SARANSH Non-resident Taxation

NON RESIDENT TAXATION

RESIDENTIAL STATUS OF A COMPANY
Determination of POEM on the basis of ABOI Test
Company What is ABOI test?
A company is said to be engaged in ABOI, if it fulfills
cumulatively the following conditions:
Yes Its passive Less than Less than Payroll
Is it an Indian
R income* 50% of its 50% of the expenses
Company?
(wherever total assets total incurred on
earned) is are situated number of such
No
N
50% or less in India employees employees
No of its total are situated are less
Is the income in India or than 50% of
POEM in NR are resident its total
India?
in India payroll
Yes expenditure
* Passive income of a company shall be aggregate of:
R (i) Income from the transactions where both the
purchase and sale of goods is from/to its AEs; and
POEM - Place of effective management i.e.,
Place where key management and commercial
(ii) Income by way of royalty, dividend, capital gains,
decisions necessary for conduct of business of interest (except for banking Cos and public financial
an entity as a whole are, in substance made. institutions) or rental income whether or not
involving AEs.

Active Business Outside India (Business Test)

Companies fulfilling the test of ABOI Companies other than those fulfilling the test
of ABOI

• POEM outside India, if majority

BOD* meetings are held outside Stage 1: Identification of persons who actually make
India. the key management and commercial decisions for
• If de facto decision-making conduct of the company’s business as a whole.
authority is not BOD but Indian Stage 2: Determination of place where these
parent or resident, POEM shall decisions are, in fact, made
be in India.

* BOD – Board of Directors

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INCOME EXEMPTED SPECIFICALLY IN THE HANDS OF NON RESIDENTS [SECTION 10]

Section Income Available to
10(4)(ii) Interest on moneys standing to the credit in a NRE Individual resident outside
A/c of an individual in any bank in India as per the India (under FEMA Act) or an
FEMA Act, 1999. individual who has been
permitted to maintain said a/c
by RBI.
10(4C) Interest payable by an Indian Co. or Business Trust in A non-corporate NR or foreign
respect of moneys borrowed from a source outside co.
India by way of issue of rupee denominated bond
(RDB) during the period from 17.9.2018 to 31.3.2019.
10(4D) Income accrued or arising to or received by specified A specified fund
fund
- on transfer of a capital asset, being a bond of an
Indian Co. or a public sector company [sold by the
Government (Govt.) and purchased by the
specified fund in foreign currency], GDR or RDB
of an Indian Co. or derivative or any other notified
security, on a Recognised Stock Exchange (RSE)
located in any IFSC and where the consideration
for such transfer is paid or payable in convertible
foreign exchange; or
- on transfer of securities (other than shares in a co.
resident in India); or
- from securities issued by a NR (not being a PE of
a NR in India) and where such income otherwise
does not accrue or arise in India; or
- from a securitisation trust which is chargeable
under the head “PGBP”
to the extent such income accrued or arisen to, or is
received, is attributable to units held by a NR (not
being the PE of a NR in India) or is attributable to the
investment division of offshore banking unit,
computed in the prescribed manner.
10(4E) Any income accrued or arisen to, or received by, a NR
NR as a result of transfer of

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Section Income Available to

- non-deliverable forward contracts or offshore
derivative instruments or over-the-counter
derivatives
- distribution of income on offshore derivative
instruments,
entered into with an offshore banking unit of an IFSC
as referred to in section 80LA(1A), which fulfills
prescribed conditions.
10(4F) Any income of a NR by way of royalty or interest, on NR
a/c of lease of an aircraft or a ship in a PY, paid by a
unit of an IFSC referred to in section 80LA(1A), if the
unit has commenced its operation on or before
31.3.2024.
10(4G) Any income received by a NR from NR
- portfolio of securities or financial products or
funds, managed or administered by any portfolio
manager on behalf of such NR; or
- such activity carried out by such person as may
be notified by the Central Government,
in an a/c maintained with an Offshore Banking Unit
in any IFSC as referred to in section 80LA(1A), to the
extent such income accrues or arises outside India
and is not deemed to accrue or arise in India.
10(4H) Any income by way of capital gains on transfer of - NR or
equity shares of domestic company, being a Unit of - a Unit of IFSC, as referred to
an IFSC, as referred to in section 80LA(1A), engaged in section 80LA(1A)
primarily in the business of lease of an aircraft which engaged primarily in the
has commenced operations on or before 31.3.2026. business of leasing of an
The exemption from capital gains on transfer of aircraft
equity shares of such domestic company is available
for a period of 10 A.Ys. –
(i) from A.Y. relevant to the P.Y. in which the
domestic company has commenced its
operations or
(ii) from A.Y. 2024-25, where the period of 10 A.Ys.
under (i) above ends before 1.4.2034.
10(6)(ii) Remuneration received by Foreign Diplomats/ Individual (not being a citizen
Consulate and their staff of India)

