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Advanced Tax- Law and Practice

International Taxation
 Important concepts
• Double Taxation Avoidance Agreements
• Transfer pricing
• Advance Ruling
• Taxation of NRIs
Introduction to DTAA
Introduction
Double taxation is imposition of two or more taxes on
the same income (in case of IT), assets (in case of Capital
Taxes) or any financial transaction (in case of sales taxes)
in different countries. This double liability is often
mitigated by tax treaties between countries.
 Introduction(cont.)
This arises from two basic rules that enable the country of residence as
well the country where the source of income exists to impose

1) Source rule
The source rule holds that income is to be taxed in the country in which it
originates irrespective of whether the income accrues to a resident or a
nonresident

2)Residence rule
The residence rule stipulates that the power to tax should rest with the country in
which the taxpayer resides
• When an Indian businessman makes a profit or some taxable gain
in another country, he may be required to pay Tax on that income
in India, as well as in country in which Income was made !!
Methods to Eliminate Double Taxation
• Exemption Method • Credit Method

Exemption
Full Full Ordinary
with
Exemption Credit Credit
Progression

Total tax paid State of residence

The Income Income earned in
in state of allows
earned state of source is credit of tax paid in
source is
in the state of considered in state of source
allowed as a
source is fully state of residence Restricted to that part
credit against
exempt in the only for rate any tax of income-tax which is
State purpose payable in state attributable to income,
of residence of residence taxable in state of
residence
Approaches for Elimination of
Double Taxation in India
• Bilateral Agreements between Contracting states
–Section 90 provides for tax relief in accordance with
treaties executed by India
–Unilateral Tax credit – Foreign tax credit system
–Section 91 provides relief where no treaty exists
Section--90
Section
Bilateral Relief, Under Section 90
•Indian government offers protection against double taxation
by entering into a DTAA with another country, based on
mutually acceptable terms.
•Such relief may be offered under two methods:
–Exemption method –Ensures complete avoidance of tax
overlapping
–Tax credit method – Provides relief by giving taxpayer a
deduction from tax payable in India
 Tax Residency Certificate (S.90(5) &
S.90A(5) w.e.f. 1 April 2013)
► Section 90A(4) provides that treaty benefit will not be available to any NR
unless he furnishes TRC from Government of other country including
therein particulars as may be prescribed.
► Rule 21AB notified on 17 September 2012 w.e.f 1 April 2013

► Explanatory Memorandum of FB 2012 had stated that submission of TRC

is ‘necessary but not a sufficient condition’ for claiming benefits under
DTAA. This is now proposed in S.90(5) of the Act
► Amendment to apply retroactively from A.Y 2013-14
 Illustration
• X(28 years) is resident and ordinarily resident in India.
• His income is 8,96,000 from a business in India and Rs. 1,92,000 from a
business in a foreign country with whom India has an ADT agreement.
• According to ADT agreement, income is taxable in the country in which it
is earned and not in the 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, business income of Rs.
1,92,000 is taxable @23%.
• During the previous year, X has deposited Rs. 42,000 in his PPF account
(out of which 10,000 is deposited out of his foreign income).
• He has also received an interest of Rs.32,000 on Government Securities.
• Find out his tax liability for the A.Y 2016-17.
 Illustration
• X Ltd. is an Indian company. For the previous year
2015-16, following incomes are noted from the
books of account of the taxpayer:
• Income from a business in India - Rs. 3,80,000
• Income from business in a foreign country with
whom India has ADT agreement- Rs. 2,16,000
• According to the ADT agreement, Rs.2,16,000 is
taxable in India. However, it can also be taxed in a
foreign country @ 17.5% which can be set off
against Indian tax liability.
 Section-91
Unilateral Relief, Under Section 91

•Indian government can relieve an individual from double taxation

whether there is a DTAA between India & other country concerned.
• Unilateral relief may be offered if:
–The person /company has been a resident of India in previous year
–Income must be accrued to & received by taxpayer outside India in
previous year
–Income should have been taxed in India & in another country with
which there is no tax treaty
–The person or company has paid tax under laws of foreign country in
question
 Unilateral Tax Credit
Relief
• Deduction from the Indian income-tax payable by him of a
sum calculated on
– such doubly taxed income at the Indian rate of tax
OR
– the rate of tax of the said country,

whichever is the lower,

OR
the Indian rate of tax if both the rates are equal
Calculation of Unilateral Tax Credit
• Ascertain the amount of doubly taxed income
• Calculate income tax on the above income
– at Indian rates of tax and
– at the rate of tax in foreign country
• Lower of the two is the relief of an amount of tax
• What is Indian rate?
– Rate determined by dividing the amount of Indian income
tax after all deductions by the total income.
• What is foreign rate?
– Income tax and super tax actually paid in that country after
all deductions, divided by the whole amount of income as
assessed in that country.
 illustration
• Y (24 years) and Z (26 years) are resident in India. The
following points are noted for the previous year 2015-16
from the books of accounts:
Y Z
Income from business in India 80,000 -1,30,000
Income from business in 1,80,000 5,50,000
Argentina(India does not have
ADT agreement with Argentina)
Income from other sources in 60,000 140,000
India (bank interest)
PPF Contribution 16,000 41,500
Tax levied in Argentina 39,000 25,000

