. in its manufacturing process;
(iii) Dorf Ltd. as per section 92A(2)(c), since this company has financed an amount which is more than 51% of
the book value of total assets of Anush Motors Ltd.
The transactions entered into by Anush Motors Ltd. with different companies are, therefore, to be adjusted
accordingly to work out the income chargeable to tax for the A.Y. 2020-21.
Particulars ` (in crores)

Income of Anush Motors Ltd. as computed under Chapter IV-D, prior to
adjustments as per Chapter X 300.00
Add: Difference on account of adjustment in the value of
international transactions:
(i) Difference in price of car @ $ 200 each for 10,000 cars
($ 200 x 10,000 x 63) 12.60
(ii) Difference for excess payment of royalty of $ 30,00,000
($ 30,00,000 x 63) [See Note below] 18.90
(iii) Difference for excess interest paid on loan of EURO 1000
crores (84*1000*1/100) 840.00
Total Income 1,171.50
The difference for excess payment of royalty has been added back presuming that the manufacture of cars by
Anush Motors Ltd is wholly dependent on the use of know-how owned by Kyoto Ltd.
Note: It is presumed that Anush Motors Ltd. has not entered into an Advance Pricing Agreement or opted to
be subject to Safe Harbour Rules.
5. Apollo Ltd. is an Indian company which is a 100% subsidiary of Zorrelo Ltd., a foreign company.
Zorrelo Ltd. sells its products to Apollo Ltd. at $50 per unit. At the same time, it sells its products to
another company Yatchilo Ltd. in India at $70 per unit. Total income of Apollo Ltd. is ` 14,00,000 after
making payment for 200 units @ $50 ($1 = ` 45). Apollo Ltd. has deducted tax at source while making
payment to Zorrelo Ltd. Compute 'arm's length price' and 'taxable income' of Apollo Ltd. and Zorrelo
Ltd. assuming that Yatchilo Ltd. has purchased 100 units @ $70 ($1 = ` 45).
Answer:
Both Apollo Ltd. and Zorrelo Ltd. are associated enterprises since Apollo Ltd. is wholly owned subsidiary of
Zorrelo Ltd. Therefore, the transaction between Apollo Ltd. and Zorrelo Ltd. is an international transaction
and its taxation will be governed by transfer pricing law.
As per Section 92, the provisions of transfer pricing will not apply where adoption of arm's length price results
in reduction of taxable income or increase in loss computed as per books of account for previous year in
which international transaction was entered.
In the given case, if ALP of US$ 70 per unit charged for sales made to Yatchilo Ltd. in India (a comparable
uncontrolled transaction) is adopted, then it will result in reduction in taxable income of Apollo Ltd., hence,
the arm's length price will not be adopted. Accordingly, the taxable income of M/s. Apollo Ltd. = 14 lakh (as
already computed).
It appears that no part of the income of Zorrelo Ltd. accrues or arises in India, as merely by having subsidiary
company in India (viz. Apollo Ltd.), no business connection cannot be said to exist, more so, when the
transactions between Zorrelo Ltd. and Apollo Ltd. relate only to purchase or sale of goods. Hence, its taxable
income in India = NIL. It can claim refund of tax deducted at source.

6. Indica Ltd., an Indian Company supplied steel structures to its holding company- Rupert Ltd., UK
during the previous year 2019-20. Indica Ltd also supplied the same product to another UK based
company, Vincent Ltd, an unrelated entity. The transactions with Rupert Ltd are priced at Euro 500
per MT (FOB), whereas the transactions with Vincent Ltd., are priced at Euro 800 per MT (CIF).
Insurance and Freight amounts to Euro 300 per MT. Compute the Arm’s Length Price for the
transaction with Rupert Ltd.
Solution:
In the given situation, Indica Ltd, the Indian Company supplied steel structures to its holding company-
Rupert Ltd. Since, the foreign company, Rupert Ltd., holds more than 26% shares in Indica Ltd, Indica Ltd
and Rupert Ltd, shall be deemed to be associated enterprises, within the meaning of Section 92A of the
Income Tax Act, 1961.
As Indica Ltd. supplies similar product to an unrelated entity- Vincent Ltd, UK, the transactions between
Indica Ltd., and Vincent Ltd, can be considered as comparable uncontrolled transactions for the purpose of
determining the arm’s length price of the transactions between Indica Ltd., and Rupert Ltd. Comparable
uncontrolled Price Method of determination of Arm’s Length Price would be applicable in this case.
Transactions with Rupert Ltd. are on FOB Basis, whereas transactions with Vincent Ltd. are on CIF basis.
This difference has to be adjusted before comparing the prices.
Particulars Amount (in Euro)

Price per MT of steel structures to Vincent Ltd. 800
Less: Cost of insurance and freight per MT 300
Adjusted Price per M.T 500
Since the adjusted price for Vincent Ltd., UK and the price fixed for Rupert Ltd are the same, the arm’s length
price is Euro 500 per MT. Since, the sale price to related party (i.e. Rupert Ltd.) and unrelated party is the
same, the transaction with related party Rupert Ltd, has also been carried at arm’s length price.
7. Secure Ltd., an Indian company, is engaged in manufacturing electronic components. 74% of the
shares of the company are held by Secure Inc., incorporated in USA. Secure Ltd. has borrowed funds
from Secure Inc. at LIBOR plus 150 points. The LIBOR prevalent at the time of borrowing is 4% for
US$. The borrowings allowed under External Commercial Borrowings Guidelines issued under the
Foreign Exchange Management Act are LIBOR plus 200 basis points. Discuss whether the borrowing
made by Secure Ltd. is at arm’s length (‘LIBOR’ means London Inter Bank Offer Rate).
Solution:
One of the methods for determination of arm’s length price in an international transaction is Comparable
Uncontrolled Price (CUP) Method. Under the CUP Method, the price charged or paid for property transacted
or services rendered in comparable uncontrolled transaction, or a number of such transactions, is identified.
Such price is adjusted to account for differences, if any, between the international transaction and the
comparable uncontrolled transaction or between the enterprises entering into such transactions, which could
materially affect the price in the open market. The adjusted price so arrived at is taken to be an arm’s length
price in respect of the property transferred or services provided in the international transaction.
Secure Inc., USA and Secure Ltd., the Indian Company shall be deemed to be associated enterprises, since
the former holds more than 26% voting power in the latter.
The arm’s length rate of interest can be determined by using the CUP Method having regard to the rate of
interest on External Commercial Borrowing permissible as per Guidelines issued under the Foreign
Exchange management Act, 1999.
The interest rate permissible is LIBOR plus 200 basis points i.e., 4% + 2% = 6%, which can be taken as the
arm’s length rate. The interest rate applicable on the borrowing by Secure Ltd., India from Secure Inc. USA,
is LIBOR plus 150 basis points i.e., 4% + 1.5% = 5.5%. Since the rate of interest, (5.5%) is less than the
arm’s length rate of 6%, the borrowing made by Secure Ltd. is not at arm’s length. However, in this case the
taxable income of Secure Ltd., India would be lower if the arm’s length rate is applied. Hence, no
adjustment is required since the law of transfer pricing will not apply if there is a negative impact on
the existing profits.

8. T Ltd. is an Indian company. It has a manufacturing unit in Kerala. It is a subsidiary company of M
Ltd., a US company. M Ltd. gets royalty from T Ltd. on supply of technical information which is used
by T Ltd. for manufacturing goods in its unit in Kerala.
For similar transfer of technical information to any unrelated entity M Ltd. charges $ 8,000 per year.
However, from T Ltd. it charges (a) $ 11,000 or (b) $ 6,000 per year which is subject to tax deduction
by T Ltd. Exchange rate is ` 49 per US dollar. Income of T Ltd. for the assessment year 2020-21
before deducting payment for technical information to T Ltd. is ` 76,00,000. Find out the income of M
Ltd. and T Ltd.
Answer:
Computation of Income
Situation (a) Situation (b)
Arm's length price ($ 8000 X 49) (a) 3,92,000 3,92,000

Income of T Ltd.
Income 76,00,000 76,00,000
Less: Payment to M Ltd. at recorded price [$11,000 x 49, $6,000 x 49] (b) 5,39,000 2,94,000
Income as per books of account (c) 70,61,000 73,06,000

Add: Recorded price (+)5,39,000 (+)2,94,000
Less: Arm's length price [i.e., (a)] (-) 3,92,000 (-) 3,92,000
Total (d) 72,08,000 72,08,000
Taxable income 72,08,000 73,06,000
[(d), but it cannot be lower than (c), as per section 92(3)]
Income of M Ltd.
Actual payment [i.e., (b)] as tax has been deducted by the payer [see 5,39,000 2,94,000
Note]
As per second proviso to section 92C(4), where income of payer has been recomputed by applying the arm's
length price, then the income of payee associate enterprise shall not be recomputed if tax has been deducted
or is deductible on such payment. Therefore, income of M Ltd. shall not be reduced in situation (a).
9. Sterling Machine Works Ltd., an Indian company declared an income of ` 450 crores. However, this
income was declared before taking into account the following adjustments:
(i) 25,000 machines were sold to Diamond Industries Ltd at a price, which is lower than the normal
transaction price by $250 per car. Diamond Industries Ltd. holds 35% shares in Sterling Machine
Works Ltd.
(ii) Wellington Ltd. was paid a royalty of $2,40,00,000, for use of its technical know- how. However,
another Indian company had paid $2,00,00,000 as royalty to Wellington Ltd. for a similar
transaction. Sterling Machine Works Ltd. was completely dependent on the technical knowhow
supplied by Wellington Ltd., for the manufacture of the machineries.
(iii) Beijing Finance Ltd. extended a loan of Euro 850 crores to Sterling Machine Works Ltd., carrying
an interest @10% p.a, which was outstanding in the books of Sterling Machine Works Ltd. as on
31.03.2020. Beijing Finance Ltd. had extended a loan of similar amount to another Indian
company @ 9% p.a. Total interest paid for the year was Euro 85 crores. The total assets of
Sterling Machine Works Ltd. as on 31.03.2020 was ` 100,000 crores.
The value of 1$ and 1 Euro may be taken to be ` 62 and ` 82 respectively.
With reference to the provisions of the Act, analyse the nature of transactions, and determine the
income of the company chargeable to tax for the A.Y. 2020-21.
Solution:
The provisions of Chapter X of the Act relate to the determination of the Arm‘s Length Price, in case of any
income arising from an international transaction involving two or more associated enterprises. The term
‘Associated Enterprise’ has been defined in Section 92A.
With reference to the provisions of Section 92A of the Income Tax Act 1961, the transactions of Sterling Ltd.
has been analysed as follows:

Transaction of Sterling Ltd. Whether Supporting statutory provision
with transacting party
an associated
enterprise or not?
Diamond Industries Ltd. Associated As per Section 92A(2)(a), a company holding

Enterprise shares carrying more than 26% of the voting
power of another company, shall be deemed to be
“Associated Enterprises”
Wellington Ltd. Associated Wellington Ltd. and Sterling Industries Ltd. have
Enterprise been considered as “Associated Enterprises”, by
virtue of Section 92A.
Beijing Finance Ltd. Associated Beijing Finance Ltd. and Sterling Industries Ltd.
Enterprise have been considered as “Associated
Enterprises”, by virtue of Section 92A(2), since
this company has financed an amount which is
more than 51% of the book value of the total
assets of Sterling Ltd.
Determination of the total income of Sterling Machine Works Ltd. after necessary adjustments
Particulars Amount
(` in crores)
Income of Sterling Machine Works Ltd. prior to adjustments 450.00
Add: Difference arising out of adjustments in the value of international transactions
a) Difference in price of machinery supplied to Diamond Industries Ltd. 38.75
( 25,000 cars x ` 62 x $ 250)
b) Difference in excess payment of royalty to Wellington Ltd. 24.80
($ 40,00,000 x ` 62)
c) Difference in excess interest paid on loan from Beijing Finance Ltd. (Euro 697.00
850 crores x 1/100 x ` 82)
TOTAL INCOME 1210.55

10. State whether the following transaction attract transfer pricing regulations:
(i) Bear Ltd., Delhi has 12 directors of which 7 directors are appointed by Lion Trade SA of France
along with its subsidiaries located in US and Europe.
(ii) DEF LLP, United Kingdom holds 28% voting power in PQR Ltd., Kolkata from 01.04.2020 though
there were transactions exceeding ` 5 crores between them in the previous year 2019-20.
(iii) Dizzy Ltd., Chennai exported semi-finished goods to its subsidiary company Tom Co. Ltd. of
Colombo. The subsidiary Tom Co. Ltd. completed the processing and after packing them
dispatched goods back to Dizzy Ltd. During the financial year 2019-20, the total value of goods
dispatched by Dizzy Ltd. to Tom Co. Ltd. was ` 3 crores and processing charges paid was ` 50
lakhs.
(iv) Karun (HUF) consists of Shir. Karun, two sons and a daughter. It is carrying on business at
Kanpur. Both the sons are in USA owning share capital exceeding 50% in 2 companies. The HUF
purchased raw materials in India and exported the same to both the companies in USA of sons
of Karun.
Answer:
(i) As per section 92A(2)(e) where more than half of the board of directors of the governing board of one
enterprise is appointed by the other enterprise, they are deemed to be associated enterprises.
Since 7 out of 12 directors of Bear Ltd are appointed by Lion Trade SA of France, the relationship
between Bear Ltd and Lion Trade SA, France, is that of associated enterprise and the transfer pricing
regulations will apply.
(ii) When one enterprise holds directly or indirectly not less than 26% of the voting power in the other
enterprise, they are said to be associated enterprises.
However, in this case only from 01.04.2020 such relationship comes into existence. For the financial year
2019-20 that relationship does not exist and hence the transfer pricing regulations will not apply.
(iii) Transfer pricing regulations are attracted when there is an international transaction between the
assessee and an associated enterprise. Here the Indian company and its subsidiary are associated
enterprises.
In this case the processing charges paid is an international transaction and therefore the transfer pricing
regulation will apply.
(iv) Where one enterprise is controlled by HUF and another enterprise is controlled by members of HUF or
relatives of members from a company formed outside India, the relationship of associated enterprise is
established between them.
In this case, the HUF is purchasing raw materials and exporting to USA to the companies were the
coparceners of the HUF have more than 50% shareholding. Therefore, the relationship of associated
enterprise is established in this case.

11. Examine with reasons whether the two enterprises referred to in the independent situations given
below can be deemed to be associated enterprises under the Indian transfer pricing regulations:
(i) Kingston Inc, a US company having its place of effective management also in the USA, has
advanced a loan equivalent to ` 130 crores to Ganga Ltd., an Indian company on 10-4-2019. The
total book value of assets of Ganga Ltd. is ` 250 crores. The market value of the assets,
however, is ` 300 crores. Ganga Ltd. Repaid ` 22 crores before 31-3-2020.
(ii) Charles plc., a UK company having its place of effective management also in the UK, has the
power to appoint 4 of the directors of Andes Ltd, an Indian company, whose total number of
directors in the Board is 9.
(iii) Total value of raw materials and consumables of Kaveri Ltd., an Indian company, is ` 720 crores.
Of this, supplies to the tune of ` 650 crores are by Aurubis GmbH, a German company having its
place of effective management in Germany, at prices and terms decided by the German
company.
Solution:
(i) Kingston Inc, a foreign company, has advanced loan of ` 130 crores to Ganga Ltd., an Indian company,
which amounts to 52% of book value of assets of Ganga Ltd. Since the loan advanced by Kingston Inc.
is 51% or more of the book value of assets of Ganga Ltd., Kingston Inc. and Ganga Ltd. are deemed to
be associated enterprises under the Indian transfer pricing regulations.
The deeming provisions would be attracted even if there is a repayment of loan during the same
previous year which brings down the said percentage below 51%.
(ii) Charles plc, a foreign company has the power to appoint 44.44% (4 out of 9) of the directors of an
Indian company, Andes Ltd.
Two enterprises would be deemed to be associated enterprises if more than half of the board of
directors of one enterprise are appointed by the other enterprise.
In this case, since Charles plc has the power to appoint only 44.44% (which is less than half) of the
directors of an Indian company, Andes Ltd., Charles plc and Andes Ltd. are not deemed to be
associated enterprises.
(iii) Since Aurubis GmbH, a German company, supplies 90.27% of the raw materials and consumables
required by Kaveri Ltd., an Indian company, which is more than the specified threshold of 90%; and the
prices and terms of supply are decided by the German company, the two companies are deemed to be
12. State with reasons, whether Netlon LLC., (Incorporated in Singapore) and Briggs Ltd., a domestic
company, are/can be deemed to be associated enterprises for the transfer pricing regulations (Each
situation is independent) of the others:
(i) Netlon LLC. has advanced a loan of ` 53 crores to Briggs Ltd. on 12-1-2020. The total book value
of assets of Briggs Ltd. is ` 100 crores. The market value of the assets, however, is ` 150 crores.
Briggs Ltd. repaid ` 10 crores before 31-3-2020.
(ii) Netlon LLC. has the power to appoint 2 of the directors of Briggs Ltd, whose total number of
directors in the Board is 4.
(iii) Total value of raw materials and consumables of Briggs Ltd. is ` 900 crores. Of this, Netlon LLC.
supplies to the tune of ` 820 crores, at prices mutually agreed upon once in six months and
depending upon the market conditions.

Solution:
(i) Netlon LLC, a foreign company, has advanced loan of ` 53 crores to Briggs Ltd., a domestic company,
which amounts to 53% of book value of assets of Briggs Ltd. Since the loan advanced by Netlon Inc. is
not less than 51% of the book value of assets of Briggs Ltd., Netlon Inc. and Briggs Ltd. are deemed to be
associated enterprises for the transfer pricing regulations.
The deeming provisions would be attracted even if there is a repayment of loan during the same previous
year which brings down his percentage below 51%.
(ii) Netlon LLC has the power to appoint 50% (2 out of 4) of the directors of Briggs Ltd. Two enterprises
would be deemed to be associated enterprises if more than half of the board of directors of one
enterprise are appointed by the other enterprise.
In this case, since Netlon LLC has the power to appoint exactly half (and not more than half) of the
directors of Briggs Ltd., they are not deemed to be associated enterprises.
(iii) Even though Netlon LLC supplies 91.11% of the raw materials and consumables required by Briggs Ltd.
which is more than the specified threshold of 90%, Netlon LLC and Briggs Ltd. are not deemed to be
associated enterprises
Reason for not deemed to be associated enterprises is since the price of supply is not influenced by
Netlon LLC but is mutually agreed upon once in six months depending upon prevailing market
conditions.

CLASS NOTES

SDT SATC G.1
SPECIFIED DOMESTIC TRANSACTIONS
1. Explain the meaning of “Specified Domestic Transactions” which are subject to transfer pricing
provisions?
Solution: The “Specified Domestic Transactions”, which are subject to transfer pricing provisions,
means any of the following transactions, not being an international transactions, namely-
1. Any expenditure in respect of which payment has been made or is to be made to a related person
referred to in Section 40A(2)(b) of the Income Tax act, 1961; FA 2017
2. Any transaction referred to in Section 80A of the Income Tax Act, 1961, i.e., inter-unit transfer of
goods and services by an undertaking or unit or enterprise or eligible business to other business
carried on by the assessee or vice versa, for consideration not corresponding to the market value on the
date of transfer;
3. Any transfer of goods or services referred to in Section 80-IA(8) of the Income Tax Act, 1961, i.e., inter-
unit transfer of goods or services between eligible business and other business, where the
consideration for transfer does not correspond with the market value of goods and services;
4. Any business transacted between the assessee carrying on eligible business and other person as
referred to in Section 80-IA(10) of the Income Tax Act, 1961;
5. Any transaction, referred to in any other Section under Chapter VI-A [80-IAB, 80-IB, 80-IC, 80-ID &
80-IE] or Section 10AA, to which provisions of Section 80-IA(8) , or Section 80-IA(10) of the Income
Tax Act, 1961 are applicable;
6. NEW: W.e.f. AY 2020-21, any business transacted between the persons referred to in sub-section
(4) of section 115BAB [Taxation Laws (Amendment) Act, 2019]; or
7. Any other transaction as may be prescribed.
However, the above mentioned transactions shall not be treated as specified domestic transaction in
case the aggregate of such transactions entered into by the assessee in the previous year does not
exceed a sum of ` 20 crore
[ICMAI WORK BOOK]
Section 115BAB(4):
Where it appears to the Assessing Officer that, owing to the close connection between the person to which
Section 115BAB applies and any other person, or for any other reason, the course of business between them
is so arranged that the business transacted between them produces to the person more than the ordinary
profits which might be expected to arise in such business, the Assessing Officer shall, in computing the
profits and gains of such business for the purposes of this section, take the amount of profits as may be
reasonably deemed to have been derived therefrom:
Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in
Section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length
price as defined in clause (ii) of section 92F:
Provided further that the amount, being profits in excess of the amount of the profits determined by the
Assessing Officer, shall be deemed to be the income of the person.

SDT SATC G.2
2. Compliance
a) Transfer pricing provision on specified domestic transactions are applicable from FY 2012-13 / AY
2013-14
b) Taxpayer must compute an arm’s length price of specified domestic transaction as per the methods
prescribed under section 92C.
c) Burden of proof is on the taxpayer to establish the arm’s length price and to maintain related
documents.
d) Must obtain a report under Form 3CEB (till now no separate Form as been prescribed for specified
domestic transaction) from a Chartered Accountant and file it before tax authorities within due date of
filing of return of income.
e) Due date for filing tax return would be 30 November for a taxpayer on whom transfer pricing
provisions are applicable.
f) Tax payer must submit the transfer pricing document to the tax authorities, within 30 days of the
receipt of notice from the department.
g) Penalties under Section 271AA, 271BA, 271G etc
3. Discuss whether transfer pricing provisions under the Income Tax Act, 1961 are attracted in respect
of the following transactions –
(i) Provision of marketing management services by PQR Inc. to its Indian subsidiary PQR Ltd.
(ii) Lease of transportation vehicle by ABC Ltd. from X Inc. X Inc. guarantees 15% of the borrowings
of ABC Ltd.
(iii) Sale of industrial design by A Ltd. to LMN Inc., a Dutch company, which holds 29% of the shares
of A Ltd.
(iv) Beta Ltd., a domestic company, has two units A & B. Unit A, which commenced business two
years back, is engaged in the business of developing a toll road. Unit B is carrying on the
business of trading in cement. Unit B transfers cement to the value of ` 5 lakh to Unit A for ` 3
lakh.
Solution:
(i) The scope of the term "international transaction" has been amplified by the Finance Act, 2012 by
insertion of Explanation to section 92B. According to the said Explanation, international transaction
includes, inter alia, provision of marketing management services. PQR Inc and PQR Ltd. are
associated enterprises, since PQR Inc., being the holding company, satisfies the condition of holding
shares carrying not less than 26% of the voting power in PQR Ltd. Since the provision of marketing
management services by PQR Inc. to PQR Ltd. is an "international transaction" between associated
enterprises, transfer pricing provisions are attracted in this case.
(ii) Lease of tangible property falls within the scope of "international transaction". Tangible property
includes "transportation vehicle". X Inc. and ABC Ltd. are associated enterprises, since X Inc.
guarantees more than 10% of the total borrowings of ABC Ltd. Therefore, lease of a transportation
vehicle by ABC Ltd. from X Inc. is an international transaction with an associated enterprise, and
consequently, the provisions of transfer pricing are attracted in this case.
(iii) The scope of the term "intangible property" has been amplified to include, inter alia, industrial design,
which is an engineering intangible. Sale of intangible property falls within the scope of the term
"international transaction". Since LMN Inc. holds shares of A Ltd. carrying not less than 26% of the
voting power, LMN Inc. and A Ltd. are associated enterprises. Therefore, since sale of industrial design
by A Ltd. to LMN Inc. is an international transaction between associated enterprises, the provisions of
transfer pricing are attracted in this case.
(iv) Unit A is eligible for deduction@100% of the profits derived from its eligible business (i.e., the business
of developing a toll road) under section 80-IA. However, Unit B is not engaged in any "eligible business".
Since Unit B has transferred cement to Unit A at a price lower than the fair market value, it is an inter-
Unit transfer of goods between eligible business and other business, where the consideration for
transfer does not correspond with the market value of goods. Therefore, this transaction would fall

SDT SATC G.3
within the meaning of "specified domestic transaction" to attract transfer pricing provisions, if the
aggregate value of transactions during the year specified in section 92BA exceeds ` 20 crore.
4. Discuss, whether transfer pricing provisions of the Income Tax Act, 1961 are applicable to the
following cases:
i. Ms. Deepika, a resident Indian, is a director of Star Enterprises Ltd., an Indian Company. Star
Enterprises Ltd. pays a salary of ` 60 Lakhs per annum to Mr. Priyanshu, who is Ms. Deepika’s
son.
ii. Goodness Ltd. transferred process patents to Titanium Ltd., an Australian company, in
consideration of guarantee of 20% of the borrowings of Goodness Ltd.
iii. Fusion Ltd., an Indian company, sold tools and equipment to Prism Inc., a Danish Company.
Fusion Ltd. is the subsidiary of Prism Inc.
Solution:
i. The transaction falls within the meaning of “specified domestic transaction”, under Section 92BA of
the Income Tax Act, 1961, since the salary payment has been made to a related person referred to
in Section 40A(2)(b) i.e., relative (i.e. son) of Ms. Deepika, who is a director of Star Enterprises Ltd.
However, such a transaction would be treated as a “specified domestic transaction” and shall attract
transfer pricing provisions only if the aggregate of such transactions as specified in Section 92BA of
the Income Tax Act, 1961, during the year by Star Enterprises Ltd. exceeds a sum of ` 20 crore.
ii. The scope of the term “intangible property” has been amplified to include, inter alia, process patents,
which is a technology intangible. Transfer of intangible property falls within the scope of the term
“international transaction”. Since, Titanium Inc. guarantees more than 10% of the borrowings of
Goodness Ltd., Titanium Inc. and Goodness Ltd., are associated enterprises. Therefore, since
transfer of process patents by Goodness Ltd. to Titanium Inc. is an international transaction between
associated enterprises, the provisions of transfer pricing are attracted in the given case.
iii. Sale of tangible property falls within the scope of “international transaction”. Tangible property
includes tools and equipment. Prism Inc. and Fusion Ltd. are associated enterprises, since Prism
Inc. is the holding company of Fusion Ltd. Prism Inc. fulfills the condition of holding shares not
carrying less than 26% of the voting power in Fusion Ltd. Therefore, sale of equipment and tools by
Fusion Ltd., to Prism Inc. (a Danish Company), is an international transaction between associated
enterprises, and consequently, the provisions of transfer pricing are attracted in this case.
5. M/s. B Ltd., a domestic company has unit A & B. Unit A which commenced business two years back
is engaged in the business of developing a toll road. Unit B is carrying on the business of trading in
cement. Unit B transfers cement of the value of ` 28.50 crores to Unit A for ` 26.5 crores. Briefly
explain whether transfer pricing provisions under Income Tax Act, 1961 are attracted.
Answer
Unit A is engaged in the business of development of toll roads, eligible for deduction @ 100% of profit derived
from business (eligible) u/s 80IA of Income-Tax Act. Unit B is not engaged in eligible business. Unit B
transferred cement to Unit-A at a price lower than the fair market value which is an inter unit transfer of goods
between eligible business and other business and the consideration for transfer does not correspond with
market value of goods.
Section 92BA covers transfer of goods or services by one unit of business to another, in respect of business
covered by sec 80-IA(8).
This transaction would fall within the meaning of specified domestic transaction to attract transfer pricing
provisions as aggregate value of transaction during the year specified in section 92BA of Income Tax Act
exceeds ` 20 crores.

