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International Taxation

[Income Tax]
Assessment Year 2016-17

Complete coverage of tax provisions for


Income from Salary and
Income from House Property
in Question & Answer format with practical illustration
Compilation of
CMA Suggested Answers [December 13 to June 16]
CA IPCC Suggested Answers [May 98 to May 16]

T K SRIDHAR
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Direct Taxation

20.1

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International Taxation

20.2

20. INTERNATIONAL TAXATION


S

Content
Double Taxation Relief

90

Agreement with foreign countries [Government to Government]

90A

Adoption by Central Government of agreement between specified associations for double


taxation relief

91

Countries with which no agreement exists [unilateral relief] [No DTAA]


SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX

92

Computation of income from international transaction having regard to arms length price.

92A

Meaning of associated enterprise.

92B

Meaning of international transaction.

92C

Computation of arms length price.

92CA

Reference to Transfer Pricing Officer

92D

Maintenance and keeping of information and document by persons entering into an international
transaction.

92E

Report from an accountant to be furnished by persons entering into international transaction.

92F

Definitions of certain terms relevant to computation of arms length price, etc.


In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,

[CMA INTER SY12, D14, 2 Marks]


Question: What is cross border transaction service? State the statutes primarily regulating the cross
border transactions.
Answer: Cross border transaction services means services related to transaction which involve two or
more countries. In India, there are two Acts which primarily seem to show the concern when a person
undertakes cross border transaction. They are (a) Foreign Exchange Management Act, 199; (b) IncomeTax Act, 1961.

[CMA INTER D07, 8 Marks]


Question: Write short note on double taxation relief under section 90A of the Income Tax Act, 1961.
Question: Briefly explain about double taxation avoidance agreement with foreign countries,
Answer: Double taxation relief, agreement with foreign countries [S. 90]
Double Taxation Relief
90

Agreement with foreign countries

90(1)

The Centw2ral Government may enter into an agreement with the Government of any

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Direct Taxation

20.3

country outside India


90(1)(a)

for the granting of relief in respect of

90(1)(a)(i)

income on which have been paid both income-tax under Income Tax Act in India and
income-tax in that country; or

90(1)(a)(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

90(1)(b)

for the avoidance of double taxation of income under this Act and under the corresponding
law in force in that country, or

90(1)(c)

for 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
investigation of cases of such evasion or avoidance, or

90(1)(d)

for recovery of income-tax under this Act and under the corresponding law in force in that
country, and may, by notification in the Official Gazette, make such provisions as may be
necessary for implementing the agreement.

90(2)

Where the Central Government has entered into an agreement with the Government of any
country outside India under sub-section (1) for granting relief of tax, or as the case may be,
avoidance of double taxation, 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.

90(3)

Any term used but not defined in this Act or in the agreement referred to in sub-section (1)
shall, unless the context otherwise requires, and is not inconsistent with the provisions of
this Act or the agreement, have the same meaning as assigned to it in the notification issued
by the Central Government in the Official Gazette in this behalf.

[CMA INTER D15, 4 Marks]


Question: What are the objectives of a double taxation avoidance agreement?
Answer: Objectives of Double Taxation Avoidance Agreement:
1. Elimination of double taxation.
2. Non-discrimination of nationals of other state.
3. Rational and equitable allocation of income tax between two countries.
4. Promotion of trade and investment between trading partners.
5. Exchange of information to combat tax avoidance/tax evasion.

[CMA INTER SY12, J15, 4 Marks]


Question: Explain the purposes for which the Central Government enters into double taxation
avoidance agreement with any foreign country as per section 90 of the Income-tax Act, 1961.
Answer: Purposes for which the Central Government can enter into DTAA

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International Taxation

20.4

Under Section 90(1) the purposes for which the Central Government can enter into double taxation
avoidance agreement with foreign country are:
1. Granting of double taxation relief, i.e., relief in respect of income on which income-tax has been paid
in India and also in the foreign country or granting of relief in respect of income-tax chargeable under
the income-tax Act and under the corresponding law in that country to promote mutual economic
relations, trade and investment.
2. For avoidance of double taxation of income under the income-tax Act and under the corresponding
law in force in that country or specified territory.
3. For exchange of information for the prevention of evasion or avoidance of Income tax chargeable
under the Income-tax Act or under the corresponding Law in force in that country or specified
territory or investigating of cases of such evasion or Avoidance.
4. For recovery of income-tax under the income-tax Act and under the corresponding law in force in that
country or specified territory as the case may be.

90A

Adoption by Central Government of agreement between specified associations for


double taxation relief

90A(1)

Any specified association in India may enter into an agreement with any specified
association in the specified territory outside India and the Central Government may, by
notification in the Official Gazette, make such provisions as may be necessary for adopting
and implementing such agreement

90A(1)(a)

for the granting of relief in respect of

90A(1)(a)(i)

income on which have been paid both income-tax under this Act and income-tax in any
specified territory outside India; or

90A(1)(a)(ii)

income-tax chargeable under this Act and under the corresponding law in force in that
specified territory outside India to promote mutual economic relations, trade and
investment, or

90A(1)(b)

for the avoidance of double taxation of income under this Act and under the
corresponding law in force in that specified territory outside India, or

90A(1)(c)

for 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 specified
territory outside India, or investigation of cases of such evasion or avoidance, or

90A(1)(d)

for recovery of income-tax under this Act and under the corresponding law in force in that
specified territory outside India.

90A(2)

Where a specified association in India has entered into an agreement with a specified
association of any specified territory outside India under sub-section (1) and such
agreement has been notified under that sub-section, for granting relief of tax, or as the case
may be, avoidance of double taxation, 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.

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Direct Taxation

20.5

90A(3)

Any term used but not defined in this Act or in the agreement referred to in sub-section (1)
shall, unless the context otherwise requires, and is not inconsistent with the provisions of
this Act or the agreement, have the same meaning as assigned to it in the notification
issued by the Central Government in the Official Gazette in this behalf.
Explanation 1.For the removal of doubts, it is hereby declared that the charge of tax in
respect of a company incorporated in the specified territory outside India 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 company.
Explanation 2.For the purposes of this section, the expressions
(a) specified association means any institution, association or body, whether
incorporated or not, functioning under any law for the time being in force in India or the
laws of the specified territory outside India and which may be notified as such by the
Central Government for the purposes of this section;
(b) specified territory means any area outside India which may be notified as such by the
Central Government for the purposes of this section.

[CMA RTP J10]


Question: Arif, a resident both in India and Malaysia in previous year 2015-2016, owns immoveable
properties (including residential house) at Malaysia and India. He has earned income of 50 lakh from
rubber estates in Malaysia during the financial year 2015-2016. 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 establishment of his

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International Taxation

20.6

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 2016-2017.
So, in this case, Arif is not liable to income tax in India for assessment year 2013-2014 in respect of
business income and capital gains arising in Malaysia.

Question: Write short note on deduction allowed [S. 91] from the Indian income tax payable where the
income doubly taxed.
91

Countries with which no agreement exists [unilateral relief] [No DTAA]

91(1)

If any person who is resident in India in any previous year proves that, in respect of his income
which accrued or arose during that previous year outside India (and which is not deemed to
accrue or arise in India), he has paid in any country with which there is no agreement under
section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise,
under the law in force in that country, he shall be entitled to the 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 at the Indian rate of tax if
both the rates are equal.

91(2)

If any person who is resident in India in any previous year proves that in respect of his income
which accrued or arose to him during that previous year in Pakistan he has paid in that
country, by deduction or otherwise, tax payable to the Government under any law for the time
being in force in that country relating to taxation of agricultural income, he shall be entitled to a
deduction from the Indian income-tax payable by him

91(2)(a)

of the amount of the tax paid in Pakistan under any law aforesaid on such income which is
liable to tax under this Act also; or

91(2)(b)

of a sum calculated on that income at the Indian rate of tax; whichever is less.

91(3)

If any non-resident person is assessed on his share in the income of a registered firm assessed
as resident in India in any previous year and such share includes any income accruing or
arising outside India during that previous year (and which is not deemed to accrue or arise in
India) in a country with which there is no agreement under section 90 for the relief or
avoidance of double taxation and he proves that he has paid income-tax by deduction or
otherwise under the law in force in that country in respect of the income so included he shall be
entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such
doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country,
whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Explanation.In this section,
(i) the expression Indian income-tax means income-tax 10 charged in accordance with the
provisions of this Act;
(ii) the expression 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

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Direct Taxation

20.7

deduction of any relief due under this 11[Chapter], by the total income;
(iii) the expression 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;
(iv) the expression income-tax in relation to any country includes any excess profits tax or
business profits tax charged on the profits by the Government of any part of that country or a
local authority in that country.