• Calculate their Indian tax liability

June 15 Question NS
Solution
Solution Contd..
 Treaty Override

• In cross-border tax scenario:

– The assessee can avail the benefit of bilateral
agreements between contracting state;
OR
– The assessee can choose to be governed by the
Indian tax laws

Whichever is more beneficial

to the tax-payer!
 Effects of an ADT
• If no tax liability, then the question of
resorting to the agrement doesnot rise
• If imposed by the Act, the agreement may
resort to reducing it.
• In case of difference b/w the provision of the
Act and the agreement ,the provision of
agreement prevails over the provision of the
Act.
Transfer Pricing
 Transfer Price: What and Why?
• TP means the value or price at which transactions
take place amongst related parties.
• TP are the prices at which an enterprise transfers
physical goods and intangible property and provides
services to associated enterprises
• TP gain significance because these can be used by
the controlling party to their advantage to minimise
tax incidence.
 What is Transfer Pricing?
The expression “transfer pricing” generally refers to prices of
transactions between associated enterprises which may take place
under conditions differing from those taking place between
independent enterprises.
• Suppose a company X purchases goods for 100 rupees and sells
it to its associated company Y in another country for 200 rupees,
who in turn sells in the open market for 400 rupees.
• Had X sold it direct, it would have made a profit of 300 rupees.
But by routing it through Y, it restricted it to 100 rupees,
permitting Y to appropriate the balance. The transaction
between X and Y is arranged and not governed by market forces.
• The profit of 200 rupees is, thereby, shifted to the country of Y.
The goods is transferred on a price (transfer price) which is
arbitrary or dictated (200 hundred rupees), but not on the
market price (400 rupees).
 Transfer Price: What and Why?
• Approximately 60% of the total transactions
across the world are between related parties.
• If the transactions are across different tax
jurisdictions, where tax rates are different,
shifting is beneficial.
 Factors Affecting Transfer Pricing
• Internal factors: Performance Measurement
and Evaluation
• External Factors:
– Accounting Standard
– Income Tax
– Custom Duty
– Currency Fluctuations
– Risk of Expropriation
CONCEPT OF TRANSFER PRICING

Independent
Related Party
Entity

Transactions
• Goods
• Services
• Intangibles
• Loans

Independent
Resident
Entity

Transfer Arm’s Length Price

Price
 SCOPE AND APPLICABILITY
• Transfer Pricing Regulations ("TPR") are
applicable to all the enterprises that enter into an
'International Transaction' with an 'Associated
Enterprise'.

• Therefore, generally it applies to all cross border

transactions entered into between associated
enterprises.

• It even applies to transactions involving a mere

book entry having no apparent financial impact.
 Transfer Price Regulations
International India
• OECD formulated • The Finance Act 2001
“Guidelines on transfer introduced the detailed
pricing”. They serve as TPR w.e.f. 1st April 2001
generally accepted • The Income Tax Act
practices by the tax • AS-18
authorities
• Other Relevant Acts
 INDIAN TRANSFER PRICING
REGULATIONS
PROVISIONS REFERENCE
Computation of Income from Section 92 of the Income tax Act,
International transactions involving 1961
transfer pricing having regard to
''Arm’s length price''
Meaning of ''Associated Enterprise'' Section 92A of the Act

Meaning of ''International Section 92B of the Act

Transaction''
Computation of ''Arm’s Length Section 92C of the Act
Price''
Reference to Transfer Pricing Officer Section 92CA of the Act
 INDIAN TRANSFER PRICING
REGULATIONS
PROVISIONS REFERENCE
Maintenance and keeping of Section 92D of the Act
information and document by
person entering into an international
transaction

Requirement of Audit Report Section 92E of the Act

Important Definitions Section 92F of the Act
 TPR: Some Important Concepts
• Income/Expenses/Cost arising from an
international transaction shall be computed
having regard to arm’s length price (ALP).
• ALP provisions can be applied if it leads
to decrease in taxable income or increase
in losses(downward revision in the
chargeable to tax in India).
 Associate Enterprise: 92A
• Direct Control/Control through intermediary
• Deemed to be associated
• Holding not less than 26% of voting power
• Loan advanced constituting not less than 51% of the total
assets of borrowing company.
• Guarantees not less than 10% on behalf of borrower
• Appointment of more than 50% of the BoD
• Dependence for 90% or more of the total raw material or
other consumables
• Manufacturing and processing or business of wholly
dependent for use of know-how, patents, copyrights and
such other IPRs
ASSOCIATED ENTERPRISE(Section 92A)

Both A and B are

A
Associated
Enterprise of C.

