Académique Documents
Professionnel Documents
Culture Documents
[Income Tax]
Assessment Year 2016-17
T K SRIDHAR
_____________________________________________________________________
Direct Taxation
20.1
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International Taxation
20.2
Content
Double Taxation Relief
90
90A
91
92
Computation of income from international transaction having regard to arms length price.
92A
92B
92C
92CA
92D
Maintenance and keeping of information and document by persons entering into an international
transaction.
92E
92F
90(1)
The Centw2ral Government may enter into an agreement with the Government of any
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Direct Taxation
20.3
90(1)(a)(i)
income on which have been paid both income-tax under Income Tax Act in India and
income-tax in that country; or
90(1)(a)(ii)
income-tax chargeable under this Act and under the corresponding law in force in that
country to promote mutual economic relations, trade and investment, or
90(1)(b)
for the avoidance of double taxation of income under this Act and under the corresponding
law in force in that country, or
90(1)(c)
90(1)(d)
for recovery of income-tax under this Act and under the corresponding law in force in that
country, and may, by notification in the Official Gazette, make such provisions as may be
necessary for implementing the agreement.
90(2)
Where the Central Government has entered into an agreement with the Government of any
country outside India under sub-section (1) for granting relief of tax, or as the case may be,
avoidance of double taxation, then, in relation to the assessee to whom such agreement
applies, the provisions of this Act shall apply to the extent they are more beneficial to that
assessee.
90(3)
Any term used but not defined in this Act or in the agreement referred to in sub-section (1)
shall, unless the context otherwise requires, and is not inconsistent with the provisions of
this Act or the agreement, have the same meaning as assigned to it in the notification issued
by the Central Government in the Official Gazette in this behalf.
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International Taxation
20.4
Under Section 90(1) the purposes for which the Central Government can enter into double taxation
avoidance agreement with foreign country are:
1. Granting of double taxation relief, i.e., relief in respect of income on which income-tax has been paid
in India and also in the foreign country or granting of relief in respect of income-tax chargeable under
the income-tax Act and under the corresponding law in that country to promote mutual economic
relations, trade and investment.
2. For avoidance of double taxation of income under the income-tax Act and under the corresponding
law in force in that country or specified territory.
3. For exchange of information for the prevention of evasion or avoidance of Income tax chargeable
under the Income-tax Act or under the corresponding Law in force in that country or specified
territory or investigating of cases of such evasion or Avoidance.
4. For recovery of income-tax under the income-tax Act and under the corresponding law in force in that
country or specified territory as the case may be.
90A
90A(1)
Any specified association in India may enter into an agreement with any specified
association in the specified territory outside India and the Central Government may, by
notification in the Official Gazette, make such provisions as may be necessary for adopting
and implementing such agreement
90A(1)(a)
90A(1)(a)(i)
income on which have been paid both income-tax under this Act and income-tax in any
specified territory outside India; or
90A(1)(a)(ii)
income-tax chargeable under this Act and under the corresponding law in force in that
specified territory outside India to promote mutual economic relations, trade and
investment, or
90A(1)(b)
for the avoidance of double taxation of income under this Act and under the
corresponding law in force in that specified territory outside India, or
90A(1)(c)
90A(1)(d)
for recovery of income-tax under this Act and under the corresponding law in force in that
specified territory outside India.
90A(2)
Where a specified association in India has entered into an agreement with a specified
association of any specified territory outside India under sub-section (1) and such
agreement has been notified under that sub-section, for granting relief of tax, or as the case
may be, avoidance of double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the extent they are more
beneficial to that assessee.
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Direct Taxation
20.5
90A(3)
Any term used but not defined in this Act or in the agreement referred to in sub-section (1)
shall, unless the context otherwise requires, and is not inconsistent with the provisions of
this Act or the agreement, have the same meaning as assigned to it in the notification
issued by the Central Government in the Official Gazette in this behalf.
Explanation 1.For the removal of doubts, it is hereby declared that the charge of tax in
respect of a company incorporated in the specified territory outside India at a rate higher
than the rate at which a domestic company is chargeable, shall not be regarded as less
favourable charge or levy of tax in respect of such company.
Explanation 2.For the purposes of this section, the expressions
(a) specified association means any institution, association or body, whether
incorporated or not, functioning under any law for the time being in force in India or the
laws of the specified territory outside India and which may be notified as such by the
Central Government for the purposes of this section;
(b) specified territory means any area outside India which may be notified as such by the
Central Government for the purposes of this section.
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International Taxation
20.6
business in India. Therefore, his personal and economic relations with Malaysia are closer, since Malaysia
is the place where(a) the property is located and (b) the permanent establishment (PE) has been set-up.
Therefore, he is deemed to be resident of Malaysia for AY 2016-2017.
So, in this case, Arif is not liable to income tax in India for assessment year 2013-2014 in respect of
business income and capital gains arising in Malaysia.
Question: Write short note on deduction allowed [S. 91] from the Indian income tax payable where the
income doubly taxed.