SDT SATC G.4
6. Examine whether transfer pricing provisions under the Income -tax Act, 1961 would be attracted in
respect of the following cases -
(i) Scientific research services provided by Lambda Sicom, an Italian company to XYZ Ltd., an Indian
company. Lambda Sicom is a “specified foreign company” as defined in section 115BBD, in
relation to XYZ Ltd.
(ii) Purchase of commodities by Omega Ltd., an Indian company, from Cylo AG, a German company.
Omega Ltd. is the subsidiary of Cylo AG.
(iii) EF Ltd., an Indian company, has two units, E & F. Unit E, which commenced business two years
back, is engaged in the development of a highway project, for which purpose an agreement has
been entered into with the Central Government. Unit F is carrying on the business of trading in
steel. Unit F transfers 20,000 metric tons of steel of the value of ` 32,000 per MT to Unit E for
` 20,000 per MT.
(iv) Ms. Geetha, a resident Indian, is a director of Theta Ltd, an Indian company. Theta Ltd. pays salary
of ` 40 lakhs per annum to Samyukta, who is Ms. Geetha’s daughter.
(v) Transfer of technical knowhow by Y Ltd., an Indian company, to Alcatel Lucent, a French
company, which guarantees 15% of the borrowings of Y Ltd.
Solution:
(i) Clause (i) of Explanation to section 92B amplifies the scope of the term “international transaction”.
According to the said Explanation, international transaction includes, inter alia, provision of scientific
research services. Lambda Sicom is a specified foreign company in relation to XYZ Ltd. Therefore, the
condition of XYZ Ltd. holding shares carrying not less than 26% of the voting power in Lambda Sicom is
satisfied, assuming that all shares carry equal voting rights.
Hence, Lambda Inc. and XYZ Ltd. are deemed to be associated enterprises under section 92A(2). Since
the provision of scientific research services by Lambda Sicom to XYZ Ltd. is an “international transaction”
between associated enterprises, transfer pricing provisions are attracted in this case.
(ii) Purchase of tangible property falls within the scope of “international transaction”.
Tangible property includes commodity. Cylo AG and Omega Ltd. are associated enterprises under section
92A, since Cylo AG is a holding company of Omega Ltd. Therefore, purchase of commodities by Omega
Ltd., an Indian company, from Cylo AG, a German company, is an international transaction between
associated enterprises, and consequently, the provisions of transfer pricing are attracted in this case.
(iii) Unit E is eligible for deduction@100% of the profits derived from its eligible business (i.e., the business of
developing an infrastructure facility, namely, a highway project in this case) under section 80-IA. However,
Unit F is not engaged in any “eligible business”. Since Unit F has transferred steel to Unit E at a price
lower than the fair market value, it is an inter-unit transfer of goods between eligible business and other
business, where the consideration for transfer does not correspond with the market value of goods.
Therefore, this transaction would fall within the meaning of “specified domestic transaction” to attract
transfer pricing provisions, since the aggregate value of such transactions during the year exceeds a sum
of ` 20 crore.
(iv) In this case, salary payment has been made to a related person referred to in Section 40A(2)(b) i.e.,
relative (i.e., daughter) of Ms. Geetha, who is a director of Theta Ltd. However, with effect from A.Y.
2018-19, section 92BA has been amended to exclude such transactions from the scope of
“specified domestic transaction”.
Consequently, transfer pricing provisions would not be attracted in this case.

SDT SATC G.5
(v) The scope of the term “intangible property” has been amplified to include, inter alia, technical knowhow,
which is a technology related intangible asset. Transfer of intangible property falls within the scope of the
term “international transaction”.
Since Alcatel Lucent, a French company, guarantees not less than 10% of the borrowings of Y Ltd., an
Indian company, Alcatel Lucent and Y Ltd. are deemed to be associated enterprises under section
92A(2). Therefore, since transfer of technical knowhow by Y Ltd., an Indian company, to Alcatel Lucent, a
French company, is an international transaction between associated enterprises, the provisions of transfer
pricing are attracted in this case.

SDT SATC G.6
Class Notes

ALP SATC H.1
DETERMINATION OF ALP
1. Discuss the concept of Arm's length price as envisaged in Section 92C of the Income-tax Act 1961.
What are the methods under which the arm's length price, relating to an international transaction, is
determined under Section 92C of the Income Tax Act, 1961?
Solution:
“Arm's Length Price" is defined in Section 92F(ii) of the Income Tax act, 1961, to mean price which is
applied or proposed to be applied in a transaction between persons other than associated
enterprises, in uncontrolled conditions.
Section 92C of the Income Tax Act, 1961 deals with the method to be adopted for determining the arm's
length price and, the factors to be considered for applying a particular method.
Section 92C(1) of the Income Tax Act, 1961 provides that the arm's length price in relation to, inter alia, an
international transaction or specified domestic transaction shall be determined by any of the following
methods, being the most appropriate method, having regard to the nature of the transaction or class of
transaction or class of associated persons or functions performed by such persons or such other relevant
factors as the Board may prescribe, namely:-
a. Comparable Uncontrolled Price method;

b. Resale Price Method;
c. Cost Plus Method;
d. Profit Split Method;
e. Transactional Net Margin Method;
f. such other method as may be prescribed by the Board.
Accordingly, the Board vide Notification No. 18/2012 dated 23.05.2012 has prescribed that the other method
for determination of the arms' length price in relation to an international transaction, shall be any method
which takes into account the price which has been charged or paid, or would have been charged or paid, for
the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar
circumstances, considering all the relevant facts.
Section 92C(2) provides that the most appropriate method shall be selected in the manner as may be
prescribed by the Rules.
W.e.f. AY 15-16, where more than one price is determined, ALP shall be computed in a manner as
prescribed.
2. Define Most Appropriate Method. Briefly explain how a person can select such method. In the context
of Transfer-Pricing provisions, read with the rules, what are the factors to be considered while
selecting the most appropriate method?
Solution:
The Most Appropriate Method shall be adopted having regard to the nature of transaction or class of
associated persons or functions performed by such persons as the Board may prescribe.
Most Appropriate Method shall be the method which -

a) is best suited to the facts and circumstances of each particular international transactions, and
b) Provides the most reliable measure of an arm's length price in relation to the international
transaction.

ALP SATC H.2
Factors for selection of Most Appropriate Method:
a) The nature and class of the international transaction,
b) The class or classes of associated enterprises entering into the transaction and the functions performed
by them taking into account assets employed or to be employed and risks assumed by such
enterprises,
c) The availability, coverage and reliability of data necessary for application of the method,
d) The degree of comparability existing between the international transaction and the uncontrolled
transaction and between the enterprises entering into such transactions,
e) The extent to which reliable and accurate adjustments can be made to account for differences, if any,
between the international transaction and the comparable uncontrolled transaction or between the
enterprises entering into such transactions,
f) The nature, extent and reliability of assumptions required to be made in application of a method.
3. What are the steps to be followed for determining Arm’s Length Price of an international transaction?
Steps in the process of computing Arm’s Length Price – Transfer Pricing (TP) Study
Transfer Pricing Study (TP Study) is the prime document which is used during transfer pricing assessment.
The following are the steps to be followed:-

Step 1 Selection of comparable companies
Step 2 Use of different filters
Step 3 Screening of comparables based on FAR
Step 4 Use of Power under Direct Tax laws
Step 5 Adjustments
The steps may be enumerated as follows:
Step 1: Selection of Comparable Companies

The first step for doing this study is to select comparable companies. This can be selected in the following
four ways:-
(a) Industry-wise selection
(b) Product-wise selection
(c) NIC (National Industrial Classification) Code-wise selection
(d) Segment-wise selection
The data relating to the financial year in which the international transaction has been entered into must be
used in analyzing the comparability of an uncontrolled transaction with an international transaction.
Step 2: Use of different filters

Once there is a selection of comparable companies, the next step is to filter these companies with the use of
quantitative and qualitative filters. The following filters are also used sometimes:
(a) Companies whose data is not available for the relevant year
(b) Companies for which sufficient financial data is not available to undertake analysis
(c) Different financial year filter
(d) Turnover filter
(e) Service Income filter
(f) Export filter
(g) Diminishing Loss filter
(h) Related party filter
(i) Companies that had exceptional year/(s) of operation
(j) Employee cost filter
(k) Onsite and offsite filter
(l) Fixed Asset filter
(m) Research & Development Expense filter
(n) Income Tax filter
[State any six filters which are used in computation of arm's length price.]

ALP SATC H.3
Step 3: Screening of comparables based on FAR
Comparability of an international transaction with an uncontrolled transaction shall have to be judged with
relevance to the following factors:
(a) The specific characteristics of the property transferred or services provided in either transaction;
(b) FAR Analysis- the (F) functions performed, taking into account (A)assets employed or to be employed or
the (R) risks assumed by the respective parties to the transactions;
(c) The contractual terms ( whether or not such terms are formal or in writing) of the transactions which lay
down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the
respective parties to the transactions;
(d) Conditions prevailing in the markets in which the respective parties to the transactions operate, including
the geographical location and size of the markets, overall economic development and level of competition
and whether the markets are wholesale or retail.
Step 4: Use of power under direct Tax Laws

This power is usually used by the Revenue Department/Authorities, with a special reference to Sec 133(6) of
the Income Tax Act, 1961. The authorities may exercise such powers for getting details which are generally
not available in the annual reports of the companies. This power is used more in the earlier years.
Step 5: Adjustments
The following enterprise level and transaction level adjustments are suggested:
(a) Functional differences
(b) Asset differences
(c) Risk differences
(d) Geographical location
(e) Size of the market
(f) Wholesale or Retail market
(g) The laws and governmental orders in force
(h) Cost of labour
(i) Cost of capital in the markets
(j) Overall economic development
(k) Level of competition
(l) Accounting practices
However, in practice the following adjustments are provided

(a) Working capital adjustment
(b) Risk adjustment
(c) Volume/geographical/depreciation/idle capacity/first year operation, etc.
4. Write a short note on "Safe harbour rule".
Solution:
In view of the powers granted to the Assessing Officer under section 92C, he can do adjustment in the
transfer price of an international transaction, if the same is not in accordance with the arm's length price. As a
result, many transactions are subjected to adjustments and dispute arises for that.
In order to overcome the above problem section 92CB empowers the CBDT to frame rules, namely "safe
harbour rules". Section 92CB provides as under:
(i) The determination of arm's length price under section 92C or section 92CA shall be subject to safe
harbour rules.
(ii) "Safe harbour" means circumstances in which the income tax authorities shall accept the transfer price
declared by the assessee.
CBDT can identify certain types of businesses and notify a certain percentage as minimum profit expected to
be declared by the assessee. If an assessee declares profit at or above such notified percentage, then in the
case of that assessee transfer pricing provisions shall not be invoked in respect of international transaction or
specified domestic transaction. This is how the concept of safe harbour functions.
5. “Under the special provisions of the Income Tax Act, 1961, any income arising from an international
transaction shall be computed having regard to the arm’s length price.” In this context, explain the
circumstances in which the provisions of arm’s length price shall be applicable. Discuss the scope of
such provisions governing the determination of the arm’s length price. Also, state the circumstances
in which such provisions shall not apply.
ALP SATC H.4
Solution: Under the provisions of Section 92(1) of the Income Tax Act, 1961 any income arising from an
International transaction shall be computed having regard to the ‘arm‘s length price’. When the international
transaction comprises of only an outgoing, the allowance for any expense or interest arising from the
international transaction shall also be determined having regard to the arm‘s length price.
Thus, the provisions of arm‘s length price shall apply to both income-generating transactions (e.g. sale of
goods, royalty, fees for technical services, know-how etc. for providing services) as well as transactions
resulting into expenditure (e.g. purchases, interest on loan etc.).
The provisions shall not apply if their application results in decrease in the overall incidence of tax in India in
respect of the parties involved in the international transactions. Where the computation of the income or
determination of the allowance for any expenses or interest or any cost or expense allocated or apportioned,
as the case may be, computed under Section 92(2) of the Income Tax Act, 1961 has the effect of reducing
the income chargeable to tax or increasing the loss computed on the basis of entries made in the books of
account in respect of the previous year in which the international transaction was entered into, the provisions
shall not apply. [Section 92(3) of the Income tax Act, 1961]
‘Arm‘s Length Price’ means a price which is applied or proposed to be applied in a transaction between the
persons other than associated enterprises, in uncontrolled conditions. It is the price that would have existed
between the enterprises not associated or related with each other [Section 92F(ii)].
6. “Multiple year data can be used for determination of Arm’s Length Price in an international
transaction.” Explain.
Solution:
Rule 10B of the Income Tax Rules, 1962, has prescribed the methods of determining Arm‘s Length Price
under Section 92C.
As per Rule 10B (4), the use of the data relating to the financial year in which such international transaction
has been entered into, must be considered, for comparing an uncontrolled transaction with the relevant
international transaction. Data for earlier years may also be used, if such data reveals facts, which could
have an influence on the determination of transfer prices in relation to the transactions being compared.
Multiple –year data can be used for comparing an uncontrolled transaction with the relevant international
transaction, only if the circumstances prevailing in the previous years, influence the determination of transfer
price in the relevant financial year.
7. What do you mean by the term ―Tested Party?
Solution:
As per the OECD guidelines, the tested party is ought to be the enterprise that offers a higher degree of
comparability or would require lesser adjustment with uncontrolled companies. Consequently, the enterprise
that requires the least amount of adjustments as compared to potentially comparable companies should be
the tested party. Hence, in most cases, the tested party will be the least complex of the controlled tax payers
and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled
comparables.

ALP SATC H.5
8. Define arm‘s length principle. Also mention the difficulties in applying the arm‘s length principle.
Solution:
The arm‘s length principle seeks to ensure that transfer prices between members of an MNE (Multi National
Enterprise which are the effect of special relationships between the enterprises, are either eliminated or
reduced to a large extent. It requires that, for tax purposes, the transfer prices of controlled transactions
should be similar to those of comparable transactions between independent parties in comparable
circumstances (“uncontrolled transactions”).
In other words, the arm‘s length principle is based on the concept that prices in uncontrolled transactions
are determined by market forces and, therefore, these are, by definition, at arm‘s length. In practice, the
“arm‘s-length price” is also called “market price”. Consequently, it provides a benchmark against which the
controlled transaction can be compared. The Arm‘s Length Principle is currently the most widely accepted
guiding principle in arriving at an acceptable transfer price. As circulated in 1995 OECD (Organisation for
Economic Co-operation & Development) guidelines, it requires that a transaction between two related parties
is priced just as it would have been if they were unrelated. The need for such a condition arises from the
premise that intra-group transactions are not governed by the market forces like those between two unrelated
entities. The principle simply attempts to place uncontrolled and controlled transactions on an equal footing.
Difficulties in applying the arm‘s length principle: The arm‘s length principle, although survives upon the
international consensus, does not necessarily mean that it is perfect. There are difficulties in applying this
principle in a number of situations.
a. The most serious problem is the need to find transactions between independent parties which can
be said to be exact compared to the controlled transaction.
b. It is important to appreciate that in an MNE system, a group first identifies the goal and then goes
on to create the associated enterprise and finally, the transactions entered into. This procedure
obviously does not apply to independent enterprises. Due to these facts, there may be transactions
within an MNE group which may not be between independent enterprises.
c. Further, the reductionist approach of splitting an MNE group into its component parts before
evaluating transfer pricing may mean that the benefits of economies of scale, or integration between
the parties, is not appropriately allocated between the MNE group.
d. The application of the arm‘s length principle also imposes a burden on business, as it may
require the MNE to do things that it would otherwise not do (i.e. searching for comparable transactions,
documenting transactions in detail, etc).
e. Arm‘s length principle involves a lot of cost to the group
[“The Arm’s Length Principle, although survives upon the international consensus, does not
necessarily mean that it is perfect” – Discuss.]
9. US Ltd., a US company has a subsidiary, IND Ltd. in India. US Ltd. sells computer monitors to IND
Ltd. for resale in India. US Ltd. also sells computer monitors to CMI Ltd., another computer reseller. It
sells 50,000 computer monitors to IND. Ltd. at ` 11,000 per unit. The price fixed for CMI Ltd. is `
10,000 per unit. The warranty in case of sale of monitors by IND Ltd. is handled by IND Ltd. However,
for sale of monitors by CMI Ltd., US Ltd. is responsible for the warranty for 3 months. Both US Ltd.
and IND Ltd. offer extended warranty at a standard rate of ` 1,000 per annum. On these facts, how is
the assessment of IND Ltd. Going to be affected?
Answer
US Ltd., the foreign company and IND Ltd., the Indian company are associated enterprises since US Ltd. is
the holding company of IND Ltd. US Ltd. sells computer monitors to IND Ltd. For resale in India. US Ltd. also
sells identical computer monitors to CMI Ltd., which is not an associated enterprise. The price charged by US
Ltd. for a similar product transferred in comparable uncontrolled transaction is, therefore, identifiable.

ALP SATC H.6
Therefore, Comparable Uncontrolled Price (CUP) method for determining arm’s length price can be applied.
While applying CUP method, the price in comparable uncontrolled transaction needs to be adjusted to
account for difference, if any, between the international transaction (i.e. transaction between US Ltd. and IND
Ltd.) and uncontrolled transaction (i.e. transaction between US Ltd. and CMI Ltd.) and the price so adjusted
shall be the arm’s length price for the international transaction.
For sale of monitors by CMI Ltd., US Ltd. is responsible for warranty for 3 months. The price charged by US
Ltd. to CMI Ltd. includes the charge for warranty for 3 months. Hence arm's length price for computer
monitors being sold by US Ltd. to IND Ltd. would be:
Particulars `
Sale price charged by US Ltd. to CMI Ltd. 10,000
Less: Cost of warranty included in the price charged to CMI Ltd. (` 1,000 x 3 /12) 250
Arm's length price 9,750
Actual price paid by IND Ltd. to US Ltd. 11,000
Difference per unit 1,250
No. of units supplied by US Ltd. to IND Ltd. 50,000

Addition required to be made in the computation of total
income of IND Ltd. (1,250 × 50,000) 6,25,00,000
No deduction under chapter VI-A would be allowable in respect of the enhanced income of ` 6.25
crores.
Note: It is assumed that IND Ltd. has not entered into an advance pricing agreement or opted to be
subject to Safe Harbour Rules.
10. I. Limited, an Indian Company supplied billets to its holding company, U. Limited, UK during the
previous year 2019-20. I. Limited also supplied the same product to another UK based company, V.
Limited, an unrelated entity. The transactions with U. Limited are priced at Euro 500 per MT (FOB),
whereas the transactions with V. Limited are priced at Euro 700 per MT (CIF). Insurance and Freight
amounts to Euro 200 per MT. Compute the arm's length price for the transaction with U. Limited.
Answer
In this case, I. Limited, the Indian company, supplied billets to its foreign holding company, U. Limited. Since
the foreign company, U. Limited, is the holding company of I. Limited, I. Limited and U. Limited are the
associated enterprises within the meaning of section 92A.
As I. Limited supplies similar product to an unrelated entity, V. Limited, UK, the transactions between I.
Limited and V. Limited can be considered as comparable uncontrolled transactions for the purpose of
determining the arm’s length price of the transactions between I. Limited and U. Limited Comparable
Uncontrolled Price (CUP) method of determination of arm’s length price (ALP) would be applicable in this
case.
Transactions with U. Limited are on FOB basis, whereas transactions with V. Limited are on CIF basis. This
difference has to be adjusted before comparing the prices.
Amount (in Euro)

Price per MT of billets to V. Limited 700
Less: Cost of insurance and freight per M.T. 200
Adjusted Price per M.T. 500
Since the adjusted price for V. Limited, UK and the price fixed for U. Limited are the same, the arm’s length
price is Euro 500 per MT. Since the sale price to related party (i.e., U. Limited) and unrelated party (i.e., V.
Limited) is the same, the transaction with related party U. Limited has also been carried out at arm’s length
price.

ALP SATC H.7
RULE 10CA - Computation of arm's length price in certain cases
1. Where in respect of an IT or SDT, the application of the most appropriate method referred to in Section
92C(1) results in determination of more than one price, then the arm's length price in respect of such IT or
SDT shall be computed in accordance with the provisions of this rule.
2. A data set shall be constructed by placing the prices in an ascending order and the arm's length price shall
be determined on the basis of the dataset so constructed:
Provided that where the comparable uncontrolled transaction has been identified on the basis of data
relating to the current year and the enterprise undertaking the said uncontrolled transaction, has in either or
both of the two financial years immediately preceding the current year undertaken the same or similar
comparable uncontrolled transaction then,-
(i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or
transactions undertaken in the aforesaid period and the price in respect of such uncontrolled
transactions shall be determined; and
(ii) the weighted average of the prices, shall be computed by taking weighted average of the current year
price and prices of last 2 financial years.
3. Where the dataset constructed consists of six or more entries, an arm's length range beginning from the
thirty-fifth percentile of the dataset and ending on the sixty-fifth percentile of the dataset shall be
constructed and the arm's length price shall be computed as per this rule.
4. If the price at which the international transaction or the specified domestic transaction has actually been
undertaken is within the range, then, the price at which such international transaction or the specified
domestic transaction has actually been undertaken shall be deemed to be the arm's length price.
5. If the price at which the international transaction or the specified domestic transaction has actually been
undertaken is outside the arm's length range, the arm's length price shall be taken to be the median of
the dataset.
6. In a case where data set consists of less than 6 entries, the arm's length price shall be the arithmetical
mean of all the values included in the dataset:
Provided that, if the variation between the arm's length price so determined and price at which the
international transaction or specified domestic transaction has actually been undertaken does not exceed
such percentage not exceeding 3% of the latter, as may be notified by the Central Government in the
Official Gazette in this behalf (1% in respect of wholesale trading), the price at which the international
transaction or specified domestic transaction has actually been undertaken shall be deemed to be the
arm's length price.
7. For the purposes of this rule,—
(a) "the thirty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the
Total entries in data set x 35/100
If this number is a fractional number, the next higher number which is a whole number shall be taken
and the value in the dta set placed at this whole number shall be 35th percentile.
If this number is a whole number, then the thirty-fifth percentile shall be the arithmetic mean of value in
data set at this number and value in data set at next higher number.
(b) "the Sixty-fifth percentile" of a dataset, having values arranged in an ascending order, shall be the
th
and the value in the dta set placed at this whole number shall be 35 percentile.
If this number is a whole number, then the Sixty-fifth percentile shall be the arithmetic mean of value in
data set at this number and value in data set at next higher number.
(c) "the median" of a dataset, having values arranged in an ascending order, shall be the
and the value in the data set placed at this whole number shall be the median
If this number is a whole number, then the median shall be the arithmetic mean of value in data set at
this number and value in data set at next higher number.

ALP SATC H.8
Class Notes

ALP SATC H.9
SAFE HARBOUR RULES FOR INTERNATIONAL TRANSACTIONS
Rule 10TD
1. Where an eligible assessee has entered into an eligible international transaction and the option exercised by
the said assessee is not held to be invalid as per prescribed procedure, the transfer price declared by the
assessee in respect of such transaction shall be accepted by the income-tax authorities, if it is in
accordance with the circumstances as specified below:
2. The circumstances referred to in sub-rule (1) in respect of the eligible international transaction specified in
column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the said
Table:-
S. No. Eligible International Transaction Circumstances
Provision of software development The operating profit margin declared by the eligible
1 services assessee from the eligible international transaction in
relation to operating expense incurred is -
(i) not less than 17 per cent, where the aggregate value
of such transactions entered into during the
previous year does not exceed a sum of ` 100
crore; or
(ii) not less than 18 per cent, where the aggregate
value of such transactions entered into during the
previous year exceeds a sum of ` 100 crore but
does not exceeds ` 200 crore.
Provision of information The operating profit margin declared by the eligible

2 technology enabled services assessee from the eligible international transaction in
relation to operating expense is -
(i) not less than 17 per cent, where the aggregate
previous year does not exceed a sum of ` 100
crore; or
(ii) not less than 18 per cent, where the aggregate
previous year exceeds a sum of ` 100 crore but
does not exceeds ` 200 crore.
Providing corporate guarantee The commission or fee declared in relation to the eligible
3 international transaction is at the rate not less than 1 per
cent per annum on the amount guaranteed.
Provision of contract research and The operating profit margin declared by the eligible
4 development services wholly or assessee from the eligible international transaction in
partly relating to software relation to operating expense incurred is not less than 24
development per cent, where the value of the international transaction
does not exceed a sum of two hundred crore rupees.
Provision of contract research and The operating profit margin declared by the eligible
5 development services wholly or assessee from the eligible international transaction in
partly relating to generic relation to operating expense incurred is not less than 24
pharmaceutical drugs per cent, where the value of the international transaction
does not exceed a sum of two hundred crore rupees.
ALP SATC H.10
Manufacture and export of core The operating profit margin declared by the eligible
6 auto components assessee from the eligible international transaction in
relation to operating expense is not less than 12 per cent.
Manufacture and export of non- The operating profit margin declared by the eligible
7 core auto components assessee from the eligible international transaction in
relation to operating expense is not less than 8.5 per
cent.
3. The provisions of sections 92D and 92E in respect of an international transaction shall apply irrespective of
the fact that the assessee exercises his option for safe harbour in respect of such transaction.