B
Associated Enterprise means an enterprise which
participates, directly or indirectly, or through one or
more intermediaries, in the management or control
or capital of the other enterprise.
C When one enterprise controls or is controlled by
another, directly or indirectly.
 Both D and E are also Associated
A D Enterprise of C.

Associated Enterprise means an

enterprise in respect of which one or
more persons who participate, directly or
indirectly, or through one or more
B E 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.
When there is a relationship of indirect
C
ownership or of mutual interest between
the two.
 DEEMED ASSOCIATED ENTERPRISE
Two enterprises shall be deemed to be associated enterprises if, at any
time during the previous year-
• One enterprise holds, directly or indirectly, shares carrying not less
than twenty-six per cent of the voting power in the other
enterprise.
• Any person or enterprise holds, directly or indirectly, shares
carrying not less than twenty-six per cent. of the voting power in
each of such enterprises.
• A loan advanced by one enterprise to the other enterprise
constitutes not less than fifty-one per cent of the book value of the
total assets of the other enterprise.
• One enterprise guarantees not less than ten per cent of the total
borrowings of the other enterprise.
• 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.
• 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.
• 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 in respect of which the other enterprise has
exclusive rights.
• Ninety per cent 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.
• 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.
• 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.
• Where one enterprise is controlled by a Hindu undivided family,
the other enterprise is controlled by a member of such Hindu
undivided family, or by a relative of a member of such Hindu
undivided family, or jointly by such member and his relative.
• Where one enterprise is a firm, association of persons or body of
individuals, the other enterprise holds not less than ten per cent.
interest in such firm, association of persons or body of
individuals.
• There exists between the two enterprises, any relationship of
mutual interest, as may be prescribed.
 Review Question
• Briefly state the quantum of interest required (in percentage), when the following
criteria are applied for two enterprises to be deemed as associated enterprises:
• (a) Shareholding with voting power - either direct or indirect.
– Answer: Not less than 26%
• (b) Advancement of loan by one enterprise to other, constituting certain
percentage of the book value of the total assets of the other enterprise.
– Answer: Not less than 51%
• (c) Based on the Board of directors or members of the governing board of one
enterprise, appointed by the other enterprise.
– Answer: 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
• (d) Total borrowing guarantee by one enterprise for the other.
– Answer: Not less than 10%
• (e) Based on the quantum of supply of raw material and consumables required for
the manufacture or processing of goods or articles carried out by one enterprise,
supplied by the other enterprise.
– Answer: 90% or more
 International Transactions: 92B
• Transaction between two or more AE of which
either both or anyone is a non-resident.
• Transactions:
– Purchase/Sale/Lease
– Provision of service
– Lending or borrowing
 INTERNATIONAL
TRANSACTION(Section 92B)
• “International transaction” means a transaction between
two or more associated enterprises, either or both of
whom are non-residents, in the nature of purchase, sale or
lease of tangible or intangible property, or provision of
services, or lending or borrowing money, or any other
transaction having a bearing on the profits, income, losses
or assets of such enterprises, and shall include 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.
 The expression “international transaction” shall
include-
Tangible Intangible Capital Provision of Business
Property Property Financing Services Restructuring

• The
A transaction
• The purchase, • Including
of business
purchase, sale, • Including provision
restructuring
sale, transfer, any type of of market
entered into
transfer, lease or long-term research,
by an
lease or use of or short- market
enterprise
use of intangible term developme
with an
tangible property. borrowing, nt.
associated
property. • including lending or • Marketing
enterprise
• Including the transfer guarantee. manageme
irrespective of
building, of • Purchase nt,
bearing on
transportat ownership, or sale of administrat
profits ,losses
ion vehicle, copyrights, marketable ion,
of such
machinery, patents, securities e technical
enterprises at
equipment trademarks tc. service ,
time of
etc. , licences repairs etc.
transaction.
etc.
 Arm’s Length Price
• Price which two independent firms would
agree on.
• Price which is generally charged in a
transaction between persons other than
associated enterprises.
ARM’S LENGTH PRICE(Section 92C)
A transaction in which the buyers and sellers of a product act
independently and have no relationship to each other. The concept
of an arm's length transaction is to ensure that both parties in the
deal are acting in their own self interest and are not subject to any
pressure or duress from the other party.

