International Taxation

Presented By
CA Swatantra Singh, B.Com , FCA, MBA

Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com

1
Issues on International Taxation
2
3
What we Discuss To-day
Why
What
How
International
Taxation
is
to
understand
/ practice
4
Why International Taxation
Globe is called as Global Village
Globalization
Movement of People Concurrent Earnings
Borderless Global Economy - Internet
Resource of Competent and Enterprising Tax
Professionals
Movement of Cross Border M & A close to
consumers and Virgin Untapped Markets
Double Taxation Conflicts

5
What is Globalization ?

Globalization is the phenomenon of
Sourcing Capital from where it is cheapest,
Sourcing People from where it is best available,
Producing where it is most Cost Effective and
Selling where there is Market for. Back
6
Residence rule due to personal attachment
protection to person etc
Source rule due to economic attachment
economic activities with in that country
Primary right should be on the activity if
all states practice territorial tax no issue-
many states follow right to tax worldwide
income of their residents

7
Double Tax is built in the system as part of
the Classical tax system of respective
country
Double Tax is harmful for international
trade
8
Types of Conflicts -
* Source-Source conflicts
* Residence-Residence conflicts
* Residence Source conflicts
* Income characterization conflict
* Entity conflicts
* Mismatching Tax systems (taxable
income and computation of taxes)
9
Resolution
Bilateral Relief
- Negotiated sharing of the tax revenues by two countries
sought
Developed countries usually have balanced sharing of
tax revenues
Developing countries may have unbalanced sharing as
they are governed by economic, social as well as
revenue considerations
Unilateral Relief
- Section 91 of the Act

10
What is International Taxation

Purpose of International Taxation

Objectives of International Taxation

Legislation of International Taxation

11

Taxing Residents World-Wide Income

Taxing Non-Residents National Income
12

India

Mr. Patel -
Indian Resident.
Indian Income
Rs. 1,000.

Mr. Smith -
Indian Interest
Income Rs. 200.

Germany

Mr. Patel -
German Interest
Income Rs.100.

Mr. Smith -
German Resident.
German Income
Rs. 2,000.

INDIA would want to tax Mr. Patel Amount
(in Rs.)
On his Indian Income On Source + Residence Basis 1,000
German Income - On Residence Basis 100
Sub Total 1,100
India would also tax Mr. Smith

on his Indian Interest income on Source Basis 200
Total 1,300
13
Germany would tax Mr. Smith

Amount
(in Rs.)
On his German Income on Source + Residence Basis 2,000
On his Indian Income on Residence Basis 200
Total 2,200
Germany would tax Mr. Patel

On his German Income on Source Basis 100
Total 2,300
Thus Domestic Income by a resident causes no problems
of Double tax.

Rs. [3,000]
Only when a resident of one country gets income from
another country, Double tax issues arise

Rs. [300]
14
Objectives of International Tax
15
Global tax rules for cross border transactions
No separate Codified law No separate tax - no
separate court
Provisions of Domestic law to handle Cross Border -
Direct & Indirect Taxes
International Tax Principles
Accepted Convention - Can not enforce tax on
territory of another country
EU Directives / Model Commentaries
16
International Law
International Tax
Tax Treaties
17
How to Understand International
Taxation
Models
Tax Treaties
- Meaning
- Objectives
- Formation
- Types
- Coverage
- Treaty Position in India
- Structure
- Discussion of the Articles
Limitation of Benefits
Interpretation of Treaties
18
MODELS
Are we talking about Role Models

Mahathma Swami Atal Bihari
Gandhi Vivekananda Vajpayee

19
MODELS
Are we talking about Super Models

Aishwarya Katrina Priyanka
Rai Kaif Chopra
20
MODELS
We are talking about Model Conventions

OECD Model Convention

UN Model Convention

US Model Convention

Indian Model Convention
21
Model Conventions
Tax Treaties are based on Model Conventions
Why do we need a Model Tax Convention?
What is a Model Tax Convention?
What is the legal value of a Model Tax
Convention?
Model Conventions
- OECD Model
- UN Model
- US Model
22
Model Conventions
Rules for interpretation of Tax Treaties
Vienna Convention on the Law of Treaties,
1969 (VCLT)
- codifies customary international law,
hence, the rules contained in it also apply
to the interpretation of treaties between
states which are not parties to the VCLT
23
Model Conventions
OECD Model
- Emphasis on residency based taxation
- Usually adopted by developed countries in case of treaties with
other developed countries
- Regularly updated / amended - latest version is July 2008
UN Model
- Emphasis on source based taxation
- Used by developed countries for treaties with developing
countries or between two developing nations
US Model
- Used by USA for all treaty negotiations
Most Indian Treaties are based on UN Model
24
Tax Treaties - Meaning
Meaning of Tax Treaty (DTA) - A tax treaty is
a formally concluded and ratified agreement
between two independent nations (bilateral
treaty) or more than two nations (multilateral
treaty) on matters concerning taxation
normally in written form.
Doctrine of Incorporation Direct effect-
US & France
Doctrine of Transformation Indirect
effect- Germany, India
25
Tax Treaties - Objectives
Limit tax
Prevent Tax
Discrimination
Certainty of
Tax Treatment to
Investors
Exchange of
Information
Ease in
Recovery
of Tax Dues
Promote
Investment &
Mutual
Relation
Allocating
Taxing
Jurisdiction
Prevent Fiscal
Evasion
Avoid Double
Taxation
OBJECTIVES
26
Tax Treaties - Formation
Formation of Tax Treaties
A DTA develops in six stages, which follow a
fairly well established procedure
(1) Negotiation
(2) Initialling
(3) Signature
(4) Ratification
(5) Entry into force
(6) Effective Date

27
Tax Treaties - Types
Types of Tax Treaties

Comprehensive Agreements This is wider in scope
addressing all sources of income.

Limited Agreements which has limited scope and covers
a) income from operation of aircrafts and
ships,
b) estates,
c) inheritance and
d) gifts.
28
Tax Treaties - Coverage
Coverage of Tax Treaties

Bilateral Treaties The treaty is entered into
between two countries

Multilateral Treaties The treaty is entered
into between two or three countries.

29
Tax Treaties Position in India
Treaty Position in India -
* Section 90 of the Act empowers the Central government to enter into tax
treaties with the government of any foreign country
* India has entered into tax treaties with more than 90 countries
* Place of treaties in the legal system depends on the countrys view on
international law / constitutional arrangements
- Most countries: treaty prevails over domestic law
- Some countries (eg US): treaty equals domestic law
* The tax payer may opt to be governed by the Act or the tax treaty, whichever
is more beneficial but cannot pick and choose the provisions
- Circular No 333 of 1982;
- Azadi Bachao Andolan 263 ITR 706 (SC);
- Vishakapatnam Port Trust 144 ITR 146 (AP)
30
Tax Treaty - Structure
Art. 1 Persons
Covered

Art. 2 Taxes
Covered

Art. 3 General
Definitions

Art. 4 Resident

Art. 5 Permanent
Establishment

Art. 30 Entry into
Force

Art. 31
Termination

Application
Articles
Distributive
Rules
Anti-Avoidance
Provisions
Miscellaneous
Provisions
Active
Income :

Art. 7, 8, 14,
15, 16, 17,
19 and 20

Passive
Income :

Art. 6, 10, 11,
12, 13,
18 and 21
Art. 9
Associated
Enterprises

Art. 23
Elimination of
Double Taxation

Art. 26
Exchange
Of Information

Art. 27
Assistance
In Collection of
Taxes

Art. 24
Non Discrimination

Art. 25
Mutual Agreement
Procedure

Art. 28
Members of
Diplomatic
Missions and
Consular
posts

Art. 29
Territorial
Extension

31
Tax Treaty - Structure
Active Incomes Passive Incomes

Art. 7 - Business Profits Art. 6 - Immovable Property
Art. 8 - Shipping, etc. Art. 10 - Dividends
Art. 14 - Independent Personal Services Art. 11 - Interest
Art. 15 - Dependent Personal Services Art. 12 - Royalties & FTS
Art. 16 - Directors Art. 13 - Capital Gains
Art. 17 - Artistes & Sports persons Art. 18 - Pensions
Art. 19 - Government Services
Art. 20 Students
Art. 21 - Other Income
32
Tax Treaty Definition of Articles
Scope -
Article 1- Applicability -Applies to a person who is a resident of one
or both the countries.

Article 2- Taxes covered- Taxes on income and capital
Indian taxes covered are income tax, surcharge and cess
FBT or DDT? Interest / Penalty?

Article 30-Entry into force
This article tells when and how a DTA becomes operative

Article 31-Termination
This article tells when and how a DTA can be terminated

33
Article 3-General Definitions
1. Person Individual, Company, taxable unit (Partnership?)
2. Company-Body corporate or entity treated as company or body
corporate for tax purposes
3. Contracting State India or the other country
4. Enterprise of a Contracting State
4. Competent Authority Ministry of Finance (Dept. of Revenue)
6. National

Undefined Terms-meaning to be as defined under the domestic tax laws
applicable to the taxes covered in the treaty
Static or Dynamic
Different views by 2 countries

34
Article 4 - Residence
A person is a resident of a country if he is liable to tax in the country
by virtue of:
- Domicile
- Residence
- Place of Incorporation
- Place of management
- Any other criterion of a similar nature

Tie-Breaker Rules- In the case of a dual resident, the tie-breaker
rules shall apply to determine the residential status
a) In the case of an individual his personal and economic ties
determine his residential status
b) In the case of others it is the place of effective management

35
Article 5 - Permanent Establishment (PE)
Means a fixed place from where the business of the
enterprise is carried on

PE includes place of management, branch, office,
factory, workshop, mine, quarry, an oil or gas well, a
construction site for long duration, a services location
for long duration and a dependent agency with power
to conclude contracts
36
ACTIVE & PASSIVE INCOME
Passive Income-refers to income derived from investment
in tangible / intangible assets.

Active Income is the income derived from carrying on
active cross border business operations or by personal
effort and exertion as in case of employment.
Assignment Rules & Source Rules

36
Equity Investment
Yiel
ds
Dividend
Debt
Right/Permission to use
assets
Disposal of capital assets
owned
Interest
Rent /
Royalties
Capital Gain
37
Exclusive right to tax is with country of
source of object
Source country reserves limited right or
shared taxation of the object
Source country can tax fully but does not
have exclusive right (Business profits)
Exclusive right to tax with country of
residence of subject (Mauritius-Capital
gain)
Type of Distributive Rules -
38
Passive Income Distributive Rights -
Article
Ref.
Nature of Income Taxing Right
of Source
State
Taxing Right
of State of
Residence
Remarks
6 Income from Immovable
Property
Has the first right to
tax
Reserves
the right to
tax
10 Dividend Income
Has the right
to tax
provided rate
does not
exceed the
agreed rate of
tax as per
DTAA
Dividend is not
taxable in India.
DDT is levied upon
the company
declaring dividends
11 Interest Income
12 Royalties and Fees for
Technical Services
13 Capital Gains Has the first right to
tax

Tax can be
determined as per
the domestic lax
18 Pensions Cannot tax pension Can tax Pension
39
Active Income Distributive Rights -
Article
Ref.
Nature of
Income
Taxing Right of
Source State
Taxing
Right of
State of
Residence
Remarks
7 Business Profits Yes, if PE exists in the
source state
Reserves
the right
to tax

Income attributable to
PE alone can be taxed
in source state
8 Shipping & Air
Transport
Cannot tax this income
14 Independent
Personal
Services
Yes, if the person has a
fixed base or his stay
extends beyond 90
days
Income attributable to
Fixed Base alone can
be taxed in source state
15 Dependent
Personal
Services
(Employment)
Yes, if employment is
exercised in the source
state. Cannot tax if stay
is less than 183 days
If salary is paid on
behalf of foreign
employer and is not
borne by PE, then
source state cannot tax
the salary
40
Article
Ref.
Nature of
Income
Taxing Right of
Source State
Taxing
Right of
State of
Residence
Remarks
16 Directors Fees Yes, the source state
can tax the same
Reserves
the right
to tax

17 Artiste & Athletes Yes, the source state
can tax the same

DTA may specify the
extent to which the
income may be exempt
19 Govt. Service
Remuneration
No, unless the person
rendering service
happens to be a
resident of and national
of the source state
20 Students &
Apprentices
No taxing rights
21 Other Income Yes, the source state
can tax the same
Active Income Distributive Rights -
41
Anti-Avoidance Provisions -
Article
Ref.
Title Comments
9 Associated
Enterprises
Adoption of Arms Length
Price in transactions between
Associated Enterprises
26 Exchange
of
Information
27 Assistance
in
collection
of taxes
Both the contracting states
shall assist each other in
collection of revenue claims
42
Elimination of Double Taxation -
Article 23 Alternate methods are as below:
The Exemption Method
- Full Exemption
- Exemption with progression