ALP SATC H.11
QUESTION & ANSWER
1. Examine the following transactions and discuss whether the transfer price declared by the following
assessees, who have exercised a valid option for application of safe harbour rules, can be accepted
by Income-tax authorities –
(i) Mercury Ltd., an Indian company, provided data processing services to Venus Inc., which is a
specified foreign company in relation to Mercury Ltd. The aggregate value of such international
transactions entered in to in the P.Y. 2019-20 is ` 105 crores. It declared an operating profit margin
of ` 16 crores. Its operating expenses were ` 80 crores.
(ii) Jupiter Ltd., an Indian company, provides contract R&D services relating to software development
to Saturn Inc., a US company which guarantees 12% of the borrowings of Jupiter Ltd. The value of
such international transactions entered into in the P.Y. 2019-20 is ` 190 crores. It declared an
operating profit margin of ` 40 crores against an operating expenses of ` 175 crores.
In case it is not binding on the income-tax authorities to accept the transfer price declared by
Mercury Ltd. or Jupiter Ltd., what is the primary adjustment, ifany, to be made by either company
in the A.Y. 2020-21?
Solution:
(i) Venus Inc. is a specified foreign company in relation to Mercury Ltd. Therefore, the condition of Mercury
Ltd. holding shares carrying not less than 26% of the voting power in Venus Inc is satisfied. Hence, Venus
Inc. and Mercury Ltd. are deemed to be associated enterprises as per section 92A(2). Therefore,
provision of data processing services by Mercury Ltd., an Indian company, to Venus Inc., a foreign
company, is an international transaction between associated enterprises, and consequently, the
provisions of transfer pricing are attracted in this case.
Data processing services with the use of information technology falls within the definition of “information
technology enabled services”, and is hence, an eligible international transaction. Since Mercury Ltd. is
providing data processing services to a non-resident associated enterprise and has exercised a valid
option for safe harbour rules, it is an eligible assessee.
Since the aggregate value of transactions entered into in the P.Y. 2019-20 exceeds ` 100 crore but
does not exceed ` 200 crore, Mercury Ltd. should have declared an operating profit margin of not less
than 18% in relation to operating expense, to be covered within the scope of safe harbour rules. In this
case, since Mercury Ltd. has declared an operating profit margin of 20% accordance with the
circumstance mentioned in Rule 10TD.
Hence, the income-tax authorities shall accept the transfer price declared by Mercury Ltd in respect of
such international transaction.
Therefore, Mercury Ltd. need not make any primary adjustment.
(ii) Saturn Inc., a foreign company, guarantees 12% of the total borrowings of Jupiter Ltd., an Indian
company. Since Saturn Inc. guarantees not less than 10% of the total borrowings of Jupiter Ltd., Saturn
Inc. and Jupiter Ltd. are deemed to be associated enterprises as per section 90A(2). Therefore, provision
of contract R & D services relating to software development by Jupiter Ltd., an Indian company, to Saturn
Inc., a foreign company, is an international transaction between associated enterprises, and
consequently, the provisions of transfer pricing are attracted in this case.
Provision of contract R& D services in relation to software development is an eligible international

transaction. Since Jupiter Ltd. is providing such services to a non-resident associated enterprise and has
exercised a valid option for safe harbour rules, it is an eligible assessee.
Since the value of the international transaction does not exceed ` 200 crore, Jupiter Ltd. should have
declared an operating profit margin of not less than 24% in relation to operating expense, to be covered
with in the scope of safe harbour rules. In this case, since Jupiter Ltd. has declared an operating profit

ALP SATC H.12
margin of 22.86 which is not a circumstance mentioned in Rule 10TD. Hence, it is not binding on the
income- tax authorities to accept the transfer price declared by Jupiter Ltd.
Jupiter Ltd. has to, therefore, make a primary adjustment of ` 2 crores [ i . e., ` 42 crores, being 24% of
` 175 crores – ` 40 crores] in the AY 2020-21.
2. ABC & Co, an Indian LLP, is solely engaged in the manufacture and export of engine, engine parts
including cooling systems and engine valves. It had supplied auto components worth ` 72 crores
during financial year 2019-20 to XYZ LLP, a foreign LLP located in Germany, controlled by A & B, the
partners of Indian LLP along with their relatives. Against the aggregate value of transactions entered
into as mentioned above, the Indian LLP incurred an operating expenditure of ` 60 crores leaving an
operating profit of ` 4.50 crores.
(i) Compute the primary adjustment required to be made in A.Y. 2020-21, if any, assuming that the
Indian LLP exercised a valid option for application of safe harbour rules prescribed under Rule
10TD read with section 92CB of the Income-tax Act, 1961.
(ii) Examine the applicability of safe harbour rules, if the Foreign LLP is located in a Notified
Jurisdictional Area.
Solution:
(i) ABC & Co., an Indian LLP, and XYZ LLP, a foreign LLP, are deemed to be associated enterprises, since
XYZ LLP is controlled by A & B, who are the partners of ABC & Co., along with their relatives.
Engine, engine parts including cooling systems and engine valves fall within the meaning of “core auto
components”, and hence, export of all such parts originally manufactured by ABC & Co. is an eligible
international transaction.
Since the Indian LLP is solely engaged in the manufacture and export5 of such parts and has exercised a
valid option for Safe Harbour Rules, it is an eligible assessee.
The Indian LLP should have declared an operating profit margin of not less than 12% in relation to
operating expense, to be covered within the Safe Harbour Rules.
However, since ABC & Co. an Indian LLP has declared an operating profit margin of only 7.5% (`
` 4.5/ `
60 crore x 100), the same is not in accordance with the circumstance mentioned in Rule 10TD.
Hence, ABC & Co., an Indian LLP, has to make primary adjustment.
Accordingly, it has to declare operating profits margin of ` 7.2 crore, being 12% of operating expenses
i.e., ` 60 crore.
Thus, primary adjustment of ` 2.7 crore [i.e., ` 7.2 crore – ` 4.5 crore] has to be made by ABC & Co.
(ii) The Safe Harbour Rules shall not apply in respect of eligible international transactions entered into with
an associated enterprise located in a notified jurisdictional area.
Therefore, if the foreign LLP is located in a NJA, the Safe Harbour Rules shall not be applicable,
irrespective of the operating profit margin declared by the assessee.
3. Examine in the context of provisions contained under the Income-tax Act and Rules thereunder
whether the Transfer Pricing relating to the International Transactions declared by the assessee who
have exercised a valid option for application of safe harbor rules can be accepted by the I.T.
Authorities for the A.Y. 2020-21 in the following cases:
(i) Bhisma Ltd. is an Indian company providing services of data processing with the use of
Information Technology to YOK Inc. of U.S.A. a foreign subsidiary of the Indian company.
Aggregate of the transactions value of services by Bhisma Ltd. to YOK Inc. during the previous
year 2019-20 is of Rs 200 crores having operating margin of ` 29 crores and operating expenses of
` 150 crores.

ALP SATC H.13
(ii) Dhanush Ltd., an Indian company providing services relating to contract of R & D of the Generic
Pharmaceutical Drugs to ABC Inc. of UK, a foreign company, which has guaranteed 15% of the
total borrowings of the Indian company. Aggregate of the transactions value of services by
Dhanush Ltd. to ABC Inc. during the previous year 2019-20 is of ` 100 crores having operating
margin of ` 18 crores and operating expenses of ` 60 crores.
Solution:
(i) YOK Inc. of U.S.A., a foreign company, is a subsidiary of Bhisma Ltd., an Indian company. Hence, YOK
Inc. and Bhisma Ltd. are associated enterprises as per section 92A(1). Therefore, providing services of
data processing by Bhisma Ltd., an Indian company, to YOK Inc., a foreign company, is an international
transaction between associated enterprises, and consequently, the provisions of transfer pricing are
attracted in this case.
As per Rule 10TA, data processing services with the use of information technology falls within the
definition of “information technology enabled services”, and is hence, an eligible international transaction
as per Rule 10TC. Since Bhisma Ltd. is providing data processing services to a non-resident associated
enterprise and has exercised a valid option for safe harbour rules, it is an eligible assessee as per Rule
10TB.
Since the aggregate value of transactions entered into in the P.Y. 2019-20 does not exceed ` 500 crore,
Bhisma Ltd. should have declared an operating profit margin of not less than 20% in relation to operating
expense, to be covered within the scope of safe harbour rules as per Rule 10TD.
However, since Bhisma Ltd. has declared an operating profit margin of only 19.33% [i.e., 29/150 x100],
the same is not in accordance with the circumstance mentioned in the Rule 10TD. Hence, it is not binding
on the income -tax authorities to accept the transfer price declared by Bhisma Ltd in respect of such
(ii) ABC Inc. of UK, a foreign company, guarantees 15% of the total borrowings of Dhanush Ltd., an Indian
company. Since ABC Inc. guarantees not less than 10% of the total borrowings of Dhanush Ltd., ABC Inc.
and Dhanush Ltd. are deemed to be associated enterprises. Therefore, provision of contract R & D
services relating to generic pharmaceutical drug by Dhanush Ltd., an Indian company, to ABC Inc., a
foreign company, is an international transaction between associated enterprises, and consequently, the
provisions of transfer pricing are attracted in this case.
Provision of contract R & D services in relation to generic pharmaceutical drug is an eligible international
transaction as per Rule 10TC. Since Dhanush Ltd. is providing such services to a non-resident associated
enterprise and has exercised a valid option for safe harbour rules, it is an eligible assessee as per Rule
10TB.
Irrespective of the aggregate value of transactions entered into in the P.Y. 2019-20, Dhanush Ltd. should
have declared an operating profit margin of not less than 29% in relation to operating expense, to be
covered within the scope of safe harbour rules.
In this case, since Dhanush Ltd. has declared an operating profit margin of 30% [i.e., 18/60 x 100], the
same is in accordance with the circumstance mentioned in Rule 10TD. Hence, the income-tax authorities
shall accept the transfer price declared by Dhanush Ltd in respect of such international transaction.

ALP SATC H.14
CLASS NOTES

ALP - AO & TPO SATC I.1
DETERMINATION OF ALP by AO & TPO

1. Briefly explain the procedure for determination of Arm’s Length Price by the Assessing Officer.
Solution:
Section 92C(3) provides that during the course of any proceeding for the assessment of income, on the
basis of material / information / document in his possession, the Assessing Officer may determine the Arm’s
Length Price (ALP), if he is of the opinion that -
a) the price charged or paid in an International Transaction or Specified Domestic Transactions has not
been determined as per Section 92C,
b) any information and document relating to an International Transaction or Specified Domestic
Transactions have not been kept and maintained by the assessee in the prescribed manner as per
Sec. 92D(1),
c) the information or data used in computation of the arm's length price is not reliable or correct,
d) the assessee has failed to furnish, within the specified time, any information or document which he
was required to furnish by a notice issued u/s 92D(3).
However, before such determination, the Assessing Officer should give the assessee, an opportunity of
being heard. This should be done by giving him a show cause notice, specifying the date and time of hearing.
When the ALP is determined by the Assessing Officer -
a) Total Income of the assessee shall be computed on the basis of such determined ALP.
b) No deduction shall be allowed u/s 10AA or under Chapter VIA on the enhanced income.
c) Income of another associated enterprise to whom payments are made after TDS, shall not be
recomputed on the basis of the revised ALP determined by the Assessing Officer.
d) Penalty provisions relating to non-compliance are also applicable.
2. Where any reference is made by the Assessing Officer to the Transfer Pricing Officer (TPO) under
Section 92CA of the Income-tax Act, what are the procedures to be followed by the TPO? Can TPO
exercise his jurisdiction on any international transaction not referred to him but subsequently
noticed by him in course of proceeding before him?
Solution:
Where any person, being the assessee, has entered into an international transaction or specified
domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient
so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the
computation of the arm's length price in relation to the said international transaction or specified domestic
transaction under section 92C to the Transfer Pricing Officer.
Procedures to be followed by TPO when reference is made to him by AO under section 92CA:
(i) The TPO shall serve a notice on the assessee requiring him to produce evidences on which he relies in
support of his computation of the arm's length price.
(ii) After considering such evidences and after taking into account all materials gathered by him, the TPO
shall pass an order determining the arm's length price and send a copy of the order to the AO and the
assessee.
(iii) The TPO shall pass the order at any time before the expiry of 60 days prior to the date on which the
time limit referred to in section 153 or section 153B for completion of assessment or reassessment
expires.
Provided that in the circumstances referred to in clause (ii) or clause (x) of Explanation 1 to section 153,
if the period of limitation available to the Transfer Pricing Officer for making an order is less than sixty
days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall
be deemed to have been extended accordingly

[Clause (ii): the period during which the assessment proceeding is stayed by an order or injunction of
any court
Clause (x): the period commencing from the date on which a reference or first of the references for
exchange of information is made by an authority competent under an agreement referred to in section
90 or section 90A and ending with the date on which the information requested is last received by the
Principal Commissioner or Commissioner or a period of one year, whichever is less;]
As per section 92CA, the jurisdiction of the TPO shall extend to the determination of the arm's length
price in respect of other international transactions which are noticed by him subsequently, in course
of proceeding before him. Such international transactions are in addition to the international transactions
referred to the TPO by the AO.
Note:
1. On receipt of the order of TPO, the Assessing Officer shall proceed to compute the total income of the
assessee in conformity with the arm's length price as so determined by the Transfer Pricing Officer.
2. With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer may amend
any order passed by him and the provisions of section 154 shall, so far as may be, apply accordingly.
3. Where any amendment is made by the Transfer Pricing Officer, he shall send a copy of his order to the
Assessing Officer who shall thereafter proceed to amend the order of assessment in conformity with
such order of the Transfer Pricing Officer.
4. The Transfer Pricing Officer may, for the purposes of determining the arm's length price under this
section, exercise all or any of the powers specified in clauses (a) to (d) of sub-section (1) of section
131 or sub-section (6) of section 133 or section 133A.
3. What is the binding nature of the arm’s length price determined by the Transfer Pricing Officer upon
a reference made to him by the Assessing Officer?
Solution:
The Assessing Officer with the prior approval of the Commissioner may refer the computation of Arm’s
Length Price to the Transfer Pricing Officer. The Transfer Pricing Officer shall determine the Arm’s Length
Price following the prescribed process and send a written copy of the Assessing Officer and the tax payer.
The Arm’s Length Price determined by the Transfer Pricing Officer shall be binding upon the Assessing
Officer and the Assessing Officer cannot complete the assessment of an income from international
transaction in disregard of the order passed by the Transfer Pricing Officer. [Section 92CA]
4. State the consequences that would follow if the Assessing Officer makes adjustment to arm’s length
price in international transactions of the assessee resulting in increase in taxable income. What are
the remedies available to the assessee to dispute such adjustment?
Solution:
In case the Assessing Officer makes adjustment to arm’s length price in an international transaction which
results in increase in taxable income of the assessee, the following consequences shall follow:-
(1) No deduction under section 10AA or Chapter VI-A shall be allowed from the income so increased.
(2) No corresponding adjustment would be made to the total income of the other associated enterprise (in
respect of payment made by the assessee from which tax has been deducted or is deductible at source)
on account of increase in the total income of the assessee on the basis of the arm’s length price so
recomputed.
The remedies available to the assessee to dispute such an adjustment are:-
(1) In case the assessee is an eligible assessee under section 144C, he can file his objections to the
variation made in the income within 30 days [of the receipt of draft order by him] to the Dispute
Resolution Panel and Assessing Officer. Appeal against the order of the Assessing Officer in pursuance
of the directions of the Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
(2) In any other case, he can file an appeal under section 246A to the Commissioner (Appeals) against
the order of the Assessing Officer within 30 days of the date of service of notice of demand.

(3) The assessee can opt to file an application for revision of order of the Assessing Officer under
section 264 within one year from the date on which the order sought to be revised is communicated,
provided the time limit for appeal to the Commissioner (Appeals) or the Income-tax Appellate Tribunal has
expired or the assessee has waived the right of such an appeal. The eligibility conditions stipulated in
section 264 should be fulfilled.
5. X Ltd., operating in India, is the dealer for the goods manufactured by Yen Ltd. of Japan. Yen Ltd.
owns 55% shares of X Ltd. and out of 7 directors of the company, 4 were appointed by them. The
Assessing Officer, after verification of transactions of ` 300 lacs of X Ltd. for the relevant year and by
noticing that the company had failed to maintain the requisite records and had also not obtained the
accountants report, adjusted its income by making an addition of ` 30,00,000 to the declared income
and also issued a show cause notice to levy various penalties. X Ltd seeks your expert opinion.
Solution:
The facts of the case indicate that X Ltd. and Yen Ltd. of Japan are associated enterprises since Yen Ltd.
holds 55% shares of X Ltd. and has appointed more than half of the board of directors of X Ltd. Since Yen
Ltd. is a non-resident, any transaction between X Ltd. and Yen Ltd. would fall within the meaning of
“international transaction” under section 92B. Therefore, the income arising from such transactions have to be
computed having regard to the arm’s length price.
The action of the Assessing Officer in making addition to the declared income and issuing show
cause notice for levy of various penalties is correct.
Section 92C(3) provides that during the course of any proceeding for the assessment of income on the basis
of material/information/document in his possession, the Assessing Officer may determine the Arm‘s Length
Price on the basis of the available material/information/document, if he is of the opinion that:
1. the price charged or paid in an international transaction has not been determined as per the prescribed
manner,
2. any information and document relating to an international transaction have not been kept and maintained
by the assessee in the prescribed manner as per Section 92D,
3. the information or data used in computation of the Arm‘s Length Price is not reliable or correct,
4. the assessee has failed to furnished, within the specified time, any information or document which he was
required to furnished by a notice issued u/s 92D.
However, the Assessing Officer, before such determination, should give the assessee, an opportunity of being
heard.
Since X Ltd. had committed defaults, as listed hereunder, in respect of which penalty, as briefed
hereunder, is imposable:
(i) Failure to maintain the requisite records as required under section 92D in relation to IT or SDT
makes it liable for penalty under section 271AA which will be 2% of the value of each international
transaction.
(ii) Failure to furnish report from an accountant as required under section 92E makes it liable for penalty
under section 271BA i.e., a fixed penalty of ` 1 Lac.
(iii) Penalty u/s 270A may also be applicable considering under-reporting or mis-reporting of income.
Note: It is assumed that X Ltd. has not entered into an APA and has also not opted to be subject to Safe
Harbour Rules.

6. Chetan (P) Ltd. located in Special Economic Zone (SEZ) since April, 2013 is engaged in
manufacturing activity by importing raw materials from its holding company Bada Inc. of UK. The
following details are furnished :
 Chetan (P) Ltd. imported goods for ` 60 crores during the financial year 2019 - 20 from Bada
Inc.
 Bada Inc. supplied similar raw materials to unrelated parties with a mark-up of 20%, whereas
for Chetan (P) Ltd. it provided a mark-up of 25%.
 Chetan (P) Ltd. was allowed to use the brand name of Bada Inc. without any payment and
whereas the unrelated parties cannot use such brand name in India. The annual cost of brand
value is ` 100 lakhs.
 Chetan (P) Ltd. was allowed credit period of 2 months, whereas for the unrelated parties, Bada
Inc. allowed only 1 month as credit period. The interest cost may be taken as 12% per annum
and the purchases were uniform throughout the year.
 The Assessing Officer referred the matter to Transfer Pricing Officer (TPO) for determination of
Arm's Length Price (ALP).
i. Compute the ALP of the transaction and adjustments to be made to the income of Chetan (P)
Ltd.
ii. What is the due date for Chetan (P) Ltd. for furnishing audit report under section 92E ?
iii. If TPO had enhanced the income of Chetan (P) Ltd. by ` 2 crores, will that enhanced amount of
income be eligible for deduction under section 10AA?
iv. Will Chetan (P) Ltd. become liable for penalty for under-reporting of income based on the report
of the TPO?
[CMA FINAL DEC 2018 – EXAM Question – 8 Marks]
Solution:
(i) Computation of income to be adjusted to the income of Cheten (P) Ltd. for AY ` in Lakhs
2020-21
Difference in mark up price between related parties and unrelated parties. The mark up (+) 240
was cost plus 25% for related party and whereas it was cost plus 20% for unrelated
parties. The cost of goods to related party is Rs. 48 crores plus 25%. To the unrelated
party it would have been 20%. Hence the adjustment would be 5% which means ` 48
crores x 5% = 2.40 crores being the extra expenditure incurred by Chetan (P) Ltd. in
India.
Cost of brand value usage obtained by Chetan (P) Ltd. free of cost due to its association (-) 100
with Bada LLC. This would have been incurred if it were an unrelated party.
Interest on extended credit period obtained from associated enterprise. The purchases (-) 5
were uniform throughout the year. Hence the benefit of the cost of capital is Rs. 5 crores
x 12% x 1/12 being the extra credit period enjoyed.
Income to be adjusted in the hands of Chetran (P) Ltd. by apply CUP method of (+) 135
ALP determination.
th
(ii) The due date for furnishing the report under section 92E is 30 November, 2020.
(iii) The income enhanced because of the order of TPO will not be eligible for deduction under section
10AA or under Chapter VI-A in view of second proviso to section 92C.
(iv) If the assessee has under-reported the income it is liable for penalty @ 50% of tax payable on under-
reported income as per section 270A.
However, if the assessee has maintained information and documents as prescribed in section 92D, it
would not be construed as under-reported income.

7. Critically comment with the help of a case law:
“An Adjustment with respect to transfer pricing has to be confined to transactions with Associated
Enterprises and cannot be made with respect to transactions with unrelated third parties”
[MTP Set 2 – Dec 2018]
Solution:
CIT -vs.- M/s Thyssen Krupp Industries Private Ltd (2015)(Bom)
The assessee is in the business of execution of turnkey contracts involving design, manufacture, supply,
erection and commissioning of sugar plants, cement plants, etc. During the subject Assessment Year, the
assessee entered into international transactions with its Associated Enterprises (AE), as well as transactions
with independent parties.
The TPO proposed an addition on account of enhancement of profit margin on all transactions of the
assessee. Aggrieved by the order, assessee filed an appeal with ITAT. The tribunal held that only
transactions entered into by an assessee with its AE are subject to transfer pricing adjustment and not
otherwise. Thus, allowing the assessee's appeal before it. Aggrieved by the order, the revenue filed an
appeal with High Court.
The High Court dismisses revenue appeal by contending that as per Chapter X of the Act,
redetermination of the consideration is to be done only with regard to income arising from International
Transactions on determination of ALP. The adjustment which is mandated is only in respect of International
Transaction and not transactions entered into by assessee with independent unrelated third parties, therefore
this adjustment is beyond the scope and ambit of Chapter X of the Act.