OECD introduced the transfer pricing guidelines for multinational

enterprises and tax administrations in 1995. OECD guidelines are
appreciated globally. In the transfer pricing system, the transfer
pricing has to be resolute on the basis of the arm’s length principle
so price determined is the Arm’s Length Price (ALP). According to
the ALP there are two type of transfer pricing methods
• Traditional Transaction Methods
• Transactional profit methods or Non Transactional Methods
 TRANSFER PRICING METHODS
Traditional Transactional
Transaction Profits Methods
Methods

Compara
ble Resale Cost Profit Transacti
Uncontro Price Plus Split onal Net
lled Method Method Method Margin
Price

Such Other Method as may be prescribed by the Board

 Comparable uncontrolled price
method
• CUP method compares the price transferred in
a controlled transaction to the price charged
in a comparable un-controlled transaction.
• CUP method is the most direct and reliable
way to apply the arm’s length principle.
COMPARABLE UNCONTROLLED PRICE
METHOD

“In this method, price charged in an uncontrolled deal between

comparable entities is recognized and evaluated with the verified entity
price to determine the Arm’s Length Principle.”

• Step 1: Determine the price charged or paid for the property

transferred or services provided in a comparable uncontrolled
transaction.
• Step 2: Such Price is then adjusted to account for the Functional
Differences between the International Transaction & the Comparable
Uncontrolled Transaction, which could materially affect the price in the
open market.
• Step 3: Such Adjusted Price is the Arm’s Length Price.
 Illustration
• A Ltd., an Indian company, sells computer
monitor to is 100% subsidiary X Ltd., in US@
$50 per piece. A Ltd. also sells its computer
monitor to another company Y Ltd. in US
@$80 per piece.
• Total income of A Ltd., for the A.Y 2015-16 is
Rs. 12,00,000 which includes sales of 100
computers to X ltd. Rate of one dollar may be
assumed to be Rs. 49.
• Will the income of X Ltd. be taxable in India?
 solution
• ALP ($80X100XRs.49)= 3,92,000
• Income of A ltd.
– Income as per books of account=12,00,000
– Less: sale consideration (recorded price)= 2,45,000
– Add: sale consideration (ALP) = 3,92,000
– Taxable income= 13,47,000
• X Ltd:
– As no income is deemed to accrue or arise in India,
nothing is taxable.
 CUP- Problems
• Identification of an identical transaction in a
situation where a price is charged for products
and services between unrelated parties.
 Resale price method
• The resale price method begins with the price
at which a product is resold to an independent
enterprise (IE)by an associate enterprise.
– X sold to AE at Rs. 1000 (profit: 300)
– AE sold to an IE at Rs. 2000
• (profit of Rs. 500 for relevant IE)
– Arms length price = 2000 - 500 = 1500
 RESALE PRICE METHOD
“This method is used where the vendor adds similarly little value to goods owned from
associate enterprises. Here, Arm’s Length Price is determined by reducing the relevant gross
profit mark-up from the sale price charged to free entity.”
• Step 1: The Price at which the Property purchased or the Services obtained by the
enterprise from an associated enterprise are sold to an unrelated enterprise is first
determined.
• Step 2: Such Resale Price is reduced by the Normal Gross Profit Margin accruing to the
Enterprise from the purchase and resale of Similar Goods in a comparable uncontrolled
transaction. If there is no comparable uncontrolled transaction, then take the Gross
Profit of an unrelated person from purchase and resale of Similar Goods.
• Step 3: Then reduce the expenses incurred by the enterprise in connection with
purchase of property.
• Step 4: The price so arrived is adjusted to account for the functional differences in the
International Transaction & the Comparable uncontrolled Transaction which could
materially affect the Gross Profit Margin in the Open Market.
• Step 5: The adjusted Price is the Arm’s Length Price
 Cost Plus Method
• This method is generally used where some
semi finished goods are sold between related
parties or long term buy and supply
arrangements..
• In CP method, first the cost incurred is
determined. An appropriate cost plus mark-up
is then added to the cost to arrive at an
appropriate profit. The resultant figure is the
arm’s length price.
 COST PLUS METHOD
“Cost Plus Method entails comparison of Gross Margin on supply of goods and
services to an associated enterprise.”

• Step 1: Determine the Direct and Indirect Costs of Production in respect of

Property transferred or Services provided to an associated enterprise
• Step 2: Determine the normal gross profit mark up to such costs which will
arise from transfer of similar goods or services to an unrelated enterprise or in
a comparable uncontrolled transaction
• Step 3: The normal gross profit mark up should be adjusted to account for the
functional differences if any between the International Transaction and
comparable uncontrolled transaction which could materially affect such profit
mark-up in the open market
• Step 4: The cost referred in step 1 shall be increased by the adjusted profit
mark up arrived
• Step 5: The sum so arrived is the arm’s length price
 Profit Split Method

• This method is applicable in case of transfer of

unique, intangible or any multiple interrelated
international transactions, which cannot be evaluated
separately.
• PSM is used when transactions are inter-related and
is not possible to evaluate separately.
• PSM first identifies the combined net profit
• The profit so determined is split between the AE on
the basis of the functions performed/assets/CE
 PROFIT SPLIT METHOD
“This method is used when associate enterprise transactions are
included that it becomes very hard to conduct a transfer pricing
analysis on a transactional base.”