[CMA INTER SY12, D14, 2 Marks]


Question: India has a Double Taxation Avoidance Agreement (DTAA) with USA. Mr. Murali, a resident
Indian, has derived certain Income in USA. Assume that as per the DTAA the said income is taxable at
the rate of 10%, whereas as per the provisions of the Income Tax Act, 1961, the same is taxable of 15%.
Can Mr. Murali opt to be governed by the provisions of the DTAA, even though the DTAA deviates from
the normal tax provisions?
Will your answer be different, if Mr. Murali were a non-resident?
Answer: As per section 90(1), India can enter DTAA with any country for granting tax reliefs. As per
section 90(2), 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. In other words, if the
provisions of the DTAA are more favourable, the same shall apply.
Section 90(2) uses the word assessee and not resident assessee. Hence, the answer will remain the
same, even where the assessee is a non-resident.

[CMA INTER J13, 5 Marks]


Question: Mr. Basu is an actor deriving income from foreign contracts performed outside India,
1,00,000. Tax of 20,000 was deducted at source in the country where the performances were given.
India does not have any agreement with that country for avoidance of double taxation. Assuming that
Indian income of Mr. Basu is 3,00,000, what is the relief due to him under Sec. 91 for the assessment year
2016-2017.
Answer:
Computation of Total Income for the A.Y. 2016-17
(a)

(b)

Computation of total income:

(i)

Indian income

3,00,000

(ii)

Foreign income

1,00,000

Gross Total Income or Total Income

4,00,000

Computation of Tax Liability:

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International Taxation

20.8

Income tax on total income:


Less

15,000

Rebate u/s 87A

2,000
13,000

Add

(i)

Education cess @ 2%

260

(ii)

SHEC @ 1%

130
13,390

Double taxation relief under Sec. 91: 1,00,000 3.35%

Less

3,350

Tax payable

10,040

Note 1: Lower of the two will be the applicable rate for relief u/s 91
Average rate of tax in the foreign country =
Average rate of tax in India =

=
=

= 20%.

= 3.35%

[CMA INTER SY12, D14, 5 Marks]


Question: Mr. Banerjee, a resident Indian and 56 years old, has derived the following income for the
previous year relevant to the previous year 2015-2016.

Particulars
Income from business in India

3,80,000

Commission (gross) from a company in Hong Kong (tax paid in Hong Kong 40,000)

2,00,000

Dividend (gross) from a company in Hong Kong (tax paid in Hong Kong 22,500)

1,50,000

Interest on fixed deposit with banks in India

1,80,000

India has no DTAA with Hong Kong. Compute the income and tax payable by Mr. Banerjee for the
assessment year 2016-17.
Answer: Mr. Banerjee is entitled to relief under section 91.
He is eligible for relief under section91, of a sum calculated on such doubly taxed income at the Indian
rate of tax or at the Hong Kong rate of tax, whichever is lower, will be eligible for the relief.

Computation of Total Income


Particulars

Income from business in India

3,80,000

Commission received from a company in Hong Kong

2,00,000

Dividend received from a company in Hong Kong

1,50,000

Interest on fixed deposits with banks in India

1,80,000

Total Income

9,10,000

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Direct Taxation

20.9

Computation of tax liability

Particulars
Tax on 9,10,000
Add

1,07,000

Education cess and SAH cess @ 3%

3,210

Total tax liability before relief u/s 91


(a)

Average rate of income tax in India =

(b)

Average rate of income tax in Hong Kong =

1,10,210
= 12.11%
= 17.86%

Relief u/s 91:Lower rate of (a) and (b) 12.11% of 3,50,000

42,385

Net Tax Liability

67,825

[CMA RTP D11]


Question: Mr. Prasad, ordinarily resident in India, furnished the following particulars of his
income/savings during the previous year 2015-2016.
(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

(iv)

Dividends gross from Indian companies

60,000

(v)

Deposit in Public Provident Fund

70,000

(vi)

Tax paid in foreign country

4,00,000

2,50,000

There is no double taxation avoidance treaty. Compute the tax liability


Answer:
Computation of Total Income for the A.Y. 2016-17
Particulars
1.

Income from House Property

2.

Income from Business

(a)

Income from Indian business

(b)

(i) Income from foreign business accruing or arising outside India

4,00,000

(-) 2,00,000

(ii) Income from foreign business deemed to accrue or arise in India


3.

(+) 10,00,000
(+) 2,00,000

10,00,000

Income from other sources


Dividends from Indian companies exempt [Sec. 10(34)]
Gross total income

Nil
14,00,000

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International Taxation

20.10

Less

Deduction for approved savings (Sec. 80C): PPF Deposits

70,000

Total income

13,30,000

Tax liability on total income

2,29,000

Add

Surcharge on income tax (assuming total income less than one crore)

Add

Education cess: 2% on the aggregate of income tax and surcharge

4,580

Add

SHEC @ 1%

2,290

Less

Nil

Tax liability

2,35,870

[S. 91] Double taxation relief on foreign business profits,

1,77,300

not deemed to accrue or arise in India [10,00,000 17.73%]


Tax payable

58,570

Note 1: Lower of the two will be the applicable rate for relief u/s 91
Average rate of tax in the foreign country =
Average rate of tax in India =

=
=

= 17.73%.

= 20.833%

Note 2: The amount of doubly taxed income has been worked out as under:

Income from foreign business, accruing outside India


Less

Income from business connection deemed to accrue or arise in India

12,00,000
2,00,000

which is not entitled to double taxation relief.


Doubly taxed income

10,00,000

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.

SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX


92

Computation of income from international transaction having regard to arms length price.

92(1)

Any income arising from an international transaction shall be computed having regard to the
arms length price.
Explanation.For the removal of doubts, it is hereby clarified that the allowance for any expense
or interest arising from an international transaction shall also be determined having regard to the
arms length price.

92(2)

Where in an international transaction, two or more associated enterprises enter into a mutual

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Direct Taxation

20.11

agreement or arrangement 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 arms length price of such benefit, service or facility, as the case may be.
92(3)

The provisions of this section shall not apply in a case where the computation of income under
sub-section (1) or the determination of the allowance for any expense or interest under that subsection, or the determination of any cost or expense allocated or apportioned, or, as the case may
be, contributed under subsection (2), 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 as entered into.]

Question: What are the conditions applicable for arms length price in the international transaction?
Answer: Conditions for applicability of arms length price in the international transactions
1.

Two or more enterprises

2.

They are associated enterprises [92A(1)] or deemed associated enterprises [S 92A(2)]

3.

International transaction [S. 92B(1) or (20)] should be carried out by the associated enterprises

Question: What does an associated enterprise mean [S. 92A] and deemed to be an associated
enterprise?
Answer:
92A

Meaning of associated enterprise.

92A(1)

For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated
enterprise, in relation to another enterprise, means an Enterprise

92A(1)(a)

which participates, directly or indirectly, or through one or more intermediaries, in the


management or control or capital of the other enterprise; or

92A(1)(b)

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.

92A(2)

For the purposes of sub-section (1), two enterprises shall be deemed to be associated
enterprises if, at any time during the previous year,

92A(2)(a)

one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent
of the voting power in the other enterprise; or

92A(2)(b)

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; or

92A(2)(c)

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; or

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20.12

92A(2)(d)

one enterprise guarantees not less than ten per cent of the total borrowings of the other
enterprise; or

92A(2)(e)

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

92A(2)(f)

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

92A(2)(g)

the manufacture or processing of goods or articles or business carried out by one enterprise
is wholly dependent on the use of knowhow, 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; or

92A(2)(h)

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; or

92A(2)(i)

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

92A(2)(j)

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

92A(2)(k)

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; or

92A(2)(l)

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; or

92A(2)(m)

there exists between the two enterprises, any relationship of mutual interest, as may be
prescribed.

[CMA INTER D15, 3 Marks]


Question: Explain associated enterprise in the context of taxation of income.
Answer: An enterprise in relation to another enterprise shall be an associated enterprise:
a) which participates, directly or indirectly, or through one or more intermediaries, in the management
or control or capital of the other enterprise; or

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Direct Taxation

20.13

b) 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, or 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.

[CMA INTER SY12, J15, 4 Marks]


Question: When shall a transaction entered into with an unrelated person shall be deemed to be an
international transaction with an associated enterprise?
Answer: International transactions with an AE: As per section 92B as amended by the finance (no. 2)
Act, 2014 a transaction entered into by an enterprise with a person other than an associated enterprises
(i.e., other person shall be deemed to be an international transaction entered into between two
associated enterprises in the following cases:
1. There exists a prior agreement in relation to the relevant transaction between the other person and the
associated enterprise or,
2. Where the terms of the relevant transaction are determined in substance between such other person
and the associated enterprise and
3. Either the enterprise or the associated enterprise or both of them are non-residents.
It is immaterial whether such other person is a non-resident.