Section 92CE - Secondary adjustment in certain cases.
1. Where a primary adjustment to transfer price,-
(i) has been made suo motu by the assessee in his return of income;
(ii) made by the Assessing Officer has been accepted by the assessee;
(iii) is determined by an advance pricing agreement entered into by the assessee

under section 92CC on or after the 1st day of April, 2017 (w.r.e.f AY 2018-19);
(iv) is made as per the safe harbour rules framed under section 92CB; or
(v) is arising as a result of resolution of an assessment by way of the mutual agreement

procedure (MAP) under an agreement entered into under section 90 or section 90A for
avoidance of double taxation,
the assessee shall make a secondary adjustment:
Provided that nothing contained in this section shall apply, if,—
(i) the amount of primary adjustment made in any previous year does not exceed one crore
rupees; and OR
(ii) the primary adjustment is made in respect of an assessment year commencing on or

before the 1st day of April, 2016 (AY 2016-17).
Provided further that no refund of taxes paid, if any, by virtue of provisions of this sub-
section as they stood immediately before their amendment by the Finance (No. 2) Act, 2019
shall be claimed and allowed. (w.r.e.f AY 2018-19)
2. Where, as a result of primary adjustment to the transfer price, there is an increase in the total
income or reduction in the loss, as the case may be, of the assessee, the excess money which is
available with its associated enterprise, if not repatriated to India within the time as may be
prescribed (90 days from Date of Return filed or from the date of order, as the case maybe),
shall be deemed to be an advance made by the assessee to such associated enterprise and
the interest on such advance, shall be computed in such manner as may be prescribed (one
year marginal cost of fund lending rate of State Bank of India as on 1st of April of the
relevant previous year plus three hundred twenty five basis points OR six month London
Interbank Offered Rate as on 30th September of the relevant previous year plus three
hundred basis points)
Explanation - For the removal of doubts, it is hereby clarified that the excess money or part
thereof may be repatriated from any of the associated enterprises of the assessee which is
not a resident in India. (w.r.e.f AY 2018-19);
Subsection (2A) to (2D) inserted W.e.f. 01/09/2019:
(2A) Without prejudice to the provisions of sub-section (2), where the excess money or part
thereof has not been repatriated within the prescribed time, the assessee may, at his

option, pay additional income-tax at the rate of eighteen per cent on such excess money or
part thereof, as the case may be.
(2B) The tax on the excess money or part thereof so paid by the assessee under sub-section
(2A) shall be treated as the final payment of tax in respect of the excess money or part
thereof not repatriated and no further credit therefor shall be claimed by the assessee or
by any other person in respect of the amount of tax so paid.
(2C) No deduction under any other provision of this Act shall be allowed to the assessee in
respect of the amount on which tax has been paid in accordance with the provisions of
sub-section (2A).
(2D) Where the additional income-tax referred to in sub-section (2A) is paid by the assessee, he
shall not be required to make secondary adjustment under sub-section (1) and compute
interest under sub-section (2) from the date of payment of such tax.
3. For the purposes of this section,—
(i) "excess money" means the difference between the arm's length price determined in
primary adjustment and the price at which the international transaction has actually been
undertaken;
(ii) "primary adjustment" to a transfer price, means the determination of transfer price in
accordance with the arm's length principle resulting in an increase in the total income or
reduction in the loss, as the case may be, of the assessee;
(iii) [ICMAI WORK BOOK] "secondary adjustment" means an adjustment in the books of
account of the assessee and its associated enterprise to reflect that the actual allocation
of profits between the assessee and its associated enterprise are consistent with the
transfer price determined as a result of primary adjustment, thereby removing the
imbalance between cash account and actual profit of the assessee.
Question:
a) Research & Co. is engaged in providing scientific research services to several non-
resident clients. Such services are also provided to B Inc., which guarantees 15% of the
total loans of Research & Co. Examine whether transfer pricing provisions are attracted
in respect of this transaction.
b) Without prejudice to the answer to (i) above, assuming that transfer pricing provisions
are attracted in this case and that the Assessing Officer had made a primary adjustment
of ` 225 lakhs to transfer price in the P.Y. 2017-18 vide order dated 1.4.2019 and the same
was accepted by Research & Co., what are the consequent requirements as per the
Income-tax Act, 1961 and the implications of non-compliance with the said
requirements? Assume that the transaction is denominated in Indian Rupees and no
amount has been repatriated upto 31.3.2020. The one year marginal cost of fund lending
rate of State Bank of India as on 1.4.2019 is 8.15%.
[CA Final RTP: May 19]

Solution:
a) Provision of scientific research services falls within the scope of international transaction under
section 92B. Research & Co. and B Inc. are deemed to be associated enterprises as per section
92A(2), since B Inc. guarantees not less than 10% of the total borrowings of Research & Co.
Since there is an international transaction between associated enterprises, transfer pricing
provisions are attracted in this case.
b) Where the Assessing Officer has made a primary adjustment of ` 225 lakhs to the transfer price
and the same has been accepted by Research & Co., secondary adjustment has to be made in
the books of account. The excess money determined based on the primary adjustment has to
be repatriated to India within 90 days from the date of order, failing which the same would be
deemed as an advance and interest would be attracted at the one year marginal cost of fund
lending rate of State Bank of India as on 1.4.2019 + 3.25%, since the international transaction
has been denominated in Indian Rupees.
In this case, since the excess money has not been repatriated within 90 days, the same
would be deemed to be an advance made by Research & Co. to B Inc. and interest would
be attracted@11.40% (8.15% + 3.25%).

QUESTION & ANSWER
1. Vishnu Polymers Ltd., is an Indian company having transactions which are subject to transfer pricing
regulations. In June, 2020, the assessments for assessment years 2018-19 and 2019-20 were
concluded after the due process under law:
In both the years, in respect of the transactions with its associated enterprises, the ALP had been
determined in Euro. For the assessment year 2018-19, the primary adjustment, as translated into INR
was ` 90 lakhs (for transactions with N Inc., Singapore) and for the AY 2019-20, the same being ` 2.4
crores (for transactions with PK Inc., Melbourne). The assessment order was passed on 12.06.2020.
The assessee is inclined to accept the same and not prefer any appeal.
You are required to answer the following in the light of above:
(i) How will the quantum of primary adjustment be treated in the books of the assessee vis-a-vis
secondary adjustment? How will the aforesaid completed assessments impact the assessee?
(ii) What steps are to be taken to prevent the secondary adjustment? Will there be any secondary
adjustment in the hands of the assessee if the required steps are not taken? You are required to
outline the concept involved.
Answer:
Secondary adjustment:
(i) Where a primary adjustment has been made by the AO, the same impacts the assessee, inter alia,
when
The same relates to an assessment year after 2016-17.
The quantum of primary adjustment (PA) made in each year is above ` 1 crore.
The same is accepted by the assessee.
In such a situation, the same will be treated as loan or advance given by the assessee to the
associated enterprise (AE).
In the given case, since the quantum of PA made in the AY 2018-19 is below ` 1 crore, the same is to
be ignored for secondary adjustment (SA) purposes. Only the PA made in AY 2019-20 will have to be
considered.
(ii) If the SA is to be avoided, then
The AE should repatriate the funds into India in foreign exchange
within 90 days from the date of order.
If the same is not done, then interest will be deemed to accrue on such advance at the prescribed
rate.
th
Interest would be calculated on such advance at the rate of six month LIBOR as on 30 September + 3%,
since the international transaction is denominated in Euro.

2.
(a) S Limited, an Indian Company supplied billets to its holding company, G Limited, Germany during the
previous year 2019-20. S Limited also supplied the same product to another German-based company,
Z Limited, an unrelated entity. The transactions with G Limited are priced at Euro 500 per MT (FOB),
whereas the transactions with Z Limited are priced at Euro 900 per MT (CIF). Insurance and Freight
amounts to Euro 300 per MT. Compute the arm's length price for the transaction with G Limited.
During the year, 10,000 MT were supplied to G Limited. What will be the effect of the change in the
ALP on the profits of S Limited? Assuming that its export profits are covered by exemption u/s 10AA
(seventh year), will there be any increase in the quantum of exemption u/s 10AA? Assume an
exchange rate of 1 Euro = 90 INR.
(b) Enumerate the consequences that would ensue if the Assessing Officer makes adjustment to arm's
length price in international transactions of the assessee resulting in increase in total income of the
assessee. What are the remedies available to an assessee to dispute such adjustment made?
(c) When is a transaction treated as an international transaction for the transfer pricing provisions as per
section 92CB?
Answer:
(a) In this case, S Limited, the Indian company, supplied billets to its foreign holding company, G Limited. Since
the foreign company, G Limited, is the holding company of S Limited, S Limited and G Limited are the
associated enterprises within the meaning of section 92A.
As S Limited supplies similar product to an unrelated entity, Z Limited, Germany, the transactions between S
Limited and Z Limited can be considered as comparable uncontrolled transactions for the purpose of
determining the arm's length price of the transactions between S Limited and G Limited Comparable
Uncontrolled Price (CUP) method of determination of arm's length price (ALP) would be applicable in this
case.
Transactions with G Limited are on FOB basis, whereas transactions with Z Limited are on CIF basis. This
difference has to be adjusted before comparing the prices.
Particulars Amount(in Euro)

Price per MT of billets to Z Limited 900
Less: Cost of insurance and freight per M.T. 300
Adjusted Price per M.T. 600
The price charged to G Ltd., is Euro 500 and the variation is more than 16% of the adjusted price.
Since the adjusted price for Z Limited, Germany and the price fixed for G Limited are not the same, the arm's
length price is Euro 600 per MT. Since the sale price to related party (i.e., G Limited) and unrelated party
(i.e., Z Limited) is not the same and the variation is more than 16%, the transaction with related party
G Limited has not been carried out at arm's length price.
There has been under invoicing to the tune of Euro 100 per MT. Increase in profits of S Ltd for 10,000 MT
is Euro 10,000 × 100 = 10,00,000. In terms of INR, it is 10,00,000 × 90 = ` 9 crore.
S Ltd. will not be entitled to any exemption u/s 10AA in respect of the above increase in profits and
hence its total income will go up by the above figure.
(b) Consequences of adjustments made to ALP
In case the Assessing Officer makes adjustment to arm's length price in an international transaction
which results in increase in taxable income of the assessee, the following consequences shall follow:-
(1) No deduction under section 10AA or Chapter VI-A shall be allowed from the income so increased.
(2) No corresponding adjustment would be made to the total income of the other associated enterprise (in
respect of payment made by the assessee from which tax has been deducted or is deductible at source)
on account of increase in the total income of the assessee on the basis of the arm's length price so
recomputed.

Remedies available to the assessee
The remedies available to the assessee to dispute such an adjustment are:-
(1) In case the assessee is an eligible assessee under section 144C, he can file his objections to the
variation made in the income within 30 days [of the receipt of draft order by him] to the Dispute Resolution
Panel and Assessing Officer. Appeal against the order of the Assessing Officer in pursuance of the
directions of the Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
(2) In any other case, he can file an appeal under section 246A to the Commissioner (Appeals) against the
order of the Assessing Officer within 30 days of the date of service of notice of demand.
(3) The assessee can opt to file an application for revision of order under section 264 within one year from
the date on which the order sought to be revised is communicated, provided the time limit for appeal to
the Commissioner (Appeals) or the Income-tax Appellate Tribunal has expired or the assessee has
waived the right of such an appeal. The eligibility conditions stipulated in section 264 should be fulfilled.
(c) As per section 92B, an international transaction is one which satisfies the following criteria -
(i) A transaction between two or more associated enterprises, either or both of whom are non-residents;
(ii) It is in the nature of purchase, sale or lease of tangible or intangible property, or provision of services,
lending/borrowing money or any other transaction having a bearing on the profits, income, losses or
assets of such enterprises;
(iii) It includes a transaction in the nature of a mutual agreement, or arrangement between two or more
associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense
incurred (or to be incurred) in connection with a benefit, service or facility provided (or to be provided) to
any one or more of such enterprises.
3. Penalties that are imposable for violation of Transfer pricing provisions

[CMA FINAL DT - JUN 2017 EXAM]
Answer:
List out four Penalties that are imposable under Transfer Pricing:
Relevant Particulars of penalty Quantum of Penalty

Sections
271AA Failure to keep and maintain prescribed 2% of value of each international
information/documents in respect of international or transaction or specified domestic
specified domestic transaction or failure to report any transaction entered by such
international or domestic transaction or furnish incorrect person
information
271(l)(c) Adjustment to tax payers income during 100% to 300% of tax on adjusted
assessment amount
271BA Failure to furnish accountant's report u/s 92E ` 1,00,000
271G Failure to furnish information/documents during 2% value of international

assessment u/s 92D(3) transactions or specified domestic
transactions for each failure.

4. Muskaan Ltd. (MK India) is an Indian company that manufactures cricket kits in India. MK India is
eligible for deduction under section 10AA of the Income-tax Act, 1961. For its UK sales, MK India has
entered into a marketing arrangement with Kits Sports (KS UK), a UK incorporated firm. MK India
uses the patented design provided by KS UK for manufacturing of cricket kits by it. MK India supplied
30,000 sports kits to KS UK for ` 5,000 per kit. In the assessment, the Assessing Officer, increased the
price charged by MK India from KS UK to ` 6,000 per kit. MK India accepts such transfer price
adjustment adopted by the Assessing officer. As a result, there is an increase in the income of MK
India.
You are required to answer the following questions in this respect:

1. Would MK India and KS UK be treated as associate enterprises for the purposes of transfer
pricing adjustment adopted by the Assessing Officer?
2. What is the liability of KS UK in respect of the change in Ann's Length Price (ALP) in respect of
purchases made by it from MK India?
3. MK India contends that since the income is increased because of the arm's length price adopted
by the Assessing Officer, the deduction claimed by it under section 10AA should also be
increased accordingly, since the amount of deduction is based upon the amount of the export
sale. Discuss whether the contention of MK India is valid.
Solution:
1. Manufacturing of cricket kits by MK India is wholly dependent on the use of patented design provided by
KS UK and therefore MK India and KS UK are deemed to be associated enterprises as per section
92A(2).
Supply of cricket kits by MK India, a resident, to KS UK, a non-resident, would be an international

transaction between associated enterprises, and hence, transfer pricing provisions would be attracted in
this case.
2. The increased amount of ` 3 crore shall be treated as an advance given by M.K. India to KS UK which is
required to be repatriated by KS UK within 90 days from the date of order.
3. As per the first proviso to Section 92C(4), in respect of the increased income of ` 3 crores, no deduction
under section 10AA shall be allowed to MK India.
Hence, the contention of MK India that deduction under Section 10AA should be increased is not
valid.
5. Konark Digital Solutions Ltd. is an Indian Company in which Yokohoma Inc., a Singapore based
company holds 30% shareholding and voting power. During the previous year 2018-19, the Indian
company supplied laptops to the Singapore based company @ $ 800 per piece. The price of laptop
supplied to other unrelated parties in Singapore is @ $ 1200 per piece. During the course of
assessment proceedings, the AO carried out primary adjustments and added a sum of ` 130 lakhs,
being the difference between actual price of laptop and arm's length price for 500 pieces and it was
duly accepted by the assessee. On account of this adjustment, the excess money of ` 130 lakhs is
available with Yokohoma Inc, Singapore. In this context, you are requested to briefly explain the
relevant provisions of Income-tax Act, 1961 and suggest suitable solution for the following issues:
(i) What is the effect of this transaction on the taxable income of Konark Digital Solutions Ltd. for the
assessment year 2020-21 on the basis that it declared an income of ` 250 lakhs and the excess
money is still lying with Yokohoma Inc. till today?
Assume the rate of exchange as 1 $ = ` 65 and the marginal cost of lending rate of SBI as on
01.04.2019 at 10.75%.

(ii) Would taxable income of Konark Digital Solutions Ltd. undergo any change, if the above
adjustment carried out resulted in addition of ` 90 lakhs as against ` 130 lakhs?
(iii) What is the impact of this adjustment on taxable income of Konark Digital Solutions Ltd. for
assessment year 2020-21, if such adjustment pertains to the previous year 2015-16 as against
2018-19?
[CA FINAL EXAM QUESTIONs NOV 2018 – 6 Marks]
Answer:
(i) On account of the primary adjustment of ` 130 lakhs made by the Assessing Officer, the total income of
Konark Digital Solutions Ltd. for A.Y. 2019-20 would increase by ` 130 lakhs. In this case, secondary
adjustment has to be made since –
(1) The company has accepted the primary adjustment made by the Assessing Officer;
(2) The primary adjustment is in respect of A.Y. 2019-20; and
(3) The primary adjustment exceeds ` 100 lakhs.
Accordingly, the excess money (i.e., ` 130 lakhs) available with the associated enterprise (i.e.,
Yokohoma Inc., Singapore) not repatriated to India within 90 days of the date of the order of the
Assessing Officer would be deemed as an advance made by the Konark Digital Solutions Ltd. to its
associated enterprise, Yokohoma Inc. Interest would be calculated on such advance at the rate of six
th
month LIBOR as on 30 September + 3%, since the international transaction is denominated in $. Such
interest, if any, for the P.Y. 2019-20 would be added to his total income of ` 250 lakhs for A.Y. 2020-21.
In order to avoid this tax implication, the excess money (i.e., ` 130 lakhs) available with the associated
enterprise (i.e., Yokohoma Inc., Singapore) must be repatriated to India within 90 days of the date of the
order of the Assessing Officer.
(ii) Since secondary adjustment in the books of account is not required if the primary adjustment does not
exceed ` 100 lakhs, no secondary adjustment needs to be made in the books of account if the primary
adjustment for A.Y. 2019-20 is only ` 90 lakhs. The total income for A.Y. 2020-21 would, therefore, be
only ` 250 lakhs.
(iii) Secondary adjustment in the books of account is not required where the primary adjustment is made in
respect of A.Y. 2016-17 (relevant to P.Y. 2015-16) or any earlier assessment year. Therefore, there would
be no impact of this adjustment on the taxable income of the company if primary adjustment pertains to
P.Y. 2015-16. The taxable income would remain at ` 250 lakhs.

Class Notes

TRANSFER PRICING SATC J.1
COMPARABLE UNCONTROLLED PRICE METHOD (CUP)
An uncontrolled price is the price agreed between unconnected parties for the transfer of goods and services. If
this transfer is in all material respects comparable to transfers between associates, then that price becomes a
Comparable Uncontrolled Price.
Under this method, the price at which a controlled transaction is carried out is compared to the price obtained in a
comparable uncontrolled transaction.
1. Explain the applicability and the different steps for computation of Arm’s Length Price (ALP) by
Comparable Uncontrolled Price Method (CUPM).
Solution: Arm’s Length Price (ALP) with Comparable Uncontrolled Price Method:
(1) Applicability:
This method is particularly good where an independent enterprise sells the same product or service as
is sold between two associated enterprises. The uncontrolled transactions should reflect goods of a
similar type, quality and quantity as those between the associated enterprises, and relate to transactions
taking place at a similar time and stage in the production/distribution chain, with similar conditions
applying.
(2) Steps: The steps involved in the application of this method are :
(i) Identify the price charged or paid for property transferred or services provided in comparable
uncontrolled transaction or a number of such transactions;
(ii) Adjust such price to account for the differences, if any,
(a) between the international transaction and the comparable uncontrolled transaction or
(b) between enterprises entering into such transaction which could materially affect the price in
the open market;
(iii) The adjusted price is taken to be the arm's length price;
(iv) The arm's length price is compared with the price charged in the international transaction;
(v) If the price charged in the international transaction is lower than the arm's length price or the price
paid in the international transaction is higher than the arm's length price then an adjustment is to
be made to the price charged or paid in the international transaction by the amount of such
variance.
Methods of CUP:
The CUP method provides the best evidence of an arm’s length price.
CUP can be either of the following:
(1) Internal CUP: this would be available if the taxpayer (or one of its group entities) enters into a comparable
transaction with an unrelated party where the goods or services under consideration are same or similar.
Situations where Internal CUP may be applicable:
a. The tax payer or any other member of the group sells similar goods in similar quantities and under similar
terms to an independent enterprise in a similar market.
b. The tax payer or another member of the group buys similar goods in similar quantities and under similar
terms from an independent enterprise in a similar market (an internal comparable).
(2) External CUP: this would be applicable if a transaction between two independent enterprises involves
comparable goods or services under comparable conditions.
a. An independent enterprise sells the particular product in similar quantities and under similar terms to
another independent enterprise in a similar market;
b. An independent enterprise buys similar goods in similar quantities and under similar terms from another
independent enterprise in a similar market.

Computation of Arm’s Length Price as per Comparable Uncontrolled Price Method
No. Particulars Amount (`)
1 Price charged or paid for property transferred or services rendered in a XXXXX
comparable uncontrolled transaction
2 Add/Less: Adjustments for differences, having material affect on the

price in the open market:
i) Adjustments for FAR Analysis XXXX
ii) Quality of the product or service XXXX
iii) Characteristics of the Property XXXX
iv) Contractual terms XXXX
v) Level of the market XXXX
vi) Geographic market in which the transaction takes place XXXX
vii) Date of the transaction XXXX
viii) Intangible property associated with the sale XXXX
ix) Foreign currency risks XXXX
x) Time of the transaction and multiple year data XXXX
xi) Data and assumptions XXXX
xii) Indirect CUP XXXX
xiii) Use of quotation medium XXXX
xiv) Extra ordinary market conditions XXXX
3 Arm’s Length Price for the purpose of Sec.92C (1 -2) XXXX

Questions on COMPARABLE UNCONTROLLED PRICE METHOD
Illustration- Comparable Sales of same product
DSM, a manufacturer, sells the same product to both controlled and uncontrolled distributors. The circumstances
surrounding the controlled and uncontrolled transactions are substantially the same, except that the controlled
sales price is a delivered price to the buyer and the uncontrolled sales are made F.O.B. DSM’s factory.
Differences in the contractual terms of transportation and insurance generally have a definite and reasonably
ascertainable effect on price, and adjustments are made to the results of the uncontrolled transaction to account
for such differences. In this case the transactions are comparable and internal CUP can be applied by
comparing the prices of both, the controlled and uncontrolled transactions, after subtracting the costs of
transportation and insurance of the controlled transaction.
Illustration-vEffect of geographic differences
FM, a foreign specialty radio manufacturer, exports its radios to a controlled U.S. distributor, AM, which serves the
United States. FM also exports its radios to uncontrolled distributors to serve in South America. The product in
the controlled and uncontrolled transactions is the same, and all other circumstances surrounding the controlled
and uncontrolled transactions are substantially the same, other than the geographic differences. The geographic
differences e.g. differences in purchasing power, levels of economic development, etc, in two different
geographies, are likely to have a material effect on price, for which accurate adjustments cannot be made
and hence the transactions are not comparable. Thus, CUP method cannot be applied.
Illustration- External Commercial Borrowing
Pharma Ltd, an Indian company has borrowed funds from its parent company at LIBOR plus 150 basis points.
The LIBOR prevalent at the time of borrowing is 4% for US$, thus its cost of borrowings is 5.50%. The borrowings
allowed under the External Commercial Borrowings guidelines issued under FEMA, for example, say is LIBOR
plus 250 basis points, then it can be said that Pharma’s borrowing at 5.50% is less than 6.50% and thus at arm’s
length.
In this connection, one may rely on Rule 10B, which specifies that the comparability of an international
transaction with an uncontrolled transaction shall be judged with reference to the laws and government
orders in force.
Question 1:
Jackle, Korea and CD Ltd, an Indian Company are associated enterprises. CD Ltd manufactures Cel Phones and
sells them to Jackle, Korea & Fox, a Company based at Nepal. During the year CD Ltd supplied 2,50,000 Cellular
Phones to Jackle Korea at a price of ` 3,000 per unit and 35,000 units to Fox at a price of ` 5,800 per unit. The
transactions of CD Ltd with Jackle and Fox are comparable subject to the following considerations -
(a) Sales to Jackle are on FOB basis, sales to Fox are CIF basis. The freight and insurance paid for each unit
is ` 700.
(b) Sales to Fox are under a free warranty for Two Years whereas sales to Jackle are without any such
warranty. The estimated cost of executing such warranty is ` 500.
(c) Since Jackle’s order was huge in volume, quantity discount of ` 200 per unit was offered to it.
Compute the Arm’s Length Price and the amount of increase in the Total Income of CD Ltd, if any, due to
such Arm’s Length Price. CMA Final Past Questions
Solution:
A. Computation of Arm’s Length Price of Products sold to Jackle Korea by CD Ltd.
Particulars ` `
Price per Unit in a Comparable Uncontrolled Transaction 5,800
Less: Adjustment for Differences -
(a) Freight and Insurance Charges 700
(b) Estimated Warranty Costs 500
(c) Discount for Voluminous Purchase 200 (1,400)
Arms’s Length Price for Cellular Phone sold to Jackle Korea 4,400
B. Computation of Increase in Total Income of CD Ltd
Particulars `
Arm’s Length Price per Unit 4,400
Less: Price at which actually sold to Jackle Korea (3,000)
Increase in Price per Unit 1,400
No. of Units sold to Jackle Korea 2,50,000
Therefore, increase in Total Income of CD Ltd (2,50,000 x ` 1,400) ` 35 Crores

Question 2: G Ltd., an Indian company, supplied billets to its holding company, J Ltd. of Japan during
the previous year 2019-20. G Ltd. also supplied the same product to another Japanese company F Ltd.
who is an unrelated entity. The transactions with J Ltd. are priced at ¥65,000 per MT (FOB) and the
transactions with F Ltd. are priced at ¥92,000 per MT (CIF). Insurance and freight amounts to ¥16,000 per
MT. Compute the arm‘s length price for the transaction with J Ltd.
Solution: Computation of Arm‘s Length Price
Particulars Amount
¥
Price of Billets to F Ltd. per MT (in comparable uncontrolled transaction) 92,000
Less: Adjustment of differences (Insurance and Freight) (16,000)

Arm‘s Length Price of billets sold to J Ltd. 76,000
Note: Since transactions with unrelated party given, Comparable Uncontrolled Price Method to be used to
arrive at the Arm‘s Length Price of the transaction with the associated enterprise.
Question 3: International Ltd. - a US Company has a subsidiary Native Ltd. in India. International Ltd. sells
mobile phones to Native Ltd. for resale in India. International Ltd. also sells mobile phones to Country Ltd.
- another mobile phone reseller in India. The sales quantity and price fixed by International Ltd. are as
follows:
Buyer Sale Price (` / unit) Sale Quantity (mobile phones)
Native Ltd. 12,000 48,000
Country Ltd. 11,000
The warranty in case of sale of mobile phones by Native Ltd. is handled by itself, whereas for sale of
mobile phones by Country Ltd., International Ltd. is responsible for warranty for 6 months. Both
International Ltd. and Native Ltd. extended warranty at a standard rate of ` 500 per annum.
In respect of the given transactions: (i) Compute the Arm’s Length Price for Native Ltd. for the given
transactions. (ii) Compute the additions required to be made in the total income of Native Ltd. (iii) Also
state whether the provisions of Section 10AA and Chapter- VIA, are applicable on the recomputed total
income of Native Ltd.
Solution: Since, Native Ltd. is a subsidiary company of International Ltd., Native Ltd. and International Ltd. are
associated enterprises. Hence in respect of the transactions of sale of mobile phones by International Ltd. to
Native Ltd., ALP has to be computed, using the Comparable Uncontrolled Price Method, as under:
Computation of the Arm’s Length Price
Particulars Amount (` `)
Sale price charged by International Ltd. to Country Ltd. 11,000
Less: Cost of Warranty for 6 months included in the price charged to Country Ltd. 250
(` 500 ×6/12)
Arm’s Length Price (ALP) 10,750
Actual Sale price charged by International Ltd. to Native Ltd. 12,000
Difference per unit, for price charged 1,250
Additions required to be made in the computation of the total income of Native Ltd. (` 600,00,000
1,250 × 48,000 units)
Exemption under section 10AA of the Income Tax Act, 1961 and the provisions of Chapter VI-A shall not be
applicable for computation of total income of Native Ltd.
Question 4: Zenith Inc., a US company holds 30% shares in Intech Ltd. an Indian company. Zenith Inc.
sells its goods to Intech Ltd. Zenith Inc. also sells similar goods to Logitech Ltd., an Indian company
which is not an associated enterprise at ` 11,000 per unit. Zenith Inc. sells 50,000 units at ` 12,000 per
unit. The warranty in the case of sale of goods by Intech Limited is handled by Intech Limited. However, in
case of sale of goods to Logitech Limited, Zenith Inc. is responsible for warranty for 6 months. Both
Zenith Inc. and Intech Limited offer extended warranty at a standard rate of ` 1,000 per annum. Compute
arm's length price under CUP method and the amount of increase or decrease in TI of Intech Limited.
Solution: Amount (` `)
Price charged by Zenith Ltd. to Logitech Ltd. 11,000
Less: Cost of warranty included in the price charged to Logitech Ltd 500
(` 1,000 x 6/12)
Arm’s length price 10,500
Price per unit charged to Intech Ltd. 12,000
Number units supplied to Intech Ltd. 50,000
Addition to be made in the computation of total income of Intech Ltd. 7,50,00,000