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Section Income Available to

Conditions:
1. The remuneration received by our
corresponding Govt. officials/member of staff
resident in such foreign countries should be
exempt.
2. The member of staff should be the subjects of the
respective countries and should not be engaged in
any other business or profession or employment
in India.
10(6)(vi) Remuneration received by a foreign national as an Individual - Salaried Employee
employee of a foreign enterprise for services rendered (not being a citizen of India) of
by him during his stay in India, if: a foreign enterprise
a) foreign enterprise is not engaged in any trade or
business in India;
b) His stay in India does not exceed 90 days in
aggregate in such P.Y.; and
c) Such remuneration is not liable to be deducted
from the income of employer chargeable under
IT Act
10(6)(viii) Salary received by or due for services rendered in Individual - Salaried Employee
connection with his employment on a foreign ship if (NR who is not a citizen of
his total stay in India does not exceed 90 days in the India) of a foreign ship
P.Y.
10(6)(xi) Remuneration received as an employee of the Govt. of Individual - Salaried Employee
a foreign State during his stay in India in connection (not being a citizen of India) of
with his training in any Govt. Office/ State Govt. of foreign State
Undertaking/ corporation/ registered society etc.
10(6BB) Tax paid by an Indian Co., engaged in the business of Govt. of foreign State or foreign
operation of aircraft, which has acquired an aircraft enterprise (i.e., a person who is
or an aircraft engine on lease, under an agreement a NR)
approved (by Central Govt.), on lease rental/income
derived (other than payment for providing spares or
services in connection with operation of leased aircraft)
by the Govt. of a foreign State or foreign enterprise.
10(6C) Royalty income or FTS under an agreement with the Foreign Co. (notified by the
Central Govt. for providing services in or outside Central Govt.)
India in projects connected with security of India.

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Section Income Available to

10(6D) Royalty income from or FTS rendered in or outside Non-corporate NR and foreign
India to, the National Technical Research Co.
Organisation (NTRO).
10(15)(iiia) Interest on deposits made by a foreign bank with a Bank incorporated outside
scheduled bank with approval of RBI. India and authorised to
perform Central Banking
functions in that Country.
10(15)(iv)(fa) Interest payable by scheduled bank on deposits in a) NR or
foreign currency where the acceptance of such b) Individual or HUF, being a
deposits is duly approved by RBI. resident but not ordinarily
[Scheduled bank does not include co-operative bank] resident
10(15)(viii) Interest on deposit made on or after 01.04.2005 in an
Offshore Banking Unit
10(15)(ix) Interest payable by a unit located in IFSC in respect NR
of monies borrowed by it on or after 1.9.2019
10(23FBC) Any income accruing or arising to or received by a Unit holder of specified Fund
unit holder from a specified fund or on transfer of
units in a specified fund
10(23FE) Dividend, Interest, any sum referred to in section Specified person, being
56(2)(xii) or LTCG arising to specified person from (i) A wholly owned subsidiary
an investment made by it in India, whether in the of the Abu Dhabi
form of debt or share capital or unit, if such
Investment Authority
investment is
(ii) A sovereign wealth fund
(i) made between 1.4.2020 and 31.3.2024;
(iii) Pension Fund
(ii) held for at least 3 years
Satisfying the prescribed
(iii) in a business trust, a Co./enterprise/
conditions.
entity in developing/ operating/
maintaining an infrastructure facility or
(iv) in a SEBI Category I or II AIF having not
less than 50% investment in one or more
of the Co. or enterprise or entity referred
to in (iii) or in (v) or in (vi) or in an
Infrastructure Investment Trust or
(v) in a domestic Co., set up and registered on
or after 1.4.2021, having minimum 75%
investments in one or more of the

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Section Income Available to

companies or enterprises or entities
referred to in (iii) or
(vi) in a NBFC registered as an Infrastructure
Finance Co. or in an Infrastructure Debt
Fund, having minimum 90% lending to
one or more of the companies or
enterprises or entities referred to in (iii).