[CMA INTER D15, 3 Marks]


Question: State whether the following transaction is international transaction between associated
enterprises: A Co. Ltd. of Delhi has guaranteed a bank term loan of 25 crores (converted in Indian rupee)
availed by Mckinsey inc. of Hong Kong. The loan guaranteed is 11% of the total borrowings of Mckinsey
inc.
Answer: When an assessee guarantees at least 10% of the borrowing of another entity, the relationship of
associated enterprises is established. Since the guarantee for the loan exceeds 10% of the total borrowing
A Co. Ltd. and Mckinsey Inc are associated enterprises.
[CMA INTER D15, 3 Marks]
Question: State whether the following transaction is international transaction between associated
enterprises: Four partners of FA LLP of Mumbai are directors in Beta Co. Ltd. of UK. There are 9 directors
in the governing board of Beta Co. Ltd. During the year FA LLP exported goods to Beta co. Ltd. for 20
crores, which is 80% of its total turnover.
Answer: When more than half of the Board of Directors or memebers of the governing board of one
enterprises are appointed by the other enterprises, the relationship of associated enterprises is
established. Since the above condition does not apply, FA LLP and Beta Co. Ltd are not associated
enterprises.

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International Taxation

20.14

[CMA INTER D15, 3 Marks]


Question: State whether the following transaction is international transaction between associated
enterprises: Ramesh & Co. a partnership firm located in Bangalore is 100% dependent on raw materials
supplied by Abdul LLP of Singapore. There is no other investment or financial interest between these two
entities.
Answer: When 90% or more of the raw material to one enterprise is supplied by the other enterprises, the
relationship of associated enterprises established. Since Ramesh & company is fully depended on Abdul
LLP for supply of raw material, they are associated enterprises.

[CMA INTER SY12, J15, 1 Mark]


Question: P. Ltd., a foreign company gave loan to Q. Limited., an Indian company. When shall P. Ltd. be
deemed to the associated enterprise of Q. Ltd.?
Answer: If loan obtained by Q. Limited from P. Limited constitutes at least 51% of the book value of the
assets of Q. Limited, then P. Limited and Q. Limited shall be said to be associated enterprises.

[CMA INTER SY12, D14, 1 Marks]


Question: State whether the following are associated enterprises. One of them being non-resident: X Co.
Ltd. holds 12% partnership right in X Traders (firm).
Answer: Since X. Co. Ltd. holds more than 10% interest in X trader (firm) the relationship between the X.
Co. Ltd. and X traders is that of associated enterprises.

[CMA INTER SY12, D14, 1 Marks]


Question: A Finance (non-corporate) guarantees loan taken by A & Co. (P) Ltd. for a term loan of 10
crores taken from a bank. A & Co. (P) Ltd. has a total borrowing of 20 crores.
Answer: When an assessee guarantees at least 10% of the total borrowings of another entity, the
relationship of associated enterprise is established. Since the guarantee for the loan exceeds 10% of the
total borrowings A Finance and A & Co. (P) Ltd. are associated enterprises.

[CMA INTER SY12, D14, 1 Marks]


Question: ABC Investments has advanced loan to DEF Ltd. which is more than 40% of book value of total
assets of DEF Ltd.
Answer: A loan advanced by one entity to another entity of at least 51% of book value of total assets
would result in associated enterprise relationship. In this case, the loan advanced forms part of only 40%
of book value of total assets of borrower DEF Ltd. Hence, they are not associated enterprises.

Question: What is international transaction?

_____________________________________________________________________
Direct Taxation

20.15

Answer:
92B

Meaning of international transaction.

92B(1)

For the purposes of this section and sections 92, 92C, 92D and 92E, 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.

92B(2)

A transaction entered into by an enterprise with a person other than an associated enterprise
shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two
associated enterprises, if there exists a prior agreement in relation to the relevant transaction
between such other person and the associated enterprise, or the terms of the relevant transaction
are determined in substance between such other person and the associated enterprise.

[CMA INTER SY12, D14, 1 Mark]


Question: What is international transaction?
Answer: International transaction means a transaction between two are 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 any other transaction as may be prescribed.

[CMA INTER D08, 4 Marks]


Question: What are International transactions in the context of transfer pricing provisions?
Answer: The term International Transaction covers a wide range of revenue and capital transactions
between two or more associated enterprises where either or both are non-residents;
The term also includes arrangements between associated enterprises for cost-sharing in connection with
benefits, services or facilities provided to any of such enterprises.
Additionally, another type of transaction is deemed to be an international transaction between two
associated enterprises. This is when an enterprises, say X, has entered into a transaction with an
unassociated person, say A Ltd. and there exists a prior agreement in relation to this transaction between
A Ltd and Y Ltd. (an associated enterprise of X), or the term of this transaction are determined in
substance between A ltd and Y Ltd.

[CMA INTER SY12, J14, 1 Mark]


Question: What is Arms Length Price?
Answer: Arms length price means a price which is applied or proposed to be applied in a transaction
between persons other than associated enterprises, in uncontrolled conditions.

__________________________________________________________________________
International Taxation

20.16

[CMA INTER SY12, D14, 1 Mark]


Question: What is the basic object of ALP determination?
The basic objective of determining ALP is to find out where any addition to income is warranted or not
by way of (i) selling goods below arms length price; or (ii) buying goods at more than arms length price.

[CMA INTER J16, 5 Marks]


Question: The first step in comparable arms length price study is selection of comparable companies.
Once there is a selection of comparable companies, the next step it to filter these companies with the use
of quantitative and qualitative filters. Name any ten filters which are commonly used.
[CMA INTER SY12, D13 & D12, 6 & 1 Marks]
Question: State any six / four filters which are used in computation of arms length price.
Answer:
(a) Turnover filter,
(b) export filter,
(c) related party filter,
(d) employee cost filter
(e) fixed asset filter,
(f) R & D expense filter;
(g) Income-tax filter;
(h) diminishing loss filter
(i) Different financial year filter; and
(j) On site and off site filter

[CMA INTER SY12, D13, 3 Marks]


Question: What is Berry ratio? Discuss its usefulness in computing ALP.
Answer: Berry ratio is the ratio of gross profit to operating expenses. It measures the return on operating
expenses. As the functions performed by the taxpayers are reflected in the operating expenses, this ratio
determines the relationship of the income earned 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 on arms length analysis of service oriented industry such as limited risk
distributor, advertising, marketing and engineering service. Berry ratio may be used to test whether
service providers have earned enough mark up on their operating expenses. In essence, the Berry ratio
implicitly assumes that there is the relationship between the level of operating expenses and the level of
gross profits earned by routine distributors and service provides.

[CMA INTER SY12, D13, 3 Marks]


Question: What is cost cover ratio and return on assets ratio?

_____________________________________________________________________
Direct Taxation

20.17

Answer: The cost cover ratio measures the ability of a company to cover its operating expenses through
operating revenue. Given the limitation of financial information publicly available, the operating
expenses of a selected comparable company are the sum of its operating revenue less EBIT.
Return on assets ratio measures, the amount of EBIT per rupee of asset invested. This is a profitability
ratio for measuring each companys operational efficiency, is how efficiently the assets have been
deployed by the company.

Question: Write a note on methods of computing arms length price. 92C


Answer:
92C

Computation of arms length price.

92C(1)

The arms length price in relation to an international transaction shall be determined by any
of the 6 methods, being the most appropriate method, having regard to the nature of
transaction

92C(2)

Most appropriate method should be taken

92C(3)

Where during the course of any proceeding for the assessment of income, the Assessing
Officer is, on the basis of material or information or document in his possession, of the
opinion that

92C(3)(a)

the price charged or paid in an international transaction has not been determined in
accordance with sub-sections (1) and (2); or

92C(3)(b)

any information and document relating to an international transaction have not been kept
and maintained by the assessee in accordance with the provisions contained in sub-section (1)
of section 92D and the rules made in this behalf; or

92C(3)(c)

the information or data used in computation of the arms length price is not reliable or
correct; or

92C(3)(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 under sub-section (3) of section 92D,
Provided that where more than one price may be determined by the most appropriate
method, the arms length price shall be taken to be the arithmetical mean of such prices. the
Assessing Officer may proceed to determine the arms length price in relation to the said
international transaction in accordance with sub-sections (1) and (2), on the basis of such
material or information or document available with him:
Provided that an opportunity shall be given by the Assessing Officer by serving a notice
calling upon the assessee to show cause, on a date and time to be specified in the notice, why
the arms length price should not be so determined on the basis of material or information or
document in the possession of the Assessing Officer.

92C(4)

Where an arms length price is determined by the Assessing Officer under subsection (3), the
Assessing Officer may compute the total income of the assessee having regard to the arms
length price so determined :

__________________________________________________________________________
International Taxation

20.18

Provided that no deduction under section 10A [or section 10AA] or section 10B or under
Chapter VI-A shall be allowed in respect of the amount of income by which the total income
of the assessee is enhanced after computation of income under this sub-section :
Provided further that where the total income of an associated enterprise is computed under
this sub-section on determination of the arms length price paid to another associated
enterprise from which tax has been deducted [or was deductible] under the provisions of
Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by
reason of such determination
of arms length price in the case of the first mentioned enterprise.