• Step 1:- Compute the Net Profit of the Associated Enterprise

arising from the International Transaction.
• Step 2:- Compute the Relative Contribution made by each of
the associated enterprise to the earning of the combined Net
Profit.
• Step 3:- Split the Combined Net Profit in proportion to their
Contributions.
• Step 4:- The Sum so arrived at is the Arms Length Price.
 ILLUSTRATION

Associated Enterprise A Associated Enterprise B

Contribution by A to Contribution by B to
the controlled the controlled
transaction; x% transaction; y%
Controlled Transaction
=> Profit

Share of profit
Share of profit from from the
the controlled controlled
transaction attributed transaction
to A; x% attributed to B;
y%
 Transactional net margin method
• Comparison between net margins derived
from operation of uncontrolled parties and
the net margin derived by an associated
enterprise on similar operation
• Similar to RPM and CPM but comparison is on
net margins and not gross margin
 TRANSACTIONAL NET MARGIN
METHOD
“The transactional net margin method (“TNMM”) examines a net profit indicator, i.e. a
ratio of net profit relative to an appropriate base (e.g. costs, sales, assets), that a
taxpayer realises from a controlled transaction (or from transactions that are
appropriate to aggregate) with the net profit earned in comparable uncontrolled
transactions.”

• Step 1: Compute the Net Margin realised by the Enterprise from an International
Transaction entered into with an associated enterprise.
• Step 2: Compute the Net Profit Margin realised by the enterprise or by an
unrelated enterprise from a comparable uncontrolled transaction.
• Step 3: Adjust the Net Profit Margin computed in Step 2 to account for differences
• Step 4: The Net Profit Margin computed in Step 1 is established to be the same as
the net Profit Margin referred to in Step 3
• Step 5: The net profit margin thus established is then taken into account to arrive
at an arm’s length price in relation to the International Transaction
 Most appropriate method
• Depends upon:
– Nature and class of transaction
– Class of AEs entering into transaction and
functions performed, assects employed or risks
assumed.
– Availability and coverage of data
– Degree of comparability between international
transaction and uncontrolled transaction
– Extent to which reliable adjustments can be made.
 June 2015 Question N/S
Rule 10C of the Indian Income Tax Rules, 1962 states that, in selecting a most
appropriate method, the following factors shall be taken into account namely:-
•(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 transactions or between the enterprises entering into such
transactions;
•(f) The nature, extent and reliability of assumptions required to be made in the
application of a method.
 ADVANCE PRICING AGREEMENT
“An APA is an agreement between a tax payer and tax authority determining
the transfer pricing methodology for pricing the tax payer’s international
transactions for future years.”

TYPES OF APA’S
• Unilateral APA: an APA that involves only the tax payer and the tax
authority of the country where the tax payer is located.
• Bilateral APA (BAPA): an APA that involves the tax payer, associated
enterprise (AE) of the tax payer in the foreign country, tax authority of the
country where the tax payer is located, and the foreign tax authority.
• Multilateral APA (MAPA): an APA that involves the tax payer, two or more
AEs of the tax payer in different foreign countries, tax authority of the
country where the tax payer is located, and the tax authorities of AEs.
 BENEFITS OF APA
• Certainty with respect to tax outcome of the tax
payer’s international transactions, by agreeing in
advance the arm’s length pricing or pricing
methodology (ies) to be applied to the tax payer’s
international transactions covered by the APA.
• Removal of an audit threat (minimize rigours of audit),
and deliverance of a particular tax outcome based on
the terms of the agreement.
• Substantial reduction of compliance costs over the
term of the APA.
• For tax authorities, an APA reduces cost of
administration and also frees scarce resources.
PROCEDURE AND FEES FOR AN APA
PROCEDURE:
• An application for a unilateral agreement should be made to the
Director General of Income Tax (international taxation) (DG-IT).
• For BAPA/MAPA, application should be made to the Competent
Authority (CA) in India. The CA will send the application to DG-IT
who in turn will send it to respective APA teams.
• In the case of BAPA/MAPA, negotiations between the CAs of India
and other country (ies) shall be carried out in accordance with the
provisions of the tax treaties.
• Further, the process in India will be initiated, only after filing the
application with the CAs in the AEs’ jurisdiction and evidence to
that effect is provided to the Indian CA.
 FEES
International
Transactions APA Filing Fee
Value