91
91(1)
If any person who is resident in India in any previous year proves that, in respect of his income
which accrued or arose during that previous year outside India (and which is not deemed to
accrue or arise in India), he has paid in any country with which there is no agreement under
section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise,
under the law in force in that country, he shall be entitled to the deduction from the Indian
income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate
of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if
both the rates are equal.
91(2)
If any person who is resident in India in any previous year proves that in respect of his income
which accrued or arose to him during that previous year in Pakistan he has paid in that
country, by deduction or otherwise, tax payable to the Government under any law for the time
being in force in that country relating to taxation of agricultural income, he shall be entitled to a
deduction from the Indian income-tax payable by him
91(2)(a)
of the amount of the tax paid in Pakistan under any law aforesaid on such income which is
liable to tax under this Act also; or
91(2)(b)
of a sum calculated on that income at the Indian rate of tax; whichever is less.
91(3)
If any non-resident person is assessed on his share in the income of a registered firm assessed
as resident in India in any previous year and such share includes any income accruing or
arising outside India during that previous year (and which is not deemed to accrue or arise in
India) in a country with which there is no agreement under section 90 for the relief or
avoidance of double taxation and he proves that he has paid income-tax by deduction or
otherwise under the law in force in that country in respect of the income so included he shall be
entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such
doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country,
whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Explanation.In this section,
(i) the expression Indian income-tax means income-tax 10 charged in accordance with the
provisions of this Act;
(ii) the expression Indian rate of tax means the rate determined by dividing the amount of
Indian income-tax after deduction of any relief due under the provisions of this Act but before
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Direct Taxation
20.7
deduction of any relief due under this 11[Chapter], by the total income;
(iii) the expression rate of tax of the said country means income-tax and super-tax actually
paid in the said country in accordance with the corresponding laws in force in the said country
after deduction of all relief due, but before deduction of any relief due in the said country in
respect of double taxation, divided by the whole amount of the income as assessed in the said
country;
(iv) the expression income-tax in relation to any country includes any excess profits tax or
business profits tax charged on the profits by the Government of any part of that country or a
local authority in that country.
(b)
(i)
Indian income
3,00,000
(ii)
Foreign income
1,00,000
4,00,000
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International Taxation
20.8
15,000
2,000
13,000
Add
(i)
Education cess @ 2%
260
(ii)
SHEC @ 1%
130
13,390
Less
3,350
Tax payable
10,040
Note 1: Lower of the two will be the applicable rate for relief u/s 91
Average rate of tax in the foreign country =
Average rate of tax in India =
=
=
= 20%.
= 3.35%
Particulars
Income from business in India
3,80,000
Commission (gross) from a company in Hong Kong (tax paid in Hong Kong 40,000)
2,00,000
Dividend (gross) from a company in Hong Kong (tax paid in Hong Kong 22,500)
1,50,000
1,80,000
India has no DTAA with Hong Kong. Compute the income and tax payable by Mr. Banerjee for the
assessment year 2016-17.
Answer: Mr. Banerjee is entitled to relief under section 91.
He is eligible for relief under section91, of a sum calculated on such doubly taxed income at the Indian
rate of tax or at the Hong Kong rate of tax, whichever is lower, will be eligible for the relief.
3,80,000
2,00,000
1,50,000
1,80,000
Total Income
9,10,000
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Direct Taxation
20.9
Particulars
Tax on 9,10,000
Add
1,07,000
3,210
(b)
1,10,210
= 12.11%
= 17.86%
42,385
67,825
12,00,000
2,00,000
(iii)
(iv)
60,000
(v)
70,000
(vi)
4,00,000
2,50,000
2.
(a)
(b)
4,00,000
(-) 2,00,000
(+) 10,00,000
(+) 2,00,000
10,00,000
Nil
14,00,000
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International Taxation
20.10
Less
70,000
Total income
13,30,000
2,29,000
Add
Surcharge on income tax (assuming total income less than one crore)
Add
4,580
Add
SHEC @ 1%
2,290
Less
Nil
Tax liability
2,35,870
1,77,300
58,570
Note 1: Lower of the two will be the applicable rate for relief u/s 91
Average rate of tax in the foreign country =
Average rate of tax in India =
=
=
= 17.73%.
= 20.833%
Note 2: The amount of doubly taxed income has been worked out as under:
12,00,000
2,00,000
10,00,000
Loss from Indian business has been set-off against profits from foreign business which is deemed to
accrue or arise in India.
The mode of set-off increases the amount of double taxation relief.
Computation of income from international transaction having regard to arms length price.
92(1)
Any income arising from an international transaction shall be computed having regard to the
arms length price.
Explanation.For the removal of doubts, it is hereby clarified that the allowance for any expense
or interest arising from an international transaction shall also be determined having regard to the
arms length price.
92(2)
Where in an international transaction, two or more associated enterprises enter into a mutual
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Direct Taxation
20.11
agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost
or expense incurred or to be incurred in connection with a benefit, service or facility provided or
to be provided to any one or more of such enterprises, the cost or expense allocated or
apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined
having regard to the arms length price of such benefit, service or facility, as the case may be.