Question: Write a note on most appropriate method for arms length price. *S. 92C(2)+
Answer: [S. 92C (2)] The most appropriate method referred to 92C(1) shall be applied, for determination
of arms length price. Provided that where more than one price is determined by the most appropriate
method, the arms length price shall be taken to be the arithmetical mean of such prices, or, at the option
of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per
cent of such arithmetical mean.

[CMA INTER J09, 5 Marks]


Question: Write a short note on Factors affecting determination of the most appropriate method in
arriving at Arms Length Price in transfer pricing regulations.
Answer: Factors Affecting Determination of the most Appropriate Method in Arriving at Arms
Length Price in Transfer Price Regulations:
The most appropriate method would be the one, which is best suited to the facts and circumstances of the
international transaction, and which provides the most reliable measures of an arms length result in
relation to the international transaction. The provisions enlist certain facts, which should be taken into
account in selecting the 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 function 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 adjustment can be made to account for different, 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 assumption required to be made in application of a method.

[CMA INTER SY12, D14, 2 Marks]

_____________________________________________________________________
Direct Taxation

20.19

Question: Can multi-year data be used for determination of ALP?


Answer: Yes, as per rule 10B (4) the use of data relating to the financial year in which such international
transaction has been entered into must be considered.
Data of earlier years may also be used, if such date reveals acts which could on influence on the
determination of transfer prices in relation to the transactions being compared.

[CMA INTER SY12, J14, J15 & J16, 1, 1 & 1 Mark]


Question: What does uncontrolled transaction mean?
Answer: Uncontrolled transaction means a transaction between enterprises other than associated
enterprises, whether resident or non-resident.

[CMA INTER SY12, J14, 1 Mark]


Question: Define safe harbor.
Answer: Safe harbor means circumstances in which the income tax authorities shall accept the transfer
price declared by the assessee. The determination arms length price is subject to Safe Harbour Rules.

[CMA INTER SY12, D14, 1 Mark]


Question: State the Form No. in which the accountant must certify the arms length price after audit.
Answer: The arms length price upon computation under any of the methods shall be audited and
certified Form No. 3 CEB vide rule 10E.
[CMA INTER SY12, D13, 1 Mark]
Question: Do you agree that arms length price determination is applicable when Indian importer
imports goods / services from related party at a price more than the price supplied to unrelated parties
by a foreign company?
Answer: Yes. Arms length price determination is applicable when Indian importer imports goods /
services from related party at a price more than the price supplied to unrelated parties by a foreign
company.

[CMA INTER SY12, D13, 1 Mark]


Question: Can the date of earlier year of comparable be used for determination of ALP?
Answer: Yes. The same can be used provided such data reveals facts which could have influence on the
determination of the ALP under the transaction which is being compared

[CMA INTER SY12, J15, 3 Marks]


Question: What are the consequences (other than penalty) of adjustment made by the Assessing
Officer to arms length price in international transactions entered into by the assessee resulting in
increase in taxable income?

__________________________________________________________________________
International Taxation

20.20

Answer: Consequences of adjustments made to ALP


In case the Assessing Officer makes adjustment to arms length price in on international transaction
which results in taxable income of the assessee, the following consequences shall follow:
1. No deduction under section 10A/10B/10AA or under Chapter VI-A shall be allowed from the income
so increased.
2. As a consequence, the total income of the assessee will go up by the amount of adjustment so made.
3. 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 arms length price so
recomputed.

[CMA RTP J11]


Question: What is Arms Length Principle?
Answer: The arms length principle seeks to ensure that transfer prices between members of an MNE
(controlled transactions), 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 arms length principle is
based on the concept that prices in uncontrolled transactions are determined by market forces and,
therefore, these are, by definition, at arms length. In practice, the arms-length price is also called
market price. Consequently, it provides a benchmark against which the controlled transaction can be
compared.
The Arms Length Principle is currently the most widely accepted guiding principle in arriving at an
acceptable transfer price. As circulated in 1995 OECD 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.

[CMA INTER D10, 5 Marks]


Question: What is meant by arms length price in the context of transfer pricing provisions? Name
the six methods used for computing the arms length price.
[CMA INTER SY12, D13, 1 Mark]
Question: State any two methods for determining arms length price.
[CMA RTP J11, D11, J12 & D12]
Question: What is arms length price? State the methods prescribed for its computation.
Answer: Arms length price is a price which is applied or proposed to be applied in a transaction:
1.

Between persons other than associated enterprises;

2.

In uncontrolled conditions.

_____________________________________________________________________
Direct Taxation

20.21

The methods prescribed u/s 92C for computation of arms length price are:
92C

Computation of arms length price.

92C(1)

The arms length price in relation to an international transaction shall be determined by any
of the following methods, being the most appropriate method, having regard to the nature of
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 :

92C(1)(a)

comparable uncontrolled price method;

92C(1)(b)

resale price method;

92C(1)(c)

cost plus method;

92C(1)(d)

profit split method;

92C(1)(e)

transactional net margin method;

92C(1)(f)

such other method as may be prescribed by the Board.

[CMA INTER SY12, J14, 5 Marks]


Question: What are the difficulties in applying arms length principle?
Answer: Following difficulties are experienced in applying arms length principle:
1.

The most common problem is the requirement to find transactions between independent parties
which can be said to be exactly comparable with controlled transaction.

2.

In a multinational environment enterprise system, a group first identifies the goal and then goes on to
create the associated enterprise and finally, the transactions are entered into. This procedure is not
applicable to independent enterprises. For this reason, there may be transactions within one
multinational group, which may not be between independent enterprises.

3.

The reductionist approach of splitting a multinational group into its the benefits of economics of
scale or integration between the parties, is not appropriately allocated between the multinational
group.

4.

Application of arms length principle imposes a burden on business, as it may require the
multinational group to do things that it would not have done otherwise, e.g., searching coparable
transactions, robust documents, etc.,

5.

Arms length principle involves cost to the multinational group.

[CMA INTER SY12, D14, 3 Marks]


Question: State the difficulties in ALP determination of intangibles.
Answer: Where the transaction involves intangible assets, the following difficulties arise in transfer
pricing determination:
1. Intangibles are seldom traded in the external market and it is very difficult to find comparables in the
public domain.
2. Intangibles are often transferred and bundled along with tangible assets.
3. They are difficult to be detected.

__________________________________________________________________________
International Taxation

20.22

COMPUTATION OF ARMS LENGTH PRICE


Comparable Uncontrolled Price method (CUP):
Step I: Identify the price charged/ paid for property transferred or services provided in a comparable
uncontrolled transaction(s).
Step II: Adjust the price derived in Step I above for differences, if any, which could materially affect the
price in the open market.
(a) between the international transaction and the comparable uncontrolled transactions, or
(b) between the enterprises entering into such transactions.
Step III: Arms Length Price = Step I Add/Less: Step II

[CMA INTER SY12, D13, 4 Marks]


Question: A Co Ltd. of Chennai and Sky Inc. of Singapore are associate enterprises. A Co Ltd. Imported
1,000 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 arms length price and the amount of increase in total income of A Co Ltd., as per CUP method.
Answer:
Determination of the ALP under CUP method for A Co Ltd.
Purchase price of television set per unit from Sign Inc. (unrelated party)

15,000

including 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

(a)

Excess differential price per unit , liable for ALP adjustment

3,000

(b)

No. of television sets involved

1,000

Reduction in purchase price, having an impact of increasing the total income ((a)(b))

30,00,000

[CMA INTER SY12, J14, 6 Marks]


Question: 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. Zenith Inc. sells 50,000 units of 12,000 per unit to Intech Ltd and of 11,000
per unit for Logitech. The warranty in the 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 arms length price under CUP method and the amount of increase or decrease in total income
of Intech Limited.
Answer:

_____________________________________________________________________
Direct Taxation

20.23

Price charged by Zenith Ltd. to Logitech Ltd.


Less

11000

Cost of warranty included in the price charged to Logitech Ltd. (1000 x 6/12)

500

Arms length price

10500

Price per unit charged to Intech Ltd.

12,000

Difference per unit

1,500

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

[CMA RTP J11]


Question: J Inc., of Korea and CD Ltd., [an Indian Company] are associated enterprises. CD Ltd
manufactures Cell Phones and sells them to J.K. & F Inc., a Company based at Nepal. During the year CD
Ltd. supplied 2,50,000 Cellular Phones to J Inc. Korea at a price of 3,000 per unit and 35,000 units to JK &
F Inc. at a price of 5,800 per unit. The transactions of CD Ltd with JK & F Inc. are comparable subject to
the following considerations a.

Sales to J Inc. are on FOB basis, sales to JK &F Inc. are CIF basis. The freight and insurance paid by J
Inc. for each unit @ 700.

b.

Sales to JK & F Inc. are under a free warranty for Two Years whereas sales to J Inc. are without any
such warranty. The estimated cost of executing such warranty is 500.

c.

