Transfer Pricing Provisions & Cross Border Issues

Seminar on Budget Demystified

(Direct Tax)

on Saturday, 19th May, 2012

CA Manoj ShahPartner

Introduction

� Aimed at expansion of tax jurisdiction

� Retrospective amendments “to clarify the intentionof the legislature”

� Plethora of stringent provisions

2

� Overruled landmark judicial pronouncements

Section 9 (1) (i)

Transfer of a capital asset

situated in India

Existing Provision

� “all income accruing or arising, whetherdirectly or indirectly,

� through or from any business connection in India,oror

� through or from any property in India, or

� through or from any asset or source of income inIndia, or

� through the transfer of a capital asset situate inIndia”

4

Amendment

Explanation 4 & Explanation 5 shall be inserted in Section 9(1)(i) andshall be deemed to have been inserted with effect from 1st April 1962:

Explanation 4—For the removal of doubts, it is hereby clarified that theexpression “through” shall mean and include and shall be deemed to havealways meant and included “by means of”, “in consequence of” or “byalways meant and included “by means of”, “in consequence of” or “byreason of”.

Explanation 5—For the removal of doubts, it is hereby clarified that anasset or a capital asset being any share or interest in a company or entityregistered or incorporated outside India shall be deemed to be and shallalways be deemed to have been situated in India, if the share or interestderives, directly or indirectly, its value substantially from the assets locatedin India.

5

Judicial Decisions Overruled

Vodafone International Holdings B.V.

� The Apex Court ruled that the words ‘directly or indirectly’in Section 9(1)(i) go with the income and not with thetransfer of a capital asset (property).

� The Judiciary held that if indirect transfer of a capital asset� The Judiciary held that if indirect transfer of a capital assetis read into Section 9(1)(i), then the words capital assetsituated in India would be rendered nugatory.

� Thus, it was clarified that the legislature has not chosen toextend Section 9(1)(i) to ‘indirect transfers’.

� It was further observed that the words ‘underlying asset’ donot find place in Section 9(1)(i).

6

Analysis of Explanation 4

� Due to insertion of words “by means of”, “inconsequence of” or “by reason of”, each indirecttransfer shall be captured within the purview ofSection 9(1)(i).

� The amendment is an attempt of expand the Indian� The amendment is an attempt of expand the Indiantaxing jurisdiction by including indirect transfer ofdomestic shares/ controlling interest by non-residententities.

� In a typical multi-level corporate structure wherefunds are indirectly routed to India, capital gain onaccount of an Indirect transfer of assets or capital assetsituated in India shall be deemed to accrue or arise inIndia and hence taxable in India.7

Analysis of Explanation 5

� The new provision aims at expansion of the coverage of the term‘capital asset situated in India’ in section 9 by providing a deemingfiction.

� This amendment is on the same footing of the proposed Direct TaxCode provisions which proposes to tax transfer of foreign companyshares by a non-resident, where the FMV of the assets in Indiashares by a non-resident, where the FMV of the assets in Indiarepresents at least 50% of the FMV of all assets owned by thecompany.

� However, no such specific % or definition of the term ‘substantialvalue derived from assets located in India’ is yet elucidated in theamendment.

� This amendment supports the doctrine of Section 9 which codifiessource rule of taxation wherein the state, where the actual economicnexus of income is situated, has a right to tax the income irrespectiveof the place of residence of the entity deriving the income.

8

Related Amendments

Explanation to Section 2(14) - Definition of capital asset :

‘For the removal of doubts, it is hereby clarified that“property” includes and shall be deemed to have always included anyrights in or in relation to an Indian company, including rightsof management or control or any other rights whatsoever.’of management or control or any other rights whatsoever.’

� This amendment is also directed to overrule observation incase of Vodafone, wherein it has been held that the capitalasset transferred were the shares of a foreign company andtransfer of controlling interest is not a capital asset in itselfbut is incidental to transfer of shares.

� After the amendment, transfer of shares (at any level)which result in transfer of controlling interest of an IndianCompany could give rise to a taxable event in India.