92(3)
The provisions of this section shall not apply in a case where the computation of income under
sub-section (1) or the determination of the allowance for any expense or interest under that subsection, or the determination of any cost or expense allocated or apportioned, or, as the case may
be, contributed under subsection (2), has the effect of reducing the income chargeable to tax or
increasing the loss, as the case may be, computed on the basis of entries made in the books of
account in respect of the previous year in which the international transaction as entered into.]
Question: What are the conditions applicable for arms length price in the international transaction?
Answer: Conditions for applicability of arms length price in the international transactions
1.
2.
3.
International transaction [S. 92B(1) or (20)] should be carried out by the associated enterprises
Question: What does an associated enterprise mean [S. 92A] and deemed to be an associated
enterprise?
Answer:
92A
92A(1)
For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated
enterprise, in relation to another enterprise, means an Enterprise
92A(1)(a)
92A(1)(b)
in respect of which one or more persons who participate, directly or indirectly, or through
one or more intermediaries, in its management or control or capital, are the same persons
who participate, directly or indirectly, or through one or more intermediaries, in the
management or control or capital of the other enterprise.
92A(2)
For the purposes of sub-section (1), two enterprises shall be deemed to be associated
enterprises if, at any time during the previous year,
92A(2)(a)
one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent
of the voting power in the other enterprise; or
92A(2)(b)
any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six
per cent of the voting power in each of such enterprises; or
92A(2)(c)
a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one
per cent of the book value of the total assets of the other enterprise; or
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International Taxation
20.12
92A(2)(d)
one enterprise guarantees not less than ten per cent of the total borrowings of the other
enterprise; or
92A(2)(e)
more than half of the board of directors or members of the governing board, or one or more
executive directors or executive members of the governing board of one enterprise, are
appointed by the other enterprise; or
92A(2)(f)
more than half of the directors or members of the governing board, or one or more of the
executive directors or members of the governing board, of each of the two enterprises are
appointed by the same person or persons; or
92A(2)(g)
the manufacture or processing of goods or articles or business carried out by one enterprise
is wholly dependent on the use of knowhow, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention, model, design,
secret formula or process, of which the other enterprise is the owner or in respect of which
the other enterprise has exclusive rights; or
92A(2)(h)
ninety per cent or more of the raw materials and consumables required for the manufacture
or processing of goods or articles carried out by one enterprise, are supplied by the other
enterprise, or by persons specified by the other enterprise, and the prices and other
conditions relating to the supply are influenced by such other enterprise; or
92A(2)(i)
the goods or articles manufactured or processed by one enterprise, are sold to the other
enterprise or to persons specified by the other enterprise, and the prices and other conditions
relating thereto are influenced by such other enterprise; or
92A(2)(j)
where one enterprise is controlled by an individual, the other enterprise is also controlled by
such individual or his relative or jointly by such individual and relative of such individual;
or
92A(2)(k)
where one enterprise is controlled by a Hindu undivided family, the other enterprise is
controlled by a member of such Hindu undivided family or by a relative of a member of
such Hindu undivided family or jointly by such member and his relative; or
92A(2)(l)
where one enterprise is a firm, association of persons or body of individuals, the other
enterprise holds not less than ten per cent interest in such firm, association of persons or
body of individuals; or
92A(2)(m)
there exists between the two enterprises, any relationship of mutual interest, as may be
prescribed.
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Direct Taxation
20.13
b) In respect of which one or more persons who participate, directly or indirectly, or through one or
more intermediaries. In its management or control or capital, or the same persons who participate,
directly or indirectly, or through one or more intermediaries, in the management or control or capital
of the other enterprise.
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International Taxation
20.14
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Direct Taxation
20.15
Answer:
92B
92B(1)
For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction
means a transaction between two or more associated enterprises, either or both of whom are
non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or
provision of services, or lending or borrowing money, or any other transaction having a bearing
on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement
or arrangement between two or more associated enterprises for the allocation or apportionment
of, or any contribution to, any cost or expense incurred or to be incurred in connection with a
benefit, service or facility provided or to be provided to any one or more of such enterprises.
92B(2)
A transaction entered into by an enterprise with a person other than an associated enterprise
shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two
associated enterprises, if there exists a prior agreement in relation to the relevant transaction
between such other person and the associated enterprise, or the terms of the relevant transaction
are determined in substance between such other person and the associated enterprise.
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International Taxation
20.16
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Direct Taxation
20.17
Answer: The cost cover ratio measures the ability of a company to cover its operating expenses through
operating revenue. Given the limitation of financial information publicly available, the operating
expenses of a selected comparable company are the sum of its operating revenue less EBIT.
Return on assets ratio measures, the amount of EBIT per rupee of asset invested. This is a profitability
ratio for measuring each companys operational efficiency, is how efficiently the assets have been
deployed by the company.