Since J Inc.'s order was huge in volume, quantity discount of 200 per unit was offered to it.

d. Compute the Arm's Length Price and the subsequent amount of increase in the Total Income of CD
Ltd, if any.
Answer:
(a)

Computation of Arm's Length Price of Products sold to J Inc. 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 J Inc. Korea

(b)

Computation of Increase in Total Income of CD Ltd

Particulars
Arm's Length Price per Unit
Less

4,400

Price at which actually sold to J Inc. Korea


Increase in Price per Unit

4,400
(3,000)
1,400

__________________________________________________________________________
International Taxation

20.24

Number of Units sold to J Inc. Korea


Increase in Total Income of CD Ltd (2,50,000 1,400)

2,50,000
35 Crores

Resale Price Method (RPM)


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 (II) 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: Arms Length Price = Step I Less: Step II & III Add / Less Step IV.

[CMA INTER SY12, D14, 5 Marks]


Question: MNO Ltd. and Roxy Inc. of USA are associated enterprises. MNO Ltd. imported 3,000 motor
bikes from Roxy Inc. at 50,000 per bike. These are sold in India at 55,000 per bike. Also, MNO Ltd.
imported exactly similar motor bikes from Hold Inc. of Japan (unrelated party) and sold outside at a
gross profit of 20% of sales.
Roxy ltd. offered a quantity discount of 1500 per motor vehicle. Hold Inc., however, offered only 500
per bike as quantity discount. The freight and insurance from Roxy USA cost MNO Ltd. 1500 per bike
whereas in respect of purchase form Hold Inc. MNO Ltd. had to pay 500 as freight charges and there
was no insurance cost on the assessee.
Determine arms length price and amount of increase in total income of MNO Ltd.
Answer: Computation of arms length price of products bought from Roxy Inc. USA and MNO Ltd.,
India
Particulars
Resale price of goods purchased from Roxy Inc.

Amount ()
55,000

Less

Adjustments for differences

(a)

Normal Gross profit margin @ 20% of sale price = 20% of 55,000

(b)

Incremental quantity discount by Roxy Inc. (1,500 500)

1,000

(c)

Difference in purchase related expenses (1,500 500)

1,000

Arms length price

11,000

42,000

_____________________________________________________________________
Direct Taxation

20.25

Computation of Increase in total income of MNO Ltd.


Particulars

Less

Amount ()

Price at which actually bought from Roxy Inc. of USA

50,000

Arms length price under resale price method

42,000

Decrease in purchase price per unit

8,000

Number of units purchased from Roxy Inc. = 3,000


Increase in total income (3,000 units x 8,000)

240 lakhs

Cost plus Method in determining ALP


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: Arms Length Price = Step I Add Step III

[CMA INTER SY12, J14, 4 Marks]


Question: State the possible cases in which cost plus method are used for determination of arms
length price.
Answer: Cost plus method is ordinarily used in the following cases:
1. Where raw materials or semi-finished products are sold.
2. Where joint facility agreements are involved.
3. Long-term buy and supply arrangements.
4. Provision of services.

[CMA INTER SY12, D13, 6 Marks]


Question: Brain Inc. London has 35% equity in Salem Ltd. is engaged in development of software and
maintenance of customers across the globe, which includes Brain Inc.
During the year 2015-16, Salem Ltd. spent 2,000 man hours for developing and maintaining software for
Brain Inc. and billed at 1,000 per hour. The cost incurred for executing maintenance work to Brain Inc.
for Salem Ltd., amounts to 15,00,000. Similar such work was done for unrelated party Try Ltd. in which
the profit was at 50%.
Brain Inc. gives technical support to Salem Ltd., which can be valued at 8% gross profit. There is no such
functional relationship with Try Ltd.

__________________________________________________________________________
International Taxation

20.26

Salem Ltd., gives credit period of 90 days the cost of which is 3% of the normal billing rate which is not
given to other parties.
Compute ALP under cost plus method in the hands of Salem Ltd., and the impact of the same on the total
income.
Answer:
Salem Ltd.
Computation of ALP under Cost plus method
%

Particulars
Normal gross profit mark up
Less

50.0

Adjustment for differences (Technical support from Brain Inc.)

8.0
42.0

Add

Cost of credit to Brain Inc. 3% of normal bill (3% of 50)

1.5

Arms length gross profit mark up

43.5

Cost of services provided to Brain Inc.


Arms length billed value (
Less

15,00,000
)(

Billed amount

26,54,867
20,00,000

Increase in total income of Salem Ltd.

6,54,867

[CMA RTP J10]


Question: 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
2,700 per Man Hour. The persons working for Harsha Industries Ltd and Branco 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.
CTLs transactions with Branco Inc. are comparable to the transactions with Harsha Industries, subject to
the following differences:
a) Branco gives technical knowhow 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 Billing
Rate, No such discount was offered to Harsha Industries Ltd.

Compute ALP and the amount of increase in Total Income of Chirag Technologies Ltd.

_____________________________________________________________________
Direct Taxation

20.27

Answer:
Computation of Arms Length Gross Profit Mark Up

(A)

Particulars

Normal GP Mark Up
Less

60

Adjustment for Differences

(a)

Technical Support from Branco 8% of Normal GP [8% of 60%]

4.8

(b)

Quantity Discount 14% of Normal GP [14% of 60%]

8.4

(13.2)
46.8

Add

Cost of Credit to Branco 2% of Normal Bill [2% GP 60%]

1.2

1.2

Arms Length Gross Profit Mark-up

(B)

48

Computation of Increase in Total Income of Branco Ltd


Cost of services provided to CTL
Arms length Billed Value =

Less

20,00,000
=

38,46,154

Billed amount [ 2,400 hours 1,300 per hour]

31,20,000

Therefore, Increase in Total Income of Branco

7,26,154

Therefore, increase in Total Income of Branco

7,26,154

Profit Split Method (PSM)


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 Arms 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 functions performed, assets employed
and 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: Arms 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.

__________________________________________________________________________
International Taxation

20.28

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 INTER SY12, D13, 3 Marks]


Question: Explain the term tested party.
Answer: This term has not been defined in Income Tax Act, 1961 but as per OCED guidelines, a tested
party is an enterprise that offers a high 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 taxpayers and will not own valuable intangible
property or unique assets that distinguish it from potential uncontrolled comparable. (OCED
Organisation for economic Co-operation and development).

[CMA INTER SY12, D13 & D14, 4 & 2 Marks]


Question: State possible cases in which Profit Split Method (PSM) is used for determination of ALP.
Answer: In the following cases profit Split Method (PSM) could be applied
(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.
As per OCED guidelines, a transactional profit method that identifies the combined profit to be split
between the associated enterprises from a controlled transaction is known as profits split method. The
profits are split between the associated enterprises based upon on economically valid basis that
approximates the division of profit that would have been anticipated and reflected in an agreement mode
at arms length.

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 Arms Length Price and the incremental Total Income of Bioinformatics
India Ltd, if any due to adopting Arms Length Price determined here under:-

Particulars
A

Euros * +

Share of each of the Associates in the Value of the Order

3,00,000

_____________________________________________________________________
Direct Taxation

20.29

value of the order:

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

Share of each of the Associates in the profit of the order

1,00,000

Combined Total Profits


Share of BIL *Contribution of 40% Total Profit 1,00,000+

40,000

Share of PCI *Contribution of 30% Total Profit 1,00,000+

30,000

Share of NBR *Contribution of 30% Total Profit 1,00,000+

30,000

C. Computation of Incremental Total Income of BIL

Add

Total Cost to Bioinformatics India Ltd

80,000

Share in the Profit to BIL (from B above)

40,000

Revenue of BIL on the basis of Arms Length Price


Less

Revenue Actually received by BIL


Increase in Total Income of BIL

1,20,000
(1,00,000)
20,000

TRANSACTION NET MARGIN METHOD (TNMM)


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: Arms Length Price = Transaction Value x Net Profit Margin as per Step IV above.
Meaning of certain terms: For the computation of Arms Length Price 1.

Transaction includes a number of closely linked transactions.

2.

Uncontrolled Transaction means a transaction between unrelated enterprises, whether resident or


non-resident.

3.

Unrelated Enterprises: Enterprises are said to be unrelated, if they are not associated or deemed to
be associated u/s 92A.

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International Taxation

20.30

4.

Uncontrolled conditions: Conditions which are not controlled or suppressed or moulded for
achievement of pre-determined results are said to be uncontrolled conditions.

5.

Property includes goods, articles or things, and intangible property.

6.

Services include financial services.

Question: Fox Solutions Inc. a US Company, sells Laser Printer Cartridge Drums to its Indian Subsidiary
Quality Printing Ltd at $20 per drum. Doc 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 Arms 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 Doc Solutions Inc.
Answer: Computation of Total Income of Quality Printing Ltd.

Particulars
Total Income before adjusting for differences due to Arms Length Price
Add

45,00,000

Difference on account of adopting Arms Length price * 12,000 x $20 45]


Amount actually paid to Doc Solutions [12,000 $ 30 45]

1,08,00,000
(1,62,00,000)

Incremental Cost on adopting ALP [U/s 92(3), Taxable Income cannot be reduced on

54,00,000

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 Arms Length Price for
transactions entered into by a Foreign Company is given in Circular 23 dated 23.7.1969, which is as
follows:
i.