9

Related Amendments

Explanation 2 to Section 2(47) - Definition of transfer :

‘For the removal of doubts, it is hereby clarified that“transfer” includes and shall be deemed to have always includeddisposing of or parting with an asset or any interest therein, orcreating any interest in any asset in any manner whatsoever,creating any interest in any asset in any manner whatsoever,directly or indirectly, absolutely or conditionally, voluntarily orinvoluntarily, by way of an agreement (whether entered into in Indiaor outside India) or otherwise, notwithstanding that such transferof rights has been characterised as being effected or dependentupon or flowing from the transfer of a share or shares of acompany registered or incorporated outside India’

Thus, ‘transfer’ would include indirect transfer of shares ifrights in such shares are effected and dependent upon transferof shares even of a foreign company.

10

� Explanation 2 to Section 195:

“Explanation 2—For the removal of doubts, it is hereby clarifiedthat the obligation to comply with sub-section (1) and to makededuction thereunder applies and shall be deemed to havealwaysapplied and extends and shall be deemed to have always extended

Related Amendments

applied and extends and shall be deemed to have always extendedto all persons, resident or non-resident, whether or not the non-resident person has—

(i) a residence or place of business or business connection inIndia; or

(ii) any other presence in any manner whatsoever in India.”

� The amendment widens the withholding tax provisions ofSection 195.

11

Future Implications

� The retrospective changes due to aftermath of SupremeCourt judgment, would have far reaching impact in manysuch pending cases before various judicial forums.

� However, it has been announced by the Hon. FinanceMinister that the retrospective amendment will not affectMinister that the retrospective amendment will not affectdeals in which assessment has been closed or the onesrouted through the 82 countries with which India hasDTAAs, i.e. retrospective clarificatory amendments shallnot override DTAA.

� The amendment will impact the business restructuringevents like merger of offshore holding or investmentcompanies of MNCs having ‘substantial’ assets in India

12

U3

Slide 12

U3 It would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have

a DTAAUser, 5/14/2012

Future Implications"The total tax implication in consequence of retrospective amendmentsintroduced in the Finance Bill may be 35,000-40,000 crore” - Minister of Statefor Finance SS Palanimanickam.

13The Economic Times dt. 10th May, 2012

Future Implications

� The proposed amendment is also not clear as to how suchcapital gains income is to be computed under theprovisions of the Income Tax Act, 1961

� FM brought out that investors of Participatory Notes(PNs) would not attract capital gain tax under Section(PNs) would not attract capital gain tax under Section9(1)(i). However, no such specific relief has beenprovided to FII Funds as of now - The Economic Times dt. 11th May,

2012

� It is observed that introduction of such provisions is aglobal trend and several countries like China, Peru andIndonesia have brought in such amendments.

14

Illustration

� A1, A2, A3, A4 are overseas investorholding units in a FII which hasinvested in Ind.Co. in India.

� In a year, investor A1, A2, A3, A4transfer units of the fund to otheroverseas investors B1, B2, B3, B4.

FII Fund

Ind.Co.

15

overseas investors B1, B2, B3, B4.

� In the absence of any threshold forsubstantial interest, such overseastransfers result into indirect transferwithin Section 9(1)(i)

� Thus, in effect of transfer of units ofFII fund, the overseas investors A1,A2, A3, A4 would be liable for tax inIndia!!!

Overseas Investors

A 4 B 4

A 3 B 3

A 2 B 2

A 1 B 1

Position under Treaty for Indirect Transfer – Controlling Interest

� India- UAE Tax Treaty- Revised Article on Capital Gains as per Protocol of 2007

� Paragraph 3 of Article 13 (Capital Gains) of the Agreement shall be replaced by the following:

� "3.Gains from the alienation of shares of the capital stock of a "3.Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.

� 4.Gains from the alienation of shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State may be taxed in that State.

� 5.Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 above shall be taxable only in the Contracting State of which the alienator is a resident."

16

Section 9 (1) (vi)

Taxation of Royalty

Existing Provision

� Section 9(1)(vi) provides that any income payable byway of royalty in respect of any right, property orinformation is deemed to be accruing or arising inIndia.

� The term “royalty” has been defined in Explanation 2� The term “royalty” has been defined in Explanation 2which means consideration received or receivable fortransfer of all or any right in respect of certain rights,property or information.

� Definition of Royalty has been a subject matter ofconflicting judgments delivered by the judiciary.