10(23FF) Income of the nature of capital gains on a/c of transfer NR or specified fund
of share of a Co. resident in India, by the resultant
fund or a specified fund to the extent attributable to
units held by NR (not being a PE of a NR in India) in
such manner as may be prescribed, and such shares
were transferred from the original fund, or from its
wholly owned special purpose vehicle, to the resultant
fund in relocation, and where capital gains on such
shares were not chargeable to tax if that relocation
had not taken place.
10(34B) Any income by way of dividends from a Co. being a Unit of any IFSC engaged in the
unit of any IFSC primarily engaged in the business of business of leasing of an aircraft
leasing of an aircraft.
10(48) Income received in India in Indian currency on a/c of Foreign co. on a/c of sale of
sale of crude oil or any other goods or rendering of crude oil, any other goods or
services, as may be notified by the Central Govt. in this rendering of services. It should
behalf, to any person in India. Foreign Co. and not be engaged in any other
agreement should be notified by the Central Govt. in activity in India.
national interest.
10(48A) Income accruing or arising on a/c of storage of crude Foreign co. on a/c of storage of
oil in a facility in India and sale of crude oil therefrom crude oil in a facility in India
to any person resident in India. Foreign Co. and and sale of crude oil therefrom.
agreement should be notified by the Central Govt. in
national interest.
10(48B) Income from sale of leftover stock of crude oil from Foreign Co. from sale of
facility in India after the expiry of agreement or leftover stock of crude oil from
arrangement referred to in section 10(48A) or on the facility in India.
termination of the said agreement or arrangement, in
accordance with the terms mentioned therein,
subject to such conditions notified by the Central
Govt.

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PRESUMPTIVE PROVISIONS APPLICABLE TO NON RESIDENTS

Particulars 44B 44BBA 44BB 44BBB
Nature of Shipping Operation Business of providing Business of civil
business business of aircraft services or facilities in construction or the
connection with, or business of erection of P &
supplying P & M on hire M or testing or
used, or to be used, in the commissioning thereof, in
prospecting for, or connection with turnkey
extraction or production power projects approved by
of, mineral oils the Central Govt.
Eligible NR NR NR Only Foreign co.
assessee
Presumptive 7.5% of 5% of 10% of specified sum 10% of specified sum
income specified specified
sum sum
Specified (i) Amount paid or payable (i) Amount paid or Amount paid or payable
sum on a/c of carriage of payable on a/c of the on a/c of such civil
passengers, livestock, provision of such construction, erection,
mail or goods shipped services or facilities for testing or commissioning
at/ from any port/place the aforesaid purposes
in India; and in India; and
(ii) Amount received or (ii) Amount received or
deemed to be received deemed to be received
in India on a/c of the in India on a/c of the
carriage of passengers, provision of services or
livestock mail or goods facilities for the
shipped at/ from any aforesaid purpose
port/place outside outside India.
India
Option to Not available Lower profits may be claimed u/s 44BB and u/s 44BBB
declare lower provided the assessee maintains books of account
profits (BOA) u/s 44AA and gets them audited u/s 44AB.
No set off of unabsorbed depreciation and b/f loss would be
allowed to the assessee in the P.Y. in which he/it declares
profits and gains @10% in accordance with the presumptive
provisions of section 44BB/ 44BBB.