Question 5:
Grand Dreams Ltd., a US company has a subsidiary, Grand India Ltd. in India. Grand Dreams Ltd. sells
computer monitors to Grand India Ltd. for resale in India. Grand Dreams Ltd. also sells computer
monitors to Computer Wizards Ltd another computer reseller. It sells 75,000 computer monitors to Grand
India Ltd. at ` 16,500 per unit. The Price fixed for Computer Wizards Ltd is ` 15,000 per unit. The warranty
in case of sale of monitors by Grand India Ltd. is handled by Grand India Ltd. However, for sale of
monitors by Computer Wizards Ltd., Grand Dreams Ltd. is responsible for the warranty for 3 months.
Both Grand Dreams Ltd. and Grand India Ltd. offer extended warranty at a standard rate of ` 1,500 per
annum. Based on these facts, discuss how the assessment of Grand India Ltd. is going to be affected?
Solution: Grand Dreams Ltd., the foreign company and Grand India Ltd., the Indian company are associated
enterprises, since Grand Dreams Ltd. holds not less than 26% voting rights in Grand India Ltd. (Being a
subsidiary of Grand Dreams Ltd., more than 50% of the voting rights of Grand India Ltd. would be held by Grand
Dreams Ltd.).
Grand Dreams Ltd. sells computer monitors to Grand India Ltd. for resale in India. Grand Dreams Ltd. also sells
identical computer monitors to Computer Wizards Ltd., which is not an associated enterprise. The price charged
by Grand Dreams Ltd. for a similar product transferred in comparable uncontrolled transaction is, therefore,
identifiable. Therefore, Comparable Uncontrolled Price (CUP) method for determining arm's length price can be
applied.
account for difference, if any, between the international transaction (i.e. transaction between Grand
Dreams Ltd. and Grand India Ltd.) and uncontrolled transaction (i.e. transaction between Grand Dreams
Ltd. and Computer Wizards Ltd.) and the price so adjusted shall be the arm's length price for the
For sale of monitors by Computer Wizards Ltd., Grand Dreams Ltd. is responsible for warranty for 3 months. The
price charged by Grand Dreams Ltd. to Computer Wizards Ltd. includes the charge for warranty for 3 months.
Hence arm's length price for computer monitors being sold by Grand Dreams Ltd. to Grand India Ltd. would be:
Particulars Amount(``)
Sale price charged by Grand Dreams Ltd. to Computer Wizards Ltd. 15,000
Less: Cost of warranty included in the price charged to CMI Ltd. (` 1,500 x 3 /12) 375
Actual price paid by Grand India Ltd. to Grand Dreams Ltd. 16,500
No. of units supplied by Grand Dreams Ltd. to Grand India Ltd. 75,000
Addition required to be made in the computation of total income of Grand India Ltd. 14,06,25,000
(` 1,875 x 75,000)
No deduction under chapter Vl-A would be allowable in respect of the enhanced income of ` 14.06 crores.
Note: It is assumed that Grand India Ltd. has not entered into an advance pricing agreement or opted to be
Question 6:
A Co Ltd. of Chennai and Sky Inc. of Singapore are associate enterprises. A Co Ltd. imported 1000
television sets at ` 16,000 per set without any warranty period. A Co Ltd. also imports similar TV sets from
unrelated party Sign Inc. of Japan. It is imported at ` 15,000 per set with warranty time of 2 years. The cost
of warranty in respect of goods imported from Sky Inc. for a period of 2 years would cost ` 2,000.
Compute arm's length price and the amount of increase in total income of A Co Ltd. as per CUP method.
Determination of the ALP under CUP method - A Co. Ltd.
Amount (`)
Purchase price of television set per unit, from Sign Inc (unrelated party) including 15,000
warranty cost for 2 years
Less: Adjustment for warranty cost to arrive at price without warranty cost 2,000
ALP 13,000
Purchase price of television set per unit, from Sky Inc., without warranty 16,000
Excess differential price per unit, liable for ALP adjustment 3,000
No. of television sets involved 1,000
Reduction in purchase price, having an impact of increasing the total income 30,00,000
(`
` 3,000 x 1,000)

Question 7:
Fox Solutions Inc. a US Company, sells Laser Printer Cartridge Drums to its Indian Subsidiary Quality
Printing Ltd at $ 20 per drum. Fox Solutions Inc. has other takers in India for its Cartridge Drums, for
whom the price is $ 30 per drum. During the year, Fox Solutions had supplied 12,000 Cartridge Drums to
Quality Printing Ltd. Determine the Arm’s Length Price and taxable income of Quality Printing Ltd if its
income after considering the above is ` 45,00,000. Compliance with TDS provisions may be assumed and
Rate per USD is ` 45. Also determine income of Fox Solutions Inc.
Solution:
(A) Computation of Total Income of Quality Printing Ltd
Particulars Amount (`) Amount(`)
Total Income before adjusting for differences due to Arm’s Length Price 45,00,000
Add: Difference on Account of adopting Arm’s Length Price [12,000 x $20 x ` 1,08,00,000
45]
Less: Amount under Arm’s Length Price[12,000 x $ 30 x ` 45] 1,62,00,000
Incremental Cost on adopting ALP u/s 92(3), Taxable Income cannot be (54,00,000)
reduced on applying ALP. Therefore, difference on account of ALP is ignored.
Total Income of Quality Printing Ltd. 45,00,000
(B) Computation of Total Income of Fox Solutions Inc.

The provisions relating to taxing income of Fox Solutions Inc., on applying Arm’s Length Price for
transactions entered into by a Foreign Company is given in Circular 23 dated 23.7.1969, which is as follows:
a. Transactions Not Taxable in India: Transactions will not be subject tax in India if transactions are on
principal-to-principal basis and are entered into at ALP, and the subsidiary also carries on business on
its own.
b. Transactions Taxable in India if the Indian Subsidiary does not carry on any business on its own. The
following are the other considerations in this regard:
I. Adopting ALP does not affect the computation of taxable income of Fox Solutions Inc. if tax has
been deducted at source or if tax is deductible
II. Where ALP is adopted for taxing income of the Parent Company, income of the recipient Company
(i.e. Quality Printing Ltd) will not be recomputed.
Question 8:
MND Inc., a company incorporated in US, sells printer to its 100% Indian subsidiary SW Ltd. @ $100 per
printer. MND Inc. also sells its printer to another company RD Ltd. in India @ $120 per printer. Total
income of SW Ltd. for the assessment year 2020-21 is ` 14,00,000 after making payment for 50 printers @
$100(1$=`50). SW Ltd. has deducted tax at source while making payment to MND Inc. Compute the arm’s
length price and taxable income of MND Inc. and SW Ltd. Assume the rate of one Dollar to be equivalent
to ` 50 in all transaction.
What will be yours answer, if MND Inc. sells its printer to RD Ltd. @ $90 per printer.
Answer:
MND Inc. sells its printer to RD Ltd. @ $120 per printer Arm’s Length Price of printer which is sold to SW Ltd.
will be $120 per printer.
Income of SW Ltd.:
`)
Income as per books of accounts 14,00,000

Add: amount charged by MND Ltd. [$100 × 50 × ` 50] 2,50,000
Less: Arm’s Length Price [$120 × 50 × ` 50] 3,00,000
Income after applying Arm’s Length Price 13,50,000
By virtue of section 92(3), one cannot reduce taxable income by applying Arm’s Length Price, Therefore, income
of SW Ltd. will be ` 14,00,000.
MND Inc. sells its printer to RD Ltd. @ $90 per printer Arm’s Length Price will be $90 per printer. Income of
SW Ltd. after applying Arm’s Length Price = `14,00,000 + `2,50,000 – `2,25,000 [i.e. $90× 50 × `50] = `
14,25,000.

Income of MND Ltd.:
If we assume that the transaction are actually on a principal to principal basis and are at Arm’s Length and SW
Ltd. functions and carries on business on its own, instead of functioning as an agent of the present company, then
MND Ltd. is not chargeable to tax in India. Otherwise, MND Ltd. will be chargeable to tax in India in respect of
income which arises on sale of goods to SW Ltd. However, the adoption of Arm’s Length Price by the Assessing
Officer will not affect the computation of taxable of MND Ltd.
Question 9:
W Ltd. an Indian company sells computer monitor to its 100% subsidiary Q Ltd. in United States @ $70
per piece. W Ltd. also sells its computer monitor to another Company Z Ltd. in United States @ $90 per
piece. Total income of W Ltd. for the assessment year 2020-21 is ` 15,00,000 which includes sales made
for 120 computer monitor @ $70 to Q Ltd. Compute the arm‘s length price and taxable income of W Ltd
and Q Ltd. The rate of one dollar may be assumed to be equivalent to ` 50 for the sake of simplicity.
Solution:
Arm‘s length price ($90 x 120 x ` 50) = ` 5,40,000
Income of W Ltd.:
Particulars `
Income as per books of account 15,00,000
Less: Sale consideration 120 monitor sold to Q Ltd.(recorded price) 4,20,000
Add: Sale consideration at arm‘s length price 5,40,000
Taxable income 16,20,000
Income of Q Ltd.: As no income is deemed to accrue or arise in India, nothing is taxable in the hands of Q Ltd.
Question 10:
Khazana Ltd is an Indian Company engaged in the business of developing and manufacturing Industrial
components. Its Canadian Subsidiary Techpro Inc. supplies technical information and offers technical
support to Khazana for manufacturing goods, for a consideration of Euro 1,00,000 per year.
Income of Khazana Ltd is ` 90 Lakhs. Determine the Taxable Income of Khazana Ltd if Techpro charges
Euro 1,30,000 per year to other entities in India. What will be the answer if Techpro charges Euro 60,000
per year to other entitles. (Rate per Euro may be taken at ` 50)
Solution:
Computation of Total Income of Khazana Ltd.
Particulars
Price actually paid by Khazana Ltd [€ 1,00,000 x 50] 50,00,000 50,00,000
Less: Price charged in Rupees ( under ALP) 65,00,000 30,00,000
[€ 1,30,000 x 50]
[€ 60,000 x 50]
Incremental Profit on adopting ALP [A] (15,00,000) 20,00,000

Total Income before adjusting for differences due to Arm’s Length Price 90,00,000 90,00,000
Add: Difference on account of adopting Arm’s Length Price [ if (A) is positive] Nil 20,00,000
Total Income of Khazana Ltd 90,00,000 1,10,00,000
Note: U/s 92(3), Taxable Income cannot be reduced on applying ALP. Therefore, difference on account of ALP
which reduces the Taxable Income is ignored

Question 11:
Chetan (P) Ltd. located in Special Economic Zone (SEZ) since April, 2012 is engaged in manufacturing
activity by importing raw materials from its holding company Bada Inc. of UK. The following details are
furnished:
Chetan (P) Ltd. imported goods for ` 60 crores during the financial year 2019-20 from Bada Inc.
Bada Inc. supplied similar raw materials to unrelated parties with a mark-up of 20%, whereas for
Chetan (P) Ltd. it provided a mark-up of 25%.
Chetan (P) Ltd. was allowed to use the brand name of Bada Inc. without any payment and whereas
the unrelated parties cannot use such brand name in India. The annual cost of brand value is
` 100 lakhs.
Chetan (P) Ltd. was allowed credit period of 2 months, whereas for the unrelated parties, Bada Inc.
allowed only 1 month as credit period. The interest cost may be taken as 12% per annum and the
purchases were uniform throughout the year.
The Assessing Officer referred the matter to Transfer Pricing Officer (TPO) for determination of
Arm’s Length Price (ALP).
Compute the ALP of the transaction and adjustments to be made to the income of Chetan (P) Ltd.
(i) What is the due date for Chetan (P) Ltd. for furnishing audit report under section 92E?
(ii) If TPO had enhanced the income of Chetan (P) Ltd. by ` 2 crores, will that enhanced amount of
income be eligible for deduction under section 10AA?
(iii) Will Chetan (P) Ltd. become liable for penalty for under-reporting of income based on the report of
the TPO?
Answer:
(i) Computation of income to be adjusted to the income of Cheten (P) Ltd. for ` in
AY 2020-21 Lakhs
Difference in mark up price between related parties and unrelated parties. The mark-
up was cost plus 25% for related party and whereas it was cost plus 20% for
unrelated parties. The cost of goods to related party is ` 48 crores plus 25%. To the
unrelated party it would have been 20%. Hence the adjustment would be 5% which (+) 240
means ` 48 crores x 5% = 2.40 crores being the extra expenditure incurred by
Chetan (P) Ltd. in India.
Cost of brand value usage obtained by Chetan (P) Ltd. free of cost due to its (-) 100
association with Bada LLC. This would have been incurred if it were an unrelated
party.
Interest on extended credit period obtained from associated enterprise. The (-) 5
purchases were uniform throughout the year. Hence the benefit of the cost of capital
is ` 5 crores x 12% x 1/12 being the extra credit period enjoyed.
Income to be adjusted in the hands of Chetran (P) Ltd. by apply CUP method of ALP (+) 135
determination.
(ii) The due date for furnishing the report under section 92E is 30th November, 2020.
(iii) The income enhanced because of the order of TPO will not be eligible for deduction under
section 10AA or under Chapter VI-A in view of second proviso to section 92C.
(iv) If the assessee has under-reported the income it is liable for penalty @ 50% of tax payable on
under-reported income as per section 270A.
However, if the assessee has maintained information and documents as prescribed in section 92D,
it would not be construed as under-reported income.

Question 12:
ABC Inc., a US company has a subsidiary, XYZ Ltd. in India. ABC Inc. sells LEDs to XYZ Ltd. for resale in
India. ABC Inc. also sells LEDs to PQR Ltd., another LED reseller in India. It sells 30,000 LEDs to XYZ Ltd.
at ` 22,000 per unit. The price fixed for PQR Ltd. is ` 18,000 per unit. The warranty in case of sale of LEDs
by XYZ Ltd. is handled by XYZ Ltd. However, for sale of LEDs by PQR Ltd., ABC Inc. is responsible for the
warranty for 6 months. Both ABC Inc. and XYZ Ltd. offer extended warranty at a standard rate of ` 2,500
per annum. On these facts, examine how the assessment of XYZ Ltd. is going to be affected.
Solution:
ABC Inc., the foreign company and XYZ Ltd., the Indian company are associated enterprises since ABC Inc. is
the holding company of XYZ Ltd. ABC Inc. sells LEDs to XYZ Ltd. for resale in India. ABC Inc. also sells identical
LEDs to PQR Ltd., which is not an associated enterprise. The price charged by ABC Inc. for a similar product
transferred in comparable uncontrolled transaction is, therefore, identifiable. Therefore, Comparable
Uncontrolled Price (CUP) method for determining arm’s length price can be applied.
While applying CUP method, the price in comparable uncontrolled transaction needs to be adjusted to account for
difference, if any, between the international transaction (i.e. transaction between ABC Inc. and XYZ Ltd.) and
uncontrolled transaction (i.e. transaction between ABC Inc. and PQR Ltd.) and the price so adjusted shall be the
arm’s length price for the international transaction.
For sale of LEDs by PQR Ltd., ABC Inc. is responsible for warranty for 6 months. The price charged by ABC Inc.
to PQR Ltd. includes the charge for warranty for 6 months. Hence, the arm's length price for LEDs being sold by
ABC Inc. to XYZ Ltd. would be:
Particulars No. `
Sale price charged by ABC Inc. to PQR Ltd. 18,000
Less: Cost of warranty included in the price charged to
PQR Ltd. (`` 2,500 x 6 /12) 1,250
Actual price paid by XYZ Ltd. to ABC Inc. 22,000
No. of units supplied by ABC Inc. to XYZ Ltd. 30,000
Addition required to be made in the computation of total income of XYZ Ltd.
(`
` 5,250 × 30,000) 15,75,00,000
No deduction under Chapter VI-A would be allowable in respect of the enhanced income of ` 15.75 crores.
Note: It is assumed that XYZ Ltd. has not entered into an advance pricing agreement or opted to be
Question 13:
ABC Ltd. is an Indian Company in which XYZ Inc., a French company, has 32% shareholding and
voting power. Following transactions were effected between these two companies during the financial
year 2019-20.
(i) ABC Ltd. sold 50,000 pieces of tie at $ 2 per tie to XYZ Inc. The identical ties were sold to unrelated
party namely PQR Inc., at $ 3 per tie.
(ii) ABC Ltd. borrowed $ 1,50,000 from a foreign lender based on the guarantee of XYZ Inc. For this,
ABC Ltd. paid $ 8,000 as guarantee fee to XYZ Inc. From an unrelated party for the same amount
of loan, XYZ Inc. collected $ 6,000 as guarantee fee.
(iii) ABC Ltd. paid $12,000 to XYZ Inc. for getting various potential customers details to improve its
business. XYZ Inc. provided the same service to unrelated parties for $ 8,000.
Assume the rate of exchange as 1 $ = ` 64

ABC Ltd. is located in a Special Economic (SEZ) and its income before transfer pricing adjustments
for the year ended 31st March, 20 was ` 900 lakhs.
Compute the adjustments to be made to the total income of ABC Ltd. State whether it can claim
deduction under section 10AA for the income enhanced by applying transfer pricing provisions.

Solution:
ABC Ltd, the Indian company and XYZ Inc., the French company are deemed to be associated enterprises as
per section 92A(2)(a), since XYZ Inc. holds shares carrying not less than 26% of the voting power in ABC Ltd.
As per Explanation to section 92B, the transactions entered into between these two companies for sale of
product, lending or guarantee and provision of services relating to market research are included within the
meaning of “international transaction”.
Accordingly, transfer pricing provisions would be attracted and the income arising from such international
transactions have to be computed having regard to the arm’s length price. In this case, from the information
given, the arm’s length price has to be determined taking the comparable uncontrolled price method to be the
most appropriate method.
Particulars ` in lakhs
Amount by which total income of ABC Ltd. is enhanced on account of
adjustment in the value of international transactions:
(i) Difference in price of tie @ $ 1 each for 50,000 pieces sold to XYZ
Inc. ($ 1 x 50,000 x ` 64) 32.00
(ii) Difference for excess payment of guarantee fee to XYZ Inc. for loan
borrowed from foreign lender ($ 2,000 x ` 64) 1.28
(iii) Difference for excess payment for services to XYZ Inc. ($ 4,000 x ` 64) 2.56
35.84
ABC Ltd. cannot claim deduction under section 10AA in respect of ` 35.84 lakhs, being the amount of
income by which the total income is enhanced by virtue of the first proviso to section 92C(4).
Question 14:
Switz Inc., a swiss company has a subsidiary, Bharat Ltd. in India. Swiss Inc. sells LEDs to Bharat Ltd. for
resale in India. Switz Inc. also sells LEDs to Hindustan Ltd., another LED dealer for resale in India. It sells
35,000 LEDs to Bharat Ltd. at ` 21,000 per unit. The price fixed for Hindustan Ltd. is ` 18,000 per unit. The
warranty in case of sale of LEDs by Bharat Ltd. is handled by Bharat Ltd. However, for sale of LEDs by
Hindustan Ltd., Switz Inc. is responsible for the warranty for 4 months. Both Switz Inc. and Bharat Ltd.
offer extended warranty at a standard rate of ` 2,400 per annum. On these facts, how is the assessment of
Bharat Ltd. going to be affected?
Solution:
Switz Inc., the foreign company and Bharat Ltd., the Indian company are associated enterprises since Switz Inc.
is the holding company of Bharat Ltd. Switz Inc. sells LEDs to Bharat Ltd. for resale in India. Switz Inc. also sells
identical LEDs to Hindustan Ltd., which is not an associated enterprise. The price charged by Switz Inc. for a
similar product transferred in comparable uncontrolled transaction is, therefore, identifiable. Therefore,
Comparable Uncontrolled Price (CUP) method for determining arm’s length price can be applied.
While applying CUP method, the price in comparable uncontrolled transaction needs to be adjusted to account for
difference, if any, between the international transaction (i.e. transaction between Switz Inc. and Bharat Ltd.) and
uncontrolled transaction (i.e. transaction between Switz Inc. and Hindustan Ltd.) and the price so adjusted shall
be the arm’s length price for the international transaction.
For sale of LEDs by Hindustan Ltd., Switz Inc. is responsible for warranty for 4 months. The price charged by
Switz Inc. to Hindustan Ltd. includes the charge for warranty for 4 months. Hence, arm's length price for LEDs
being sold by Switz Inc. to Bharat Ltd. would be:
Particulars `
Sale price charged by Switz Inc. to Hindustan Ltd. 18,000
Less: Cost of warranty included in the price charged to Hindustan Ltd.
(`
` 2,400 x 4 /12) 800
Actual price paid by Bharat Ltd. to Switz Inc. 21,000
No. of units supplied by Switz Inc. to Bharat Ltd. 35,000
Addition required to be made in the computation of total income of Bharat Ltd.
(`
` 3,800 × 35,000) 13,30,00,000

No deduction under Chapter VI-A would be allowable in respect of the enhanced income of ` 13.30
crores.
Note: It is assumed that Bharat Ltd. has not entered into an advance pricing agreement or opted to be subject
to Safe Harbour Rules.
Question 15:
EF Limited, an Indian company, is engaged in manufacturing electronic components. 74% of shares of the
company are held by EF Inc., incorporated in USA. EF Limited has borrowed funds from EF Inc. at LIBOR
plus 150 points. The LIBOR prevalent at the time of borrowing is 4% for US $. The borrowings allowed
under the External Borrowing Guidelines issued under Foreign Exchange Management Act are LIBOR
plus 200 basis points. Discuss whether the borrowing made by EF Limited is at arm's length (‘LIBOR'
means London inter-bank offer rate).
Answer
EF Inc., USA and EF Limited, the Indian company, are associated enterprises since the former holds 74% shares
in the latter.
The arm's length rate of interest can be determined by using Comparable Uncontrolled Price Method (CUP
method) having regard to the rate of interest on external commercial borrowing permissible as per the guidelines
issued under Foreign Exchange Management Act.
The interest rate permissible is LIBOR plus 200 basis points i.e., 4% + 2% = 6%, which can be taken as the arm’s
length rate. The interest rate applicable on the borrowing by EF Limited, India from EF Inc., USA, is LIBOR plus
150 basis points i.e., 4% + 1.5% = 5.5%. Since the rate of interest, i.e. 5.5% is less than the arm's length rate of
6%, the borrowing made by the EF Ltd. is not at arm’s length.
However, in this case, the taxable income of EF Ltd., India, would be lower if the arm’s length rate is applied.
Hence, no adjustment is required since the law of transfer pricing will not apply if there is a negative impact on the
existing profits.
Note - One of the methods for determination of arm's length price in an international transaction is Comparable
Uncontrolled Price method (CUP). Under the CUP method, the price charged or paid for property transferred or
services rendered in a comparable uncontrolled transaction, or a number of such transactions, is identified.
Such price is adjusted to account for differences, if any, between the international transaction and the comparable
uncontrolled transaction or between the enterprises entering into such transactions, which could materially affect
the price in the open market. The adjusted price so arrived at is taken to be an arm’s length price in respect of the
property transferred or services provided in the international transaction.
Question 16:
M Ltd., a US company has a subsidiary, N Ltd., in India. M Ltd. sells computer monitors to N Ltd. for resale
in India. M Ltd. also sells computer monitors to K Ltd., another computer reseller. It sells 50,000 computer
monitors to N. Ltd. at ` 11,000 per unit. The price fixed for K Ltd. is ` 10,000 per unit. The warranty in case
of sale of monitors by N Ltd. is handled by N Ltd. However, for sale of monitors by K Ltd., M Ltd. is
responsible for the warranty for 3 months. Both M Ltd. and N Ltd. offer extended warranty at a standard
rate of ` 1,000 per annum. On these facts, determine the ALP and the effect on the net profit/income of the
assessee-company.
[CA FINAL EXAM QUESTIONs - May 2017]

Solution:
M Ltd., the foreign company, and N Ltd., the Indian company, are associated enterprises since M Ltd. is the
holding company of N Ltd. M Ltd. sells computer monitors to N Ltd. for resale in India. M Ltd. also sells identical
computer monitors to K Ltd., which is not an associated enterprise. The price charged by M Ltd. for a similar
product transferred in comparable uncontrolled transaction is, therefore, identifiable. Therefore, Comparable
Uncontrolled Price (CUP) method for determining arm’s length price can be applied.
For sale of monitors by K Ltd., M Ltd. is responsible for warranty for 3 months. The price charged by M Ltd. from K
Ltd. includes the charge for warranty for 3 months. Hence arm's length price for computer monitors being sold by
M Ltd. to N Ltd. would be:
Particulars `
Sale price charged by M Ltd. from K Ltd. 10,000
Less: Cost of warranty included in the price charged to K Ltd. (`
` 1,000 x 3/12) 250
Actual price paid by N Ltd. to M Ltd. 11,000
No. of units supplied by M Ltd. to N Ltd. = 50,000
Addition required to be made in the computation of total income of N Ltd.
(`
` 1,250 × 50,000) 6,25,00,000
Notes:
account for difference, if any, between the international transaction (i.e. transaction between M Ltd. and N
Ltd.) and uncontrolled transaction (i.e. transaction between M Ltd. and K Ltd.) and the price so adjusted
shall be the arm’s length price for the international transaction.
It is assumed that N Ltd. has not entered into an advance pricing agreement or opted to be subject to
Safe Harbour Rules.
No deduction under Chapter VI-A would be allowable in respect of the enhanced income of ` 6.25 crores.