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.

ii. 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: 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.

_____________________________________________________________________
Direct Taxation

20.31

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)

Answer: Computation of Total Income of Khazana Ltd.


Particulars
When Price Charged for Comparable Uncontrolled Transaction
Price actually paid by Khazana Ltd *1,00,000 x 50]
Less

1,00,000

50,000

50,00,000

50,00,000

Price charged in Rupees (under ALP)


*1,30,000 x 50+

65,00,000

*50,000 x 50+

30,00,000

Incremental Profit on adopting ALP [A]


Total Income before adjusting for differences due to Arms Length Price
Add

Difference on account of adopting Arms Length Price * if (A) is positive+


Total Income of Khazana Ltd

(15,00,000)

20,00,000

90,00,000

90,00,000

Nil

20,00,000

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.

[CMA INTER SY12, J15, 2 Marks]


Question: What is residuary method of determination of arms length price as per Rule 10AB of the
Income-tax Rules?
Answer: Residuary method of determination of ALP: As per Rule 10AB, for the purpose of section
92C(1)(f), the residuary or other method for determination of the arms length price in relation to an
international transaction or specified domestic 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 material facts.

92CA

Reference to Transfer Pricing Officer

92CA(1)

Where any person, being the assessee, has entered into an international 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 Commissioner, refer the computation of the arms length
price in relation to the said international transaction under section 92C to the Transfer
Pricing Officer.

92CA(2)

Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a
notice on the assessee requiring him to produce or cause to be produced on a date to be

__________________________________________________________________________
International Taxation

20.32

specified therein, any evidence on which the assessee may rely in support of the computation
made by him of the arms length price in relation to the international transaction referred to
in sub-section (1).
92CA(3)

On the date specified in the notice under sub-section (2), or as soon thereafter as may be,
after hearing such evidence as the assessee may produce, including any information or
documents referred to in sub-section (3) of section 92D and after considering such evidence
as the Transfer Pricing Officer may require on any specified points and after taking into
account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by
order in writing, determine the arms length price in relation to the international transaction
in accordance with sub-section (3) of section 92C and send a copy of his order to the
Assessing Officer and to the assessee.

92CA(3A)

Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the
order under sub-section (3) has not been made by the Transfer Pricing Officer before the said
date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an
order under sub-section (3) may be made at any time before sixty days prior to the date on
which the period of limitation referred to in section 153, or as the case may be, in section
153B for making the order of assessment or reassessment or recomputation or fresh
assessment, as the case may be, expires.]

92CA(4)

On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute
the total income of the assessee under sub-section (4) of section 92C in conformity with the
arms length price as so determined by the Transfer Pricing Officer.+

92CA(5)

With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer
may amend any order passed by him under sub-section (3), and the provisions of section 154
shall, so far as may be, apply accordingly.

92CA(6)

Where any amendment is made by the Transfer Pricing Officer under subsection (5), 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.

92CA(7)

The Transfer Pricing Officer may, for the purposes of determining the arms length price
under this section, exercise all or any of the powers specified in clauses (a) to (d) of subsection (1) of section 131 or sub-section (6) of section 133.
Explanation.For the purposes of this section, Transfer Pricing Officer means a Joint
Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the
Board23 to perform all or any of the functions of an Assessing Officer specified in sections
92C and 92D in respect of any person or class of persons.]

Question: A Ltd., an Indian company, is a subsidiary company of B Inc., a company registered in the
USA. It purchases raw material from B Inc. Purchase prices of raw material determined by the most
appropriate methods are 9,800 and 10,200 per unit. A Ltd., however, pays (1) 10,200, (2) 10,300, (3)
10,400 (4) 9,600 (5) 9,700 and (6) 9,800. Determine the arms length price in the six situations.
Answer:

_____________________________________________________________________
Direct Taxation

20.33

Situations

Arithmetic mean of two prices

10,000

10,000

10,000

10,000

10,000

10,000

Actual transaction price

10,200

10,300

10,400

9,600

9,700

9,800

Difference [1 - 2]

200

300

400

400

300

200

3% of arithmetic mean

300

300

300

300

300

300

Arms length price

10,200

10,300

10,000

9,600

9,700

9,800

[CMA INTER J14, 6 Marks]


Question: P Limited, an Indian company bought goods from its associated enterprise Q Limited of UK at
3,050 per unit. Using Resale Price method, which is found to be the most appropriate method, the arms
length prices determined are 3,000, 3,050, 2,900 and 2,950.
1. Compute the arms length price assuming tolerance variation notified by the Central Government to
be 3%.
2. Will your answer be different, if Q Limited paid 3,080 per unit to P. Limited?

Answer: Arithmetical mean =

= 2,975

3% of Arithmetical mean = 89.25


1.

ALP can be taken as 3,050

2.

If Q Ltd. paid 3080, ALP would be taken as 2,975.

[CMA RTP J11]


Question: What is Transfer Pricing?
Answer: Transfer pricing means pricing of goods and services supplied to associated enterprises that
belong to the same business group. It concerns prices charged by an enterprise for transfer of goods and
services to its related enterprise.
The Organization of Economic Cooperation and Development (OECD) defines Transfer prices as prices
at which an enterprise transfers physical goods and intangibles or provides services to associated
enterprises.

[CMA INTER D08, 2 Marks]


Question: What is the binding nature of the arms length price determined by the Transfer Pricing
Officer upon a reference made to him by the Assessing Officer?
Answer: The TPO shall determine the ALP following the prescribed process and send a written copy of
the same to the AO and the taxpayer. The ALP determined by the TPO shall be binding upon the AO.

Question: What are the documents or information to be kept or maintained by the persons entering
into an international transaction? [S. 92D]

__________________________________________________________________________
International Taxation

20.34

Answer:
92D

Maintenance and keeping of information and document by persons entering into an


international transaction.

92D(1)

Every person who has entered into an international transaction shall keep and maintain such
information and document in respect thereof, as may be prescribed

92D(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 that subsection.

92D(3)

The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding
under this Act, require any person who has entered into an international transaction to furnish
any information or document in respect thereof, as may be prescribed under sub-section (1),
within a period of thirty 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 thirty days by a further period not exceeding thirty
days.

Question: Write a note on the report to be furnished by persons entering into international
transaction? [S. 92E]
Answer: Every person who has entered into an international transaction during a previous year shall
obtain a report from an accountant and furnish such report on or before the specified date in the
prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth
such particulars as may be prescribed.

[CMA INTER SY12, J14, 2 Marks]


Question: What is the period for which an assessee has to keep and maintain the information and
records relating to international transactions/ specified domestic transactions?
Answer: The information and records relating to international transactions / specified domestic
transactions shall be kept and maintained for a period of 8 years from the end of the relevant assessment
year.

Question: Definitions of certain terms relevant to computation of arms length price, etc. *S.92F+
Answer: Definitions of certain terms relevant to computation of arms length price, etc. In sections 92,
92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,

92F(i)

accountant shall have the same meaning as in the Explanation in S. 288(2)

92F(ii)

arms length price means a price which is applied or proposed to be applied in a transaction
between persons other than associated enterprises, in uncontrolled conditions;

_____________________________________________________________________
Direct Taxation

20.35

92F(iii)

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 articles or goods, or 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, or the provision of services of
any kind, 26[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;

92F(iiia)

permanent establishment, referred to in clause (iii), includes a fixed place of business


through which the business of the enterprise is wholly or partly carried on;

92F(iv)

specified date shall have the same meaning as assigned to due date in Explanation 2 below
sub-section (1) of section 139;

92F(v)

transaction includes an arrangement, understanding or action in concert,


(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by
legal proceeding.]

[CMA INTER SY12, D13, 1 Mark]


Question: State any two types of permanent establishments.
Answer: There are three types of permanent establishment.
(a) Basic rule PE a fixed place of business, office, branch, installation etc.
(b) Service PE Presence of employees
(c) Agency PE Presence of dependent agent.