92C(1)
The arms length price in relation to an international transaction shall be determined by any
of the 6 methods, being the most appropriate method, having regard to the nature of
transaction
92C(2)
92C(3)
Where during the course of any proceeding for the assessment of income, the Assessing
Officer is, on the basis of material or information or document in his possession, of the
opinion that
92C(3)(a)
the price charged or paid in an international transaction has not been determined in
accordance with sub-sections (1) and (2); or
92C(3)(b)
any information and document relating to an international transaction have not been kept
and maintained by the assessee in accordance with the provisions contained in sub-section (1)
of section 92D and the rules made in this behalf; or
92C(3)(c)
the information or data used in computation of the arms length price is not reliable or
correct; or
92C(3)(d)
the assessee has failed to furnish, within the specified time, any information or document
which he was required to furnish by a notice issued under sub-section (3) of section 92D,
Provided that where more than one price may be determined by the most appropriate
method, the arms length price shall be taken to be the arithmetical mean of such prices. the
Assessing Officer may proceed to determine the arms length price in relation to the said
international transaction in accordance with sub-sections (1) and (2), on the basis of such
material or information or document available with him:
Provided that an opportunity shall be given by the Assessing Officer by serving a notice
calling upon the assessee to show cause, on a date and time to be specified in the notice, why
the arms length price should not be so determined on the basis of material or information or
document in the possession of the Assessing Officer.
92C(4)
Where an arms length price is determined by the Assessing Officer under subsection (3), the
Assessing Officer may compute the total income of the assessee having regard to the arms
length price so determined :
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International Taxation
20.18
Provided that no deduction under section 10A [or section 10AA] or section 10B or under
Chapter VI-A shall be allowed in respect of the amount of income by which the total income
of the assessee is enhanced after computation of income under this sub-section :
Provided further that where the total income of an associated enterprise is computed under
this sub-section on determination of the arms length price paid to another associated
enterprise from which tax has been deducted [or was deductible] under the provisions of
Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by
reason of such determination
of arms length price in the case of the first mentioned enterprise.
Question: Write a note on most appropriate method for arms length price. *S. 92C(2)+
Answer: [S. 92C (2)] The most appropriate method referred to 92C(1) shall be applied, for determination
of arms length price. Provided that where more than one price is determined by the most appropriate
method, the arms length price shall be taken to be the arithmetical mean of such prices, or, at the option
of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per
cent of such arithmetical mean.
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Direct Taxation
20.19
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International Taxation
20.20
2.
In uncontrolled conditions.
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Direct Taxation
20.21
The methods prescribed u/s 92C for computation of arms length price are:
92C
92C(1)
The arms length price in relation to an international transaction shall be determined by any
of the following methods, being the most appropriate method, having regard to the nature of
transaction or class of transaction or class of associated persons or functions performed by
such persons or such other relevant factors as the Board may prescribe, namely :
92C(1)(a)
92C(1)(b)
92C(1)(c)
92C(1)(d)
92C(1)(e)
92C(1)(f)
The most common problem is the requirement to find transactions between independent parties
which can be said to be exactly comparable with controlled transaction.
2.
In a multinational environment enterprise system, a group first identifies the goal and then goes on to
create the associated enterprise and finally, the transactions are entered into. This procedure is not
applicable to independent enterprises. For this reason, there may be transactions within one
multinational group, which may not be between independent enterprises.
3.
The reductionist approach of splitting a multinational group into its the benefits of economics of
scale or integration between the parties, is not appropriately allocated between the multinational
group.
4.
Application of arms length principle imposes a burden on business, as it may require the
multinational group to do things that it would not have done otherwise, e.g., searching coparable
transactions, robust documents, etc.,
5.
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International Taxation
20.22
15,000
2,000
ALP
13,000
Purchase price of television set per unit from Sky Inc. without warranty
16,000
(a)
3,000
(b)
1,000
Reduction in purchase price, having an impact of increasing the total income ((a)(b))
30,00,000
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Direct Taxation
20.23
11000
Cost of warranty included in the price charged to Logitech Ltd. (1000 x 6/12)
500
10500
12,000
1,500
50,000
7,50,00,000
Sales to J Inc. are on FOB basis, sales to JK &F Inc. are CIF basis. The freight and insurance paid by J
Inc. for each unit @ 700.
b.
Sales to JK & F Inc. are under a free warranty for Two Years whereas sales to J Inc. are without any
such warranty. The estimated cost of executing such warranty is 500.
c.
Since J Inc.'s order was huge in volume, quantity discount of 200 per unit was offered to it.
d. Compute the Arm's Length Price and the subsequent amount of increase in the Total Income of CD
Ltd, if any.
Answer:
(a)
5,800
Less
(a)
700
(b)
500
(c)
200
(1,400)
(b)
Particulars
Arm's Length Price per Unit
Less
4,400
4,400
(3,000)
1,400
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International Taxation
20.24
2,50,000
35 Crores
Amount ()
55,000
Less
(a)
(b)
1,000
(c)
1,000
11,000
42,000
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Direct Taxation
20.25
Less
Amount ()
50,000
42,000
8,000
240 lakhs
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International Taxation
20.26
Salem Ltd., gives credit period of 90 days the cost of which is 3% of the normal billing rate which is not
given to other parties.
Compute ALP under cost plus method in the hands of Salem Ltd., and the impact of the same on the total
income.
Answer:
Salem Ltd.