Value <= Rs.100 crores 10 lakhs

Value <= Rs.200 crores 15 lakhs

Value > Rs.200 crores 20 lakhs

The fees shall be computed with reference to the total value of

international transactions in respect of which an APA is proposed.
Accordingly, the fees shall be based on transaction value of the full
period of the proposed APA.
 APA ROLL BACK PROVISIONS
• The concept of ‘rollback’ in the context of APA means application of
negotiated position under an executed APA could be applied to the
prior years, provided the facts and circumstances of the
international transactions are similar.
• With effect from 1 October 2014, it is proposed to provide roll back
mechanism in the APA programe. It is proposed that an APA in
respect of an international transaction may, subject to such
prescribed conditions, apply during any period, not exceeding four
previous years preceding the first previous year for which the APA is
applied.
• It is also proposed to strengthen the tax
administrative set-up for quick disposal of APA
applications.
 Review Question
• Videsh Ltd., a US company has a subsidiary, Hind Ltd. in India.
• Videsh Ltd. sells mobile phones to Hind Ltd. for resale in India. Videsh Ltd.
also sells mobile phones to Bharat Ltd., another mobile phone reseller. It
sold 48,000 mobile phones to Hind Ltd. at Rs.12,000 per unit. The price
fixed for Bharat Ltd. is Rs.11,000 per unit.
• The warranty in case of sale of mobile phones by Hind Ltd. is handled by
itself, whereas, for sale of mobile phones by Bharat Ltd., Videsh Ltd. is
responsible for warranty for 6 months. Both Videsh Ltd. and Hind Ltd.
extended warranty at a standard rate of Rs.500 per annum.
• On the above facts, how is the assessment of Hind Ltd. going to be
affected?
• Show your calculations also.
Solution
 Illustration
• Medical Instruments Ltd. is a 100% Indian
subsidiary of a US company. The parent
company sells one of its products to the Indian
subsidiary at a price of US$ 100 per unit.
– The same product is sold to unrelated buyers in
India at a price of US$ 125 per unit.
– The US parent company sells the same product to
an unrelated company in India @ US$ 80 per unit.
Computation of Arm’s Length Price: I
Situation
• Price charged by the US parent company for
supply to its 100% Indian subsidiary per unit-
100 US dollars
• Sale price to unrelated buyers in India per
unit-125 US dollars
• Here there is no loss of revenue to the
Government due to the International
transaction hence there is no need to calculate
the Arm’s Length Price.
Computation of Arm’s Length Price: II
Situation
• In this situation price charged by the US Parent
Company for supplies to an unrelated Indian buyer
per unit- 80 US dollars
• Price charged to the Indian subsidiary per unit- 100
US dollars
• Applying comparable uncontrolled price method
• Arm’s length price per unit -80 US dollars
• Assumption: The transactions between the US Parent
Company and its Indian subsidiary are not on
principal to principal basis.
 Review Question
• Rule 10A(a) dealing with the Transfer Pricing
defines an ‘uncontrolled transaction’ to mean
a transaction between enterprises other than
_________, whether resident or non-resident.
• Explain how the arm’s length price in relation
to an international transaction is computed
under the comparable uncontrolled price
method as per Rule 10B of the Income-tax
Rules, 1962.
 Domestic Transfer Pricing Provisions
w.e.f 1.4.2013
• Specified domestic transactions (not being an
international transaction) between associated
enterprises are subject to transfer pricing
compliances at par with the norms applicable for
international transactions.[Sec 92A(2)]
• Allowance for expenditure or for allocation of
cost or any income shall be computed as per ALP,
provided the determination is not likely to result
in reduction of income chargeable to tax or result
in increase in the loss.
 Specified domestic transaction
includes
• Any expenditure in favour of a person referred
to in section 40A(2)(b)
• Or transactions referred to in section 80A, 80-
IA(8), 80-IA(10), 10AA or any other transaction
as may be prescribed
• The limit of Rs. 5 crores increased to Rs. 20
crores applies to aggregate to all transactions.
 Domestic Transfer Pricing
• "associated enterprise" shall,-(i) have the
same meaning as assigned to it in section 92A
 Notification 41/2013- Domestic
Transfer Pricing
• Notification No. 41/2013/F. No. 142/42/2012 (10
June 2013) revises the rules applicable to the
Accountant’s Report in Form No. 3CEB, to align
those reporting requirements with the definition
of international transactions and to extend
transfer pricing provisions for certain specified
domestic transactions. All international
transactions and specified domestic transactions
must be appropriately disclosed in Form No.
3CEB on or before the 30 November due date.
 So what do the Tax Authorities do
• They ask you to report all international
transactions between Associated entities and
to maintain support documentation to
establish this.
• They also conduct Transfer Pricing Audits to
scrutinize your documentation and the
method you have adopted to establish this.
Determination of arm’s length price by
AO in certain cases
• There is a proceeding for assessment of income
• AO has material information and is of the opinion
that:
– Arms length price has not been determined in accordance
with section 92(C)
– Assessee has not kept prescribed documents
– Data used for calculating ALP is not correct
– Assessee has failed to furnish information required by the