� Therefore, in order to avoid series of litigations andestablish synergy, amendments have been brought

out.18

Amendments

Explanation 4, 5 & 6 shall be inserted in Section 9(1)(vi)and shall be deemed to have been inserted with effectfrom 1st June 1976:

Explanation 4—For the removal of doubts, it is hereby clarified thatExplanation 4—For the removal of doubts, it is hereby clarified thatthe transfer of all or any rights in respect of any right, property orinformation includes and has always included transfer of all or anyright for use or right to use a computer software (includinggranting of a licence) irrespective of the medium through which suchright is transferred.

19

Amendments

Explanation 5—For the removal of doubts, it is hereby clarified that theroyalty includes and has always included consideration in respect of anyright, property or information, whether or not—

a) the possession or control of such right, property or information iswith the payer;with the payer;

b) such right, property or information is used directly by the payer;

c) the location of such right, property or information is in India.

Explanation 6—For the removal of doubts, it is hereby clarified that theexpression “process” includes and shall be deemed to have alwaysincluded transmission by satellite (including up-linking, amplification,conversion for down-linking of any signal), cable, optic fibre or by anyother similar technology, whether or not such process is secret;’.

20

DECISIONS OVERRULED

� DIT v. Ericsson AB [2011] 16 taxmann.com 371 (Delhi)� It was held that Software which was imbedded in the mobile

telephone system was an integral and inseparable part of the

Judicial Decisions – Explanation 4

telephone system was an integral and inseparable part of thesystem.

� Such software was incapable of independent use and the cellularoperator did not receive any copyright.

� Thus, Delhi High Court ruled that ‘Computer Software’ being a‘copyrighted product’ and a ‘copyright’ itself can not be consideredas ‘Royalty’

� Tata Consultancy Services v. State of AP - 271 ITR 401(SC)

21

DECISIONS CONFIRMED

� Gracemac Cpropration v. Assistant Director of Income-tax [2010] 42 SOT 550� It was held the payments made by end users for granting of license

Judicial Decisions – Explanation 4

� It was held the payments made by end users for granting of licensein copy right and other intellectual property rights was payment ofroyalty.

� It was also held that by way of a copyrighted article, the end useshad not purchased copy of software product, but a license to usesuch software products.

� CIT v. Samsung Electronics Co.Ltd. [2011] 16taxmann.com 141 (Karnataka HC)

22

� A general understanding of definition of 'Royalty' provided inExplanation 2 of the Section 9(1)(vi) can be accepted to include'computer programme', being an intellectual property but not'computer software'.

� This amendment seeks to resolve controversy regarding whetheruse of computer software is royalty or not which has arisen due

Analysis of Explanation 4

use of computer software is royalty or not which has arisen dueto contrary judiciary pronouncements.

� However, It may be argued that an explanation can only explainand may not expand or add to the scope of the original section,however a clarificatory amendment - to justify that computersoftware was very much covered under definition of royaltyfrom inception - has widened the scope of main section.

� A mere right to use a shrink-rapped/ off-the-shelf software bythe end user would also get covered within the ambit of Section9(1)(vi) on account of this amendment.

23

� With this amendment tax will have to deducted under section194J in respect of resident payees and under section 195 inrespect of non-resident payees on payments made forpurchase of computer software.

� It would result into a cascading effect of taxation as every

Future Implication - Explanation 4

� It would result into a cascading effect of taxation as everyuser at every stage in distribution chain would be subject toSection 9(1)(vi).

� An estimate of around �. 10,000 crores increase in taxes isenvisaged from the retrospective amendment in the context ofcomputer software.

� The only resort that can be sought is scope of 'Royalty' inDTAA. However, DTAAs with Malaysia, Russia, Morocco etc.do cover computer software within the term 'Royalty'.

24

DECISIONS OVERRULED

� Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 197 Taxmann263

� Customers merely given access to broadband available intransponder .

� Control and constructive possession pf transponders could not be

Judicial Decisions - Expl. 5 & 6

� Control and constructive possession pf transponders could not behanded over by satellite operators to its customers.

� Thus, it was held that satellite payments received by foreignsatellite companies can not be regarded as ‘Royalty’ and hence suchincome is not taxable in India.