Foreign Tax Credit Method
- Full Credit
- Ordinary Credit

Deduction Method

Tax Sparing Method

43
Miscellaneous Provisions -
Article Ref. Title
24 Non-Discrimination
25 Mutual Agreement Procedure
28 Diplomatic Missions & Consular Posts
29 Territorial Extension
44
Limitation of Benefits
A limitation clause which permits only
certain entities to enjoy treaty benefits
Could be imposed by
- Minimum expenditure requirement
- Requirement that the entity is regulated, to be
considered resident such as stock exchange etc
Netherland LOB, Singapore LOB, US
LOB

45
Interpretation of Treaties
MoU to an existing treaty can be considered for
interpreting such treaty or an earlier treaty or another
identically worded treaty enacted subsequently
Protocol
- A protocol is an indispensable and integral part of the treaty with the same binding
force as the main clauses therein and can be relied upon
- A protocol to a later treaty between two countries could apply while interpreting
the predecessor treaty between the same countries
The preamble to a treaty could be used for interpretation
Case laws under other Indian treaties
- It is permissible to rely upon decisions rendered in respect of corresponding treaties
Model Commentaries

46
How to Practice International Taxation
Concepts of International Taxation
Applying Tax Treaties
Domestic Law Regulations
International Tax Planning
Role of CAs
Reference

47
State V/s. Other Contracting State
Source Country V/s. Residence Country
Taxable Subject V/s. Taxable Object
Capital Importing Country V/s.
Capital Exporting Country
Juridical Double Taxation V/s.
Economic Double Taxation
Active Income V/s. Passive Income

48
Tie-Breaker rule for Residential Status
Permanent Establishment
Force of Attraction
Associated Enterprises Transactions
Beneficial Ownership
Make Available
Tax Relief
49
Most Favored Nation Clause
Non-Discrimination Clause
Mutual Agreement Procedure
Exchange of Information
Controlled Foreign Companies
Treaty Shopping
Thin Capitalisation

50
State V/s. Other Contracting State -
In bilateral agreements between two countries one
country is referred to as State and the other country
as Other Contracting State.

Source Country V/s. Residence Country
Source Country Country in which income arises
Residence Country Country in which the assesssee
is Residing
51
Taxable Subject V/s. Taxable Object
Taxable Subject refers to assessee
Taxable Object refers to income or capital

Capital Importing Country V/s Capital Exporting Country-
Capital Importing Country More capital is invested into the
country by foreigners than locals are investing overseas
Developing Country
Capital Exporting Country More capital is invested overseas
by locals than foreigners are investing in the country
Developed Country
52
Juridical Double Taxation V/s. Economic Double Taxation -
Economic Double Taxation Same Income Taxed in the hands of
Different Persons viz., Dividend Income.
Juridical Double Taxation - Concept
- Double taxation of a taxable subject - person liable to tax (dual
residence)
- Double taxation of an economic event which produces taxable
object (Royalties / Fees for Technical Services payment / source
basis)
- Double taxation due to differing tax base - world wide basis vs
territorial basis

53
Connecting Factors - For taxing jurisdiction, there are two Connecting Factors
internationally accepted.
54
India Can not tax US residents for income
earned in US
A country can tax
- activities of resident even outside country
- activities of non-resident in that country
55
Assessee
Tax Subject
Income
Tax Object
India
Indian Resident
World Income
Taxable
For Non-resident &
NORs
Only Income Sourced
In India is taxable
Indian Sourced Income,
Taxable in India.
Irrespective of Status
of Assessee.

Foreign Sourced Income
Taxable ONLY IF
Earned by
Indian Resident

Foreign Sourced Income
earned by Non-Residents
Not Taxable in India.
There is no nexus with
India.
In
di
a
India

56
Tax Subject
Tax Country Tax Object
Connecting Factors
57
Active Income V/s. Passive Income
Active income means income derived from business or
employment activities.
Passive income (and gains) is income (and gains) from
investment in tangible and intangible (including financial) asset.

Tie-breaker rule for Residential Status
For Individuals Five Level Tie-breaker Test
(Permanent Home, Centre of Vital
Interests, Habitual Abode, Nationality
and Mutual Agreement)
For Others - POEM (Place Of Effective Management)
58
Permanent Establishment { PE }
Permanent Establishment means a fixed place of business through
which the business of an enterprise is wholly or partly carried on.

Force of Attraction
It is a concept wherein PE is taxed on the income derived not only
by PE but also by the H.O. in the country where PE is located.

Associated Enterprise Transactions
Transactions between associated enterprises attracts transfer
pricing provisions and it should be at Arms Length Pricing

59
Beneficial Owner -

Beneficial owner receives concessional tax treatment

Legally, beneficiary or beneficial owner is a person who benefits
financially from property held by another (trust)

No benefit to intermediary between beneficiary and payer

Conduit company not beneficial owner (benefits of DTAA with conduits
state not available)

Real title vs Formal title

Substance vs Form

60
Make Available
Technology should be transferred to another person

Tax Relief
The methods of tax relief available from juridical double
taxation are
a. Exemption Method
b. Tax Credit Method
c. Deduction Method
d. Tax Sparing Method
Full Exemption
Exemption with Progression
Full Credit
Ordinary Credit
61
Most Favored Nation Clause -
Normally benefit under this clause is restricted to a specific group like
OECD countries, developing countries

Nature of benefit
- lower tax rate
- limited scope of income liable to tax

MFN clause is usually found in Protocols and Exchange of Notes
- Eg - treaties with Netherlands, Belgium, France, Norway, Switzerland,
etc

Generally Notification is issued to give effect to MFN clause However,
such notifications are mere clarificatory

62
Non-Discrimination Clause -
This clause prohibits a country from discriminating in its tax
treatment between its own nationals and nationals of other
contracting state.

Mutual Agreement Procedure -
Where there is a dispute between the two contracting states
wrt. any of the provisions of DTA, then they have to resolve
the same by mutual agreement.

Exchange of Information -
This clause allows the tax administrations in the contracting
states to exchange information with each other.

63
Controlled Foreign Companies { CFC }
This is a legislation to tax foreign sourced income
on an accrual basis, instead of on a receipt basis
To explain for eg. Company P (Parent Co.) a
resident in Country R incorporates a subsidiary
(Company S) in a tax heaven country. Income is
diverted to Co., S. To avoid this circumstances,
Country R may tax Co., P for income earned by
Company S.

64
What does it Mean?

Tax Evasion Vs Tax Avoidance
There are many principles in fiscal economy which,
though at first blush might appear to be evil, are
tolerated in a developing economy, in the interest of
long term development.

Foreign
Investor
Invest
s in
Co.
incorporated in
Mauritius (Shell
Co.) which in
turn
Invest
s in
Indian
Compan
y
Treaty Shopping -
65
Interest on loan is a tax deductible
expenditure, while dividend on
shares is not

High debt, low equity preferred

Thin capitalization rules provide
normative debt to equity ratio

In case of excess debt, interest re-
characterized as dividend and tax
deduction not available

90%
Russia
Australia
60%
Interest
Cyprus
Loan
Thin Capitalization -
66
Applying Tax Treaties
Step 1 What is the nature of the income ?
Step 2 Does the treaty apply?
Step 3 Determine which Article applies?
Step 4 How are taxation rights assigned?
Step 5 How is the income calculated?
Step 6 Give Tax Credit or Tax Relief

67
Domestic Tax Systems
To have knowledge of Domestic Tax
Systems of various countries
Incentives provided in various countries
Anti Avoidance Measures of various
countries
68
International Tax Planning
Exemption from Tax- 10A, R&D
Reduction in tax rate- FTS
Reduction in tax base-PE, Transfer Price
Deferral of the tax payment Royalty, Div
Credit or exemption of foreign tax paid
Treaty Shopping
Draft Direct Taxes Code Bill
Taxation of House
Property for Individuals
(Self Occupied)
Shift from
EEE to EET system
for savings and
investments
Revised draft of DTC Bill delayed!
Nine Critical Areas on which Position Papers are expected to be released
Tax on
Gross Assets
Deductions for
Retirement
Benefits
Capital
Gains Tax
Taxation
of Charitable
Organizations
Management and Control of
Foreign Cos.

Tax Treaty Override

General
Anti- Avoidance
Rule
69
Section 206AA
- Compulsory furnishing of PAN by Recipient
70
From 1.4.2010, absence of PAN of Payee results in higher
Withholding Tax (WHT) by Payer at 20 percent as compared to
applicable rate (even Tax Treaty Rate)
Key issues for Non-residents
Whether PAN mandatory where no income is taxable in
India?
Whether provision results in Treaty Override?
Whether refund of excess WHT can be claimed by filing
tax return in India?
Whether credit for excess WHT available in Home
Country?
Whether PAN required even for net of tax contracts?
Whether applies to TDS on or before 31 March 2010 but
deposited after 1 April 2010?
70
Withdrawal of Circulars 23/
1969 and 786/2000
71
Withdrawal of Circular Nos.
23/1969 and 786/2000
Circulars withdrawn w.e.f. 22-10-2009

Circular 23/1969 : Clarification on taxability of income of non-resident -
Non resident exporter selling goods from abroad to Importer
Non Resident Company selling goods from abroad to Indian subsidiary
Foreign Agents of Indian exporters
Non Resident persons purchasing goods in India
Sale by Non residents either directly or indirectly through agents

Circular 786/2000 : Further clarification in case of export commission

Objective of withdrawal (as claimed by CBDT):
Circular was being interpreted by some taxpayers to claim relief which was not in
accordance with the provisions of Section 9 of the Income Tax Act

Extensive use of Circular by assessee & reliance by judiciary in case of Dependent
Agent Permanent Establishment (DAPE) to claim no tax liability of Non-resident seem
to have triggered withdrawal

72
Effect of Withdrawal
On positions taken before withdrawal (i.e. 22/10/2009)
Withdrawal is prospective [DDIT v. Siemens Aktiengesellschaft (Mum ITAT)]
Later withdrawal cannot be the ground to read down the circular in earlier years
when it was operational
On earlier decisions of court
A circular which is contrary to the statutory provisions of the law has no existence in
law [CCE vs. M/s Ratan Melting and Wires Industries 220 CTR 98]
A circular is binding upon the revenue authorities. It is not binding on the courts.
The court decisions represent courts interpretations of provisions of the statute
Withdrawal would not render court decisions ineffective
Unless they are solely based on circular without independent interpretation of
law
Withdrawal does not mean that the positions were incorrect
Principles applied in the Circular may still remain valid
The only difference is that now they need to be argued
Same conclusions may still be drawn

73
Impact of withdrawal of Circular 23 on Foreign
commission Agents
Prior to withdrawal foreign agents not liable to tax in India
Post withdrawal
Indian exporter may be regarded as business connection
Only income attributable to operations carried out in India to be taxable in India
[Explanation 1(a) to Section 9(1)(i).]
If all the activities by the agent are performed outside India No profits accrue in India
Whether services of foreign agent be termed as technical services?
Expression technical not defined under the Act
As per dictionary meaning Technical includes services rendered by expert of
respective field.
If the services include expert services of any field, it may be treated as technical
services
Consequently may be treated as deemed accrued in India
Question to be answered based on facts & circumstances of each case.
74
Retrospective Amendment to
Explanation to Section 9(1)
75
Judicial Position on Section
9(1)(vii)
Judicial opinion before
Amendment by Finance
Act, 2007
Judicial Opinion after
Act, 2007
Judicial Opinion after
Act, 2010
In absence of explanation
to Section 9(1), it was held
in Ishikawajima-Harima
Heavy Industries Ltd. 288
ITR 408 in order to be
taxable in india, the
technical services must be
utilized in India as well as
rendered in India.
The Explanation inserted
by Finance Act, 2007 to
Section 9(1) does not
eliminate the requirement of
rendering services in India
and hence the law laid down
in Ishikawajimas case
prevails even after the said
retrospective amendment.
(Jindal Thermal power co.)
It has been held in
Ashapura Minechem Ltd. v.
ACIT (Int. tax) that it is no
longer necessary that, in
order to invite taxability
under section 9(1)(vii) of
the Act, the services must be
rendered in the Indian tax
jurisdiction.
76
Applicability of Tax Treaty
77
Jurisdiction
Apply treaty of correct jurisdiction and cannot apply treaty if the
specific territory is not covered

Generally DTAA excludes territories which have special status / not
recognized as part of the country
Peurto Rico, Virgin Island, Guam not included in USA
Hong Kong & Macau not included in China
Bermuda, BV Island, Cayman Island, Isle of Man, Gibralter, Jersy
not included in UK
Denmark does not include Faroe Island & Greenland
Netherland Antilles not included in Netherlands

Northern Ireland included in DTAA with UK
Southern Ireland included in DTAA with Ireland

78
Resident
Person must be resident of a country in order to apply tax treaty with
such country
Resident is generally a person who is liable to tax on global income in
such country

Significant issues arise in respect of tax transparent entities
Partnerships in many countries are tax transparent / pass-through
LLCs have option to be treated as pass-through

India has given its view that treaty does not apply to pass-through
entities as these entities fail the test of liable to test
Unless specifically agreed in the treaty

79
India USA Tax Treaty
Article 4(1):
For the purposes of this Convention, the term resident of a Contracting State means
any person who, under the laws of that State, is liable to tax therein by reason of his
domicile, residence, citizenship, place of management, place of incorporation, or any
other criterion of a similar nature, provided, however, that
(a) this term does not include any person who is liable to tax in that State in respect
only of income from sources in that State; and
(b) in the case of income derived or paid by a partnership, estate, or trust, this
term applies only to the extent that the income derived by such partnership, estate,
or trust is subject to tax in that State as the income of a resident, either in its
hands or in the hands of its partners or beneficiaries.