TRANSFER PRICING SATC K.1
RESALE PRICE METHOD (RPM)
1. The RPM is a direct method which comprises the gross margins (i.e. gross profit over sales) earned in
transactions between related and unrelated parties for the determination of the arm’s-length price.
2. The RPM method requires high level of functional comparability and is mainly applicable where the
controlled party is a distributor.
3. Applicability of RPM:
This method is ideally suited to measure the value of the services performed by a buyer or seller of
goods who generally acts as a distributor and does not add a significant value to goods sold. It is
applicable even with differences in products, as long as the functions performed are similar. However, it is
less useful where goods are further processed or in nature of raw material.
RPM is applied in a backward process. From the sale price to an unrelated third party, appropriate
adjustments to the gross margin is made by comparing the transaction to other, third party transactions.
a) This method can be applied when there are no comparable uncontrolled sales and an applicable resale
price is available within a reasonable time before or after the controlled sale.
b) Where the reseller does not add substantial value to the goods through physical modification. Limited
enhancements such as packaging, repackaging, labeling or minor assembly ordinarily do not generally
affect the use of RPM. Hence, RPM may not be applicable if the reseller performs value added
functions.
c) RPM is more accurate where it is realized within a short time of the reseller’s purchase of goods.
d) RPM is ordinarily used when the controlled reseller does not use intangible property to add substantial
value to the products.
e) RPM is applied when the reseller does not alter the physical characteristics of the product.
f) Where the reseller has the exclusive right to resell the goods, the gross margin would be affected
by factors like size of market, existence of substitute goods, and level of activity undertaken by
the reseller.
4. How do you determine Arm’s Length Price under Resale Price Method?
Answer:
Resale Price Method is applied when a property purchased or service obtained from an associated enterprise
is resold to an unrelated enterprise. This method is suitable in cases where goods are resold within a
short period of purchased and influenced of other factors is found to be minimal.
Arm’s Length Price under Resale Price Method can be determined using the following steps:
Step I: Identify the price at which property purchased or service obtained by the enterprise from an
associated enterprise is resold or are provided to an unrelated enterprise.
Step II: Reduce the normal GP margin accruing to the enterprise or to an unrelated enterprise from the
purchase and resale of the same or similar property or from obtaining and providing the same or
similar services, in a comparable uncontrolled transaction(s).
Step III: Reduce expenses incurred by the enterprise in connection with the purchase of property or
obtaining of services.
Step IV: Adjust for functional and other differences, including differences in accounting practices, if any,
between the international transaction and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions, which could materially affect the
amount of gross profit margin in the open market.
Step V: Arm’s Length Price = Step I Less Step II & III Add / Less Step IV.

5. Computation of Arm’s Length Price as per RPM Method
No. Particulars Amount (`)
1 Price at which property purchased or services obtained by the XXXXX
enterprise from an associated enterprise are resold or are provided to
an unrelated enterprise.
2 Add/Less: Adjustments for differences, having material affect on the

price in the open market:
i) Adjustments for FAR Analysis XXXX
ii) Quality of the product or service XXXX
iii) Characteristics of the Property XXXX
iv) Contractual terms XXXX
v) Level of the market XXXX
vi) Inventory Turnover XXXX
vii) Intangible property associated with the sale XXXX
viii) Foreign currency risks XXXX
ix) Data and assumptions XXXX
x) Extra ordinary market conditions XXXX
3 Arm’s Length Price for the purpose of Sec.92C (1 -2) XXXX

Illustrations on RESALE PRICE METHOD
Question:
Swinhoe LLP of France and Rani Ltd of India are associated enterprises. Rani Ltd. imports 3,000 compressors for
Air Conditioners from Swinhoe at ` 7,500 per unit and these are sold to Paharpur Cooling Solutions Ltd at a price
of ` 11,000 per unit. Rani had also imported similar products from Cold Ltd and sold outside at a Gross Profit of
20% on Sales.
Swinhoe offered a quantity discount of ` 1,500 per unit. Cold could offer only ` 500 per unit as Quantity Discount.
The freight and customs duty paid for imports from Swinhoe LLP had cost Rani ` 1,200 a piece. In respect of
purchase from Cold Ltd., Rani Ltd. had to pay ` 200 only as freight charges.
Determine the Arm’s Length Price and the amount of increase in Total Income of Rani Ltd.
Solution:
A. Computation of Arm’s Length Price of Products bought from Swinhoe, France by Rani Ltd.
Resale Price of Goods Purchased from Swinhoe 11,000
Less: Adjustment for Differences –
(a) Normal Gross Profit Margin at 20% of Sale Price [20% × ` 11,000] 2,200
(b) Incremental Quantity Discount by Swinhoe [`` 1,500 – ` 500] 1,000
(c) Difference in Purchase related Expenses [`
` 1,200 – ` 200] 1,000
Arms Length Price 6,800
B. Computation of Increase in Total Income of Rani Ltd

Particulars `
Price at which actually bought from Swinhoe LLP of France 7,500
Less :Arms Length Price per unit under Resale Price Method (6,800)
Decrease in Purchase Price per Unit 700
No. of Units purchased from Swinhoe 3,000
Therefore, increase in Total Income of Rani Ltd [3,000 Units × ` 700] ` 21,00,000
Illustration:
A Ltd. an Indian company purchases microwave ovens from its parent company situated in US. The same
are sold to third party customers in India. The price of the microwave oven set is ` 9,000 and the same is
sold for ` 12,000. A Ltd. also purchases washing machines from another company in UK who is not a
related party for ` 10,000. The washing machines are sold to customers in India for ` 12,000. A Ltd.
performs the same functions in case of both purchases of microwave oven and washing machines, that is
reselling the goods to the Indian customer. Both the products are sold in the same market and in the
same conditions.
Analysis
In this case A Ltd. has transactions with the US Company and the UK Company. The transactions with the US
Company are controlled transactions and those with the UK Company are uncontrolled transactions. However,
the functions performed in case of both type of transactions are same/similar, that is distributing the same to the
third party customers in India without adding any value. Further, the product purchased from US Company and
from UK Company are both consumer durables. Though the products need not be similar but the functions are
similar and both products broadly fall within the same industry (the white goods industry segment).
Hence, for the purpose of RPM, these transactions can be taken as the basis of comparison. The RPM for
this product would be calculated as under:
Particulars Microwave Oven (`

`) Washing Machine (`
`)
Sale Value 12,000 12,000
Cost of Goods Sold 9,000 10,000
Other Expenses 1,500 1,000
Gross Profit (GP) 1,500 1,000
Gross Profit Margin (%) 12.5 8.33
In this case the gross profit margin in case of purchases made from related party is higher as compared to the
margin in respect of purchases made from the unrelated party. Hence the controlled transactions are at Arm’s
Length

Class Notes

TRANSFER PRICING SATC L.1
COST PLUS METHOD (CPM)

1. The cost plus method determines an arm’s length price by adding an appropriate gross profit margin to an
associated entity’s costs of producing products or services.
The gross profit margin should reflect the functions performed by an entity and should include a return
for capital used and risks accepted by the entity.
The gross profit margin for a controlled transaction is calculated by reference to the gross profit
margins made in comparative uncontrolled transactions.
2. Steps in Computation of Arm’s Length Price using Cost Plus Method
Step I: Determine the direct and indirect costs of production incurred by the enterprise in respect of
property transferred or services provided to an associated enterprise.
Step II: Determine the normal GP mark-up to such costs (computed under same accounting norms)
arising from the transfer or provision of the same or similar property or services by the
enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction(s).
Step III: Adjust the normal gross profit mark-up referred to in Step II to take into account the functional
and other differences, if any, between the international transaction and the comparable
uncontrolled transactions, or between the enterprises entering into such transactions, which
could materially affect such profit mark-up in the open market.
Step IV: Arm’s Length Price = Step I Add Step III
3. Scope: Application of CPM:
The CPM is ordinarily used where

a) Semi finished goods are sold between related parties;
b) Contract/Toll Manufacturing arrangements have been entered;
c) Long-term buy and supply arrangements have been entered; and
d) Services are provided.
4. Computation of Arm’s Length Price as per CPM Method
Same as RPM Method

Questions on COST PLUS METHOD
Question 1:
Branco Inc., French Company, holds 45% of Equity in the Indian Company Chirag Technologies Ltd (CTL).
CTL is engaged in development of software and maintenance of the same for customers across the globe.
Its clientele includes Branco Inc. During the year, CTL had spent 2,400 Man Hours for developing and
maintaining software for Branco Inc, with each hour being billed at ` 1,300. Costs incurred by CTL for
executing work for Branco Inc. amount to ` 20,00,000. CTL had also undertaken developing software for
Harsha Industries Ltd for which CTL had billed at Rs. 2,700 per Man Hour. The persons working for
Harsha Industries Ltd. and Branco Inc. were part of the same team and were of matching credentials and
caliber. CTL had made a Gross Profit of 60% on the Harsha Industries work.
CTL’s transactions with Branco Inc. are comparable to the transactions with Harsha Industries, subject to
the following differences:
a) Branco Inc. gives technical know-how support to CTL which can be valued at 8% of the normal gross
profit. Harsha Industries does not provide any such support.
b) Since the work for Branco involved huge number of man hours, a quantity discount of 14% of Normal
Gross Profits was given.
c) CTL had offered 90 Days credit to Branco the cost of which is measured at 2% of the Normal Gross
Profits, No such discount was offered to Harsha Industries Ltd.
Compute ALP and the amount of increase in Total Income of Chirag Technologies Ltd.
Solution:
(a) Computation of Arms Length Gross Profit Mark Up
Particulars % %
Normal Gross Profit Mark Up 60.00
Less:
Adjustment for differences:(which had the effect of reducing the profit of CTL)
A. Technical support from Branco Inc. (8% of Normal Gross Profit 60%) 4.80
B. Quantity Discount @ 14% of Normal Gross Profit (14% of 60%) 8.40 (13.20)
Normal Gross Profit Rate of CTL, had the transaction been unrelated and there been no 46.80
technical support or quantity discount
Add: Cost of Credit to Branco Inc. @2% of Normal Gross Profit (2% of Gross Profit 60%) [since +1.20
this had effect of increasing the gross profit of CTL]
Arms Length Gross Profit Mark-up 48.00
(b) Computation of Increase in Total Income of CTL for services to Branco Inc.
`)
Cost of Services provided to Branco 20,00,000
Billed Value at Arm’s Length - [ Cost / (100 – Arm’s Length Mark)]
- ` 20,00,000/ (100% -48%) 38,46,154
Less: Actual Billing to Branch Inc. [2,400 x 1,300] (31,20,000)
Increase in Total Income of Branco Inc. 7,26,154
Question 2:
Indco, an Indian company, manufactures specialized stamping equipment for uncontrolled companies in
the manufacturing industry using designs supplied to them by the arm’s length parties. Indco realizes its
costs plus a mark-up of 8% on this custom manufacturing. Under the arm’s length agreements, costs are
defined as the sum of direct costs (i.e., labour and materials) plus 50% of the direct costs. The additional
50% of direct costs is intended to approximate indirect costs, including overhead. Indco also
manufactures stamping machines for its Chinese subsidiary, Chco, using designs supplied by Chco.
Under the Chco agreement, costs are defined as the sum of the direct costs plus the indirect costs,
including overhead is also computed at 50% of direct costs, and the mark-up earned is 10% of the direct
and indirect costs.
Solution: Calculation of arm’s length cost mark up

Cost plus markup from uncontrolled transactions 8%
Cost plus mark up from controlled transactions 10%
Thus the controlled transactions are at Arm’s Length.
However, in practice, globally it is found that it is not feasible to apply this method.
Question 3:
Techno King India Ltd., is a financial BPO arm of Techno King Inc., Germany. It bills Techno King Inc., at $
20,00,000 per month for its services. Techno King India Ltd., also provides the same services to SG Ltd.,
South Africa and bills it at $ 18,00,000 per month. The man-hours spent on each work form the basis of
billing. The direct cost of services per hour for Techno King India Ltd., works out to $500 and the indirect
cost of services per hour for Techno King India Ltd., works out to $2000 per hour. In a month of 30 days
Techno King India Ltd. works at 2 shifts per day, consisting of 7 hours work for Techno King Inc.,
Germany and 6 hours work for SG Ltd. respectively. Determine, whether the transactions are done at
Arm’s Length Price.
Solution:
Techno King Ltd. provides services for different consumers consuming different man-hours each. From the
given information, the Gross Margins realized can be identified. It is suitable to apply Cost plus Method as
the Gross Margins can be identified only in proportion to the manhours spent. Therefore, the Gross Margins
realized from each customer shall be computed taking man-hours as the basis.
Computation of Gross Margins

Particulars Techno King Ltd. SG Ltd.
Amount (`
`)
Billing Price 20,00,000 18,00,000
Less: Direct Cost of Service
$500 × 7 hours × 30 days 1,05,000
$500 ×6 hours × 30 days 90,000
18,95,000 17,10,000
Less: Indirect Cost of Service
$2000 × 7 hours × 30 days 4,20,000
$2000 ×6 hours × 30 days 3,60,000
Gross Margin 14,75,000 13,50,000
Total man hours 210 hrs 180 hrs
Gross Margin per hour 7,024 7,500
The margin realized from the transactions with Associated Enterprises is less than the unrelated transaction.
Techno King Ltd., India has to offer the same margin for the international transactions with the Associated
Enterprise also. Therefore, the Arm’s Length Price shall be fixed at $7,500 per hour.

Question 4:
A Co. Ltd. is an Indian company at Pune. It provides software development service to various customers
and also to its associated enterprise B Co. Ltd. of Mumbai. It billed ` 2 crores for the software
development services rendered to B Co. Ltd. during the year 2019-20. The total costs (direct and indirect)
incurred for executing the work was ` 175 lakhs. In the case of unrelated parties for similar services A Co.
Ltd. earned a gross profit of 50% on costs.
The following distinguishing features are observed between the transaction with the related party (i.e.) B
Co. Ltd. and other unrelated parties:
(i) B Co. Ltd. provided technology support to A Co. Ltd. in the software development project
assigned by it. In the case of unrelated parties the value of technology support expenditure for
similar project would be ` 17,50,000.
(ii) A Co. Ltd. gave discount of 10% to B Co. Ltd. and this benefit is not given to outside customers.
(iii) A Co. Ltd. carried out marketing functions in respect of transaction with B Co. Ltd. and incurred
` 13,12,500. This marketing function is not normally provided by A Co. Ltd. to outside parties.
(iv) A Co. Ltd. provided extended credit period and the cost of credit period is estimated at 2.5% of its
cost. This extended credit period is given only because B Co. Ltd. is its associated enterprise.
State the most appropriate method to be adopted for determination of ALP and compute the arm‘s length
gross profit mark up and how much of income has to be increased or decreased in the hands of A Co.
Ltd. for the transactions carried out for B Co. Ltd.

Answer:
Most appropriate method:
In this case the activity involved is provision of service to an associated enterprise. The direct and indirect costs of
production incurred by the enterprise vis a vis the price charged for similar services to other outsiders is
compared. The cost plus method is the most appropriate method for determination of ALP.
The amount of normal gross profit mark-up to costs arising from rendering services to unrelated enterprise in
relation to a transaction is determined and the said normal gross profit mark-up is appropriately adjusted to take
into account the functional and other differences if any between the international transaction and other
transactions.
Determination of ALP gross profit mark-up

Gross profit mark-up in the case of unrelated parties 50%
Less: Technology support from related party (which is not availed from unrelated parties) 10%
(` 17.50 lakhs × 100 / ` 175 lakhs)
40%
Add:
Discount to related party which is not given to unrelated parties 10%
Cost of credit to B Co Ltd 2.5%
Marketing functions performed by A Co Ltd. for B Co Ltd.
` 13,12,500 × 100 / ` 175 lakhs = 7.5%

Arm’s length gross profit mark-up 60%
` in lakhs
Determination of arm’s length price:
Direct and indirect cost incurred by A Co Ltd. 175.00

Arm’s length gross profit mark-up 105.00
Arm’s length income 280.00

Less: Actual price charged 200.00
Income to be increased in the hands of A Co Ltd. 80.00
Question 5:
Amar P Ltd., Bangalore is engaged in IT Enabled services. It is the subsidiary of ABC Inc in US. It also
provides similar services to a company SAK Ltd. at Singapore. Its billings and other information is as
given hereunder:
(i) Billings per month to ABC Inc. - USD 85000
(ii) Billings per month to SAK Ltd. - USD 70000
(iii) ABC Inc has provided a loan of USD 100000 to Amar P Ltd. towards purchase of hardware for
executing its project. Rate of interest charged for the said loan is at 3% p.a.
(iv) Direct and indirect cost incurred are USD 100 and USD 200 per hour, respectively.
(v) Amar P Ltd. works 9 hours per day for 15 days to execute the projects for ABC Inc and 8 hours per
day for 15 days to execute projects for SAK Ltd. Service was provided by the company to both its
customers throughout the year.
(vi) Warranty was provided to SAK Ltd. for a period of 2 years. Cost of warranty is calculated at 1% of
direct cost incurred. The cost of warranty is neither included in the direct nor indirect cost.
Assume conversion rate 1 USD = ` 64. Compute Arm's Length Price as per the cost-plus method and the
amount to be added, if any, to the income of Amar P Ltd.
Solution:
Determination of Gross Margin of Comparable Uncontrolled transaction i.e., of SAK Ltd.
Particulars Amt in USD

Direct Cost (USD 100 x 8 hours x 15 days) 12,000
Indirect Cost (USD 200 x 8 hours x 15 days) 24,000
Total Direct and Indirect cost 36,000
Billing per month 70,000
Gross Margin being gross profit 34,000
Gross Margin to cost (%) [34,000 x 100/36,000] 94.44%
Adjustment for functional difference on account of cost of warranty

Total Direct and Indirect Cost 36,000
Add: Cost of warranty [1% of direct cost of USD 12,000] 120
Total Cost 36,120
Billing per month 70,000

Margin after cost of warranty being profit margin [70,000 - 36,120] 33,880
Profit margin to cost (%) [after considering functional difference on 93.80%

account of cost of warranty [33,880 x 100/36,120]
Computation of Arm’s Length Price by applying Cost Plus Method

ABC Inc (USD)
Direct Cost (USD 100 x 9 hours x 15 days) 13,500
Indirect Cost (USD 200 x 9 hours x 15 days) 27,000
Total Direct and Indirect cost 40,500
Add: Interest on loan of USD 1,00,000 borrowed for purchase of
hardware [USD 3,000 (i.e., USD 1,00,000@3%) / 12] 250
Total Cost 40,750
Profit margin by applying the margin of 93.80% of total cost of USD 40,750 38,224

Arm’s length price of billing per month 78,974
Arm’s length price (in `) [USD 78,974 x 64] = ` 50,54,336
Actual Billing per month 85,000
In the present case, since actual billing of USD 85,000 per month to the ABC Inc, an AE, is higher than the
Arm’s length price of USD 78,974 determined by ap plying cost plus method, no adjustment is to be made to
the income of Amar P Ltd.

TRANSFER PRICING SATC M.1
PROFIT SPLIT METHOD (PSM)
1. Applicability of PSM (Profit Split Method):
The Indian TPR affirms that the PSM may be applicable mainly in the following cases:
a) Transactions involving transfer of unique intangibles;
b) Multiple inter-related international transactions which cannot be evaluated separately for determining the
ALP of any one transaction.
Further,
a. The extent of economies of backward and forward integration, the existence of intangibles on both sides
of the transaction, and complex functional and transactional structures may limit the use of standard
approaches to economic analysis for transfer pricing purposes (i.e. performing comparable company
searches to apply the TNMM). In those circumstances, the arm’s length nature of transactions may be
better evaluated by considering the transaction from an end-to-end perspective, and thus PSM can be
applied.
b. This method can be used in situations where economies of integration differentiate the tested party from
the comparables, provided these are taken into account in the principle for allocating profits. The method
enables accounting for valuable intangibles being developed on both sides of the transaction.
c. The allocation of profit can be calculated based on principles that take into account the contribution of
intangibles in the industry’s or the group’s value creation process.
d. This method is also well suited to complex transactions where several entities are involved in the same
functions and it is not possible to define precisely the scope of functions and responsibilities. While this
method has not been widely used, it has been somewhat popular in the financial services industry.
2. Briefly explain Profit Split Method in determining Arm’s Length Price.
Answer: This method is mainly applicable in international transactions involving transfer of unique intangibles
or in multiple international transactions which are so inter-related that they cannot be evaluated separately for
the purpose of determining the Arm’s Length Price of any one transaction.
Step I: Determine the combined net profit of the associated enterprises arising from the international
transaction in which they are engaged.
Step II: Determine the relative contribution made by each of the associated enterprises to the earning of such
combined net profit. This is determined on the basis of the FAR Analysis:
a) Functions performed;
b) Assets employed;
c) Risks assumed by each enterprise;
And on the basis of reliable external market data which indicates how such contribution would be
determined by unrelated enterprises performing comparable functions in similar circumstances.
Step III: Split the combined net profit amongst the enterprises on the basis of reasonable returns and in
proportion to their relative contributions, as determined in Step II. (See note below)
Step IV: Arm’s Length Price - Profit apportioned to the assessee under Step III.
NOTE: Combined Net Profit shall be split as under:

III.A. First Split = Reasonable Return:
Allocate an amount to each enterprise so as to provide it with a basic return appropriate for the type of
international transaction with reference to market returns achieved in similar types of transactions by
independent enterprises.
III.B. Second Split = Contribution Ratio:
Allocate the residual net profit amongst the enterprises in proportion to their relative contribution.
III.C. Total Profit: Share of profit of each enterprise = Step III.A + III.B

CMA-FINAL - TRANSFER PRICING SATC M.2
Questions on PROFIT SPLIT METHOD
Question:
NBR Medical Equipments Inc. (NBR) of Canada has received an order from a leading UK based Hospital for
development of a hi-tech medical equipment which will integrate the best of software and latest medical
examination tool to meet varied requirements. The order was for 3,00,000 Euros. To execute the order, NBR
joined hands with its subsidiary Precision Components Inc. (PCI) of USA and Bioinformatics India Ltd (BIL), an
Indian Company. PCI holds 30% of BIL. NBR paid to PCI and BIL Euro 90,000 and Euro 1,00,000 respectively
and kept the balance for itself. In the entire transaction, a profit of Euro 1,00,000 is earned. Bioinformatics India
Ltd incurred a Total Cost of Euro 80,000 in execution of its work in the above contract. The relative contribution of
NBR, PCI and BIL may be taken at 30%, 30% and 40% respectively. Compute the Arm’s Length Price and the
incremental Total Income of Bioinformatics India Ltd, if any due to adopting Arms Length Price determined here
under.
A Share of each of the Associates in the Value of the Order 3,00,000
Share of BIL [Given] 1,00,000
Share of PCI [Given] 90,000
Share of NBR [Amount Retained = 3,00,000 – 1,00,000 - 90,000] 1,10,000
B Share of each of the Associates in the Profit of the Order
Combined Total Profits 1,00,000
Share of BIL [Contribution of 40% x Total Profit € 1,00,000] 40,000
Share of PCI [Contribution of 30% x Total Profit € 1,00,000] 30,000
Share of NBR [Contribution of 30% x Total Profit € 1,00,000] 30,000
C Computation of Incremental Total Income of BIL

Total Cost to BIL Ltd 80,000
Add: Share in the Profit to BIL (from B above) 40,000
Revenue of BIL on the basis of Arm’s Length Price 1,20,000
Less: Revenue Actually received by BIL (1,00,000)
Increase in Total Income of BIL 20,000
Question:
Clear View Glasses Ltd., India exports semi finished glasses to its parent company Clear View Glasses
Inc., USA. The exports are made at $ 200 per glass to the US Company (Freight and Insurance costs $75 is
incurred separately). The cost per glass works out to $125 on import. Clear View Glasses Inc., USA
polishes the glasses and markets the same @ $ 500 per glass. The polishing and marketing process cost
@ $100 per glass. Compute the Arm’s Length Price (ALP), for the said transaction.
Solution:
In the given case, a single product is captively consumed and ultimately sold by the associated enterprises.
The profit realized by the product is one and same. Therefore, the suitable method to determine the Arm‟s
Length Price will be the Profit Split Method.
Particulars Amount (in $) Amount (in $)

Sale Price 500
Less: Costs incurred
Manufacturing Costs of Clear View Glasses Ltd. 125
Polishing and Marketing Costs of Clear View Glasses Ltd. 100 225
275
Less: Freight Insurance Costs 75
Net Profit 200
Apportionment of profit on the basis of Direct Costs incurred
Clear View Glasses Ltd. India [200 ×125/225] 111
Clear View Glasses Inc. USA [200 ×100/225] 89
Total Profit 200
Therefore, a profit of $111 per glass shall be treated as arm’s length price for the transactions,
entered into between the associated enterprises.