[CMA INTER SY08, D14 1 Mark]


Question: Fill up the blanks: The provisions of specified domestic transfer pricing are attracted when the
transaction between two related enterprises exceeds _____1
[CMA INTER SY12, J14, 3 Marks]
Question: During the previous year 2015-16 ABC Associates, an Indian partnership firm made payment
of 6 Crores for purchase of raw materials from Mr. D., who is a close relative of Mr. A, a partner of the

Answer: 5 crore

__________________________________________________________________________
International Taxation

20.36

firm. Both Mr. D and Mr. A are residents in India. Explain whether transfer pricing provision is
applicable to the said transaction.
Answer: Where the assessee incurs any expenditure for which payment has been made or is to be made
to person referred to in section 40A(2), such transaction is a specified domestic transaction under section
92BA, Relative of a partner is related person to the firm within the meaning of section 40A(2).
Disallowance under section 40A(2) is made by the Assessing Officer, if such payment is excessive or
unreasonable having regard to the fair market value of goods or services received. However, such
disallowance is not be made, if such transaction is of arms length price in accordance with section 92F.
In view of above provisions transfer pricing provisions shall apply to the instant transaction of purchase
of raw materials for sum exceeding 5 crores from relative of the partner.
[CMA INTER J16, 5 Marks]
Question: State any five items covered within the scope of the term specified domestic transaction
as per section 92BA.
[CMA INTER D8, 4 Marks]
Question: what are the specified domestic transactions which are liable for transfer price adjustments?
Answer: Specified domestic transactions which are liable for transfer price adjustment:
1. Any expenditure incurred between related parties.
2. International transactions between various units/undertakings of the associate in respect of goods or
services.
3. Transactions of tax holding undertakings.
4. Any other transactions as may be prescribed.
[CMA INTER SY12, D13 & D14, 4 & 5 Marks]
Question: What is impermissible avoidance arrangement and state the four tests applied for
deciding the same.
Answer: Impermissible avoidance agreement
An agreement whose main purpose or one of the main purposes is to obtain a tax benefit and which also
satisfies at least one of the four tests can be declared as an impermissible avoidance agreement.
The four tests applied for deciding the same are
1. The arrangement creates rights and obligations, which are not normally created between parties
dealing at arms length.
2. It results in misuse or abuse of the provisions of tax laws.
3. It lacks commercial substance or is deemed to lack commercial substance.
4. It is carried out in a manner, which is normally not employed for bona fide purpose.

[CMA INTER SY12, J15, 3 Marks]

_____________________________________________________________________
Direct Taxation

20.37

Question: Is it possible to apply advance pricing agreement entered into in a previous year to
international transactions entered into in preceding previous years as well?
Answer: Applicability of ALP to earlier year As per section 92CC (9A) inserted by the finance (no. 2) act,
2014 advance pricing agreement may provide for determining the arms length price or specify the
manner in which arms length price shall be determined in relation to international transaction entered
into by the person during maximum four previous years preceding the first of the previous years for
which such agreement is entered into and the arms length price shall be determined in accordance with
the said agreement.

[CMA INTER SY12, D13 & D14, 1 &1 Mark]


Question: Who can apply for advance pricing agreement and state the time limit for its withdrawal?
Answer: Any person (i) who has undertaken on international transaction or (ii) who is contemplating to
undertake on international transaction is eligible to apply for Advance Pricing Agreement (APA). The
applicant may withdraw the application for agreement in Form No. 3 CEE at any time before the
finalization of the terms of the agreement. The fee paid shall not be refunded on withdrawal of
application by the applicant.

[CMA INTER SY12, D13, 4 Marks]


Question: Narrate the procedures relating to pre-filling consultation of advance pricing agreement.
Answer: Every person proposing to enter into APA must file an application in writing making a request
for pre-filing consultation. On the receipt of request in Form No. 3CEC, the team shall hold consultation
with the person referred to in rule 10G (i.e. a person who has undertaken or contemplating to undertake
international transaction). The competent authority in India or his representative shall be associated in
pre-filling consultation involving bilateral or multilateral agreement.
The pre-filling consultation shall include
a) determining the scope of agreement;
b) identify transfer pricing issues;
c) determine the suitability of international transaction for the agreement; and
d) discuss the broad terms of the agreement.
The pre-consultation agreement will not bind the Board or the person to enter into an agreement or
initiate the agreement process. It shall not deemed to mean that the person has applied for entering into
an agreement.
[CMA INTER SY12, D13, 3 Marks]
Question: Can the application for advance pricing agreement be amended If so, state the conditions.
Answer: Yes, The application may request in writing for an amendment to the application of any stage
before the finalization of the terms of the agreement.
The DGIT for unilateral agreement or the competent authority in India for bilateral or multilateral
agreement may allow the amendment if it does not have the effect of altering the nature of application

__________________________________________________________________________
International Taxation

20.38

originally filed. An amendment is possible only if it is accompanied by the additional fee, if any,
necessitated by such amendment in accordance with rule 10-1.

[CMA INTER SY12, J14 & J15, 1 & 1 Mark]


Question: What is the maximum period for which advance pricing agreement shall remain valid?
Answer: An advance pricing agreement shall remain valid for such period not exceeding 5 consecutive
previous years as may be specified in the agreement.

[CMA INTER D15 SY12, J14, 3 & 1 Marks]


Question: When an advance pricing agreement may be declared void abinitio? What are consequences
in such situation?
Answer: As per section 92CC(7), the CBDT may, with the approval of the Central Government, by an
order declare an advance pricing agreement void abinitio, if it finds that the agreement has been obtained
by the person by fraud or misrepresentation of facts. As per section 92CC(8) upon declaring the
agreement void ab-initito: All the provisions of the Act shall apply to the person as it such agreement had
never been entered into; and Notwithstanding anything contained in the Act, for the purpose of
computing any period of limitation under the Act, the period beginning with the date of such agreement
and ending on the date of order under section 92CC(7) shall be excluded.

[CMA INTER SY12, J14, 4 Marks]


Question: State the reasons for cancellation of advance pricing agreement.
Answer: Reason for cancellation of Advance Pricing Agrreement:
1. 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;
2. The assessee has failed to file the annual compliance report in time;
3. The annual compliance report furnished by the assessee contains material errors; or
4. The agreement is to be cancelled under sub-rule (4) of rule 10Q.

[CMA INTER SY12, J14, 4 Marks]


Question: Narrate the procedure for furnishing Annual Compliance Report by the assessee, where
advance pricing agreement has been entered into.
Answer: Furnishing of annual Compliance Report:
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 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 of annual compliance report to the competent

_____________________________________________________________________
Direct Taxation

20.39

authority in India, one copy to the Commission 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.

[CMA INTER SY12, J14, 3 Marks]


Question: In case an advance pricing agreement is entered into, does it have any effect on the return of
Income of the assessee?
Answer: As per section 92CD, where any person has entered into advance pricing agreement, and he has
already furnished return of income under section 139 for any assessment year to which such agreement
applies, such person shall furnish a modified return of income within a period of 3 months from the end
of the month in which the said agreement was entered into in a accordance with and limited to the
agreement.

[CMA INTER SY12, J15, 3 Marks]


Question: Explain binding nature of advance pricing agreement.
Answer: Binding nature of APA. As per section 92CC(4) the advance pricing agreement entered into shall
be binding
1. On the person in whose case, and in respect of the transaction in relation to which, the agreement has
been entered into, and
2. On the principal commissioner or and the income-tax authorities subordinate to him, in respect of the
said person and the said transaction.
However, the agreement shall not be binding if there is a change in law for facts having bearing on the
agreement so entered.

[CMA INTER SY12, J15, 3 Marks]


Question: A person resident in India seeks to remit certain amount liable to tax in India to a company
incorporated in a notified jurisdictional area. At what rate should the tax be deducted a source from
such payment?
[CMA INTER SY12, J14, 4 Marks]
Question: 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 authorization 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?
Answer: 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.

__________________________________________________________________________
International Taxation

20.40

Under section 94A(5) X, Ltd. is required to deduct tax at source from such interest of the highest of the
following three rates 1. Rate or rates in force;
2. Rate specified in the relevant provisions of the Income-tax Act;
3. 30%

[CMA INTER D15, 3 Marks]


Question: Write short note on Tax Residency Certificate (TRC)
Answer: Tax Residency certificate is a certificate produced by a non- resident to avail tax benefits. In the
Finance Act, 2012, Indian Government made it mandatory for non- residents to produce a TRC from the
home country revenue authority when seeking to avail themselves of tax benefits.
Provision of tax residency certificate (TRC) require specified people to obtain this certificate from their
home country for claiming relief under the double taxation avoidance agreement (DTAA) that India has
entered into with the country.
[CMA INTER J16, 1 Marks]
Question: Where a foreign company receives royalty from an Indian company in pursuance of
agreement dated 1st July, 2012, what is the rate of tax on such royalty?

[CMA INTER J16, 1 Marks]


Question: When a resident-assessee has income from a foreign source, what is the time limit for
reopening the assessement?

[CMA INTER J16, 1 Marks]


Question: At what rate long-term capital gain arising to foreign institutional investors (FII) is
chargeable to tax?