India USA makes specific provision to this effect
Treaty benefit available to partnership to the extent it is subject to tax in US as resident
in hands of its partners

Provision is only in respect of partnership and not LLC
Benefit not available to LLC
80
Article 4(3):
Where, by reason of paragraph 1, a company is a resident of
both Contracting States, such company shall be considered to
be outside the scope of this Convention except for purposes of
paragraph 2 of Article 10 (Dividends), Article 26 (Non-
Discrimination), Article 27 (Mutual Agreement Procedure),
Article 28 (Exchange of Information and Administrative
Assistance) and Article 30 (Entry into Force).

Generally, where a company is tax resident of both the countries,
it is treated as resident of the country in which effective control
and management is situated.

However, where a company is resident of India as well as USA,
it cannot claim benefit of India USA DTAA.
81
Meaning of Royalty
82
Special provisions in the treaty
regarding Royalty
83
Definition of royalties specifically includes
consideration for use of computer software /
computer programs
Malaysia, Morocco, Namibia, Russia,
Trinidad and Tobago, Turkmenistan,
Kazakhstan and Kyrgyz Republic
Rentals and other income from
cinematographic films are considered as
business profits and not as royalties
Libya
Features Treaties covered
Article 12(3):
The term royalties as used in this Article means :
(a) payments of any kind received as a consideration for the
use of, or the right to use, any copyright or a literary, artistic, or
scientific work, including cinematograph films or work on film,
tape or other means of reproduction for use in connection with
radio or television broadcasting, any patent, trade mark, design or
model, plan, secret formula or process, or for information
concerning industrial, commercial or scientific experience,
including gains derived from the alienation of any such right
or property which are contingent on the productivity, use, or
disposition thereof ; and

If the property transferred with payment contingent with productivity, it
is to be treated as royalty and not Capital Gains
84
India Australia Tax Treaty
Article XII(3):
The term royalties in this Article means payments or
credits, whether periodical or not, and however described
or computed, to the extent to which they are made as
consideration for :
(a)

(g) the rendering of any services (including those of
technical or other personnel), which make available
technical knowledge, experience, skill, know-how or
processes or consist of the development and transfer of a
technical plan or design;

Royalty includes fees for technical services
Article XII to be applied and not Article VII
85
India Brazil Tax Treaty
Article 12(3):
The term royalties as used in this Article means payments of any kind
received as a consideration for the use of, or the right to use, any copyright of
literary, artistic or scientific work (including cinematography films, films or
tapes for television or radio broadcasting), any patent, trade mark, design or
model, plan, secret formula or process, or for the use of, or the light to use,
industrial, commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience.
Protocol Para 2:
With reference to Article 12, paragraph 3 - It is understood that the provisions
of paragraph 3 of Article 12 shall apply to payments of any kind to any
person, other than payments to an employee of a person making such
payments, in consideration for the rendering of assistance or services of a
managerial, administrative, scientific, technical or consultancy nature.

Royalty covers FTS by through Protocol
86
Meaning of Fees for Technical
Services
87
FTS under the Treaty regarding FTS
Most Indian treaties have a separate article for FTS though it is absent in some treaties (for
example: India Mauritius)
If beneficial owner of the FTS carries on business in the other contracting state in which the FTS
arises through a PE, such fees would form part of the business profits under the Article

88
No separate article for FTS Australia, Bangladesh, Brazil, Greece,
Indonesia, Libya, Mauritius, Nepal,
Philippines, Sri Lanka, Syria, Thailand, UAE
and UAR
Covered only if it make available technology
USA, UK, Australia, Canada, Cyprus, Finland,
Malta, Netherlands, Portugal, and Singapore
Payments for teaching in or by educational
institutions excluded in treaties with
USA, UK and Switzerland
India Norway Tax Treaty
Article 13(2):
However, such royalties and fees for technical services may
also be taxed in the Contracting State in which they arise
and according to the laws of that State. But insofar as fees
for technical services are considered, to the extent such
fees are paid in respect of a contract which is signed
after the date of entry into force of this Convention, the
tax so charged shall not exceed 10 per cent of such fees.

Rate limitation applicable only in respect of contract
signed after date of entry into force of DTAA
89
India China Tax Treaty
Article 12(4):
The term fees for technical services as used in this Article means any
payment for the provision of services of managerial, technical or
consultancy nature by a resident of a Contracting State in the other
Contracting State, but does not include payment for activities
mentioned in paragraph 2(k) of Article 5 and Article 15 of the
Agreement.

Treaty wordings suggests that it is treated as FTS only if
rendered in India for inbound services

However, in a recent judgement in case of Ashapura
Minechem, Mumbai ITAT held that these words are in contrast
to provisions of Article 12(6). It further held that in order to
avoid absurdity and keeping in mind the amendment by Finance
Act, 2010 such narrow meaning should not be taken.

90
Most favored Nation Clause
(MFN)
91
MFN Principle
Binds the contracting country (A) to offer
to the other contracting country (B) the
same benefits which A may offer to a third
country

MFN is actually result of compromise made
by one of the party while signing DTAA
and then seeks favourable treatment if treaty
partner offers such treatment to other
countries

India has MFN clauses in tax treaties with
Netherlands, Belgium, France, Sweden,
Norway, Switzerland, Spain, Kazakhstan,
Philippines and Hungary

MFN may
Directly amend the treaty or may trigger re-
negotiation for the amendment
With respect to scope or rate or both
May cover taxation of some of the items of
income

92
India - Netherlands Tax Treaty
Protocol IV:
If after signature of this convention under any Convention or Agreement between India
and a third State which is a member of the OECD India should limit its taxation at
source on dividends, interests, royalties, fees for technical services or payments for
the use of equipment to a rate lower or a scope more restricted than the rate or scope
provided for in this Convention on the said items of income, then as from the date on
which the relevant Indian Convention or Agreement enters into force the same rate or
scope as provided for in that Convention or Agreement on the said items of income shall
also apply under this Convention.

MFN triggered only if other OECD country favoured
Applied immediately
MFN for scope as well as rate of taxation

Changes later on incorporated in the DTAA through amendment in DTAA notified vide
SO 693(E) dated 30-8-1991
93
India - Israel Tax Treaty
Protocol Para 2:
The competent authorities of the Contracting States shall initiate the proper procedure
to review the provisions of Articles 12 and 13 (Royalties and fees for technical services,
respectively) after a period of five years from the date of entry into force of this
Convention. However, if under any Convention or Agreement between India and any
third State which enters into force after 1-1-1995, India limits its taxation at source or
Royalties or Fees for Technical Services or Interest or Dividends to a rate lower or a
scope more restricted than the rate or scope provided for in this Convention, the same
rate or scope as provided for in that Convention or Agreement on the said items of
income shall also apply under this Convention with effect from the date on which the
present Convention comes into force or the relevant Indian Convention or Agreement,
whichever enters into force later.

MFN triggered only if any other country favoured after 1-1-1995
Applied immediately
Based on DTAA with Finland, Malta, Portugal, restricted scope applies taxable only
if it make available technology
MFN for scope as well as rate of taxation
No notification but still valid to claim benefit as Protocol automatically provides the
same
94
India Swiss Confederation Tax
Treaty
Protocol Para 4:
If after the signature of the Protocol of 16th February, 2000 under any
Convention, Agreement or Protocol between India and a third State which
is a member of the OECD India should limit its taxation at source on
dividends, interest, royalties or fees for technical services to a rate lower or
a scope more restricted than the rate or scope provided for in this
Agreement on the said items of income, then, Switzerland and India shall
enter into negotiations without undue delay in order to provide the same
treatment to Switzerland as that provided to the third State.

MFN triggered only for re-negotiation
Cannot be applied without formal amendment to DTAA and notification
thereof
No notification yet

Similar provision in case of India - Philippines DTAA as well
95
India Norway Tax Treaty
Article 13(2):
However, such royalties and fees for technical services may also be
taxed in the Contracting State in which they arise and according to the
laws of that State. But insofar as fees for technical services are
considered, to the extent such fees are paid in respect of a contract
which is signed after the date of entry into force of this Convention, the
tax so charged shall not exceed 10 per cent of such fees. For the
purposes of this paragraph, if a lower rate of Indian tax is agreed upon
with any other State than Norway after the entry into force of this
Convention, such rate shall be applied.

Clause in DTAA itself (not in protocol)
Applicable only for lower rate (not for scope)
Lower rate yet not agreed by India with any country
Immediately applied
96
India - Netherlands Tax Treaty
Protocol V:
It is understood that in case India applies a levy, not being a levy covered by Article 2,
such as the Research and Development Cess, on payments meant in Article 12, and if
after the signature of this Convention under any Convention or Agreement between India
and a third State which is a member of the OECD India should give relief from such
levy, directly, by reducing the rate or the scope of the levy, either in full or in part, or,
indirectly, by reducing the rate of the scope of the Indian tax allowed under the
Convention or Agreement in question on payments as meant in article 12 of this
Convention with the levy, either in full or in part, then, as from the date on which the
relevant Indian Convention or Agreement enters into force, such relief as provided for in
that Convention or agreement shall also apply under this Convention.

MFN covers R&D Cess also
If India agrees with another OECD country, similar position would be applied to
Netherlands
Exemption / Reduction of R&D Cess
Reduction of Income-tax to the extent of R&D Cess (something which is presently
done in case of Service tax)
97
Force of Attraction Rule
98
Force of Attraction Principle
Generally, in case of PE only profits attributable to the activities
of PE are taxable in India

However, even other activities of the assessee can be taxed in
India because of existence of PE in India
Even if such activities are carried out by the Head Office and PE does
not perform any activity in such event

This Principle is referred as Force of Attraction
Additional tax liability is attracted once you have significant presence (PE)
Need to read each PE article closely to apply DTAA

Presently, internationally this issue is subject matter of debate as
application of force of attraction principle

99
India Germany Tax Treaty
Protocol to Article 7(1):
(c) In respect of paragraph 1 of Article 7, profits derived from the
sale of goods or merchandise of the same or similar kind as
those sold, or from other business activities of the same or
similar kind as those effected, through that permanent
establishment, may be considered attributable to that permanent
establishment if it is proved that :
(i) this transaction has been resorted to in order to avoid
taxation in the Contracting State where the
permanent establishment is situated, and
(ii) the permanent establishment in any way was involved in
this transaction.

The protocol gives reason why force of attraction rule is required

Germany DTAA provides this for clarification.

100
Article 7(1):
The profits of an enterprise of a Contracting State shall be taxable only in that
State unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to (a) that permanent
establishment ; (b) sales in the other State of goods or merchandise of the
same or similar kind as those sold through that permanent establishment ;
or (c) other business activities carried on in the other State of the same or
similar kind as those effected through that permanent establishment.

Goods sold / services provided by HO which is similar to PE then profits of
such activities are taxable in India

101
India Belgium Tax Treaty
Article 7(1):
The profits of an enterprise of a Contracting State shall be taxable only
in that State unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated therein. If
the enterprise carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so much of them as
is attributable to (a) that permanent establishment ; (b) sales in the
other State of goods or merchandise of the same or similar kind as
those sold through that permanent establishment ; or (c) other
business activities carried on in the other State of the same or
similar kind as those effected through that permanent
establishment.