Illustration:
lndco, an Indian company, has developed and manufactures a robot to be used for multiple industrial
applications. The robot is considered to be an innovative technological advance. Chco, a Chinese
subsidiary of Indco, has developed and manufactures a software programme which incorporates the new
programme in the robot and makes it more effective. The success of the robot is attributable to both
companies for the design of the robot and the software programme.
Indco manufactures and supplies Chco with the robot for installing of the new software programme for
assembly and manufacture of the robot. Chco manufactures the robot and sells to an arm’s length
distributor. In light of the innovative nature of the robot and software, the group was unable to find
comparable with similar intangible assets. Because they were unable to establish a reliable degree of
comparability, the group was unable to apply the traditional transaction methods or the TNMM.
However, reliable data are available on robot and software manufacturers without innovative intangible
property, and they earn a return of 10% on their manufacturing costs.
The total profits attributable to manufacture of robots are calculated as follows:
`) Amount (`
`)
Sales to the arm’s length distributor 1,000
Deduct:
Indco’s manufacturing costs 200
Chco’s manufacturing costs 300
Total manufacturing costs for the group 500
Gross Margin 500
Deduct:
Indco’s development costs 100
Chco’s development costs 50
Indco’s operating costs 50
Chco’s operating costs 100 300
Net profit 200
Indco’s return to manufacturing (200 * 10%) 20
Chco’s return to manufacturing (300 * 10%) 30
Residual profit attributable to development 150
The split of the residual profit has been considered on the basis of the development cost considering the
significance of technology in the manufacturing process.
Based on proportionate development costs
Particulars (Rs)
Indco’s share of residual profit [100/)100+50)] * 150 100
Chco’s share of residual profit [50/(100+50)] * 150 50
Indco’s transfer price is calculated as follows:
Particulars Amount (Rs)

Manufacturing costs 200
Development costs 100
Operating costs 50
Routine 10% return on manufacturing costs 20
Share of residual profit 100
Transfer price 470

Class Notes

TRANSFER PRICING SATC N.1
TRANSACTION NET MARGIN METHOD (TNMM)
1. TNMM requires comparison between net margins derived from the operations of the uncontrolled parties and
net margins derived by an AE from similar operations. Net margin is indicated by the rate of return on
sales or cost or operating assets, and this forms the basis for TNMM.
2. Steps in computation of Arm’s Length Price using Transaction Net Margin Method
Step I: Compute the net profit margin realised by the enterprise from an international transaction entered
into with an associated enterprise, in relation to costs incurred or sales effected or assets
employed by enterprise or having regard to any other relevant base.
Step II: Compute the net profit margin realised by the enterprise or by an unrelated enterprise from a
comparable uncontrolled transaction (s), having regard to the same base as in Step I.
Step III: Adjust the net profit margin as per Step II for differences, if any, which could materially affect amount
of net profit margin in the open market:
a) between the international transaction and the comparable uncontrolled transactions, or
b) between the enterprises entering into such transactions.
Step IV: Net Profit Margin for uncontrolled transactions = Step II Add/Less Step III.
Step V: Arm’s Length Price = Transaction Value x Net Profit Margin as per Step IV above.
3. Use of Profit Level Indicator (PLI)
In trying to benchmark the results of the tested party with that of unrelated parties i.e. comparable companies,
by applying the TNMM, it is important to use appropriate PLIs. The choice of PLI is dependent upon the
following which also includes:
a) the nature of the activities of the tested party,
b) the reliability of the available financial data with respect to comparable companies,
c) the extent to which a particular PLI is applicable to this data.
All PLIs not similar. The selection of the appropriate PLI depends on the structure and the business of the
tested party. For example, Berry Ratio might be a right PLI in case of the tax-payers that almost exclusively
perform services and distribution activities. On the other hand, a manufacturing concern with an
extensive capital investment in plant and equipment might require the application of the return on
assets to determine the arm’s length prices.
4. Cost Cover Ratio

The cost coverage ratio measures the ability of a company to cover its operating expenses through operating
revenue.
5. Return on Assets Ratio

The return on assets ratio measures the amount of EBIT per rupee of asset invested. This is a profitability
ratio measuring each company’s operational efficiency, that is, how efficiently the assets have been deployed
by the company.
6. Berry Ratio [MTP JUNE 2019 (SET 1) - 8 Marks]

Berry ratio is the ratio of gross profit to operating expenses. It measures the return on operating
expenses.
As the functions performed by the tax-payers are often reflected in the operating expenses, this ratio
determines the relationship of the income earned in relation to the functions performed.
This ratio helps in overcoming the difficulties in applying the RPM, which does not explain the creation of
gross profit. This ratio is used in conducting an arm’s length analysis of service-oriented industry such as
limited risk distributor, advertising, marketing and engineering services.
The Berry ratio may be used to test whether service providers have earned enough mark-up on their
operating expenses.
In essence, the Berry ratio implicity assumes that there is a relationship between the level of operating
expenses and the level of gross profits earned by routine distributors and service providers.

Example 1:
Designer Dolls Ltd. (DDI), located in United States, has a subsidiary in India. The Subsidiary manufactures
designer dolls, using the unique technology developed by DDI. The Subsidiary has been able to locate
from the public data base similar independent doll manufacturer. The Subsidiary pays Royalty to DDI @
10% on sales, which is part of operating costs, which is the only international transaction that needs to be
benchmarked.
The following is the profitability of the two companies:

Particulars Subsidiary Co. Independent Co.
(`) (`)
Net Sales 2,50,000 7,00,000

Cost of goods sold 1,50,000 4,00,000
Operating Costs(including Royalty of ` 25,000) 50,000 2,00,000
Net Profit 50,000 1,00,000
Operating Margin: Net Profit/Net Sales *100 20% 14.28%
Thus, as the net profit margins earned by the subsidiary are more than the margin earned by the Independent
Co., the international transactions of the Subsidiary, i.e. Royalty paid of ` 25,000 is at arm’s length.
Question 2:
Luxury Life, India exports bath furniture only to its holding company, Luxury Life, Canada. The sale price
per furniture is CAD 2,500. The direct and indirect costs amount to CAD 1,750. The furniture industry in
India, of the comparable companies, has earned total export revenue of CAD 3,750 million. The industry
average of total expenses of comparable companies works out to 85%. Compute the arm’s length price of
Luxury Life India.
Solution: Luxury Life, India exports bath furniture only to its parent company. There are no other comparable
uncontrolled transactions available within the company. As the assessee company functions in the furniture
industry, the industry averages shall be taken as the comparable transaction. The Margins realized by the
assessee and the Industry shall be compared for arriving at the Arm’s Length price. The only method which
recognizes the Net Margins comparison is Transaction Net Margin Method.
Computation of Net Margins

Particulars Amount (in CAD)
(A) Net Margin made by Luxury Life, India
Sales made by Luxury Life, India 2,500
Less: Direct and Indirect Costs 1,750
Net Margin 750
Net Margin to Sales 30%
(B) Net Margin of the Industry
Industry Turnover 3,750
Less: Total Expenses @ 85% 3,188
Net Margin 562
Net Margin to Sales 15%
As the Net Margin realized by Luxury Life, India is more than the net margin realized by the industry,
International transactions between the associated enterprises shall be regarded as adhering with the arm’s
length pricing principles.
Question 3:
BB India Limited produces steel furniture which is supplied to its holding company BB Inc. USA. BB India
Limited raises invoice for US $ 3,000 per piece of furniture, while the direct and indirect costs of
manufacturing work out to US $ 2,250 per piece. BB India Limited does not supply its products to any
other party either in India or abroad. The data base in public domain shows that the still furniture industry
in India of comparable companies has export turnover of US $ 3,000 million and the industry average of
total expenses of comparable companies is 80%. Determine whether the transaction entered into by BB
India Limited is at arm's length.

Solution:
Computation of net margin made by BB India Limited

Particulars US$
Export price per set of furniture 3,000
Less: Direct and Indirect cost per set of furniture 2,250
Net margin 750
% of net margin to sales 25%
Computation of net margin of the industry

Particulars US$ million
Industry turnover 3,000
Less: Direct and Indirect cost 2,400
Industry margin 600
% of net margin to sales 20%
As the net margin realised by BB India Limited is more than the net margin realised by the industry,
international transactions entered into with the associated enterprise, BB Inc., USA shall be considered to be
at arm's length.
Example 4:
Indco, an Indian company produces a pen for itself and three foreign subsidiaries of its Swiss parent company.
The foreign parent owns the rights to the product formulae for the pen. Although Indco has no internal comparable
transactions, it has been able to locate data from a public data base, relating to a third party who manufactures
similar pens. Indco has been able, after the appropriate functional analysis, to verify that the pen manufacturer is
comparable. However, Indco cannot obtain the relevant information at the gross margin level. Therefore, it is
unable to apply the CPM. The arm’s length manufacturer realizes a net mark-up of 10% on the cost of
manufacturing pens.
The following is the comparison of the net cost plus earned by IndCo, vis-à-vis the independent manufacturer is
calculated as follows:
`)
Indco’s cost of goods sold 1,000
Indco’s operating expenses 300
Total costs 1,300
Sales Price earned by IndCo. 1,430
Markup earned (`1430 – `1300) 130
Net Cost plus earned by IndCo (130/1300 * 100) 10%
Net Cost plus earned by Third Party Manufacturer 10%
Thus, IndCo’s transactions are at arm’s length.
Example 5:
ABC Ltd. India acts as a limited risk distributor in respect of the goods manufactured by its parent
company. Dr. Profit and loss account of ABC Ltd India for the year ended March 31, 20XX
Particulars (`
`) (`
`) Particulars (`
`) (`
`)
To Purchases 1,500 By Sales 2,500
To Gross profit 1,000
Total 2,500 Total 2,500
To Employee Cost 250 Total 1,000
To Rent 200
To Legal Charges 100
To Depreciation 200
To Operating Expenses 750
To Interest Cost 15
To Loss on sale of assets 2
To Net Profit before tax 8

In this case, ABC India purchases the goods from its AE only on receipt of orders received from third party
domestic customers. Accordingly, it does not bear the risk of inventory.
In such a scenario, Berry Ratio would be an appropriate PLI as it represents a return on a company’s value added
functions and assumes that those functions are captured in its operating expenses. Thus, a Berry Ratio > 1
implies that the distributor earns enough to be able to recover its operating costs. ABC India’s Berry Ratio (Gross
Profit/Operating Expenses) works out to be 1.33 (100/75). Similarly, the mean of Berry Ratio of comparable
companies is 1.17, which is illustrated as under:
Name of the Company Gross Profit (`) Operating Expenses (`) Berry Ratio (GP/Op.Exp)
A Ltd. 50 40 1.25
B Ltd. 75 80 0.94
C Ltd. 120 80 1.50
D Ltd. 90 90 1.00
Mean 1.17
Since, the Berry Ratio of ABC India is higher than that of the mean of comparable companies the
international transactions of ABC India regarding purchase of goods are at arm’s length.
Question 6:
What are the advantages while computing arm’s length price Transactional Net Margin Method?
MTP CMA Final
Answer:
It is based on Net Margins are less affected by Transactional differences.
The Net Margins are also more tolerant to Functional Differences between Controlled and Uncontrolled
transactions than Gross Profit Margins
It is not necessary to determine the Functions performed and responsibilities assumed by more than one of
the associated enterprises.
It is favorable where one of the parties to the transaction is Complex and has many Inter-related activities or
when it is difficult to obtain reliable information about one of the parties.
Question 7:
Beta Inc. having its business in Singapore has advanced a loan of SD 1,60,000 to Beta Ltd, Mumbai. Book
value of total assets of Beta Ltd was ` 125 lakhs. Beta Ltd provides software backup support to Beta Inc.
Beta Ltd has spent 50,000 manhour during the financial year 2019-20 for the services rendered to Beta
Inc. The cost for Beta Ltd is SD 75 / manhour. Beta Ltd has billed Beta Inc. at SD 90.75 / manhour.
Gama Ltd. in Mumbai which has a similar business model, provides software backup support to Olive Inc.
in Penang, Malaysia. Gama Ltd's cost and operating profits are as hereunder:
Particulars INR in lakhs

Direct costs 600
Indirect costs 200
Operating profits 200
1. Calculate Arm’s Length Price for the transaction between Beta Ltd. and Beta Inc. based on the
above data of Gama Ltd. using the Transactional Net Margin Method. Assume 1 SD = ` 45.
2. Explain, if there is any adjustment to be made to the total income of Beta Ltd.
Note: SD = Singapore Dollars

Solution:
Two enterprises are deemed to be associated enterprises where one enterprise advances loan constituting not
less than 51% of the book value of the total assets of the other enterprise.
In this case, since Beta Inc., a foreign company, has advanced loan to Beta Ltd., an Indian company, and such
loan constitutes 57.6% [(` 45 x 1,60,000 x 100/1,25,00,000] of the book value of total assets of Beta Ltd., Beta Inc
and Beta Ltd. are deemed to be associated enterprises.

Since the transaction of provision of software backup support by Beta Ltd. to Beta Inc. is an international
transaction between associated enterprises the provisions of transfer pricing would be attracted in this case.
Determination of Operating Margin of transaction of provision of software backup support. by Beta Ltd. to
Beta Inc
Particulars `
Billing per manhour [SD 90.75/hour x ` 45] 4,083.75
Cost per man hour [SD 75/hour x ` 45] 3,375.00
Operating profit per manhour 708.75
Operating profits to cost (%) [708.75 x 100/3375] = 21%
Determination of Operating Margin of Comparable Uncontrolled transaction i.e., provision of software

backup support. by Gama Ltd. to Olive Inc
Particulars ` in lakhs
Direct Cost 600
Indirect Cost 200
Total cost 800
Operating profits 200
Operating profits to cost (%) [200 x 100/800] = 25%
Computation of Arm’s Length Price of provision of software backup support provided by Beta Ltd. to
Beta Inc. by applying TNMM
Particulars `
Cost for Beta Ltd. (per man hour) [SD 75 x ` 45/SD] 3,375.00
Add: Arm’s length operating profit margin as % of cost (25% of ` 3375) 843.75
Arm’s length price (per manhour) in INR [See Note] 4,218.75
Arm’s length price of total manhours spent by Beta Ltd. for providing software backup support to
Beta Inc. [` 4,218.75 x 50,000 man hours] = ` 21,09,37,500
Adjustment to be made to the total income of Beta Ltd.

Particulars `
Arm’s length price of total manhours spent by Beta Ltd. for 21,09,37,500
providing software backup support to Beta Inc.
Less: Amount actually billed [90.75 SD x ` 45/SD x 50,000 manhours] 20,41,87,500
Arm’s length adjustment to be made to the total income of Beta Ltd. 67,50,000

Class Notes

TRANSFER PRICING SATC O.1
NOTIFIED JURISDICTIONAL AREA [Section 94A]
1. The Central Government may, having regard to the lack of effective exchange of information with any
country or territory outside India, specify by notification in the Official Gazette such country or territory as a
notified jurisdictional area in relation to transactions entered into by any assessee.
2. If an assessee enters into a transaction where one of the parties to the transaction is a person
located in a notified jurisdictional area, then-
(i) all the parties to the transaction shall be deemed to be associated enterprises within the meaning
of section 92A;
(ii) any transaction in the nature of purchase, sale or lease of tangible or intangible property or provision of
service or lending or borrowing money or any other transaction having a bearing on the profits, income,
losses or assets of the assessee including a mutual agreement or arrangement for allocation or
apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection
with a benefit, service or facility provided or to be provided by or to the assessee shall be deemed to
be an international transaction within the meaning of section 92B,
and the provisions of Transfer Pricing shall apply accordingly.
3. No deduction, in respect of any payment made to any financial institution located in a notified jurisdictional
area shall be allowed under this Act, unless the assessee furnishes an authorisation in the prescribed
form authorising the Board or any other income-tax authority acting on its behalf to seek relevant
information from the said financial institution on behalf of such assessee; and
4. Where, in any previous year, the assessee has received or credited any sum from any person located in a
notified jurisdictional area and the assessee does not offer any explanation about the source of the said sum
in the hands of such person or the explanation offered by the assessee, in the opinion of the Assessing
Officer, is not satisfactory, then, such sum shall be deemed to be the income of the assessee for that
previous year.
5. Where any person located in a notified jurisdictional area is entitled to receive any sum or income or amount
on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following
rates, namely:—
a. at the rate or rates in force;
b. at the rate specified in the relevant provisions of this Act;
c. at the rate of 30%.

QUESTIONS
1. Alpha Ltd., the assessee has sold goods on 23.01.2020 to Beta Ltd., which is situated in a notified
jurisdictional area. The CIF value of the goods (4,000 MT) sold is ` 4 crores. Beta Ltd., is an absolute
stranger to Alpha Ltd. Will the transfer pricing provisions apply and will these two companies be
regarded as associated enterprises? Following further data are available:
(i) Identical goods have been sold to H Ltd., in Sydney, at ` 10,200 per MT, the trade terms being the
same;
(ii) As per TNM method, the price arrived at is ` 10,180 per MT.
If transfer pricing provisions are applicable, what will be the impact on the profits of Alpha Ltd., for
the assessment year 2020-21?
Answer:
Transfer pricing applicability
As per Section 94A(2) of the Income-tax Act, 1961, notwithstanding anything to the contrary contained in the
Act, if an assessee enters into a transaction where one of the parties to the transaction is a person located in
a notified jurisdictional area, then all the parties to the transaction shall be deemed to be associated
enterprises within the meaning of section 92A of the Act.
Therefore Alpha Ltd. and Beta Ltd. will be regarded as associated enterprises and the transfer pricing
provisions will apply.
Determination of ALP
(i) As per CUP method, the price sold to a stranger is taken, i.e. ` 10,200 per MT is the ALP, since the trade
terms are identical. So the price of 4000 MT will be ` 4.080 crores.
(ii) As per TNM method, the ALP is ` 10,180 per MT. So the price of 4000 MT will be ` 4.072 crores.
(iii) Where values are available from more than one method, the mean of the two values is assumed to be
taken as ALP. So ALP is ` 4.076 crores.
(iv) Where one of the entities is in a notified jurisdictional area, no adjustment can be given to the ALP. Hence
the ALP has to be taken as ` 4.076 crores.
Impact on net profits of Alpha Ltd.

ALP as per transfer pricing provisions ` 407 lacs
Sale price as per books ` 400 lacs
Increase in net profit of Alpha Ltd. ` 7 lacs.
2. Wellness Ltd., an Indian company, exports apples to Nature Inc. for an amount of ` 40 Lakhs. Nature
Inc. is located in a Notified Jurisdictional Area (NJA). Wellness Ltd. charges ` 48 Lakhs and ` 50
Lakhs for the sale of similar goods to AlpineInc and Iris Inc., respectively, which are not located in
Notified Jurisdictional Area and both of them are not associated enterprises of Wellness Ltd.
Assuming that the permissible variation notified by the Central Government for such class of
international transaction is 3% of the transaction price, state the tax implications under Section 94A of
the Income Tax Act, 1961, in respect of the above transaction by Wellness Ltd, to Nature Inc.
Solution:
As per Section 94A of the Income Tax Act, 1961, in case an assessee enters into any transaction where one
of the parties thereto is located in the Notified Jurisdictional Area (NJA), then the parties to the transaction
shall be treated as associated enterprises and the transaction shall be deemed to be an international
transaction. The transfer pricing provisions would, therefore be attracted in such a case. However, the
benefit of permissible variation between the transfer price and the arm’s length price, as notified by
the Central Government, shall not be available in such a case.
Since, Nature Inc. is located in a NJA, the transaction of export of apples, by the Indian company ‘Wellness
Ltd’ would be deemed to be an international transaction and Nature Inc and Wellness Ltd., would be deemed
to be associated enterprises. Therefore, the provisions of transfer pricing would be attracted in this case.
The prices of ` 48 Lakhs and ` 50 Lakhs, charged for sale of similar goods to Alpine Inc. and Iris Inc.
respectively, being independent entities located in a non-NJA country, can be taken into consideration for
determining the Arm‟s Length Price (ALP) under the Comparable Uncontrolled Price (CUP) Method.

Since, more than one price is determined by the CUP Method, the ALP would be the arithmetical mean of
such prices.
Therefore, ALP= ` 49,00,000, i.e., [(` 48,00,000 + ` 50,00,000)/2]
Transfer Price = ` 40,00,000
Since the ALP is more than the transfer price, the ALP of ` 49 Lakhs would be considered for computing the
income from the international transaction between Wellness Ltd., and Nature Inc.
3. X Limited, an Indian company has borrowed certain sum from a financial institution, a resident of a
Non Jurisdictional Area (NJA) notified by the Central Government. During the previous year, X Limited
paid interest of ` 10 lacs to the financial institution. What authorisation is to be furnished by X.
Limited? At what rate tax is required to be deducted source by X. Limited from payment of such
interest?
Solution:
As per section 94A(3), X. Ltd. has to furnish authorization in the prescribed form authorizing the CBDT or any
other income tax authority acting on its behalf to seek relevant information from the financial institution
located in notified jurisdictional area on behalf of X Ltd. Otherwise, deduction shall not be allowed in respect
of interest on loan.
Under section 94A(5), X Ltd. is required to deduct tax at source from such interest at the highest of the
following three rates –
i. Rate or rates in force;
ii. Rate specified in the relevant provisions of the Income-tax Act;
iii. 30%
4. Hajee Moosa Ltd., the assessee, a domestic company, exported on 1.2.2020, bananas to Mystery Inc.,
for an amount of ` 81 lacs. Mystery Inc is located in a Notified Jurisdictional Area (NJA). Mystery Inc.,
is not associated with the assessee in any manner whatsoever, and is a rank outsider. During the
year, the assessee has billed ` 84 lacs and ` 86 lacs for sale of similar goods of identical quantity to
Sun Inc. and Moon Inc., respectively, which are located in Kuala Lumpur (not a NJA) and both of
which are not associated enterprises of the assessee.
The permissible variation notified by Central Government for such class of international transaction is
5% of the transaction price.
The management wants to know the tax implications under section 94A in respect of the above
transaction entered into by the assessee with Mystery Inc., during the Assessment Year 2020-21.
Advise them suitably.
Answer:
Advise on Computation of ALP
As per Section 94A, in case an assessee enters into any transaction where one of the parties thereto located
in the notified jurisdictional Area (NJA) then the par ties to the transaction shall be treated as associated
enterprises and the transaction shall be deemed to be an international transaction. The transfer pricing
provisions would, therefore be attracted in such a case. However, the benefit of the permissible variation
between the transfer price and the arm's length price, as notified by the Central Government, shall not be
available in such a case.
Since Mystery inc. is located in a NJA, the transaction of export of bananas by the assessee- company, would
be deemed to be an international transaction. Further, Mystery Inc. and the assessee would be deemed to be
associated enterprises. It is immaterial that Mystery Inc is a rank outsider and is not associated with the
assessee in any manner.
Therefore, the provisions of transfer pricing would be attracted in this case.
The prices of ` 84 lakhs and ` 86 lakhs charged for sale of similar goods to Sun Inc. and Moon Inc.
respectively, being independent entities located in a non-NJA country, can be taken into consideration for
determining the arm's length price (ALP) under Comparable Uncontrolled Price (CUP) Method.
Since more than one price is determined by the CUP Method, the ALP would be the arithmetical mean of
such prices.

Therefore, ALP - ` 85,00,000 i.e.,[(` 84,00,000 + 86,00,000)/2]

Transfer Price = ` 81,00,000
Since the ALP is more than the transfer price, the ALP of ` 85,00,000 would be considered for computing the
income from the international transaction between the assessee and Mystery Inc. The net profit of the
assessee will increase by ` 4 lacs, as a consequence.

Section 94B - Limitation on interest deduction in certain cases
(W.e.f. AY 18-19)
1. Notwithstanding anything contained in this Act, where an Indian company, or a permanent
establishment of a foreign company in India, being the borrower, incurs any expenditure by way
of interest or of similar nature exceeding one crore rupees which is deductible in computing income
chargeable under the head "Profits and gains of business or profession" in respect of any debt
issued by a non-resident, being an associated enterprise of such borrower, the interest shall
not be deductible in computation of income under the said head to the extent that it arises from
excess interest, as specified in sub-section (2)
Provided that where the debt is issued by a lender which is not associated but an associated
enterprise either provides an implicit or explicit guarantee to such lender or deposits a
corresponding and matching amount of funds with the lender, such debt shall be deemed to
have been issued by an associated enterprise.
2. For the purposes of sub-section (1), the excess interest shall mean an amount of total interest
paid or payable in excess of 30% of earnings before interest, taxes, depreciation and
amortisation of the borrower in the previous year or interest paid or payable to associated
enterprises for that previous year, whichever is less.
3. Nothing contained in sub-section (1) shall apply to an Indian company or a permanent

establishment of a foreign company which is engaged in the business of banking or insurance.
4. Where for any assessment year, the interest expenditure is not wholly deducted against income
under the head "Profits and gains of business or profession", so much of the interest expenditure
as has not been so deducted, shall be carried forward to the following assessment year or
assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of
any business or profession carried on by it and assessable for that assessment year to the extent
of maximum allowable interest expenditure in accordance with sub-section (2).
No interest expenditure shall be carried forward under this sub-section for more than eight
assessment years immediately succeeding the assessment year for which the excess interest
expenditure was first computed.