Computation of ALP under Cost plus method
%
Particulars
Normal gross profit mark up
Less
50.0
8.0
42.0
Add
1.5
43.5
15,00,000
)(
Billed amount
26,54,867
20,00,000
6,54,867
CTL had offered 90 Days credit to Branco the cost of which is measured at 2% of the Normal Billing
Rate, No such discount was offered to Harsha Industries Ltd.
Compute ALP and the amount of increase in Total Income of Chirag Technologies Ltd.
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Direct Taxation
20.27
Answer:
Computation of Arms Length Gross Profit Mark Up
(A)
Particulars
Normal GP Mark Up
Less
60
(a)
4.8
(b)
8.4
(13.2)
46.8
Add
1.2
1.2
(B)
48
Less
20,00,000
=
38,46,154
31,20,000
7,26,154
7,26,154
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International Taxation
20.28
III.B. Second Split = Contribution Ratio: Allocate the residual net profit amongst the enterprises in
proportion to their relative contribution.
III.C. Total Profit: Share of profit of each enterprise = Step III.A + III.B
Question: NBR Medical Equipments Inc. (NBR) of Canada has received an order from a leading UK
based Hospital for development of a hi-tech medical equipment which will integrate the best of software
and latest medical examination tool to meet varied requirements. The order was for 3,00,000 Euros. To
execute the order, NBR joined hands with its subsidiary Precision Components Inc. (PCI) of USA and
Bioinformatics India Ltd (BIL), an Indian Company. PCI holds 30% of BIL. NBR paid to PCI and BIL Euro
90,000 and Euro 1,00,000 respectively and kept the balance for itself. In the entire transaction, a profit of
Euro 1,00,000 is earned. Bioinformatics India Ltd incurred a Total Cost of Euro 80,000 in execution of its
work in the above contract. The relative contribution of NBR, PCI and BIL may be taken at 30%, 30% and
40% respectively. Compute the Arms Length Price and the incremental Total Income of Bioinformatics
India Ltd, if any due to adopting Arms Length Price determined here under:-
Particulars
A
Euros * +
3,00,000
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Direct Taxation
20.29
1,00,000
90,000
1,10,000
1,00,000
40,000
30,000
30,000
Add
80,000
40,000
1,20,000
(1,00,000)
20,000
2.
3.
Unrelated Enterprises: Enterprises are said to be unrelated, if they are not associated or deemed to
be associated u/s 92A.
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International Taxation
20.30
4.
Uncontrolled conditions: Conditions which are not controlled or suppressed or moulded for
achievement of pre-determined results are said to be uncontrolled conditions.
5.
6.
Question: Fox Solutions Inc. a US Company, sells Laser Printer Cartridge Drums to its Indian Subsidiary
Quality Printing Ltd at $20 per drum. Doc Solutions Inc. has other takers in India for its Cartridge Drums,
for whom the price is $30 per drum. During the year, Fox Solutions had supplied 12,000 Cartridge Drums
to Quality Printing Ltd.
Determine the Arms Length Price and taxable income of Quality Printing Ltd if its income after
considering the above is 45,00,000. Compliance with TDS provisions may be assumed and Rate per USD
is 45. Also determine income of Doc Solutions Inc.
Answer: Computation of Total Income of Quality Printing Ltd.
Particulars
Total Income before adjusting for differences due to Arms Length Price
Add
45,00,000
1,08,00,000
(1,62,00,000)
Incremental Cost on adopting ALP [U/s 92(3), Taxable Income cannot be reduced on
54,00,000
45,00,000
Transactions Not Taxable in India: Transactions will not be subject tax in India if transactions are on
principal-to-principal basis and are entered into at ALP, and the subsidiary also carries on business
on its own.
ii. Transactions Taxable in India if the Indian Subsidiary does not carry on any business on its own.
The following are the other considerations in this regard i.
Adopting ALP does not affect the computation of taxable income of Fox Solutions Inc. if tax has been
deducted at source or if tax is deductible.
ii. Where ALP is adopted for taxing income of the Parent Company, income of the recipient Company
(i.e. Quality Printing Ltd) will not be recomputed.
Question: Khazana Ltd is an Indian Company engaged in the business of developing and manufacturing
Industrial components. Its Canadian Subsidiary Techpro Inc. supplies technical information and offers
technical support to Khazana for manufacturing goods, for a consideration of Euro 1,00,000 per year.
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Direct Taxation
20.31
Income of Khazana Ltd is 90 Lakhs. Determine the Taxable Income of Khazana Ltd if Techpro charges
Euro 1,30,000 per year to other entities in India. What will be the answer if Techpro charges Euro 60,000
per year to other entitles. (Rate per Euro may be taken at 50)
1,00,000
50,000
50,00,000
50,00,000
65,00,000
*50,000 x 50+
30,00,000
(15,00,000)
20,00,000
90,00,000
90,00,000
Nil
20,00,000
90,00,000
1,10,00,000
Note: U/s 92(3), Taxable Income cannot be reduced on applying ALP. Therefore, difference on account of
ALP which reduces the Taxable Income is ignored.