Goods sold / services provided by HO which is similar to PE
then profits of such activities are taxable in India

102
Limitation of Benefit
103
Limitation of Benefit
To avoid treaty shopping, DTAA may include
Limitation of Benefit (LoB) clause

USA invariably includes such provisions in DTAA

India now includes LoB clause in most of its DTAA
signed / renegotiated

LoB restricts applicability of DTAA to certain
persons / payments

104
India Singapore Tax Treaty
Article 24(1):
Where this Agreement provides (with or without other conditions) that
income from sources in a Contracting State shall be exempt from tax,
or taxed at a reduced rate in that Contracting State and under the laws
in force in the other Contracting State the said income is subject to tax
by reference to the amount thereof which is remitted to or received in
that other Contracting State and not by reference to the full amount
thereof, then the exemption or reduction of tax to be allowed under
this Agreement in the first-mentioned Contracting State shall apply to
so much of the income as is remitted to or received in that other
Contracting State.

Treaty benefit in case of India Singapore DTAA is applicable
only to the extent such income is remitted to Singapore as
foreign sourced income is taxable in Singapore only on
remittance basis

105
106

Overview of Transfer Pricing Regulation

107
PRESENTATION OUTLINE
Introduction

Indian transfer pricing regulation A birds
eye view

Key issues A macro perspective
108
INTRODUCTION
CONCEPT :
Enterprise choose to deal with its group
entities in preference to a non group entity
for gaining the benefit of group synergy

Pricing between associated enterprise(AEs)
with respect to transfer of goods, services,
know how

Transfer Pricing
Transfer pricing is an economic term, which
refers to the valuation process for
transactions between related entities.
Defined as the amount charged by one
segment of an organisation for product or
service that it supplies to another segment
of the same or related organisation
109

Transfer pricing

transfer pricing generally refers to prices
of transactions between associated
enterprises which may take place under
conditions differing from those taking place
between independent enterprises.
110
111
Transfer Pricing
Transfer pricing issues affect situations when
goods and services are provided, knowingly or
otherwise, on non-arms length basis by
related entities. The situations are
Transfer of Tangible Property
Transfer of In-tangible Property
Provision of Services
Provision of Finance
112
INTRODUCTION
RELAVANCE :
Revenue Authorities :
Obtain fair share of revenue in respect of
economic activities carried within its
jurisdiction
Management:
Decision making, groups performance
evaluation, fair profit of an enterprise, etc
113
114
INDIAN TRANSFER PRICING
REGULATION : A BIRDS EYE VIEW

Chapter X Special provision relating to
avoidance of tax (prior to 1.4.2002 section 92)

Pre TPR provisions Section 40A(2), Section
10A/B , Section 80 IA

Based on Raj Narain committee Finance Act
2001 incorporated detailed TP provisions in
INCOME TAX ACT,1961

CBDT has set up new post of Director General ,
International Tax

115
Indian situations & TP regulation
Increasing MNC activity Inbound & sourcing

Inbound key sectors : IT, Pharma, chemicals,
services, telecom , etc

Sourcing illustrative applicability :
BPO activity , global sourcing base for various
products

Accelerating trend of Indian companies setting up
bases abroad

116
TPR Developments since
Finance Act , 2001

1
st
APRIL 2001
Section 92 to 92F introduced
21
st
AUGUST
2001
Rules 10A to 10E notified
Documents prescribed
23
rd
AUGUST
2001
Circular No 12 issued
Section 40A(2)(b) vs TPR
Section 40A(2)(b) of IT Act
Payment to relative/person
having substantial interest in
taxpayers business
Applicable irrespective of
residential status
Only Expenditure
No specific documentation
prescribed
Burden of proof on the
Assessing officer
No specific report format

Transfer Pricing Regulation
Section 92 to 92 F of the IT Act.
Payment to associated
enterprise
Either one or both should be
non-residents
Both Income & Expenditure
Specific set of
documentation prescribed
Burden of proof on the
taxpayer
Form 3 CEB
117
SC Decision of CIT v. GlaxoSmithKline Asia Private Limited
118
TPR Developments since
Finance Act , 2001

December 2001
Circular No 14 issued
( Explanatory nature)
April 2002
Guidance note issued by
ICAI
May 2002
Finance Act 2002 notified
119
Key Operative Provisions :
Section 92 Income arising from an
international transaction to be
computed with regard to ALP
Section 92A/B/F r/w
Rule 10A
Meaning & Definition
Section 92C r/w
Rules 10B/C
Computation of ALP
Section 92CA Reference to Transfer pricing
officer (TPO)
Section 92D/E r/w
Rules 10D/E
Maintenance & keeping of
information & documents ,
Accountant's Report
120
Applicability of TPR :
2 Basic Conditions

There should be an international transaction

Such a transaction should be between two
or more associated enterprises (AEs) of
which at least one should be a non resident

2 BASIC CONDITIONS
121
IMPORTANT MEANINGS &
DEFINITIONS :
Section 92A Associated Enterprise
Section 92B International Transaction
Section 92C Computation of Arms length
price
Section 92F ( i ) Accountant
Section 92F (ii) Arms length price ( ALP)
122
IMPORTANT MEANINGS &
DEFINITIONS :
Section 92F (iii) Enterprise
Section 92F ( iiia) Permanent establishment
Section 92F ( iv) Specified date
Section 92F (v)

Transaction

123
Section 92: Charging Section

Any income arising from an international transaction shall
be computed having regard to ALP

In computing such income , any allowance for expense or
interest shall be determined having regard to ALP

ARRANGEMENT FOR ALLOCATION OR
CONTRIBUTION FOR COST OR EXPENSES

NON APPLICABILTY OF SECTION - when ALP has
the effect of reducing income or increasing loss on the
basis of entries made in books of accounts
Associated Enterprise

In order to be AEs the entities must be
Enterprises as defined in S.92F(iii)

92A (1) (a) Direct participation .

Management,
Capital, etc
A B
124

Indirect Participation

A I
Management,
Capital, etc.
B
Intermediary
125
[S.92A(2)(a)] Equity holding of not less than 26
%

40% 50%

Intermediary
A Ltd
Not less
than 26%

B Ltd

A Ltd

C Ltd

B Ltd
126
[S.92A(2)(b)] Equity holding of not less than
26 %

40% 50%
A Ltd controls not less than
26% of the voting power
of B Ltd & C Ltd.
B Ltd

C Ltd

A Ltd
127
[S.92A(2)(c)] Loan advanced

A Ltd
A Ltd given loan of INR
75 lakhs to B Ltd.
Book value of total assets
of B Ltd is INR 100 lakhs

B Ltd

128
[S.92A(2)(d)] Guarantees

A Ltd
A Ltd received loan worth
INR 100 lakhs from Indian
banks on the basis of
guarantees given by B Ltd to
the extent of 50 lakhs.

B Ltd

129
[S.92A(2)(e)] Board of Directors/Governing Board

A Ltd
Appoints more
than half of the
Board of Directors
or
one or more
Executive Director
of the Governing
Board

B Ltd

130
[S.92A(2)(f)]Board of Directors/Governing
Board

Appoints more Appoints two
than half of the executive
directors directors

A Ltd

B Ltd

Mr. X
131
[S.92A(2)(g)]Use of know-how, patents,etc.

A Ltd
A Ltd provides B Ltd
with technical know-
how for the
manufacture of
goods.

B Ltd

132
[S.92A(2)(h)] Supply of raw materials & price of
supply

Price & other
conditions influenced
by B Ltd.

A Ltd
(Manufact
urer)
B Ltd
supplies more
than 90% of
the raw
material
required for A
Ltd
B Ltd
Supplier
133
C Ltd
Supplies
to A Ltd.,
[S.92A(2)(i)] Sold to the enterprise or persons specified by the
other
enterprise

Price & other conditions influenced by B Ltd.

Price & other
conditions influenced
by B Ltd.

A Ltd
(Manufact
urer)
A Ltd sells
goods
to B Ltd
B Ltd
(Buye
r)
C Ltd
(Buyer
specifie
d by B
Ltd)
134
[S.92A(2)(j)] Control by individual/relative

Mr.P and Mr.R are relatives

Joint control

Controls Controls

Mr.P

Mr.R
A Ltd

B Ltd

135
[S.92A(2)(k)] Control by HUF/members of HUF

Controls Controls

HUF -
P
Mr.R, a
member of
HUF P or
relative of
Mr.R.
A Ltd

B Ltd

136
[S.92A(2)(l)] Control by Firm/AOP/BOI

A -
Firm
Not less
than 10%

B
Firm
137
138
Section 92A : Associated Enterprise
An Enterprise
which directly or
indirectly
participate in
Management or
Control or Capital
(M C C) of the
other Enterprise

( Section 92A (1)(a) )
DIRECT INDIRECT

A
B
M
C
C
A
M
C
C
I
M
C
C
B
139
Section 92A : Associated Enterprise
AEs in which one
or more persons
participate, directly
or indirectly,
in M C C of more
than one Enterprise

(section 92A( 1 )(b) )
COMMON M C C

A
B
C

140
Section 92A (2) : Deemed Associated
Enterprise
1. Holding of shares carrying 26% or more
voting powers
2. Common ownership- Holding of shares
carrying 26% or more voting powers in
more than one enterprises
3. Advance of loan not less than 51% of the
total assets of the borrowing company
4. Guarantees not less than10% of the total
borrowings on behalf of the borrower

141
Enterprise ...
5 Appointment of more than half of the BOD or
members of the governing board or appointment
of one or more executive directors or members

6 Common appointments

7 Total dependence on an enterprise possessing
exclusive rights for manufacturing or processing
of goods or articles or carrying on business using
know how, patents, copyrights, trade marks,
licenses, franchise , etc

142
Enterprise ...
8 Dependence , up to 90% or more for the
raw materials & consumables , on another
enterprise
9 Influence on prices for goods or articles
manufactured or processed & sold to an
enterprise
10 One individual ( or his/ her relative jointly
or separately) controlling two different
enterprises
143
Enterprise ...
11.One HUF (or member or relative of
member jointly or separately) controlling
different enterprises

12. Enterprise holding not less than 10%
interest in firm / AOP / BOI

13. Relationship of mutual interest as may be
prescribed

144
Section 92B:International Transaction
Means transaction between two or more AE ,
either or both of whom are non residents, in the
nature of :
1. Sale of products
2. Purchase of products
3. Provision of services
4. Lending or borrowing
5. Cost sharing arrangements
6. Leasing & hiring of assets,etc

Transaction
Transaction:
Defined in 92F(v)
Includes arrangement
understanding
action in concert
Whether formal or in writing
Whether intended to be enforceable by legal
proceedings
Definition
Is in addition to normal ordinary meaning

145
146
Other Definitions u/s 92F :
92F( i ) Accountant As per sec 288(2)
92F( ii ) ALP Price in uncontrolled condition
other than for AE
92F( iii ) Enterprise Person (including PE of such
person)
92F( iiia ) Permanent
establishment
Fixed place of business through
which business is wholly or
partly carried on
92F( iv ) Specified date Due date as per section 139(1)
explanation 2
92F( v ) Transaction Arrangement,understanding or
action in concert
147
Other Definition in Rule 10A :
10A (a) Uncontrolled
transaction
Transaction between
enterprises other than AE,
whether resident or non
resident
10A (b) Property Includes goods,articles or
things & intangible property
10A (c) Services Includes financial services
10A (d) transaction Includes a number of closely
linked transaction
148
Section 92C :Computation of ALP
ALP shall be determined having regard
to :
1. Nature of transaction or class of
transaction
2. Class of associated enterprise
3. Functions performed
4. Other relevant factors as may be
prescribed by CBDT

149
Methods for Computation of ALP
1. Comparable uncontrolled price (CUP)
2. Resale price method (RPM)
3. Cost plus method (CPM)
4. Profit split method (PSM)
5. Transactional net margin method (TNMM)
6. Such other method as may be prescribed by the
Board
ALP shall be most appropriate method (MAP)
out of the above
150
Division of ALP based on :
Transaction methods Other methods /
transactional profit
methods :

CUP

RPM CPM
PSM
TNMM
I NTER
NAL
EXTER
NAL
151
Comparable Uncontrolled Price : CUP
Method Rule 10B(a)

Where the price charged for goods, services or property
transferred in a controlled transaction is compared to a
CUT ( comparable uncontrolled transaction )

CUT is
identified
CUT is adjusted to a/c
For differences in
IT & CUT
Adjusted
Price of
CUT is ALP
152
Types of transactions considered appropriate for
adoption of CUP method
Transfer of goods
Provision for services
Intangibles
Loans,provision of finance
This method is particularly good where an independent
Enterprise Sells the same product or service as sold
between two Associated enterprises
153
Resale Price Method : RPM
Rule 10B(b)
Where price @ which goods/property purchased or services
obtained from AE is resold to unrelated party is identified.