AO
Reference to transfer pricing officer
• AO may refer the computation of ALP to TPO is he
considers it necessary and approval of the
Commissioner is obtained.
• TPO to be of the rank of Joint Commissioner, Deputy
Commissioner or assistant Commission appointed by
the CBDT.
• TPO shall serve a notice to the assessess
• TPO shall hear the case and take into account all
relevant material and then pass the order and send
copies to AO and assessee
 Determination of total income after
computing the ALP
• AO may recompute income
• However, AO will not make any adjustment to
ALP determined by the taxpayer is such price
is upto 3% less or upto 3% more than the price
determined by the AO.
• Income chargeable under the Act should not
decrease on applying arm’s length price
 Income-tax (16th Amendment), Rules,
2013- safe harbour rules
• Under the safe harbor rules, ratios for eligible international transactions based on industry
sectors are provided, and offer a degree of relief and certainty. For instance, with respect to
software development or IT services, the safe harbor ratio for operating profit margin-to-
operating expense can be 20% or 22% (depending on the aggregate value of the international
transactions).
• 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 under rule 10TE, 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 the rules.
• The safe harbour rules shall be applicable for 5 assessment years beginning from and
including assessment year 2013-14.
• AO can make reference to TPO within 2 Months of receipt of Form 3CEFA and the TPO has to
pass an order within 2 Months of receipt of reference from AO on the validity of the option.
• The assessee can appeal against the order to the commissioner, who will be required to file
an order within 2 Months of the appeal.
• Provisions relating to Documentation (sections 92D and 92E) will still apply. This option can
be exercised by filing of Form 3CEFA which has been prescribed in the rules.
• Shall not apply to transaction entered into with an associated enterprise located in any
country or territory notified under section 94A or in a no tax or low tax country or territory.
Advance Rulings
 Liberalization and International Tax
Problems
• the application of Double Tax Avoidance Agreements
(DTAAs);
• their use and inevitable misuse in tax planning;
• conflicts between DTAAs and domestic legislation;
• taxation of international partnerships;
• transfer of assets into and out of tax jurisdictions;
• taxation of international acquisitions, business
combinations, mergers and demergers;
• taxation of services, pensions, royalties, technical fees and
income from supply of labour, equipment;
• transfer pricing;
• thin capitalization etc
• ADVANCE RULING.docx
 WHO CAN SEEK ADVANCE RULING?
• (a) A non-resident;
• (b) Resident having transactions with non-residents.
• (c) A resident who has undertaken or propose to
undertake one or more transactions of value of Rs.100
crore or more in total[vide Notification No. 73, dated
28-11-2014]
• (d) Specified categories of residents.
• (e) Any person (resident or non-resident) making an
application for determining whether an arrangement,
is an impermissible avoidance agreement as referred to
in Chapter X-A (applicable from 1-4-2015).
Nature of applicant
A non-resident applicant
A resident applicant who has undertaken
a transaction with non-resident or
proposes to undertake a transaction with
non-resident.
A resident who has undertaken or
propose to undertake one or more
transactions of value of Rs.100 crore or
more in total; or
Nature of application
A determination by the AARin relation to a
transaction which has been undertaken or is
proposed to be undertaken by a non-resident
applicant. Such determination shall include
the determination of any question of law or
of fact specified in the application.
A determination by the AARin 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. Such
determination shall include the
determination of any question of law or of
fact specified in
the application.
A determination by the AARin relation to the
tax liability of a resident applicant arising out
of such transactions and such determination
shall include the determination of any
question of law or of fact specified in the
Nature of applicant
A resident falling within notified class or
category of persons (i.e., a public sector
company).
Any person (resident or non-resident)
making an application for determination
of whether an arrangement is an
impermissible avoidance agreement as
referred to in Chapter X-A. (applicable
from 1-4-2015)
Nature of application
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 and such
determination or decision shall include
the determination or decision of any
question of law or of fact relating to such
computation of total income specified in
the application.
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. (applicable from. 1-4-2015)
 SALIENT FEATURES
• Must relate to a transaction entered into or
proposed to be entered into by the applicant
• The advance ruling is to be given on questions
specified in relation to such a transaction by
the applicant.
 Questions on which ruling can be
sought
• Even though the word used in the definition is singular namely “question”, it is clear that there can
be more than one question in one application. This has been made amply clear by Column No.8 of
the Form of application for obtaining an advance ruling (Form No.34C).