92CA
92CA(1)
Where any person, being the assessee, has entered into an international transaction in any
previous year, and the Assessing Officer considers it necessary or expedient so to do, he may,
with the previous approval of the Commissioner, refer the computation of the arms length
price in relation to the said international transaction under section 92C to the Transfer
Pricing Officer.
92CA(2)
Where a reference is made under sub-section (1), the Transfer Pricing Officer shall serve a
notice on the assessee requiring him to produce or cause to be produced on a date to be
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International Taxation
20.32
specified therein, any evidence on which the assessee may rely in support of the computation
made by him of the arms length price in relation to the international transaction referred to
in sub-section (1).
92CA(3)
On the date specified in the notice under sub-section (2), or as soon thereafter as may be,
after hearing such evidence as the assessee may produce, including any information or
documents referred to in sub-section (3) of section 92D and after considering such evidence
as the Transfer Pricing Officer may require on any specified points and after taking into
account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by
order in writing, determine the arms length price in relation to the international transaction
in accordance with sub-section (3) of section 92C and send a copy of his order to the
Assessing Officer and to the assessee.
92CA(3A)
Where a reference was made under sub-section (1) before the 1st day of June, 2007 but the
order under sub-section (3) has not been made by the Transfer Pricing Officer before the said
date, or a reference under sub-section (1) is made on or after the 1st day of June, 2007, an
order under sub-section (3) may be made at any time before sixty days prior to the date on
which the period of limitation referred to in section 153, or as the case may be, in section
153B for making the order of assessment or reassessment or recomputation or fresh
assessment, as the case may be, expires.]
92CA(4)
On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute
the total income of the assessee under sub-section (4) of section 92C in conformity with the
arms length price as so determined by the Transfer Pricing Officer.+
92CA(5)
With a view to rectifying any mistake apparent from the record, the Transfer Pricing Officer
may amend any order passed by him under sub-section (3), and the provisions of section 154
shall, so far as may be, apply accordingly.
92CA(6)
Where any amendment is made by the Transfer Pricing Officer under subsection (5), he shall
send a copy of his order to the Assessing Officer who shall thereafter proceed to amend the
order of assessment in conformity with such order of the Transfer Pricing Officer.
92CA(7)
The Transfer Pricing Officer may, for the purposes of determining the arms length price
under this section, exercise all or any of the powers specified in clauses (a) to (d) of subsection (1) of section 131 or sub-section (6) of section 133.
Explanation.For the purposes of this section, Transfer Pricing Officer means a Joint
Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the
Board23 to perform all or any of the functions of an Assessing Officer specified in sections
92C and 92D in respect of any person or class of persons.]
Question: A Ltd., an Indian company, is a subsidiary company of B Inc., a company registered in the
USA. It purchases raw material from B Inc. Purchase prices of raw material determined by the most
appropriate methods are 9,800 and 10,200 per unit. A Ltd., however, pays (1) 10,200, (2) 10,300, (3)
10,400 (4) 9,600 (5) 9,700 and (6) 9,800. Determine the arms length price in the six situations.
Answer:
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Direct Taxation
20.33
Situations
10,000
10,000
10,000
10,000
10,000
10,000
10,200
10,300
10,400
9,600
9,700
9,800
Difference [1 - 2]
200
300
400
400
300
200
3% of arithmetic mean
300
300
300
300
300
300
10,200
10,300
10,000
9,600
9,700
9,800
= 2,975
2.
Question: What are the documents or information to be kept or maintained by the persons entering
into an international transaction? [S. 92D]
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International Taxation
20.34
Answer:
92D
92D(1)
Every person who has entered into an international transaction shall keep and maintain such
information and document in respect thereof, as may be prescribed
92D(2)
Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the
period for which the information and document shall be kept and maintained under that subsection.
92D(3)
The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding
under this Act, require any person who has entered into an international transaction to furnish
any information or document in respect thereof, as may be prescribed under sub-section (1),
within a period of thirty days from the date of receipt of a notice issued in this regard:
Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application
made by such person, extend the period of thirty days by a further period not exceeding thirty
days.
Question: Write a note on the report to be furnished by persons entering into international
transaction? [S. 92E]
Answer: Every person who has entered into an international transaction during a previous year shall
obtain a report from an accountant and furnish such report on or before the specified date in the
prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth
such particulars as may be prescribed.