GP margin of CUT is reduced from such resale price to
arrived at ALP
10 A
12
AE
NORMAL GP
as per CUT is 10%
15 (-) 10%
=13.50
13.50 (-)
EXPS
ALP
15 xyz
154
adoption of RPM method
Distribution of finished products or other
goods involving no or little value addition

Where the entity performs basic sales ,
marketing & distribution functions

Where goods are further processed or
incorporated into other products
155
Cost Plus Method : CPM (C+)
Rule 10B( c )

(To consider fn
& other diff. )

Direct & indirect cost of production in respect of goods/services
sold to AE is identified , to which normal GP mark up in CUT
is added to arrive @ ALP
DC 10
I D 05
---
TC 15
==
STRUCTURE
A
AE
GP
10%
CUT
ALP
156
adoption of CPM method
Provision of services
Contract manufacturing
Joint facility arrangement
Transfer of semi finished goods
Long term buying & selling arrangements
Subsidiary or
peripheral
157
Profit Split Method : PSM
Rule 10B (d)
1. PSM applied when there is transfer of unique intangibles
2. Multiple IT so interrelated that they can not be evaluated
separately for the purpose of determining ALP
A
9
AE
6
Combined NP
of AEs
15
Relative contribution of each AE to be identified based on:
Functions performed
Assets employed or to be employed
Risk assumed
Reliable external market data
158
adoption of PSM
Integrated services provided by more than
one enterprise
Transfer of unique intangibles
Multiple inter related transactions , which
cannot be separately evaluated
The profit should be split on an economically valid basis
That reflects the functions & risks of each of the parties
159

Transaction Net Margin Method : TNMM
Rule 10B (e)

NP margin in IT with AE established based on cost incurred
sales effected, assets employed, etc
NP margin in CUT is calculated based on the same criteria
NP margin in CUT situations is adjusted to factor open market issues
NP margin of AE transaction established/ compared with CUT NP

A
10%
AE
X
Y
8%
ALP shall be based on 8%margin
160
adoption of TNMM
Provision of services
Distribution of finished products where
resale price method cannot be adequately
applied
Transfer of semi finished goods
In India,in majority cases, method selection process would
lead to selection of TNMM as MAM, due to Non Availability
of requisite data for other methods.

161

Computation Related Documents
Degree of Similarity Required Under Various Methods:
Methods to
be used
PRODUCT FUNCTIONS
RESOURCES
RISKS COMPLEXITY
CUP

CPLM/RPM

TNMM

PSM

162
Computation Related Documents
Degree of Similarity Required Under Various Methods
(Contd.):
CUP - High comparability of Products and Risks.

CPLM and RPM High comparability of Functions and Risks.

TNMM High Comparability of Risk and Resources. Functions also important.

PSM Exceptionally used in complex cases, such as presence of intangibles.
In India, in majority cases, method selection process would lead to
selection of TNMM as MAM, due to Non Availability of requisite
data in other methods.

163

Rule 10C provides for following factors for selecting MAM:

Nature of International Transaction
Class of Associated Enterprise
(e.g. Distributor, Contract Mfgr. Etc.)
Functions Performed, Assets Employed, Risks Assumed.
Availability, Coverage and Reliability of Data
Extent to Which Reliable and Accurate ,Adjustments Can Be Made.
Nature, Extent and Reliability of Assumptions Required.
Most appropriated method ( MAM) for ALP
Factors for Selection of MAM [Rule 10C R.W. S. 92C]:
Most Appropriate Method must be Reliable Measure of ALP
Most appropriate Method - Rule 10C
In selecting the most appropriate method as specified in sub-rule (1) of Rule 10 C,
the
following factors shall be taken into account, namely:
the nature and class of the international transaction;
the class or classes of associated enterprises entering into the transaction and
the functions performed by them taking into account assets employed or to be
employed and risks assumed by such enterprises;
the availability, coverage and reliability of data necessary for application of
the method;
the degree of comparability existing between the international transaction and
the uncontrolled transaction and between the enterprises entering into such
transactions;
the extent to which reliable and accurate adjustments can be made to account
for differences, if any, between the international transaction and the
comparable uncontrolled transaction or between the enterprises entering into
such transactions;
the nature, extent and reliability of assumptions required to be made in
application of a method.

164
165
41
167
Reference to Transfer Pricing Officer ( TPO)
(Section 92CA):

AO (with CIT prior approval ) may refer
computation to TPO

TPO : Authorized JCIT / DCIT / ACIT

Binding nature of his direction to AO

ALP computed by Assessee (+/-) 5% of price
determined by AO NO adjustment (Circular no
12/2001 dated 23-08-2001)

Power of Board to make safe harbour
rules (Section 92CB)
The determination of arms length price
under section 92C or section 92CA shall be
subject to safe harbour rules.

The Board may, for the purposes of sub-section
(1), make rules for safe harbour.

Explanation.For the purposes of this section,
safe harbour means circumstances in which the
income-tax authorities shall accept the transfer
price declared by the assessee.
168
169
Documentation :
Section 92D r.w Rule 10D
Every person who has entered into an international transaction
shall keep and maintain prescribed information and documents.
(S.92D(1) ).

Prescribed the period for which such information and documents is
required to be kept and maintained is 8 years.[S.92D(2), Rule
10D(5)].

The information or documents so maintained can be called for
within a period of 30 days from the date of receipt of notice by the
assessee. The said period can be further extended by another 30
days. (S. 92D(3)).

Rule 10D(2) provides for exemption from documentation
requirements to the assessees, whose aggregate value as recorded in
the books of account, of international transactions entered into by
him does not exceed Rs. 1 crore.

170
PRESCRIBED DOCUMENTATION
Principal Documents [Rule 10D(1)]

Supportive Documents[Rule 10D(3)]

171
Principal Documents
ICAIs classification of Principal
Documents:

Enterprise-Wise Documents [clauses (a) to (c )
of Rule 10D(1)]

Transaction-Specific Documents [clauses (d) to
(h) of Rule 10D(1)]

Computation Related Documents [clauses (i) to
(m) of Rule 10D(1)]

172
Supportive Documentation [Rule 10D(3)]
The information and records maintained shall be
supported, to the extent possible by authentic
documents, e.g.:

1. Official publications, reports and studies and databases
from the Government of the countries of AEs.
2. Market research studies carried out and technical
publications brought out by institutions of national or
international repute
Price publications (e.g. stock market / commodity market
quotations)
173
Supportive Documentation [Rule 10D(3)]
Published accounts and financial statements of
AEs
Agreements / contracts in respect of transactions
with unrelated parties which are comparable with
the relevant international transactions
Letters/other correspondences documenting any
terms negotiated with related parties (i.e.
Associated Enterprises)
Documents issued for various transactions under
the accounting practices followed

Documentation
o Rule 10D has prescribed 13 different
information and documents that are to be
kept and maintained u/s 92D
o These documents can be broadly classified
as:
o Enterprise wise documents
o Transaction specific documents
o Computation related documents

174
Documentation
Documents containing the following information
should be maintained:
Ownership Structure
Details of shares
Profile of the group
Name, address, legal status, ownership linkages,country of tax
residence of the each of the enterprises
Nature of business /industry and market condition
Broad description of the business of the taxpayer,
Industry background
Business of associated enterprises

175
Documentation

Controlled Transactions
Nature and terms of international transactions,
Details of property transferred /services provided
Quantum and value of international transactions

Background documents
Record of economic and market analysis,
Forecasts, budgets or any other financial estimate

Factors for choosing the method employed to
determine ALP
Determination of ALP
Assumptions
Adjustments carried out

176
Documentation

Comparability, functional and risk analysis
Record of uncontrolled transactions along with analysis to
evaluate its comparability with international transactions
Record and evaluation of comparability of transactions
Description of functions performed, risks assumed and assets
employed
Selection of the transfer pricing method
Description of methods considered for determining ALP
Best method selected, along with reasons for selection

determine ALP
Assumptions

177
Documentation

Application of the transfer pricing method
Record of actual working of ALP.
Detail of actual working of the comparable data with respect to
ALP
Details of differences between comparable data and un-
controlled transaction
Mode of adjusting the factors
Assumptions, strategies, policies
Assumption, policies and price negotiations, if any, which
have critically affected the determination of ALP

determine ALP
Assumptions

178
Documentation

Supporting information
Official reports, publications, databases and studies from the
government in the country of residence of the AE, or any
other country, as relevant to the international transaction

Market research studies and technical publications brought
out by institutions of national or international repute

Correspondence documenting the terms negotiated between
the Aes.

determine ALP
Assumptions

179
180
ACCOUNTANTS REPORT : Section 92E
(Rule 10E)

Every person who has entered into an international
transaction shall obtain a report form an
accountant
Report shall be in Form 3CEB ( Rule 10E)
Accountant to certify the contents of annexure to
Form 3CEB as true &correct
Furnish such report before specified date
No requirement to furnish along with return of
income
181
Important clauses of 3CEB

Clause 8 Transaction in respect of tangible
property
Clause 9 Transaction in respect of intangible
property
Clause 10 Particulars in respect of provision of
services
Clause 11 Particulars in respect of lending or
borrowing money
Clause 12 Particulars in respect mutual agreement
or arrangement
Clause 13 Particulars in respect any other
transaction
Penalties

Section under the
Income-Tax Act.

Particulars

Penalty
271 AA Failure to maintain
documentation
2% of the value of each
international transaction
271 G Failure to furnish/submit
any information/document
to the transfer pricing
officer
2% of the value of the
international transaction
for each such failure.
271 BA Failure to furnish
accountants report
INR 1,00,000
271(1)(c) read with
explanation 7
Transfer pricing adjustment
considered as concealed
income
100-300% of amount of tax
on adjustments
182
183
Penalties for non compliance of TPR
Section
271(1)(C)
explanation
7
Addition made in computing
total income u/s 92C(4) shall be
deemed concealed income
100% -
300% of tax
sought to be
evaded
Section
271AA
Failure to keep & maintain such
information & documentation as
per section 92D
2% of value
of each
international
transaction
Section
271BA
Failure to furnish accountants
report as per section 92E
Rs. 1 LAC
Section
271G
Failure to furnish any
information or documents as
required u/s 92D(3)
2% of the
value of
transaction
for each
failure
Reasonable Cause
Sec 273B
Components of TPR

No

Yes

No
184
Is there and
internationa
l transaction

Transfer Pricing
Regulations not
applicable to the
transactions. No ALP
to be determined

Between
the AEs
Components of TPR

No

Yes

No
185
At l east 1
AE is Non-
Resident

Transfer Pricing
Regulations not
applicable to the
transactions. No ALP to
be determined

Are
International
transaction
at ALP ?
Adjustments to total
income is made
Levy of penalty
u/s 271(1)(c)
Some Landmark TPR rulings
Case law Important observations
Oracle India The Tribunal held that transfer pricing provisions, being
specific in nature, override the domestic tax avoidance
provisions concerning related party transactions.

Accordingly, if the Transfer Pricing Officer holds a
transaction to be at arms length, there can be no disallowance
under the pretext of excessive payment to related party under
the provisions of Section 40(A) of the Act
Canoro Resources, where it was held that the Transfer Pricing provisions, being
more specific override the general provisions.
186
Some Landmark TPR rulings
Case law Important observations
Vertex The Tribunal has affirmed that where a taxpayer has computed the arms
length price as per law, in 'good faith and with due diligence, penalty should
not be levied.

This comes as welcome relief to taxpayers subjected to arbitrary or
procedural penalty on transfer pricing adjustments.

Cargill India

The Tribunal had favored the taxpayer holding that where penalty was levied
for non-maintenance of documentation.

In this case, the Tribunal had ruled that Revenue has to call only for
specific and relevant information and not simply all information.