1. Question:
Kiwi LLC., is a foreign company incorporated in Singapore. Brightstars Inc. (BI), is a foreign
company incorporated in Australia. Daffodils Pvt. Ltd. (DPL) is an Indian Company.
The Indian company has taken a loan of ` 120 crore from Moonshine Inc., a foreign
company, at the rate of 10% per annum on 1st October, 2019. The guarantee for this loan has
been provided by BI. This is the only loan taken by DPL during the year.
Kiwi LLC, holds 27% of the voting power in BI as well as in DPL. The net profit of DPL, after
above interest and depreciation of ` 1.8 crore, but before income-tax is ` 9.2 crore, for the
year ended 31.3.2020. Income-tax liability for the year may be taken as ` 1.2 crore.
Is any disallowance warranted in respect of interest in the hands of DPL, as per the transfer
pricing provisions, for the assessment year 2020-21? Append suitable notes.
[CMA FINAL DEC 2018 EXAM Question – 8 Marks]
Solution: - Applicability of Section 94B

Kiwi LLC., holds 27% of the voting power in BI as well as in DPL, which is more than 26%. Hence
BI and DPL will be deemed associated enterprises.
Where the debt is issued by a lender which is not associated but an associated enterprise either
provides an implicit or explicit guarantee to such lender, such debt shall be deemed to have been
issued by an associated enterprise (AE) and limited of interest deduction would be applicable.
If an Indian company, being the borrower, incurs any expenditure by way of interest in respect of
any debt issued by its non-resident associated enterprise (AE) and such interest exceeds ` 1
crore, then, the interest paid or payable by such Indian company in excess of
- 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or
- Interest paid or payable to associated enterprise,
Whichever is lower, shall not be allowed as deduction as per Section 94B.
Hence DPL shall be deemed to have taken loan from BI, an AE. Restriction laid down in
Section 94B may come into play.
Particulars ` in crore
PBT, but after interest and depreciation 9.2
Add : Depreciation 1.8
Interest 6.0
EBITDA 17.0
Permissible interest is lower of 30% of EBITDA, i.e. 30% of 17 crores, i.e. 5.1 Cr. or actual interest
is 6 cr. Hence, 5.1 cr will be allowed as deduction.
Amount to be disallowed u/s. 94B is ` 0.9 crore (6 - 5.1)

2. What is Thin Capitalization?
CMA FINAL WORK BOOK
A company is typically financed or capitalized through a mixture of debt and equity. The way a
company is capitalized often has a significant impact on the amount of profit it reports for tax
purposes as the tax legislations of countries typically allow a deduction for interest paid or
payable in arriving at the profit for tax purposes while the dividend paid on equity
contribution is not deductible.
Therefore, the higher the level of debt in a company, and thus the amount of interest it pays, the
lower will be its taxable profit. For this reason, debt is often a more tax efficient method of
finance than equity.
Multinational groups are often able to structure their financing arrangements to maximize these
benefits. For this reason, country’s tax administrations often introduce rules that place a limit on the
amount of interest that can be deducted in computing a company’s profit for tax purposes. Such
rules are designed to counter cross-border shifting of profit through excessive interest
payments, and thus aim to protect a country’s tax base.
Under the initiative of the G-20 countries, the Organization for Economic Co-operation and
Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the
issue of base erosion and profit shifting by way of excess interest deductions by the MNEs in
Action plan 4. The OECD has recommended several measures in its final report to address this
issue.
In view of the above, Sec. 94B was inserted in line with the recommendations of OECD BEPS
Action Plan 4, to provide that interest expenses claimed by an entity to its associated enterprises
shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization
(EBITDA) or interest paid or payable to associated enterprise, whichever is less.
3. What is meant by Thin Capitalisation? Why is it considered as an anti avoidance measure?

Which action plan of BEPS addresses Thin Capitalisation? Explain the provision
incorporated in the Income-tax Act, 1961 to address Thin Capitalisation.
[CA Final RTP Nov 18]
Solution:
A company is typically financed or capitalized through a mixture of debt and equity. The manner in
which company raises capital has a significant impact on the amount of profit it reports for tax
purposes. This is due to the reason that tax legislations of countries typically allow a deduction for
interest paid or payable in arriving at the profit for tax purposes while the dividend paid on equity
contribution is not deductible.
Therefore, the higher the level of debt in a company, and thus, the amount of interest it pays, the
lower will be its taxable profit. For this reason, debt is often a more tax efficient method of finance
than equity. Since in such a structure, equity financing is less, it is referred to as Thin
Capitalization. Thin capitalization, thus, refers to the process of funding an entity by debt instead of
equity with a view to take advantage of interest deduction benefits.

Multinational groups are often able to structure their financing arrangements to maximize these
benefits. To prevent tax erosion on account of such arrangements, country's tax administrations
often introduce rules that place a limit on the amount of interest that can be deducted in computing
a company's profit for tax purposes. Such rules are designed to counter cross-border shifting of
profit through excessive interest payments, and thus aim to protect a country's tax base.
Under the initiative of the G-20 countries, the Organization for Economic Co-operation and
Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the issue
of base erosion and profit shifting by way of excess interest deductions by the MNEs in its Action
Plan 4. The OECD has recommended several measures in its final report to address this issue.
In view of the above, new section 94B has been inserted in the Income-tax Act, 1961, in line with
the recommendations of OECD BEPS Action Plan 4, to provide that interest paid or payable by an
entity to its non-resident associated enterprises shall be restricted to 30% of its earnings before
interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to non-resident
associated enterprises, whichever is less.
4. Narmada Ltd., an Indian Company has borrowed ` 80 crores on 01-04-2019 from M/s.
Thames Inc, a Company incorporated in London, at an interest rate of 10% p.a. The said
loan is repayable over a period of 5 years. Further, loan is guaranteed by M/s Tyne Inc.
incorporated in UK. M/s. Tweed Inc, a non-resident, holds shares carrying 40% of voting
power both in M/s Narmada Ltd. and M/s Tyne Inc. Net profit of M/s. Narmada Ltd. for P.Y.
2019-20 was ` 7 crores after debiting the above interest, depreciation of ` 4 crores and
income-tax of ` 3 crores.
Calculate the amount of interest to be disallowed under the head “Profits and gains of
business or profession” in the computation of M/s Narmada Ltd., giving appropriate
reasons.
[CA FINAL RTP – May 2019 EXAM]
Solution:
any debt issued by its non-resident associated enterprise (AE) and such interest exceeds ` 1 crore,
then, the interest paid or payable by such Indian company in excess of 30% of its earnings before
interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated
enterprise, whichever is lower, shall not be allowed as deduction as per Section 94B.
Further, where the debt is issued by a lender which is not associated but an associated enterprise
either provides an implicit or explicit guarantee to such lender or deposits a corresponding and
matching amount of funds with the lender, such debt shall be deemed to have been issued by
an associated enterprise and limitation of interest deduction would be applicable.
In the present case, since M/s Tweed Inc holds 40% of voting power i.e., more than 26% of voting
power in both Narmada Ltd and M/s Tyne Inc, Narmada Ltd. and M/s Tyne Inc are deemed to be
Since loan of ` 80 crores taken by Narmada Ltd., an Indian company from M/s Thames Inc, is
guaranteed by M/s Tyne Inc, an associated enterprise of Narmada Ltd., such debt shall be deemed

to have been issued by an associated enterprise and interest payable to M/s Thames Inc shall be
considered for the purpose of limitation of interest deduction under Section 94B.
Computation of interest to be disallowed as per section 94B in the computation of income

under the head profits and gains of business or profession of M/s. Narmada Ltd.
Particulars `
Net profit 7,00,00,000
Add: Interest already debited (`
` 80 crores x 10%) 8,00,00,000
Depreciation 4,00,00,000
Income tax 3,00,00,000
EBITDA 22,00,00,000
Interest paid or payable by Narmada Ltd. 8,00,00,000

Interest paid or payable in excess of the lower of the following would be disallowed
- 30% of EBITDA 6,60,00,000
- Interest paid or payable to non-resident AE 8,00,00,000 6,60,00,000
Interest to be disallowed as deduction 1,40,00,000
5. X Ltd., a resident Indian Company, on 01-04-2019 has borrowed ` 100 crores from M/s. A
Inc, a Company incorporated in US, at an interest rate of 9 % p.a. The said loan is repayable
over a period of 10 years. Further, loan is guaranteed by M/s B Inc incorporated in US. M/s.
K Inc, a non-resident, holds shares carrying 30% of voting power both in M/s X Ltd. and M/s
B. Inc. M/s K Inc has also deposited ` 100 crores with M/s A Inc.
Other information:
Net profit of M/s. X Ltd. was ` 10 crores after debiting the above interest, depreciation of ` 5
crores and income-tax of ` 3.40 crores.
Calculate the amount of interest to be disallowed under the head “Profits and gains of
business or profession” in the computation of M/s X Ltd. Substantiate your answer with
reasons.
Answer:
any debt issued by its non-resident associated enterprise (AE) and such interest exceeds ` 1 crore,
then, the interest paid or payable by such Indian company in excess of 30% of its earnings before
interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated
enterprise, whichever is lower, shall not be allowed as deduction as per section 94B.
Further, where the debt is issued by a lender which is not associated but an associated enterprise
either provides an implicit or explicit guarantee to such lender or deposits a corresponding and
matching amount of funds with the lender, such debt shall be deemed to have been issued by
an associated enterprise and limitation of interest deduction would be applicable.
In the present case, since M/s K Inc holds 30% of voting power i.e., more than 26% of voting power
in both X Ltd and M/s B Inc, X Ltd. and M/s B Inc are deemed to be associated enterprises.

Since loan of ` 100 crores taken by X Ltd., an Indian company from M/s A Inc, is guaranteed by M/s
B Inc, an associated enterprise of X Ltd., such debt shall be deemed to have been issued by an
associated enterprise and interest payable to M/s A. Inc shall be considered for the purpose
of limitation of interest deduction under section 94B.
Computation of interest to be disallowed as per section 94B in the computation of income

under the head profits and gains of business or profession of M/s. X Ltd.
Particulars `
Net profit 10,00,00,000
Add: Interest already debited (` 100 crores x 9%) 9,00,00,000
Depreciation 5,00,00,000
Income tax 3,40,00,000
EBITDA 27,40,00,000
Interest paid or payable by X Ltd. 9,00,00,000

Interest paid or payable in excess of the lower of the following would be disallowed
-30% of EBITDA 8,22,00,000
-Interest paid or payable to non-resident AE 9,00,00,000 8,22,00,000
Interest to be disallowed as deduction 78,00,000
Note- Since K Inc., an associated enterprise of X Ltd., has deposited a matching amount of ` 100
crores with A Inc., the interest payable by X Ltd. to A Inc. on loan of ` 100 crores borrowed from A
Inc. would be subject to limitation of interest deduction on the basis of this line of reasoning also.

TRANSFER PRICING SATC P.1
TAX HAVENS
1. What are the key factors used to determine whether a jurisdiction is a tax haven?
[MTP Set 2 – Dec 2018]
Solution:
Four key factors are used to determine whether a jurisdiction is a tax haven:
1. Imposes no or only nominal taxes:

Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer
themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high
taxes in their country of residence.
2. Lack of transparency:
Transparency ensures that there is an open and consistent application of tax laws among similarly
situated taxpayers and that information needed by tax authorities to determine a taxpayer‘s correct tax
liability is available (e.g., accounting records and underlying documentation). A lack of transparency in
the operation of the legislative, legal or administrative provisions is another factor used to identify tax
havens. The OECD is concerned that law should be applied openly and consistently, and that
information needed by foreign tax authorities to determine a taxpayer‘s situation is available. Lack of
transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their
laws effectively. ‗Secret rulings‘, negotiated tax rates, or other practices that fail to apply the law openly
and consistently are examples of a lack of transparency. Limited regulatory supervision or a
government‘s lack of legal access to financial records is contributing factors.
3. Lack of effective exchange of tax information with foreign tax authorities:

Whether there are laws or administrative practices that prevent the effective exchange of information for
tax purposes with other governments on taxpayers benefiting from the no or nominal taxation. Tax
havens typically have laws or administrative practices under which businesses and individuals can
benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents
the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
4. No requirement for a substantive local presence of the entity:

The absence of a requirement that the activity be substantial is important because it suggests that a
jurisdiction may be attempting to attract investment and transactions that are purely tax driven. It may
also indicate that a country does not provide a legal or commercial environment or offer any economic
advantages that would attract substantive business activities in the absence of the tax minimising
opportunities it provides. The no substantial activities criterion was included in the 1998 Report as a
criterion for identifying tax havens because the lack of such activities suggests that a jurisdiction may be
attempting to attract investment and transactions that are purely tax driven. In 2001, the OECD‘s
Committee on Fiscal Affairs agreed that this criterion would not be used to determine whether a tax
haven was co-operative or uncooperative

2. Explain the modes of doing business through tax havens.
Solution:
The modes of doing business through tax havens broadly, are as under:
(i) Personal Residency: Where wealthy individuals reallocate themselves from high tax zones to low tax
zones.
(ii) Asset Holding: It involves utilizing a trust or a company or a trust owing a company. Usually in this case,
an entity from high tax jurisdiction transfers its assets to a trust in a low tax jurisdiction and settles his
share in the trust on himself and later to his descendents without going through inheritance tax.
(iii) Business Activity: Many corporate entities do not require locational or factor leverage to establish their
business entities. Simply by transferring activities to low tax jurisdiction, they can earn 'margin' even
though they are not performing any financial activity.
(iv) Financial Intermediaries: The business activities are done in tax havens through financial intermediaries
like mutual funds, banking, life insurance, pension funds, etc. The funds are deposited with such
intermediaries located in tax havens (often known as "offshore funds"), who, in turn, invest in business
activities in such tax haven and earn income therefrom. This strategy doesn't avoid tax in home country of
the investor, but helps him to earn income from opportunities across the world, without bearing any
double/additional burden of tax.

TREATY SHOPPING
3. Explain the concept and validity of 'Treaty shopping'.
Answer:
Treaty shopping: If a resident of a third country takes unintended advantage of tax treaty between two
countries, it is known as treaty shopping. For taking such unintended advantage, an entity is formed or
incorporated in another country having regard to tax treaty available with the other country and whose laws
make it a suitable base for such international investment.
For example: In Mauritius there is no capital gains tax. As per Indo-Mauritius DTAA, residents of Mauritius
will be taxed only by Mauritius government in respect of capital gains arising from movable properties in
India.
To take unintended advantage of such treaty, persons of other countries incorporates a company in Mauritius
and make their investments in India through that company, thus avoiding capital gains tax liability from
investments in India.
Validity of Treaty Shopping:

The Supreme Court in UOI v. Azadi Bachao Andolan [2003] observed that many developed countries
tolerate or encourage 'treaty shopping' for other non-tax reasons even if it is unintended, improper or
unjustified, unless it leads to a significant loss of tax revenue.
The Supreme Court recognized that the treaties are negotiated and entered into at political level and have
several considerations as their bases. This is an important principle to be kept in mind in the interpretation of
the provisions of an international treaty. The Court observed that if it was intended that a resident of a third
state should be precluded from the benefits of a DTAA, then a suitable limitation to that effect must find place
in the DTAA itself. In the absence of a limitation specifically provided in the DTAA, treaty shopping cannot be
held to be invalid.
4. If a tax payer has legitimately reduced his tax burden by taking advantage of treaty, the benefit
cannot be denied to him on the ground of loss of revenue. Explain in the context of decided case law.
[MTP JUNE 2019 (SET 2) - 7 Marks]
Answer:
Every country seeks to tax the income generated within its territory on the basis of one or more connecting
factors such as location of the source, residence of the taxable entity, maintenance of a permanent
establishment, and so on. A country might choose to emphasize one or the other of the aforesaid factors for
exercising fiscal jurisdiction to tax the entity.
Depending on which of the factors is considered to be the connecting factor in different countries, the same
income of the same entity might become liable to taxation in different countries. This would give rise to harsh
consequences and impair economic development.
In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter
into bilateral treaties, Conventions or agreements for granting relief against double taxation. Such treaties,
conventions or agreements are called double taxation avoidance treaties, conventions or agreements.
The Government of India has entered into various Agreements (also called Conventions or Treaties) with
Governments of different countries for the avoidance of double taxation and for prevention of fiscal evasion.
The purpose of these Agreements is to avoid double taxation and to encourage mutual trade and investment
between the two countries, as also to bring an environment of certainty in the matters of tax affairs in both
countries.
The Apex Court in the case of UOI –vs.- Azadi Bachao Andolan has held that an act which is otherwise valid
in law cannot be treated as non-est (not exist) merely on the basis of some underlying motive supposedly
resulting in some economic detriment or prejudice to the national interests.
Thus, the benefit cannot be denied to tax payer on the grounds of loss of revenue if he has
legitimately reduced his tax burden by taking advantage of treaty.

CONTROLLED FOREIGN CORPORATION
With the globalization and liberalisation of economies, the tax payers in many countries have resorted to various
tax deferral method to avoid the tax incidence in the home country which charges high tax rate. Among others,
one of the popular methods of tax deferral is transfer of passive or investment income (such as interest, dividend
and capital gains) by establishing an entity in a low tax country or tax havens. The Mechanism of tax deferrals
starts by establishing an entity in a low tax jurisdiction. Such entity, since controlled by parent company, is called
a “Controlled Foreign Corporation” in the home country of parent company. E.g., a 100% subsidiary of an Indian
company in Texas is a CFC in India.
The passive income of such CFCs is then not distributed to the shares holders of CFC to avoid levy of taxes in the
parent company home country tax jurisdiction for a long time, thus deferring the incidence of tax on such Income.
This artificial deferral of taxes through the holding structure in low tax or preferred tax regimes has been
considered as an injurious to revenue collection targets in various countries specially the developed economies.
Several countries have adopted measures aimed at preventing this artificial deferral of passive or investment
income through CFC’s. The CFC rules are measures to curb the practice of artificial deferral of income. CFC
rules generally deeming in nature and are applied to apportion income of a CFCs to the parent entity and to
subject it to taxation in the parent entity’s home country.
Under CFC rules any undistributed income of a CFC is deemed to be distributed to the parent company /
shareholders, thus taxed in their hand in the home country tax jurisdiction.
Thus, Controlled foreign company (CFC) regimes are used in many countries as a means to prevent erosion of
the domestic tax base and to discourage residents from shifting income to jurisdictions that do not impose tax or
that impose tax at low rates. USA was first to introduce the CFC rules
While the rules applicable to CFCs and the attributes of a CFC differ from country to country, the concept of CFC
regimes in general is that they eliminate the deferral of income earned by a CFC and tax residents currently on
their proportionate share of a CFC’s income.
Typical conditions for the application of such regimes are that:

1. a domestic taxpayer “control” the CFC;
2. the CFC be located in a “low tax” jurisdiction or a jurisdiction that imposes a tax rate lower than the rate in
the shareholder’s country, or alternatively that the CFC be located in a “black” or “grey” list jurisdiction (as
opposed to favored “white” list jurisdictions); and
3. the CFC has earned the passive income like interest, dividend, capital gains, etc.;
4. the CFC has not distributed such income to the parent company for a long time.
In case the above conditions are satisfied, the passive undistributed income of the CFC is deemed to be
distributed to the shares holders and is taxed in the hands of such shareholders in the home country of such
shareholder in proportion of their shareholdings.

TRANSFER PRICING SATC Q.1
Key Transfer Pricing Audit Issues And Difficulties

Indian transfer pricing administration over the years has witnessed several challenges in administration of transfer
pricing law. In the above backdrop, this chapter highlights some of the emerging transfer pricing issues and
difficulties in implementation of arm’s length principle.
a. Challenges in the comparability analysis

Increased market volatility and increased complexity in international transaction have thrown open serious
challenges to comparability analysis and determination of arm’s length price.
b. Issue relating to risks

A comparison of functions performed, assets employed and risks assumed is basic to any comparability
analysis. India believes that the risk of a MNE is a by-product of performance of functions and ownership,
exploitation or use of assets employed over a period of time. Accordingly, risk is not an independent
element but is similar in nature to functions and assets. In this context, India believes that it is unfair to
give undue importance to risk in determination of arm’s length price in comparison to functions performed
and assets employed.
c. Comparability Adjustment
Like many other countries, Indian transfer pricing regulations provide for “reasonably accurate comparability
adjustments”. The onus to prove “reasonably accurate comparability adjustment” is on the taxpayer.
The experience of Indian transfer pricing administration indicates that it is possible to address the issue of
accounting difference and difference in capacity utilization and intensities of working capital by making
comparability adjustments. However, Indian transfer pricing administration finds it extremely difficult to
make risk adjustments in absence of any reliable and robust and internationally agreed methodology
to provide risk adjustment. In some cases taxpayers have used Capital Asset Pricing Method (CAPM).
d. Intangibles [5 marks]
Transfer pricing of intangibles is well known as a difficult area of taxation practice. However, the pace of
growth of the intangible economy has opened new challenges to the arm’s length principle. Seventy five
percent of all private R&D expenditure worldwide is accounted for by MNEs.
The transactions involving intangible assets are difficult to evaluate because of the following
reasons:
a. Intangibles are seldom traded in the external market and it is very difficult to find comparables in
the public domain.
b. Intangibles are often transferred bundled along with tangible assets.
c. They are difficult to be detected.
A number of difficulties arise while dealing with intangibles. Some of the key issues revolve around
determination of arm’s length price of rate of royalties, allocation of cost of development of market and brand
in a new country, remuneration for development of marketing, Research and Development intangibles and
their use, transfer pricing of cobranding etc.
e. R&D Activities
Several global MNEs have established subsidiaries in India for research and development activities on
contract basis to take advantage of the large pool of skilled manpower which are available at a lower cost.
These Indian subsidiaries are generally compensated on the basis of routine and low cost plus mark up. The
parent MNE of these R&D centres justify low cost plus markup on the ground that they control all the risk and
their subsidiaries or related parties are risk free or limited risk bearing entities.
The claim of parent MNEs that they control the risk and are entitled for major part of profit from R&D
activities is based on following contentions:
a. Parent MNE designs and monitors all the research programmes of the subsidiary.
b. Parent MNE provides fund needed for R&D activities.
c. Parent MNE controls the annual budget of the subsidiary for R&D activities.
d. Parent MNE controls and takes all the strategic decisions with regards to core functions of R&D
activities of the subsidiary.
e. Parent MNE bears the risk of unsuccessful R&D activities.

TRANSFER PRICING SATC Q.2
The Indian transfer pricing administration always undertakes a detailed enquiry in cases of contract R&D
centres. Such an enquiry seeks to ascertain correctness of the functional profile of subsidiary and parent
MNE on the basis of transfer pricing report filed by the taxpayers, as well as information available in the
public domain and commercial databases. After conducting detailed enquiries, the Indian tax
administration often reaches the following conclusions:
a. Most parent MNEs were not able to file relevant documents to justify their claim of controlling risk of
core functions of R&D activities and asset (including intangible assets) which are located in the
country of subsidiary or related party.
b. Contrary to the above, it was found that day to day strategic decisions and monitoring of R&D
activities were carried out by personnel of subsidiary who were engaged in actual R&D activities and
more relevant operational risks.
f. Intra-Group Services [5 marks]
Globalization and the drive to achieve efficiencies within MNE groups have encouraged sharing of resources
to provides support between one or more location by way of shared services. Since these intra group
services are the main component of “tax efficient supply chain management” within an MNE group,
the Indian transfer pricing authorities attach high priority to this aspect of transfer pricing.
The tax administration has noticed that some of the services are relatively straight forward in nature like
marketing, advertisement, trading, management consulting etc. However, other services may be more
complex and can often be provided on stand alone basis or to be provided as part of the package and is
linked one way or another to supply of goods or intangible assets. An example can be agency sale technical
support which obligates the licensor to assist the licensee in setting up of manufacturing facilities, including
training of staff.
The Indian transfer pricing administration generally considers following questions in order to identify
intra group services requiring arm’s length remuneration:
a. Whether Indian subsidiaries have received any related party services i.e., intra group services?
b. Nature and detail of services including quantum of services received by the related party.
c. Whether services have been provided in order to meet specific need of recipient of the services?
d. What are the economic and commercial benefits derived by the recipient of intra group services?
e. Whether in comparable circumstances an independent enterprise would be willing to pay the price for
such services?
f. Whether an independent third party would be willing and able to provide such services?
The answers to above questions enable the Indian tax administration to determine if the Indian subsidiary
has received or provided intra group services which requires arms’ length remuneration. Determination of
the arm’s length price of intra group services normally involve following steps:
a. Identification of the cost incurred by the group entity in providing intra group services to the related
party.
b. Understanding the basis for allocation of cost to various related parties i.e., nature of allocation keys.
c. Whether intra group services will require reimbursement of expenditure along with markup.
d. Identification of arm’s length price of markup for rendering of services.
g. Financial Transactions
Inter-Company loans and guarantees are becoming common international transactions between related
parties due to management of cross border funding within group entities of a MNE group. Transfer pricing of
inter-company loans and guarantees are increasingly being considered some of the most complex
transfer pricing issues in India.
The Indian transfer pricing administration has followed a quite sophisticated methodology for pricing
inter-company loans which revolves around:
a. comparison of terms and conditions of loan agreement;
b. determination of credit rating of lender and borrower;
c. Identification of comparables third party loan agreement;
d. suitable adjustments to enhance comparability.

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THIS BOOK HAS BEEN A REALITY

ONLY BECAUSE OF MY FAMILY &

Contact: 8527230445 ; 01147542530

I dedicate this book to my beloved late grandparents & Papa.

Updated as on 10.03.2020 (10th Edition - 1st Print)

“One more step towards success”

SURAJ AGRAWAL TAX CLASSES

18 ANAND VALLABH OLI `04161004350 NOW IN CMA FINAL

List C : Students cleared First OR Second Group of CMA Inter

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THANK YOU TO ALL OF YOU

THANKS TO ALL OF YOU

SURAJ AGRAWAL TAX CLASSES

2. Place of Effective Management AA.1 – AA.18

3. Explanation 5, 6 & 7 to Section 9(1)(i) & Section 9A AB.1 – AB.08

Question & Answer - NR AC.1 – AC.14

4. Double Taxation Relief B.1 – B.16

5. Foreign Tax Credit BB.1 – BB.4

6. AAR C.1 – C.12

7. GAAR D.1 – D.8

8. APA DD.1 – DD.14

9. International Transaction E.1 – E.14

10. Associated Enterprises & Deemed AE F.1 – F.10

11. Specified Domestic Transactions G.1 – G.6

12. ALP & Methods H.1 – H.14

13. TPO & AO (including Secondary Adjustments) I.1 – I.14

14. CUP J.1 – J.12

15. RPM K.1 – K.4

16. CPM L.1 – L.6

17. PSM M.1 – M.4

18. TNMM N.1 – N.6

19. Notified Jurisdictional Area O.1 – O.10

20. Tax Havens P.1 – P.4

21. Key Issues Q.1 – Q.2

ADDITIONAL CONDITION [Section 6(6)]: ROR

Period of stay of Crew Member (Indian Citizen) of Foreign Bound Ship

Finance Act 2015 [May 2016]

By CA Suraj Agrawal [8527230445] Suraj Agrawal Tax Classes: 011-47542530

By CA Suraj Agrawal [8527230445] Suraj Agrawal Tax Classes: 011-47542530

Resident but Not-Ordinarily Resident (HUF)

RESIDENT STATUS OF A COMPANY [Section 6(3)]

RESIDENT STATUS OF PERSONS OTHER THAN ABOVE [Section 6(4)]