Question: Definitions of certain terms relevant to computation of arms length price, etc. *S.92F+
Answer: Definitions of certain terms relevant to computation of arms length price, etc. In sections 92,
92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,
92F(i)
92F(ii)
arms length price means a price which is applied or proposed to be applied in a transaction
between persons other than associated enterprises, in uncontrolled conditions;
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Direct Taxation
20.35
92F(iii)
enterprise means a person (including a permanent establishment of such person) who is, or
has been, or is proposed to be, engaged in any activity, relating to the production, storage,
supply, distribution, acquisition or control of articles or goods, or know-how, patents,
copyrights, trade-marks, licences, franchises or any other business or commercial rights of
similar nature, or any data, documentation, drawing or specification relating to any patent,
invention, model, design, secret formula or process, of which the other enterprise is the owner
or in respect of which the other enterprise has exclusive rights, or the provision of services of
any kind, 26[or in carrying out any work in pursuance of a contract,] or in investment, or
providing loan or in the business of acquiring, holding, underwriting or dealing with shares,
debentures or other securities of any other body corporate, whether such activity or business is
carried on, directly or through one or more of its units or divisions or subsidiaries, or whether
such unit or division or subsidiary is located at the same place where the enterprise is located
or at a different place or places;
92F(iiia)
92F(iv)
specified date shall have the same meaning as assigned to due date in Explanation 2 below
sub-section (1) of section 139;
92F(v)
Answer: 5 crore
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International Taxation
20.36
firm. Both Mr. D and Mr. A are residents in India. Explain whether transfer pricing provision is
applicable to the said transaction.
Answer: Where the assessee incurs any expenditure for which payment has been made or is to be made
to person referred to in section 40A(2), such transaction is a specified domestic transaction under section
92BA, Relative of a partner is related person to the firm within the meaning of section 40A(2).
Disallowance under section 40A(2) is made by the Assessing Officer, if such payment is excessive or
unreasonable having regard to the fair market value of goods or services received. However, such
disallowance is not be made, if such transaction is of arms length price in accordance with section 92F.
In view of above provisions transfer pricing provisions shall apply to the instant transaction of purchase
of raw materials for sum exceeding 5 crores from relative of the partner.
[CMA INTER J16, 5 Marks]
Question: State any five items covered within the scope of the term specified domestic transaction
as per section 92BA.
[CMA INTER D8, 4 Marks]
Question: what are the specified domestic transactions which are liable for transfer price adjustments?
Answer: Specified domestic transactions which are liable for transfer price adjustment:
1. Any expenditure incurred between related parties.
2. International transactions between various units/undertakings of the associate in respect of goods or
services.
3. Transactions of tax holding undertakings.
4. Any other transactions as may be prescribed.
[CMA INTER SY12, D13 & D14, 4 & 5 Marks]
Question: What is impermissible avoidance arrangement and state the four tests applied for
deciding the same.
Answer: Impermissible avoidance agreement
An agreement whose main purpose or one of the main purposes is to obtain a tax benefit and which also
satisfies at least one of the four tests can be declared as an impermissible avoidance agreement.
The four tests applied for deciding the same are
1. The arrangement creates rights and obligations, which are not normally created between parties
dealing at arms length.
2. It results in misuse or abuse of the provisions of tax laws.
3. It lacks commercial substance or is deemed to lack commercial substance.
4. It is carried out in a manner, which is normally not employed for bona fide purpose.
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Direct Taxation
20.37
Question: Is it possible to apply advance pricing agreement entered into in a previous year to
international transactions entered into in preceding previous years as well?
Answer: Applicability of ALP to earlier year As per section 92CC (9A) inserted by the finance (no. 2) act,
2014 advance pricing agreement may provide for determining the arms length price or specify the
manner in which arms length price shall be determined in relation to international transaction entered
into by the person during maximum four previous years preceding the first of the previous years for
which such agreement is entered into and the arms length price shall be determined in accordance with
the said agreement.
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International Taxation
20.38
originally filed. An amendment is possible only if it is accompanied by the additional fee, if any,
necessitated by such amendment in accordance with rule 10-1.
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Direct Taxation
20.39
authority in India, one copy to the Commission of Income Tax who has the jurisdiction over the
income-tax assessment of the assessee and one copy to the Transfer Pricing Officer having the
jurisdiction over the assessee.
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International Taxation
20.40
Under section 94A(5) X, Ltd. is required to deduct tax at source from such interest of the highest of the
following three rates 1. Rate or rates in force;
2. Rate specified in the relevant provisions of the Income-tax Act;
3. 30%
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Direct Taxation
20.41
source and remitted. The Arms Length Price of Takoya Inc. was recomputed during the course of
transfer pricing assessment. Janak Ltd. wants to know whether there will be a corresponding recomputation in its hands also. Advice.
Answer: No Adjustment to Associated Enterprises Income: In cases where the total income of a
taxpayer is recomputed after determination of the arms length price paid to another associated
enterprises from which tax has been deducted or was deductible at source, the income of the other
associated enterprises shall not be recomputed by reasons of such determination of arms length price in
the case of the taxpayer. As a consequence, there will be no recomputation in Janak Ltds hands.
[CMA INTER D15, 4 Marks]
Question: Richard Shipping Co. of Australia is engaged in shipping business. It received 600 lakhs
towards carriage of goods from the port of Kolkata to Sydney during the year 2015-16. The net tonnage of
the ship exceeded 25,000 and the total quantum of goods carried was 6,000 tonnes.
The assessee wants to offer income on presumptive basis. Compute the income and state the procedure
for tax compliance.
Note: Presumptive income for a qualifying ship exceeding 25,000 net tonnage is 11,770 plus 29 for each
100 tonnes exceeding 25 tonnes.