It further held that the penalty would not be justified if the Revenue does
not point out any specific default in complying with the documentation
requirements and does not consider any reasonable cause that the
taxpayer may have resulting in the default
187
188
Revision :
Applicability
Charging section
Deemed Associated Enterprises Situations
International transaction
ALP & Methods
TP METHODOLOGIES -PRACTICAL
ISSUES
189

Introduction

Methodologies and guidelines for selection of a method

Tested party

Practical issues arising in selection of a method

Practical issues in applying any particular method

SYNOPSIS
190
The law does not oblige a trader to make the maximum profit
that he can out of his transactions. It is the income in the hands
of the trader which is taxable. Any income he could have, but
not earned, is not exigible to tax as income [CIT v. A Raman
and Co. [1968] 67 ITR 11 (SC) ]

As long as prices at which international transactions are
entered into are ALPs, it is hardly relevant whether or not the
AE has ensured that the assessee makes reasonable profits
ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657

No businessman can be compelled to maximise his profits :
SA Builders 288 ITR 1 SC

Introduction
191
ALP in relation to an international transaction shall be
determined by one of the five methods

Being the most appropriate method (MAM)

MAM shall be determined having regard to
- Nature of transaction
- Class of transaction
- Class of AEs
- Functions performed by AEs
- Other relevant factors as may be prescribed by Board

Section 92C (1) Methodologies
192
Other relevant factors as may be prescribed by Board as per Rule 10C(2)
are

- Nature and class of international transaction (I.T.)
- Class/classes of AEs entering into transaction and FAR performed
- Availability/coverage/reliability of data necessary for application of
method
- Degree of comparibility existing between I.T.s and U.T.s or between the
enterprises entering into such transaction
- Extent to which reliable/accurate adjustments can be made to account for
differences between I.T.s and U.T.s or between the enterprises entering
into such transaction
- Nature, extent and reliability of assumptions required to be made in the
application of a method

Section 92C (1) Methodolgies
193
ALP to be determined with reference to an international transaction
as per sections 92(1) and 92C(1)

MAM shall be the method which is best suited to the facts and
circumstances of each particular international transaction as per Rule
10C(1)

As per Rule 10A(d), transaction includes a number of closely linked
transactions

As per Section 92F(v) transaction includes an arrangement,
understanding or action in concert whether or not

- Same is formal or in writing
- Same is intended to be enforceable by legal proceeding

Section 92C (1) Certain aspects
194
Section 92 C(3) provides for determination of ALP by AO

If on basis of material/document/information in his possession

If he is of opinion that

- Price charged/paid in an international transaction has not been determined in
accordance with sub sections (1) & (2)
- Information/documents have not been kept and maintained in accordance
with sec 92D(1) and Rule 10D
- Information/data used in computation of ALP is not reliable/correct
- Assessee has failed to furnish information/document

Section 92C (3) ALP determination by AO
195
However, the power to determine ALP can be exercised only subject to
the conditions of section 92C(3)

Circular No.12 of 2001 makes it clear that AOs can have recourse to the
above power only
- under aforesaid circumstances (a) to (d) of sec 92C(3)
- in the event of material information or document in his possession
- on the basis of which an opinion can be formed that any such circumstance
exists

Circular provides that in other cases, the value of international
transaction should be accepted without further scrutiny

196
The aforesaid power can be exercised only during
the course of assessment proceeding

Before determining ALP, AO has to give a show
cause notice as to why ALP should not be
determined on the basis of material or information
or document in his possession

197
Is it possible to take a stand that no method is applicable and hence TP is not
applicable?

- Importer and its foreign collaborator, even if assumed to be related persons,
their transaction value is to be accepted, when that relationship did not
influence price CCE v. PRODELIN India (P.) LTD (2006) 202 ELT 13 (SC)

- By simply saying that none of the methods prescribed can be applied and citing
excuses for the same, does not absolve an assessee of his statutory duty in
determining ALP as per law : Starlite 192 Taxman (ii) [Mum ITAT] 6 Taxman.com
41

Can assessee change the method from one year to another year
- When there is no change in facts & circumstances
- When there is a change

Can AO/TPO change the method as aforesaid?

198

Considerations for selecting a method

- The assessee is free to adopt any method as prescribed by
law, if it considers that method as the most appropriate
method : UCB India Pvt Ltd 121 ITD 131 (Mum.)

- Consideration as to which method will be more beneficial to
the Revenue authorities is certainly not germane to the
selection of most appropriate method : ACIT v. MSS India
(P) Ltd. [2009] 123 TTJ (Pune) 657

199
Transaction method v. profit method

- Use only profit methods when transactions methods fail
[ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune)
657]

- TNMM is the appropriate method in case of service PE
:. Morgan Stanley and Co. Inc. (2007) 292 ITR 416
(SC)

- Trend of OECD Leans more towards TNMM
200

- the tested party will be the participant in the controlled transaction

- whose operating profit attributable to the controlled transactions
can be verified

- using the most reliable data and requiring the fewest and most
reliable adjustments, and

- for which reliable data regarding CUTs can be located.

- Consequently, in most cases the tested party will be least complex
of the controlled taxpayers and will not own valuable intangible
property or unique assets that distinguish it from potential CUTs.

Tested Party : Sec. 1.482-5 of the US TP
Regulations

201
While determining MAM, it is first necessary to select the tested party and
the tested party will be the least complex of the controlled taxpayer and will
not own valuable intangible property unique assets that distinguish it from
potential CUTs: Development Consultants (P) Ltd. (2008) 115 TTJ (Kol)
577

Tested party normally should be the party in respect of which reliable data
for comparison is easily & readily available and fewest adjustments in
computations are needed. It maybe local or foreign entity, i.e., one party to
the transaction : Ranbaxy [2008] 110 ITD 428 (Delhi)

If the taxpayer wishes to take foreign AE as a tested party, then it must
ensure that it is such an entity for which the relevant data for comparison is
available in public domain or is furnished to the tax administration. He is not
then entitled to take a stand that such data cannot be called for or insisted
upon from the taxpayer : Ranbaxy(supra)
Tested Party
202
Aggregating of all foreign AEs as tested parties in taking their margin of
profit for comparison with some American companies and six other
companies with location not disclosed is not acceptable : Ranbaxy 110 ITD
428 (Delhi)

The least complex party needs to be selected as the tested party for the
purpose of carrying out Arms Length analysis. The reasons for testing the
margins of a less complex party is that the simpler party requires a fewer and
more reliable adjustments to be made to its operating profit margins. A
foreign entity is unsuitable as a tested party because it is difficult to compare
in different jurisdictions since the facts and circumstances are different in
each geographical location. Moreover, it is difficult to obtain all relevant
facts that could lead to a proper FAR analysis. Further the relevant data
required to make the requisite adjustments is also very difficult to obtain in
relation to the foreign comparables : Global Vantedge Pvt 2010-TIOL-24-
ITAT-DEL
Tested Party
203

CUP method

Resale Price method

Cost plus method

Profit split method

Transaction net margin method

METHODS
204
When CUP may be chosen

CUP is rejected in Eli Lilly and Co. and Subsidiaries v. CIR (84 US Tax Court
Reports 996) as noted in UCB India 121 ITD 131 (Mum.)

As difference arising due to

(a) credit terms;
(b) supply of raw material;
(c) packaging;
(d) product quality;
(e) patents.

between controlled and uncontrolled transactions could not be accounted
for by a reasonable number of adjustments.

Practical issues in CUP method
205
Aggregation of transactions

a) Yes : Rule 10A(d) transaction includes a
number of closely linked transactions.

a) No :

- Development Consultants 23 SOT 455 Kol
- UCB India 30 STO 95 Mum
- Ranbaxy 110 ITD 428 (Delhi)

Practical issues in CUP method
206
Gharda Chemicals Ltd 130 TTJ 556 Mum

- Whole sale price and retail price are not comparable

- Price operated in UK/Australia cannot be compared
with that of USA

Practical issues in CUP method - CUT
207
Can Market Quotations be used as CUT?

- London Metal Exchange quotations provide the most reliable
prices at which uncontrolled comparable transactions are
entered into : MSS India (P) Ltd. [2009] 123 TTJ (Pune) 657

- LIBOR could be taken : Perot Systems 2010-TIOL-51-ITAT-DEL

- Certificate of Market Committee produced is public document
forming record of public body & rates disclosed therein to be treated
as authentic : Rameshwar Das [2010] 30 VST 531 (P&H) HC

- Rates published in news papers like Economic Times cannot be used
for benchmarking : Suresh Kumar Bajoria vs. Income Tax
Officer [2008] 113 TTJ (Jp) 364

Practical issues in CUP method - CUT
208
Gharda Chemicals Ltd 130 TTJ 556 Mum

External CUP contemplates comparison of price charged by assessee from its AE
with open market price in that country from transactions between the unrelated third
parties.
Take price at which such goods are imported by others on an average basis.
Such an average price should be some realistic price representing the price from the
whole or the large part of whole of the imports made in USA of this product and not
some isolated or a stray transaction.
If product A is imported by 100 parties at rates ranging between 50 US$ to 70US$
from different countries, lowest price of 50 USD cannot be taken as ALP.
Rather in such a situation the average price of 60 USD should be taken as ALP.
A third party report cannot be the sole basis for determining the ALP on CUP
method for the reason that the third party is not a Government Agency of USA,
which could vouch for the price
The third party, in turn, may have relied on certain stray instance
Reliance on such selective data is not best guide for the determination of ALP.

Practical issues in CUP method ALP
determination
209

Libor rate to be increased by average basis pont : Perot
Systems 2010-TIOL-51-ITAT-DEL

CUT price may be suitably enhanced for

- significant service in producing the raw material and
- freight and insurance which is paid by the AE.

[ACIT v. MSS India (P) Ltd. [2009] 123 TTJ (Pune)
657 ]

Practical issues in CUP method - FAR
210
When assessee enters into the raw material purchase
transaction with the AE at an ALP, it is of no
consequence whether or not he makes sufficient
profits on manufacturing products from such raw
material [ACIT v. MSS India (P) Ltd. [2009] 123
TTJ (Pune) 657 ]

Practical issues in CUP method - Others
211

Year of data
Number of comparables
Different geographical locations
Loss making companies as CUTs
Super profit companies as CUTs
Turnover filters
Companies with controlled transactions as CUTs
Internal cut v. External cut

Practical issues in TNMM
212

Search process - filters
Application of TNMM Entity level or transaction
level
Operating costs/margin
FAR analysis
213
Year of data : Rule 10B(4) read with proviso [See Rule 10D(4) also]

a) Same year

- CITv. Denso Haryana (P.) Ltd. [2010] 190 Taxman 389 (Delhi) HC
- Aztek 107 ITD 141 (Bang.) (SB)
- Mentorgraphics 109 ITD 101 Delhi
- Philips 119 TTJ (Bang) 721
- Customer Service 2009-TIOL-424-ITAT-DEL
- Skoda 122 TTJ 699
- Honewell 2009-TIOL-104-ITAT-PUNE [Future year cannot be
taken]

b) Different year - Development Consultants 23 SOT 455 Kol577

214

Number of comparable companies

a) Even one comparable will do

1. Rule 10B(1)
2. ICAI guidance note
3. Vedaris Technology [2010] 131 TTJ (Del) 309
4. Mentor Graphics [2007] 109 ITD 101 (Delhi)

b) There should be reasonable number of CUTs

Practical issues in TNMM CUT selection
215
Primary filters

Data not update
(i) no directors report
(ii) no notes to accounts
(iii) insignificant data
(iv) no segment information

Related party transactions

Geography of operation exports < 25%

Consistent losses

Functionally different

Turnover ie size

Exceptional year of operation

Practical issues in TNMM Search process
216

Secondary filters

Salary costs being < 25%

R & D costs greater than 5%

Forex filter

Trading activity filter

Asset filter when assets > revenues

Practical issues in TNMM Search process
217

Different geographical area

Adjustments merely for volume off take, credit
period and credit risk, though material are not
sufficient to make the sale price to AE in Thailand
comparable with the sale to unrelated party in
Vietnam unless an adjustment for differential
end user price in two countries is made : Intervet
India (P.) Ltd. v. ACIT 130 TTJ 301 Mum

218
Loss making companies

- OECD draft notes dt 10.05.2006 has accepted to exclude loss as
well as high profit making companies where tax payer is a captive
enterprise

- A business organization with negative net worth cannot be treated
at par with a normal business organization : Quark Systems Pvt Ltd
Vs ITO 2010 TIOL 31 Chandigarh

- However, merely because a comparable is making loss, it cannot
be excluded from the list of comparables : Quark Systems (supra)

- Loss and competition are normal incident of business and merely
on above factors, exclusion is not justified : Sony India [2008] 114
ITD 448 (Delhi)

219

Companies making extra ordinary profits should
be excluded :

- Quark Systems Pvt Ltd Vs ITO 2010 TIOL 31
Chandigarh

- Philips Software v. ACIT 119 TTJ (Bang) 721

- E-Gain Communication [2008] 118 TTJ (Pune) 354

220
Turnover filter

- Is captive service provider immune from size of
turnover?