� ISRO Satellite Centre [307 ITR 59] (AAR)

� Dell International Services India (P) Ltd. [305 ITR 37] (AAR)

DECISIONS CONFIRMED

� New Skies Satellite N.V. v. ADIT [121 ITD 1] (Delhi)(SB)

� Verizon Communications Singopore Pte.Ltd. v. ITO (54 DTR 65)(Chennai) (Tri) 25

� The term ‘Royalty’ would now include any consideration inrespect of any right, property or information, whether or notits possession or control is with the payer, it is used directlyby the payer, or its location in India.

� It is directed to counter the position adopted by the tax

Analysis - Expl. 5 & 6

� It is directed to counter the position adopted by the taxpayers, based on various judicial precedents, to treat incomein respect of right, property or information as businessincome on reasoning of no direct use, location outside India,etc.

� With this amendment will tax have to deducted under section194J in respect of resident payees and under section 195 inrespect of non-resident payees payment of bills of mobilephones, leased lines, internet charges, DTH charges and suchother charges will come under the ambit of TDS?.

26

Transactions targeted:

� Data processing support and disaster recovery etc.

� Income from lease of Transponder in satellite and bandwidth infibre optic network

� Roaming charges Agreement and payment of spectrum licence

� Use or right to use Transponder capacity in satellite and bandwidth

Future Implications - Expl. 5 & 6

� Use or right to use Transponder capacity in satellite and bandwidthcapacity in fibre optic network

� Uploading and access to web portals, web servers of the foreigncompanies

� Rights viz. satellite signals, transmission of voice/data locatingoutside India

� Up-linking, amplifying and down linking of signals will come underthe definition of ‘process’, irrespective of whether or not suchprocess is secret

27

Transfer Pricing

Advance Pricing Agreement

� Introducing scheme of APA through Section 92CC & 92CD

� As the words suggest- it is an agreement between tax payerand taxing authority

� It’s an agreement to either determine ALP or manner ofdetermining ALP for a set of transactionsdetermining ALP for a set of transactions

� It shall be binding on the taxpayer and Commissionerincluding authorities subordinate to him.

� Agreement to loose its binding nature in case of change inlaw or facts having bearing on the agreement

� Agreement to have validity period of 5 consecutiveprevious years

� Agreement to turn ‘void ab initio’ if obtained by fraud ormisrepresentation

29

� A modified return to be furnished within 3 months

� Effective from 1st July 2012

� Board to prescribe a framework for APA

� More clarity needed in terms of:� Time frame to conclude an APA

Advance Pricing Agreement

� Time frame to conclude an APA

� Amount of pre-filing of APAs

� Considering the proposed nature of APAs, it believed thatthe scheme of APA would lessen the burden of compliancedue to greater certainty regarding their TP methods andalso advance resolution of the issues

30

Widening the scope of International Transaction

� Explanation added to Section 92B to expand the scope ofInternational Transaction.

� International Transaction arising from use & transfer ofintangible property substantially enlarged by definingintangible property introducing many new items like -

� customer list, Marketing Channel, brand, commercial secret,know-how, industrial property right, exterior design,exterior design or practical and new design or any otherbusiness or commercial rights of similar nature

� marketing related, technology related, artistic related, dataprocessing related, engineering related, customer related,contract related, human capital related, location related,goodwill related, methods programs, forecasts etc.

31

� International Transaction arising from use & transfer oftangible property amplified with many specific itemsbeing covered

� Capital financing including guarantee

� Transactions of business restructuring

Widening the scope of International Transaction

� Transactions of business restructuring

� Impact:

� Provision of list of intangibles & its wide definition wouldhave significant impact on characterization of entities whileanalyzing FAR.

� Specific inclusion of Guarantee will make the Tribunal’sdecision void which regarded, Guarantee as not in the natureof Intl. transaction. (Four Soft Limited vs. Dy. CIT, ITA No.1495/HYD/2010 )

32

Reducing tolerance limit from 5% to 3%

� Presently, in case the variation between ALP and TPdoesn’t > 5% of the latter, the price at which internationaltransaction, has actually been carried out shall be deemedto be ALP

� Finance Act, 2012 has substituted 5% with 3% w.e.f A.Y.� Finance Act, 2012 has substituted 5% with 3% w.e.f A.Y.2013-14.