Answer: Computation of tonnage income u/s 115VG
First,1,000 tons
1,000
700
9,000
4,770
15,000
6,300
35,000
10,150
2,19,200
Tonnage income = 2, 19,200 365 days = 37, 16,526 (Assuming Shipping days are 365 days)
As per section 115 VF the tonnage income computed under section 115VA would be deemed to be the
profit chargeable under head profit and gain of business.
The following conditions to be fulfilled by the company for applicability of the tonnage tax scheme.
(i) An option to get assessed under chapter X11G has to be filed by the company.
(ii) The company is required to credit to a reserve account tonnage tax reserve account, at least 20% of the
book derived from its core and incidental activities to be utilized before the expiry of 8 years for
acquisition of a new ship for the purpose of the business of the company until the acquisition of a new
ship, the amount can be utilized for the purpose of the business of operating qualifying ship. However
the amount should not be used for distribution of dividend or profit or for remittance outside India.
As profit or for creation of assets outside India.
[CMA INTER D15, 2 Marks]
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International Taxation
20.42
Question: A branch office of a foreign company in India has loss of 20 lakhs after charging head
office expenses of 50 lakhs. Explain with reasons the amount of income chargeable to tax in the hands
of the branch for the assessment year 2016-17.
Answer: Section 44C restricts the quantum of expenditure relating to head office to the extent of the
actual expenditure or 5% of the adjusted total income whichever is less.
The adjusted total income means the total income before deducting head office expenditure. The adjusted
total income in this case is 30 lakhs (20lakhs + 50lakhs). The amount eligible for deduction under
section 44C is 5% of 30 lakhs being 1.50 lakhs. Hence the total income liable to tax is 28.50 lakhs (30
lakhs less 5%).
[CMA INTER J16, 8 Marks]
Question: Mike Hussey, a non-resident and cricket player of Australia came to India in January 2016
and earned following incomes in India till 31.03.2016.
1. Income from participation in matches 7,00,000.
2. Appearance fee for advertisement for a tyre manufacturer 10,00,000.
3. Income from newspaper for writing articles on T20 world cup 5,00,000.
4. Income from horse race 2,00,000.
Compute his total income and tax liability for the assessment year 2016-17.
[CMA INTER D11, 8 Marks]
Question: ANJU, an individual resident retired employee of the All India Radio aged 60 years is a well-known
dramatist deriving income of 1,10,000 from theatrical works played abroad. Tax of 11,000 was deducted in the
country where the plays were performed. India does not have any Double Tax Avoidance Agreement under Section
90 of the Income-tax Act, 1961, with that country. Her income in India amounted to 5,10,000. In view of tax
planning she has deposited 70,000 in Public Provident Fund and paid contribution to approved Pension Fund of
LIC 32,000 along with subscription to notified long-term infrastructure bonds 25,000. She also contributed
18,000 to Central Government Health Scheme during the previous year and gave payment of medical insurance
premium of 21,000 to insure the health of her father, a non-resident aged 76 years, who is not depedent on her.
Compute the tax liability of ANJU for the Assessment year 2016-17.
Answer:
Computation of tax liability of Anju for the A.Y. 2016-17
Particulars
Less
Amount in
Indian Income
5,10,000
Foreign Income
1,10,000
Deductions
Deposit in PPF (section 80C)
70,000
32,000
Section 80D
Central Government Health Scheme
18,000
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Direct Taxation
20.43
21,000
39,000
But restricted to
30,000
Total Income
4,88,000
Nil
18,800
2,000
16,800
Add
Education cess @ 2%
336
Add
SHEC @ 1%
168
17,304
3,905
13,399
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International Taxation
20.44
Amount ()
1,25,000
Income in India
3,00,000
Total income
4,25,000
17,500
2,000
15,500
EC & SHEC at 3%
465
Total
15,965
3.756%
25%
1,25,000
4,695
11,270
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Direct Taxation
20.45
US$
Less
400
200
200
Since the price charged from Q. Ltd. is equal to ALP, the transaction between P. Ltd. and Q. Ltd. satisfies
the arms length test.
[CMA INTER D15, 4 Marks]
Question: LV Ltd., an Indian company supplied textile articles to its holding company BB Ltd., Spain
during the same product to another Spain based company VX Ltd., an unrelated party. During the year, it
supplied 10,000 units to BB Ltd. at Euro 100 per unit. It supplied 4,000 units to VX Ltd. at Euro 110 per
unit. It gave 3 months credit time to BB ltd. and whereas to VX Ltd. it supplied against payment i.e. no
credit time was given. The cost of capital may be taken as 12% per annum. Compute the arms length
price for the transaction with BB Ltd. 1Euro = 80.
Answer: LV ltd. supplied goods to its foreign holding company BB Ltd. at Euro 100 per unit with a credit
time of 3 months. To the unrelated party VX Ltd. it supplied at Euro 110 per unit with no credit time.
The cost of capital is given as 12% per annum which means 1% per month. The supply to unrelated party
with no credit time and to the related party with 3 months credit period show that the cost of capital at
3% for the extended credit time of 3 months.
Particulars
In Euro
100
3
103
110
7
70,000
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International Taxation
20.46