- Turnover of Rs 1 crore to infinite is a not reasonable
classification as turnover base : Quark Systems Pvt Ltd
Vs ITO 2010 TIOL 31 Chand

- Oversized companies to be avoided E-Gain
Communication [2008] 118 TTJ (Pune) 354

- Guidance Note of ICAI

221
Can company with controlled transactions be
considered?

a) Not even one such transaction is acceptable

- Mentor Graphics 109 ITD 101 Delhi
- Philips 119 TTJ (Bang) 721

b) 10% to 15% of such transactions is tolerable

- Sony 114 ITD 448 (Delhi)

222
Internal cut or external cut : In case external
comparables are not available due to lack of data in
public domain, the AO may accept internal
comparables including segmental data or internal
TNMM : UCB India Pvt Ltd 121 ITD 131 (Mum.)

Is assessee estopped by companies originally
selected?
No : Quark Systems Pvt Ltd Vs ITO 2010 TIOL 31
Chand

223

When information available in public domain is not
sufficient to make the comparisons possible, it is
inevitable that some approximations and reasonable
assumptions are to be made : Skoda Auto India (P.)
Ltd. 122 TTJ 699 Pune

224
TNMM evaluates profitability of transactions rather than profitability
of an enterprise.

Transaction of different nature cannot be aggregated for the
purpose of comparison under TNMM.

In practice though the profitability of comparable entities is used to
benchmark the international transactions of taxpayers, however, in
such a scenario an underlying assumption overrides the analysis for
the lack of data.

Acting assumption in such case is that due to a well designed
functional analysis only those companies are taken as comparables
which have undertaken homogeneous & comparable transactions.

Thus, in such a scenario, the profitability of the comparable
entities, in effect, represents the profitability of comparable
transactions.
Source : OECD TP guidelines 1995 clause 3.42 applied in Global
Vantedge Pvt Ltd 2010-TIOL-24-ITAT-DEL

225

Comparing the operational margin at entity level
cannot be termed as TNMM : UCB India 121 ITD
131 (Mum.)

TNMM to be applied on Entity level or transaction
level
226

Provision for future losses to be deducted :
Honeywell 2009 TIOL 104 Pune

TNMM as per Rule 10B refers to net profit and not
operating profit. Therefore, there is no scope for
reducing interest and other overheads : T Two
International Pvt Ltd 2010-TIOL-166-ITAT-MUM

Profit before depreciation may be taken for
benchmarking : Schefenacker Motherson [2009] 123
TTJ (Del) 509

Practical issues in TNMM Operating costs/margin
227
If high import content is necessitated by the
extraordinary circumstances beyond assessee's
control, may warrant an adjustment in operating
margin : Skoda Auto India 122 TTJ 699 Pune

Reimbursement of advertisement expenditure by
associated enterprise, Provision written back,
Balances written back, Insurance claim and Interest
received from customers for delayed payment
cannot be excluded from normal operating profits :
Sony India P. Ltd. [2009] 315 ITR (AT) 150 (Delhi)

Practical issues in TNMM Operating costs/margin
228
Intangibles and Risks : Make 20% adjustment as per
Sony India [2008] 114 ITD 448 (Delhi)

No blind adjustments without examination of vital
issues : Philips 2009 TIOL 123 Kar HC & Vedaris
Technology (P) Ltd. [2010] 131 TTJ (Del) 309

Adjustments should be made for risk, working capital
and R&D
- Mentor Graphics 109 ITD 101
- Schefenacker Motherson [2009] 123 TTJ (Del) 509
- E Gain Communications 118 ITD 243 Pune

Practical issues in TNMM FAR
229
Use of trademark and logo by domestic AE : Maruti Suzuki
India Ltd. [2010] 31 CAPJ 158

- Where use is discretionary : No adjustment

- Where use is mandatory : Appropriate payment should be
made by foreign AE, on account of the benefit it derives in the
form of marketing intangibles, obtained by it from such
mandatory use of its trademark and/or logo.

- Expenditure incurred by domestic AE on advertisement etc.,
need not be paid by foreign AE as long as such expenses dont
exceed what an independent person would have incurred in
similar situations

230
Start up assessee v. Established comparables
Adjustment towards idle capacity: Global Vantedge Pvt
2010-TIOL-24-ITAT

- Looking into the IT industries which were in booming
stage, a surplus capacity to the extent of 1/3rd of the
existing capacity is treated as normal in this industry in
anticipation of future growth in business and an
adjustment to the profitability of the comparables
should be made to the extent of 33.33%.

- the profitability of the comparables need to be adjusted
by the above %age to bring them to a level of
inefficiency that appellant operated at.
231
Is fact of AE suffering losses justification for lower
margin?

- No as per Gharda Chemicals Ltd Vs DCIT, 130 TTJ
556 Mum

- Yes as per DCIT v. M/s. Indo American Jewellery 131
TTJ (Mumbai) 163

- The total adjustment made to assessee together with the
ALP already reported by him cannot exceed the total
revenue earned by him and his AE from third party
independent clients : Global Vantedge 2010-TIOL-24-
ITAT-DEL

Practical issues in TNMM Other aspects
232
Can industry average/norm be used as a
benchmark?

- Yes as per CIT. v. DUA and associates P. Ltd.,
[2009] 316 ITR 224 (P & H) HC [Hotel industry
Non TP case]

- Report on the Indian BPO Industry prepared by
INGRES, a division of ICRA Ltd could be used to
benchmark marketing effort in the absence of any
other evidence : Global Vantedge Pvt 2010-TIOL-
24-ITAT

233
Can ALP margin be worked when assessee is
working as per Government regulations?

- Where no profits is inferable, there in no option
except to accept declared price [In Exxon Corpn. &
Affiliated Companies al v. CTC Memo 1993-616]

- Where payment is made to cane growers as per the
directions of the State Govt, assessee cannot be
accused of paying to the cane growers in excess of
the fair market price : CIT v. Manjara Shetkari
Sahakari Sakhar Karkhana [2008] 301 ITR 191 (Bom)
HC

234
Is TPO bound by acceptance of transaction by other
department?

- RBI's approval does not put a seal of approval as per
Perot Systems Tsi 2010-TIOL-51-ITAT-DEL

- Declaration in customs does not bind the assessee in TP
proceedings DCITVs M/s United Racing & Bloodstock
Breeders Pvt Ltd 2009-TIOL-423-ITAT-BANG

- Circ No.6 dated 6
th
July, 1968 with reference to sec 40A(2) :
payment approved by one wing of Government, cannot be
treated as unreasonable by another wing of the same
Government.

235

OECD : Customs adjustment cannot be automatically taken

Customs TP Income tax TP
Intangibles are ignored Intangibles are considered
Functional analysis is not
recognised
Functional analysis is
recognised
Post import adjustments are
not usually carried out
Post import adjustments are
usually carried out

Aggregation of transactions is
not accepted
Aggregation of similar
transactions is acceptable
236
Is TPO bound by acceptance of transaction by other department?

- Agreements having been approved by the various Government authorities
from time to time, the terms thereof could not be regarded as unreasonable
or excessive and the same, in any case, cannot be considered as sham or
collusive merely on the basis of surmises and conjectures.

- Sheraton International Inc. vs. DDIT (2007) 107 ITD 120 (Delhi) :
- CIT vs. Lucas TVS Ltd. (1997) 226 ITR 281
- CIT vs. Sriram Pistons and Rings Ltd. (1990) 181 ITR 230 Del
- The expenses have been incurred after obtaining FIPB approval from the
R.B.I cannot be said to be not at ALP : KLM Royal Dutch Airlines v. ADIT
[2007] 292 ITR 49 [Delhi HC]

237
Adoption of operating margin?

- To be applied only on international transactions and not on all transactions :
IL Jin Electronics 2010 TIOL 151 (Mum Tri)

- TNMM should be applied by working out the average net profit. The
adjustment should be worked out by reducing the net profit declared by the
assessee from the gross sales and then divide the same in the controlled and
uncontrolled sale and apply the net profit rate : T Two International Pvt
Ltd 2010-TIOL-166-ITAT-MUM

- Revenue earned by assessee from servicing independent clients, without
involvement of related party should not be benchmarked. The proportionate
costs attributable to such revenue should be ignored while computing ALP :
Global Vantedge Pvt Ltd 2010-TIOL-24-ITAT-DEL

238

Is TP applied on cost sharing?

- Section 92(2)

- OECD Guidelines on TP [noted in ABB Ltd., In Re [2010] 322
ITR 564 (AAR)]

each participant in a CCA would be entitled to exploit his
interest in the CCA separately as an effective owner thereof
and not as a licensee, and so without paying a royalty or other
consideration to any party for that interest. Conversely, any
other party would be required to provide a participant proper
consideration (e.g., a royalty), for exploiting some or all of
that participants interest

239

Is assessee/AO/TPO bound to adopt same ALP
margin as earlier year when facts have not changed?

- Mandate to use contemporaneous data : Rule 10B(4)

- In absence of any change in factual position, profit
rate declared and accepted in preceding years
constituted a good basis for working out gross profit
rate as per CIT v. Inani Marbles (P) Ltd. [2008]
175 Taxman 56 (Raj.)

240

How is IPR to be dealt with in TNMM?

- The income arising from the transfer of its right, title
and interest in and to the trade-marks is taxable in India
under the Income-tax Act, 1961. 'Independent valuation
report' obtained by the applicant may be accepted by the
department if it is found true and correct on
examination : 2008 - TMI - 4676 - AAR

241
| 242
IS THERE A TIME LIMIT FOR MAKING TP REFERENCE?
Limitation for
initiating scrutiny
assessment
Sep 30
2011
Limitation
for initiating
TP audit
Dec 31
2011
Limitation for
completion of
TP audit
Oct 31
2012
March 31
2019
Date till which
documentation is
required to be
maintained
Deadline for
maintaining
documentation,
filing tax return
and
accountants
report
Sep 30
2010
AY 2010-11
Second proviso to Sec 153(1) during the course of proceeding for the assessment of total
income, a reference u/s.92CA(1) is made
| 243
TP ASSESSMENT BY JDIT VALIDITY?
Explanation to section 92CA(7) For the purposes of this section, Transfer Pricing Officer
means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner
authorised by the Board 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

Sec 2(28C) - Joint Commissioner means a person appointed to be a Joint Commissioner of
Income-tax or an Additional Commissioner of Income-tax u/s.117(1)
Sec 2(9A) - Assistant Commissioner means a person appointed to be an Assistant
Commissioner of Income-tax or a Deputy Commissioner of Income-tax u/s.117(1)