� The amendment would is applicable to all assessments orreassessment proceedings pending before AO as on 1st dayof October, 2009

� 5% not available as a standard deduction [Sub-section (2A)of Section 92C – Retrospective from 1st April , 2002]

� The amendment would lead to higher adjustment andconsequently increased litigations

33

Failure to reportInternational Transaction

� Sub-section (2B) of Section 92CA – If TP report underSection 92E is not furnished in respect of any internationaltransaction, such transaction shall be automaticallyreferred to TPO [Retrospective from 1st June , 2002]

� Penalty provisions – A penalty of 2% of the value of the� Penalty provisions – A penalty of 2% of the value of theinternational transaction shall be levied for failure to reportany international transaction or maintenance/furnishingof any incorrect information/ document [w.e.f. 1st July,2012]

� Income escaping assessment – All cases wherein aninternational transaction has not been reported by thetaxpayer would be considered as a case of deemedescapement of income and such a case will be reopened.[w.e.f. 1st July, 2012] 34

� Appeal against DRP –

� Income tax department has been granted a right to appealagainst the directions of DRP vide Section 253 and 254

� Applicable for objections filed on or after 1st July, 2012

� With this amendment, results in the favor of assessee can be

Dispute Resolution Panel (DRP)

� With this amendment, results in the favor of assessee can beexpected in future

� The amendment places CIT (A) route and DRP route on thesame footing with only differences being in terms ofpayment of demand, time involved, etc.

� Search and seizure - Similar to the other assessments, thetime limit for completion of assessments involving searchand seizure will also be as per the provisions relating to theDRP and that the other provisions of time limit will notapply to such assessments.

35

DRP – other amendments

� Extension of power of DRP [Explanation to Section 144C] –

� Till now the DRP has power to confirm, reduce or enhancethe variations proposed in the draft assessment order.

� It has been clarified that DRP has the powers to consider anissue arising out of the audit proceedings relating to the draftissue arising out of the audit proceedings relating to the draftorder [Retrospective from 1st April, 2009]

� The FB 2012 further proposes an exclusion of orders passed bythe tax officer pursuant to the DRP directions, from thejurisdiction of the CIT (A) and provides for filing the appealdirectly with ITAT in such cases. These amendments will beeffective retrospectively from 1 October 2009.

� Assessment timelines - The due date for completion of a transferpricing assessment is extended by 3 months. AP assessments forAY 2009-10, need to be completed by 31 January 2013.

36

Specified Domestic Transaction (SDT)

Brief Background

� The Finance Bill 2012 edict the applicability of TP Regulations to"specified domestic transactions“ from F.Y.2012-13.

� The existing provisions providing for tax holiday & related partytransactions paid emphasis on “fair market value” or “market value”of the transactions. However, in the absence of specific guidelines forcomputation of such “value” of goods and services, much was left tocomputation of such “value” of goods and services, much was left tothe discretion of both taxpayers and Revenue, thus leading toambiguity and litigation.

� This amendment is based on the observations of the Supreme Court incase of CIT vs Glaxo Smithkline Asia (P) Ltd.

� Hence a recommendation was made by the court so as to Transfer Pricing Provisions should be extended to domestic transactions to “reduce litigation”

38

Specified Domestic Transaction

� Sub-section (2A) has been inserted in Section 92 w.e.f.1st April, 2013:

“Any allowance for an expenditure or interest or allocationof any cost or expense or any income in relation to thespecified domestic transaction shall be computed havingspecified domestic transaction shall be computed havingregard to arm’s length price”

� Few illustrations of such Transactions:� Purchase/sale of goods & services

� Payment to Directors

� Loans granted/availed

� Reimbursement/Recovery Services

� Corporate and administrative Services39

Introducing Transfer Pricing to Domestic Transactions

� Certain Transactions (Specified Domestic Transactions-SDT) to undergo test of Arm’s Length Price

� Sec 92 (BA) being introduced

� Transactions specified are-

i. Any expenditure in respect of which payments ismade/to be made to a person referred to in clause(b) of sub-section (2) of section 40A;

ii. any transaction referred to in section 80A;

40

iii. Taxpayers claiming deductions for undertakingengaged in specified business activities[underSection 80- IA etc of ITA]

iv. Taxpayers operating in Special Economic Zones(under Section 10AA of ITA); and

Introducing Transfer Pricing to Domestic Transactions

41

(under Section 10AA of ITA); and

v. any other transaction as may be prescribed,

The provisions apply only if the aggregate amount ofsuch transaction exceed Rs.5.00 crores during a F.Y.