[CMA INTER J16, 1 Marks]


Question: What is the time limit available to the Dispute Resolution Panel for issue of direction to the
Assessing Officer to complete the assessment?
[CMA INTER J16, 5 Marks]
Question: State the requirements of section 92 relating to computation of income from international
transactions, having regard to arms length price.
[CMA INTER J09, 2 Marks]
Question: Janak Ltd., is an associated enterprises of Takoya Inc., Tokyo; the latter has a permanent
establishment in India. This company rendered service to Janak Ltd., for which tax was deducted at

_____________________________________________________________________
Direct Taxation

20.41

source and remitted. The Arms Length Price of Takoya Inc. was recomputed during the course of
transfer pricing assessment. Janak Ltd. wants to know whether there will be a corresponding recomputation in its hands also. Advice.
Answer: No Adjustment to Associated Enterprises Income: In cases where the total income of a
taxpayer is recomputed after determination of the arms length price paid to another associated
enterprises from which tax has been deducted or was deductible at source, the income of the other
associated enterprises shall not be recomputed by reasons of such determination of arms length price in
the case of the taxpayer. As a consequence, there will be no recomputation in Janak Ltds hands.
[CMA INTER D15, 4 Marks]
Question: Richard Shipping Co. of Australia is engaged in shipping business. It received 600 lakhs
towards carriage of goods from the port of Kolkata to Sydney during the year 2015-16. The net tonnage of
the ship exceeded 25,000 and the total quantum of goods carried was 6,000 tonnes.
The assessee wants to offer income on presumptive basis. Compute the income and state the procedure
for tax compliance.
Note: Presumptive income for a qualifying ship exceeding 25,000 net tonnage is 11,770 plus 29 for each
100 tonnes exceeding 25 tonnes.
Answer: Computation of tonnage income u/s 115VG
First,1,000 tons

1,000

700

Next 9,000 tons

9,000

4,770

Next 15,000 tons

15,000

6,300

Balance 35,000 tons

35,000

10,150
2,19,200

Tonnage income = 2, 19,200 365 days = 37, 16,526 (Assuming Shipping days are 365 days)
As per section 115 VF the tonnage income computed under section 115VA would be deemed to be the
profit chargeable under head profit and gain of business.
The following conditions to be fulfilled by the company for applicability of the tonnage tax scheme.
(i) An option to get assessed under chapter X11G has to be filed by the company.
(ii) The company is required to credit to a reserve account tonnage tax reserve account, at least 20% of the
book derived from its core and incidental activities to be utilized before the expiry of 8 years for
acquisition of a new ship for the purpose of the business of the company until the acquisition of a new
ship, the amount can be utilized for the purpose of the business of operating qualifying ship. However
the amount should not be used for distribution of dividend or profit or for remittance outside India.
As profit or for creation of assets outside India.
[CMA INTER D15, 2 Marks]

__________________________________________________________________________
International Taxation

20.42

Question: A branch office of a foreign company in India has loss of 20 lakhs after charging head
office expenses of 50 lakhs. Explain with reasons the amount of income chargeable to tax in the hands
of the branch for the assessment year 2016-17.
Answer: Section 44C restricts the quantum of expenditure relating to head office to the extent of the
actual expenditure or 5% of the adjusted total income whichever is less.
The adjusted total income means the total income before deducting head office expenditure. The adjusted
total income in this case is 30 lakhs (20lakhs + 50lakhs). The amount eligible for deduction under
section 44C is 5% of 30 lakhs being 1.50 lakhs. Hence the total income liable to tax is 28.50 lakhs (30
lakhs less 5%).
[CMA INTER J16, 8 Marks]
Question: Mike Hussey, a non-resident and cricket player of Australia came to India in January 2016
and earned following incomes in India till 31.03.2016.
1. Income from participation in matches 7,00,000.
2. Appearance fee for advertisement for a tyre manufacturer 10,00,000.
3. Income from newspaper for writing articles on T20 world cup 5,00,000.
4. Income from horse race 2,00,000.
Compute his total income and tax liability for the assessment year 2016-17.
[CMA INTER D11, 8 Marks]
Question: ANJU, an individual resident retired employee of the All India Radio 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 5,10,000. In view of tax
planning she has deposited 70,000 in Public Provident Fund and paid contribution to approved Pension Fund of
LIC 32,000 along with subscription to notified long-term infrastructure bonds 25,000. She also contributed
18,000 to Central Government Health Scheme during the previous year and gave payment of medical insurance
premium of 21,000 to insure the health of her father, a non-resident aged 76 years, who is not depedent on her.
Compute the tax liability of ANJU for the Assessment year 2016-17.
Answer:
Computation of tax liability of Anju for the A.Y. 2016-17

Particulars

Less

Amount in

Indian Income

5,10,000

Foreign Income

1,10,000

Deductions
Deposit in PPF (section 80C)

70,000

Contribution to approved Pension Fund of LIC (Section 80CCC)

32,000

Section 80D
Central Government Health Scheme

18,000

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Direct Taxation

20.43

Medical insurance Premium

21,000
39,000

But restricted to

30,000

Total Income

4,88,000

Tax on Total Income on first 3,00,000


On balance 1,88,000 @10%

Nil
18,800

Rebate u/s 87A

2,000
16,800

Add

Education cess @ 2%

336

Add

SHEC @ 1%

168

17,304

Average rate of tax in india (i.e. 17,304/4,88,000 100)3.55%


Average rate of tax in foreign country 10% (I,e. 11,000/1,10,000
100)
Less

Rebate under Section 91 on 1,10,000 @ 3.55%


Tax payable in India

3,905
13,399

[CMA INTER J16, 7 Marks]


Question: Hrikesh Patel, a resident Indian aged 24, earned a sum o 5, 00,000 for playing football match
in a nation with which India does not have a double taxation avoidance agreement. In that nation,
Income-tax at 15% was levied on such income.
In India, he has received match fees of 9, 75,000 for playing football matches. He has paid life insurance
premium of 1, 60,000 and mediclaim insurance premium of 28,000
Compute his income-tax liability for the assessment year 2016-17.

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International Taxation

20.44

Additional CMA Exam Questions


[CMA INTER SY12, J15, 4 Marks]
Question: Ayush is a musician who derived income of 1,25,000 during the previous year 2015-16 from a
concert performed in a country with which India has no double taxation avoidance agreement. Tax of
31,250 was deducted at source in the said country. His income from profession in India during the
previous year 2015-16 amounted to 3,00,000. Compute tax payable by Ayush for Assessment Year 201617.
Answer: Computation of tax payable by Ayush for Assessment year 2016-17
Particulars

Amount ()

Income in the foreign country

1,25,000

Income in India

3,00,000

Total income

4,25,000

Tax on total income (4,25,000 2,50,000) 10%


Less

17,500

Rebate u/s 87A

2,000
15,500

EC & SHEC at 3%

465

Total

15,965

Average Rate of tax in India (

3.756%

Average Rate of tax in Foreign Country (

Doubly taxed income


Less

25%
1,25,000

Amount of relief U/s 91 ( 1,25,0003.756%)(lower of a & b)


Tax payable (15,965 4,695)

4,695
11,270

[CMA INTER SY12, J15, 4 Marks]


Question: P. Ltd., an Indian company, sold steel rods to its holding company. Q. Ltd., USA of US Dollar
200 (FOB) per MT during previous year 2015-16. P. Ltd. also sold identical product to an independent
company in USA. R. Ltd. at US Dollar 400 (CIF) per MT. Insurance and freight amounts to 200 per MT.
Determine whether the transaction between P. Ltd. and Q. Ltd. satisfies the arms length test.
Answer: As P. Ltd. holds more than 26% shares in Q. Ltd., P. Ltd. and Q. Ltd. are deemed to be associated
enterprises. As P. Ltd., supplied similar product to R. Ltd. an unrelated entity in USA, the transaction
between P. Ltd. and R. Ltd. is comparable uncontrolled transaction for determining arms length price.
Comparable uncontrolled price (CUP) method for determining ALP is applicable.

_____________________________________________________________________
Direct Taxation

20.45

US$

Less

Price per MT of steel rods to R. Ltd.

400

Cost of insurance and freight

200

Arms length price

200

Since the price charged from Q. Ltd. is equal to ALP, the transaction between P. Ltd. and Q. Ltd. satisfies
the arms length test.
[CMA INTER D15, 4 Marks]
Question: LV Ltd., an Indian company supplied textile articles to its holding company BB Ltd., Spain
during the same product to another Spain based company VX Ltd., an unrelated party. During the year, it
supplied 10,000 units to BB Ltd. at Euro 100 per unit. It supplied 4,000 units to VX Ltd. at Euro 110 per
unit. It gave 3 months credit time to BB ltd. and whereas to VX Ltd. it supplied against payment i.e. no
credit time was given. The cost of capital may be taken as 12% per annum. Compute the arms length
price for the transaction with BB Ltd. 1Euro = 80.
Answer: LV ltd. supplied goods to its foreign holding company BB Ltd. at Euro 100 per unit with a credit
time of 3 months. To the unrelated party VX Ltd. it supplied at Euro 110 per unit with no credit time.
The cost of capital is given as 12% per annum which means 1% per month. The supply to unrelated party
with no credit time and to the related party with 3 months credit period show that the cost of capital at
3% for the extended credit time of 3 months.
Particulars

In Euro

Price per unit supplied to related party


Add

Cost of capital for 3 months

100
3

Adjusted price per unit to the related party

103

Price charged to unrelated party

110

Under price for related party


No. of units supplied 10,000 7

7
70,000

Arms length price to related party to be adjusted 70,000 80 = 56laksh

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International Taxation

20.46

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