Sec 2(28D) - Joint Director means a person appointed to be a Joint Director of Income-tax
or an Additional Director of Income-tax u/s.117(1)
Sec (19C) - Deputy Director means a person appointed to be a Deputy Director of Income-
tax u/s 117(1)
Notification by CBDT authorising JDITs as TPOs Validity in view of provisions?
| 244
VALIDITY 133(6)
INFORMATION
Second proviso to sec.133(6) Provided
further that the power in respect of an inquiry,
in a case where no proceeding is pending,
shall not be exercised by any income-tax
authority below the rank of Director or
Commissioner without the prior approval of
the Director or, as the case may be, the
Commissioner
Validity of centralized collection of
information and distribution to various
assessment circles
| 245
AE TRIGGER
Sec 92A(1) AE definition - Participation in management or control or capital of
other enterprise
Sec 92A(2) deemed to be AE - 12 triggers
CBDT clarified that falling under 92A(2) is necessary to be treated as AE
Will it hold good even if there is no participation in management or control or
capital
Usage of for the purpose sub-section (1) in sec 92A(2)
Principle of deeming fiction and purpose interpretation
Sec 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 will cover all customers? What words to be supplied to
interpret?
| 246
TRANSFER PRICING -
UNLIMITED
Ranbaxy
Fab India
| 247
IS PROFIT SHIFTING INCENTIVE A PRE-REQUISITE?
Aztec software (5 member spl bench)
Necessary and expedient; Tax avoidance need not be
established before reference
TP reference is valid even if unit is enjoying tax holiday
Philips software x MSS India
Indo-American Jewellery
Coca Cola India
Pure domestic transaction between project office in India
(status is non-resident) and Indian co (AE)
| 248
TP NOT TO APPLY IN THE ABSENCE OF CHARGE
Dana Corporation (AAR)
Amiantit International (AAR)
Absence of charge due to failure of computational
provisions
Did not consider Sec 47 exemption
Vanen burg (AAR)
Transfer not liable to tax in India as per DTAA
provisions
| 249
TP VS OTHER PROVISIONS
40A vs TP provisions
Jurisdiction of AO vs TPO
Aztec Software
Oracle India
45(3) vs TP provisions
General vs Specific
Canoro Resources

| 250
TP AND 10A/10B
Tweezerman India Beware of super profits!
More than ordinary profits in eligible business due to close relationship with
any other profits sec 80IA(10)
I-gate : Suo motu TP adjustment
92C(4): Where an arms length price is determined by the Assessing Officer
u/s.(3), the Assessing Officer may compute the total income of the assessee
having regard to the arms length price so determined :
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
However, realization in foreign exchange condition to be met for availing 10A
deduction
| 251
AMENDMENT TO 5 PERCENT ADJUSTMENT
Position prior to amendment - 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.
Plethora of decisions that 5 percent is
available as a standard adjustment even if
price is out of the 5 percent range
Sony India, Development Consultants, Philips
Software

| 252
AMENDMENT TO 5 PERCENT ADJUSTMENT..2
Amendment with effect from 1.10.2009 - 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; Provided further that if the variation between the
arms length price so determined and price at which the international transaction has actually
been undertaken does not exceed five per cent of the latter, the price at which the
international transaction has actually been undertaken shall be deemed to be the arms length
price
Memorandum explaining Finance Bill, 2009 amendment is effective for
all assessments done after 1.10.2009
Amendment prospective or retrospective?
SAP Labs India Pvt Ltd (Bang ITAT) Amendment applicable from AY
2009-10 only
Should it be read as AY 2010-11 and subsequent years only?
| 253
TP AND ROYALTY
Maruti Suzuki and the Concept of Reverse
royalty
TP risk to import distributors on possible
disallowance of advertisement expenditure
Mere arms length revenue not sufficient
Expenditure also to be at arms length
Royalty on sales and claim of bad debts
CA Computer Associates - Bad debts written off
cannot be a factor to determine arms length
nature of royalty
RBI ceiling rates not accepted as benchmarks
Coca cola India; Perot systems
| 254
TP AND INTEREST ON LOANS
Loan vs Quasi equity Perot Systems
PLR vs LIBOR VVF
Netting off receivables Boston Scientific
Loan vs Trade receivables Nimbus
communications

Promoters guarantee to foreign subsidiary
GE Canada ruling and implicit guarantee
| 255
DEVIATING FROM 3CEB AND
DOCUMENTATION
Quark systems
Company selected in own documentation can be
sought to be excluded
AM Todd co
Spot rates inadvertently taken in 3CEB
| 256
BENCHMARKING ISSUES
Rejection of TP documentation without
reasons Mentor graphics, Indo american
Jewellery
Tested party Ranbaxy x Development
consultants
Contemporaneous search Philips, Toshiba
Aggregation of transactions Star India,
Ranbaxy
Previous year data Customer Service
Subsequent year data Denso Haryana
Different year ending Honeywell
Related party transactions Sony India;
Philips
| 257
BENCHMARKING ISSUES
Loss making comparables Sony India
Entity wide TNMM and segmentals UCB
Business model differences and adjustments
Skoda auto
Adoption of cash profits as Profit Level Indicator
(PLI):Schefenecker
Foreign exchange fluctuation is operating income
SAP labs
Expense reimbursement is operating income
Sony India, Chrys capital
Recovery for expenses vs rendering of service
Zydus Altana Health care
| 258
TP IN THE CUP
Patented vs Generics UCB, Cheminova
Spot rates at the time of entering into contract AM Todd
Rates stated in expert report as CUP Gharda chemicals
Industry average rates Aztec, 3Global services, Essar
Market/Geographical comparability Gharda, Intervet, Dufon
Retail vs wholesale Gharda, Dufon
Comparison on weighted average price of all tested
transactions in the year - Dufon

Samsung Electronics - Karnataka High Court
Textronics US
100 percent
French Co.
USA
Samsung India
Korea
India
Samsung
Korea
France
Import of shrink wrapped
software
Karnataka High Court decision
Payer cannot determine the taxability in India
of Non-resident (No reference to CBDT
Circulars by HC)
Withholding tax obligation relieved only by
application and Certificate / Order from the
Tax authorities
Taxability of software import transaction per se
not dealt with
Relied on its own interpretation of Supreme
Court decision in A.P. Transmission
Corporation
Current Position
Hearing before Supreme Court fixed in August
2010
Payment of demand stayed
259
259
Van Oord ACZ India (P) Ltd. vs. CIT Delhi HC
260
On VO Indias application for Nil withholding on
reimbursements of mobilization, demobilization costs to
Netherlands Parent Company, the Tax Authorities:
Directed tax withholding at 11 percent
Sum disallowed u/s 40 (a) (i) n absence of thereof
Delhi High Court ruled:
VO India was not liable to deduct tax under Section
195(1) since the payments were mere
reimbursements and not income
Obligation to withhold tax is only when the payments
are income chargeable to tax in India
Karnataka HC decision in Samsung not followed
Delhi HC in Maharishi Housing is on same lines
260
Prasad Production Chennai Tribunal (SB)
261
The SB deviated from the decision in Samsung (Kar HC) and held as
under:
SC decision in A.P Transmission related to sums chargeable to tax
including income embedded in the sums paid
On proper construction of SC decision, witholding tax obligation is
attracted only on payments to non-resident which are liable to tax in
India - not otherwise
There is no basis to contend that Payer cannot determine the tax
liability of the Payee qua the payments proposed
Certificate from a CA is an alternate procedure to Section 195(2) as
laid down by the CBDT Circulars
The withholding tax process is tentative and is subject to assessment
thereby protecting interest of all parties involved
261
E*Trade USA
E*Trade
Mauritius
HSBC Violet
Mauritius
IL&FS
India
WOS
AAR Ruling
CBDT Circular No. 789 applies and the Certificate of
Residence is relevant to determine beneficial ownership /
confer treaty benefits
The SC in Azadi Bachao found no legal taboo against
treaty shopping
The motive does not impact legality or validity of the
transactions
Tax Treaty benefits are to be granted so long as
transaction done within the framework of law
E*Trade Mauritius is eligible to benefits of the India-
Mauritius Tax Treaty
Note: Earlier the Bombay HC had refused to go into merits
and the matter with consent of Parties was restored back
to Tax Office
Sale of shares of ILFS, India
E*Trade AAR
- Validity of Treaty Shopping
262
262

SAAC, Saudi Arabia
AIH, Bahrain
AFIL, India
Facts
Under Group Restructuring process, all non European
investments (including India) were proposed to be held
by ACHL Cyprus
AAR Ruling
Charging Section and Computation provision to be
read together and where Computation provision fails,
Charging Section also fails
In absence of consideration on share transfer,
Computation mechanism fails - Charging Section fails
B C Srinivasa Setty (SC)
In view of above, no taxes were required to be
withheld in India, since there was no Income
chargeable to tax
Transfer pricing provisions not applicable in absence
of Income chargeable to tax
Caution Impact of Section 56(2)(viia)

ACHL, Cyprus
100 percent
70 percent
Share contribution
without consideration
Amiantit AAR
- No Capital Gain on Nil Consideration
263
263

PG Germany
PG Netherlands
PG India
Facts
Post incorporation, all shares in PG India were transferred
by PG Germany to PG Netherlands for a consideration
determined under FEMA Regs.
PG Netherlands thereafter made substantial equity
investment in PG India to support expansion plans
PG Netherlands proposes to transfer shares of
PG India to another Non resident which Treaty to apply
Netherlands or Germany?
AAR Ruling
Netherlands Treaty applies as PG Netherlands
Has substance Significant investment in India
Is a separate legal entity
No legal / factual basis to show PG Germany is real
beneficial owner of shares and the capital gains
that would accrue
Conduit approach or colorable device seem
conspicuously absent

Non resident

Proposed share transfer

AAR-- Share Transfer not taxable as per Treaty
264
264
Sea Gate Singapore AAR
- Demarcated warehouse space is PE
Facts
ISP to provide earmarked warehouse
space to SCo. with requisites such as
storage racks, electronic devices etc.
SCo.s representatives have a right to
enter the warehouse for inventory
verification, inspection, audit,
repackaging etc.
ISP to give delivery to OEM on behalf
of SCo.
The AAR Ruled:
Demarcated space in the warehouse
of ISP constitutes PE of SCo. under
Article 5(1) ISP-SCo act in cohesion
to effect Delivery

Attribution PE should be treated as
a distinct enterprise carrying on part
of sales activity in India Amounts
paid to ISP and other expenses
deductible
SCo.
(Manufacturer & Seller
of Hard Disk)
OEM
Customers
(Equipment
Manufacturer)
Singapore
India
ISP
(Independent Service
Provider)
Keep stock of SCo.
and delivers goods
on Just-in-time basis
Invoices for
goods directly
Pays directly
Ships goods based
on OEM purchase
order & property
in goods remains
with SCo.
265
265
Recent judgments on Transfer Pricing
Ruling Key principles / Takeaways
Indo American
Jewellery, Mumbai
ITAT
Transfer pricing study and ALP determined cannot be rejected
simply without any cogent reasons
The fact that AE earned meager profit or incurred losses as
compared to the taxpayer showed that there was no transfer
of profit by the taxpayer out side India
As tax rates were higher in the overseas jurisdiction as
compared to India, there would be no incentive to shift profits
offshore
Firmenich Aromatics
(India) Pvt. Ltd,
Mumbai ITAT
No penalty for bona fide difference of opinion between the
Revenue and the taxpayer on the Most Appropriate Method, as
it cannot be construed to be concealment of facts or
furnishing of inappropriate particulars
Intervet India Private
Limited, Mumbai ITAT
Reasonably accurate adjustments for differences in economic
and market conditions in different locations must be made in
applying the CUP method
266
266
Chrys Capital Investment
Advisors India Pvt. Ltd.,
Delhi ITAT
Non-operating income - such as interest, dividend, income
from share trading, etc. to be excluded in determining the
amount of the profit margin under TNMM
Expenses incurred on behalf of AE if included in operating
cost, any reimbursement pertaining to such expenses
must be included in operating revenue
Toshiba India Private
Limited, Delhi ITAT
AO not to make any changes to the set of comparable
companies without providing cogent reasons for the same
ALP to be determined by a systematic approach and
cherry-picking of comparables is not acceptable
3 Global Services Private
Limited, Mumbai ITAT
Hourly rate billing for the customer care business
segment published by NASSCOM is an acceptable external
CUP for benchmarking IT enabled services
Detailed FAR analysis for tested party and comparable
companies is crucial
267
267
IL Jin Electronics (I) Pvt.
Ltd, Delhi ITAT
T Two International Pvt.
Ltd., Tara Jewels Exports
Pvt. Ltd. and Tara Ultimo
Pvt. Ltd v. ACIT, Mumbai
ITAT
Computation of transfer pricing adjustment must be
restricted only to the international transactions of the
taxpayer and not on the entire sales of the company
Only net profit margin should be considered for TNMM
and there is no scope for reducing interest or other
overheads
CA Computer Associates
Private Limited, Mumbai
ITAT
ALP is to be determined by the methods prescribed in the
Indian Tax Laws
Bad debts written off cannot be a factor to determine the
ALP
Perot Systems TSI (India)
Ltd, Delhi ITAT
VVF Limited, Mumbai ITAT
Interest free loans by Indian Companies to foreign
subsidiaries do not comply with arms length standard
Benefit of +/- 5 percent safe harbor is available only
where more than one arms length price is determined.
RBIs approval does not endorse the arms length
character of the international transaction
268
268
Section 56(2)(viia) Key Issues
Can a NR seek to rely on DTAA to mitigate the impact of Section
56(2)(viia)?
Whether receipt of shares from an AE at a price below FMV or for a
Nil consideration could result in transfer pricing adjustment under
Section 92 in the hands of the transferor? Could this lead to double
taxation i.e. taxation in the hands of recipient as well as transferor?
Whether FMV as notified by CBDT under Section 56 could also be
considered as an ALP for the purpose of transfer pricing provisions
under Section 92?
Whether shares in an Indian Co. can be considered to be received
outside India by a NR if the transfer agreement is executed outside
India? and hence, could it be argued that such receipt is not taxable in
India under Section 5(2)?
269
269
270

Presented By

CA Swatantra Singh, B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com

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