• Though the word “question” is unqualified, it is only proper to read it as a reference to questions of
law or fact, pertaining to the income tax liability of the non-resident qua the transaction
undertaken or proposed to be undertaken.
• The questions may be on points of law as well as on facts or could be mixed questions of law and
facts.
• There should be so drafted that each question is capable of a answer. This may need breaking-up of
complex questions into two or more simple questions.
• The questions should arise out of the statement of facts given with the application.
• No ruling will be given on a purely hypothetical question.
• No question not specified in the application can be raised during the course of hearing.
• Normally a question is not allowed to be amended but in deserving cases AAR may allow
amendment of one or more questions.
• Subject to the limitations to be presently referred to, the question may relate to any aspect of the
non-resident’s liability including international aspects and aspects governed by double tax
avoidance agreements.
• The questions may even cover aspects of allied laws that may have a bearing on tax liability such as
the law of contracts, the law of trusts etc., but the question must have a direct bearing, on and
nexus with the interpretation of the Indian Income-tax Act.
 Time limit for ruling
• The authority shall pronounce it ruling within
six months of receipt of the application.
• Binding nature of advance ruling :
– The effect of the ruling is stated to be limited to
the parties who appear before the authority and
the transaction in relation to which the ruling was
given. This is because the ruling was rendered on
a set of facts before the authority and can not be
general application.
 FORMS
• The application may be withdrawn within 30 days from the date of
the application.
• Form 34C: Applicable for a non-resident applicant.
• Form 34D: Applicable for a resident having transactions with a non-
resident
• Form No. 34DA : A resident seeking advance ruling in relation to his
tax liability arising out of one or more transactions valuing Rs.100
crore or more in total which has been undertaken or proposed to
be undertaken by him
• Form 34E: Applicable for class of persons notified by Central
Government
• Form No. 34EA : Any person (resident or non-resident) making an
application for determination of whether an arrangement, is an
impermissible avoidance agreement as referred to in Chapter X-A.
(applicable from 1-4-2015)
 APPLICABILITY OF ADVANCE RULING
(SECTION 245-S)
• (a) On the applicant who had sought it;
• (b) In respect of the transactions in relation to
which the ruling had been sought; and
• (c) On the Commissioner, and the income-tax
authorities subordinate to him, in respect of
the applicant and the said transaction.”
 PROCEDURE ON RECEIPT OF
APPLICATION
• If jurisdiction clear: forward application to the concerned
Commissioner
• In case of non existing assessees: the Central Board of
Direct Taxes (CBDT) is to be requested under Rule 13(1) of
the Procedure Rules to designate a Commissioner in
respect of an applicant within two weeks.
• the Authority may, after examining the application and the
records called for, either ‘allow’ or ‘reject’ the application.
• In case Authority has admitted the application, it is
empowered to collect or receive additional material and it
will examine all the material thus available to it at the time
of hearing and pronouncing a ruling on the application.
 Question precluded
• The authority shall not allow the application where the
question raised in it :
– Involves determination of fair market value of any property; or
– It relates to a transaction or issue which is designed prima facie
for the avoidance of income-tax ;Exception to this provision:
• (i) resident taxpayer falling within notified class or category of persons
i.e. a public sector company and
• (ii) Any person (i.e., resident or non-resident) making an application to
determine whether an arrangement proposed to be undertaken is an
impermissible avoidance arrangement under Chapter X-A..
– if the question concerned is pending before other authorities
(However, exception will apply in the case of a resident
applicant falling within the notified class or category of persons
i.e. a public sector company)
Fees
 Review questions
• The authority for advance ruling will not allow
consideration of any question involving
determination of ______________ of any
property.
• The ruling given by the authority for advance
rulings will be binding on ______________.
 Review question
• Can a public sector undertaking which has
undertaken a transaction with a nonresident,
seek an advance ruling in respect of tax
liability of the non-resident and also its own
liability ? Indicate the scope of applicability of
such advance rulings.
 Solution
• A public sector undertaking, being a resident, has been
notified by central government vide notification No. 725(E)
dated 03-08-2000 in exercise of power conferred by
subclause (iii) of clause (b) of section 245N as applicant for
the purpose of advance ruling and if it has undertaken a
transaction with a Non-resident and it can seek an Advance
Ruling in respect of tax liability of non-resident as per
Section 245N(i)(ii).
• The fact that such resident is a public sector undertaking
(PSU) notified under Section 245N(b)(iii) should not make
any difference.
• It cannot, however, seek any ruling in respect of its own tax
liability. (In re Airport Authority of India (2008) 168
Taxmann 158 AAR, New Delhi).