Assessee Related Party

Individual Any Relative

�Any

•Company �Director of the company

•Firm �Partner of the firm

•AOP �Member of the Association or family

•HUF �or any relative of such Director, Partner or Member

In Case of Substantial Interest in the Business & Profession of the Assessee held By: Individual Any Relative

Such Any

•Company •Company •Director of the company

Related Entities u/s 40A(2)(b)

42

•Company •Company •Director of the company

•Firm •Firm •Partner of the firm

•AOP,HUF •AOP, HUF •Member of the Association or family*or any relative of such Director, Partner or Member

•Director of the company •Director (he himself) of the company

•Partner of the firm •Partner of the firm

•Member of the Association or family

•Member of the Association or family

*or any relative of such Director, Partner or Member

Definition of Related Party Expanded in Sec 40A(2)(b)

� Sub-Clause (iv) is modified by adding words- “or any other company carrying on business or profession in which the first mentioned company has substantial interest”mentioned company has substantial interest”

� This would bring under purview transactions between subsidiaries of common parent company holding more than 20% in both the Companies.

43

Subsection 8 of Section 80-IA( Inter unit trf of

goods/services of the tax payer claiming tax

holiday)

Section 40A(2)(b) payments Section 40A(2)(b) payments to specified related parties

Sections Covered under SDT

44

Domestic Transfer Domestic Transfer Pricing Regulations

Chapter VI-A or Section 10AA (where provisions of Section 80IA are applicable)

of goods/services from the unit of tax payer claiming

Subsection 10 of Section 80-IA (Trf of goods/services from the unit of tax payer claiming tax holiday to a person with

close connection)

Section Transactions/ExamplesImplication of Amendment on Sections covered under SDT

40A(2b) Payments to Relatives:Powers to the assessing officer to disallow unreasonable expenses or payments made to related parties.

The application of the arm’s length standard to domestic intra group transactions or with related parties in goods or services with units/

Transactions included as SDT

45

payments made to related parties. However there was no criteria forestimating the reasonableness of the transaction

goods or services with units/ undertakings/enterprises eligible for certain income tax deductions will ensure that companies do not misuse the deductions by undertaking non arm’s length transactions in order to increase the profits eligible for income tax deductions or increasing losses.

80A This Sec prescribes certain conditions to be applied while computing deduction from GTI. AO is empowered to re-compute income (based on FMV) of the undertaking, provided there are tr. With related parties or other undertakings of same entity

Section 80-IA

Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc

Sub section 8 of Section 80-IA

Goods or services held for the purposes of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee-Consideration received should be at the market price

The application of the arm’s lengthstandard to domestic intra grouptransactions or with related parties ingoods or services with units/undertakings/enterprises eligible forcertain income tax deductions willensure that companies do not misusethe deductions by undertaking non

Subsection

•It appears to the Assessing Officer that,•owing to the close connection between the

Transactions included as SDT

46

the deductions by undertaking nonarm’s length transactions in order toincrease the profits eligible forincome tax deductions or increasinglosses.

section10 ofSection80-IA

•owing to the close connection between theassessee carrying on the eligible businessand any other person•the course of business between them is soarranged that the business transactedbetween them produces to the assesseemore than the ordinary profits•the Assessing Officer shall, in computingthe profits and gains of such business fortake the amount of profits as may bereasonably deemed to have been derivedtherefrom.

Analysis of Amendment

� Deterrent for shifting of profits from a profit making entity to a lossmaking entity

� There is no provision for “Corresponding Adjustment” i.e. it willlead to Double Taxation

� The penal consequences currently applicable to transfer pricingregulations are also applicable to SDT.

47

regulations are also applicable to SDT.

� The due dates for filing remains the same as applicable to TransferPricing Audits i.e. 30th November.

� Tax Payers will have to formalize their product pricing within groupas detailed documentation would be needed as a part of compliance

� It would be possible for such taxpayers to utilize TP concepts andmethodologies (such as FAR analysis, benchmark driven pricing) forboth commercial as well as taxation purposes.

� Benchmarking would pose problems for certain transactions such as– Director’s remuneration

� Documentation: The taxpayers have also to maintainthe documentation as mentioned in section 92 D andobtain report in Form 3CEB from the Accountant asper the provisions of Sec 92E.

� Compliance: File form 3CEB along with their return

Procedural Aspects for SDT

48

� Compliance: File form 3CEB along with their return(Sec 92E).

� Methods: Follow the Transfer Pricing Methods asapplicable to determine the ALP.

� Penal Provision: Be subject to penal provisions asprovided U/s 271AA, 271G, 271BA and 271(1)(c).

Other Amendments

Tax Residency Certificate

� Sub-section (4) to Section 90 has been inserted w.e.f. 1st April,2013 to ensure that only actual tax residents are entitled to thebenefits of DTAA

� Tax Residency Certificate (TRC) must to avail DTAA benefits

� TRC of a resident of a foreign country shall contain particulars ofTRC of a resident of a foreign country shall contain particulars ofhis being a resident of such foreign country

� It should be obtained by foreign resident from the Governmentof his tax resident country

� Section 90A has also been amended accordingly [Sub-section (4)]

� However, TRC not sufficient condition to claim treaty benefits

50

Powers to define Terms not defined in DTAA or ITA

� Explanation 3 to Section 90 & 90A hasbeen inserted to enable the IndianGovernment to notify definition for theterms which are used but not defined interms which are used but not defined inDTAA or ITA (from the date on whichthe DTAA came into force)

51

Assessments where info. sought under a DTAA

Extension of time limit for completion of assessment orreassessment where information is sought under a DTAA

� Provisions of Section 153 and 153B state that the time takenin obtaining information (form foreign tax authorities) shallbe excluded from the time prescribed for completion ofbe excluded from the time prescribed for completion ofassessment or reassessment in the case of an assessee.

� This period of exclusion is has been extended from6months to one year [w.e.f 1st July, 2012]

� This time period to be excluded would start from the dateon which the process of getting information is initiated bymaking a reference by the competent authority in India tothe foreign tax authorities and end with the date on whichinformation is received by the Commissioner.

52

U5

Slide 52

U5 During the course of assessment proceedings, in the case of an assessee having income or assets outside India, information is being

sought from the tax authorities situated outside India, while completing an assessment.User, 5/18/2012

Taxation of a non-resident entertainer, sports person etc.

� Section 115BBA – increase in taxation rate from 10% to20% of the gross receipts [w.e.f. 1st April, 2013]

� Section 194E dealing with withholding of tax has beenamended accordingly

� Persons covered under aforesaid section –� Persons covered under aforesaid section –

� Non-resident non-citizen sportsmen

� Non-resident non-citizen entertainer such as theatre,radio or television artists and musicians

� Non-resident sports associations

� This is bring consistency in provisions with DTAAwherein there is parity between a non-residentsportsman and a non-resident

53

GAAR

� Indian provisions are on the lines of South AfricanGAAR

� However, while drafting GAAR provisions, theemphasis is solely on “tax saving”, rather thandistinguishing between legitimate “Tax Planning” vs.distinguishing between legitimate “Tax Planning” vs.“Tax Evasion”

� The Indian provisions, in present form disregard, therelevant facts & circumstances leading to a particular“arrangement”

54

GAAR

� Indian provision:

Sec 96(2) – “An arrangement which results in any tax benefit (butfor the provisions of this Chapter) shall be presumed to have beenentered into, or carried out , for the main purpose of obtaining a taxbenefit unless the person obtaining the tax benefit proves thatbenefit unless the person obtaining the tax benefit proves thatobtaining the tax benefit was not the main purpose of thearrangement.”

� South African provision:

Sec.80G (1) – “An avoidance arrangement is presumed to have beenentered into or carried out for the sole or main purpose of obtaininga tax benefit unless and until the party obtaining a tax benefitproves that, reasonably considered in light of the relevant factsand circumstances, obtaining a tax benefit was not the sole ormain purpose of the avoidance arrangement.”

55

CA Manoj ShahE-mail: manoj@shahmodi.com

56