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DEDUCTION IN RESPECT OF HEAD OFFICE EXPENSES IN CASE OF NON

RESIDENTS [SECTION 44C]
Deduction of Head Office (HO) expenditure in case of Non-residents (NR) while computing
PGBP

Lower of

5% of Adjusted Total Income (TI) Amount of HO expenditure incurred by the NR

attributable to the business or profession in India

Meaning of Adjusted TI Meaning of HO expenditure

TI, without giving effect to: Executive and general administration expenditure incurred
(i) HO exp by the NR outside India, incl:
(ii) Unabsorbed depreciation (a) Rent, rates, taxes, repairs or ins of any premises
(iii) Capital exp. on family planning outside India used for business or profession
(iv) Losses c/f : (b) Salary, wages, perquisite etc. to any employee or
- Business loss u/s 72(1) other person managing the affairs of any office
- Speculation business Loss u/s outside India
73(2) (c) Travelling expenditure by any employee or other
- LTCL/STCL u/s 74(1) person managing the affairs of any office outside
- Loss from owning and India
maintaining race horses u/s (d) Such other executive and general administration
74A(3) expenditure prescribed
(v) Deductions under Chapter VI-
A from Gross Total Income

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SPECIAL PROVISIONS RELATING TO TAXATION OF INVESTMENT INCOME AND

LONG TERM CAPITAL GAINS OF A NON RESIDENT [CHAPTER XII-A]

Special Provisions relating to certain incomes of NR individual, being a citizen

of India or Person of Indian Origin

Investment LTCG relating LTCG of an asset, Other

Income to FEA, being a other than a specified Income
from FEA LTCA asset

Normal rates
Rate of tax 20% 10% 20%
of tax

Allowable.
Not However, benefit Allowable. Allowable
Deduction for
allowable of indexation of Benefit of indexation
expenses or
COA is not of COA is available.
allowance
available.

Deduction Not
under allowable Not allowable Not allowable Allowable
Chapter VI-A

Exemption
Allowable
u/s 115F
If entire net
If part of net
consideration is
consideration is
invested in
invested in specified
specified asset
asset (new asset)
(new asset)

Entire LTCG would be Proportionate LTCG

exempt would be exempt

Exempted LTCG deemed In case of transfer of new

to be income chargeable to asset/conversion into money within 3
tax in the year of transfer years of acquisition

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Meaning of Foreign Exchange Asset (FEA)

Acquired/purchased/ subscribed to in convertible

Specified asset
foreign exchange

Shares in Debentures Deposits Any security Other assets

an Indian issued by an with an of the CG notified by
Co. Indian Co. Indian Co. the CG
(other than a (other than
Pvt. Co.) a Pvt. Co.)

SPECIAL PROVISIONS FOR COMPUTING TAX ON INCOME BY WAY OF DIVIDEND,

INTEREST ETC. [SECTION 115A]
(i) Where the total income of a foreign Co. or a non-corporate NR includes any income Rate of
by way of Tax
(1) - Dividends received from a unit in an IFSC, referred to in section 80LA(1A) 10%
- Dividend other than mentioned above 20%
(2) Interest received from the Govt. or an Indian concern on monies borrowed or debt 20%
incurred by the Govt. /Indian concern in foreign currency, other than (3) and (4)
mentioned below
(3) Interest received from an infrastructure debt fund referred to in section 10(47) 5%
(4) Interest referred to in section 194LC received from an Indian Co. or business
trust –
- in respect of monies borrowed by an Indian Co. or business trust in foreign currency
from sources outside India
• Under a loan agreement between 1.7.2012 and 30.6.2023 or
• by way of issue of long-term infrastructure bonds between 1.7.2012 and
30.9.2014 or 5%
• by way of issue of long-term bonds including long-term infrastructure bonds
between 1.10.2014 and 30.6.2023
as approved by the Central Govt.
- in respect of monies borrowed from sources outside India by way of RDB on or
before 30.6.2023
- in respect of monies borrowed by it from a source outside India by way of issue of 4%
any long-term bond or RDB between 1.4.2020 and 30.6.2023, which is listed only on
a RSE located in any IFSC

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- in respect of monies borrowed by it from a source outside India by way of issue of

any long-term bond or RDB on or after 1.7.2023, which is listed only on a RSE 9%
located in any IFSC
(5) Interest to a Foreign Institutional Investor or Qualified Foreign Investor
- payable between 1.6.2013 and 30.6.2023 on investment made in
• Rupee denominated bond of an Indian company 5%
• Government security
- payable between 1.4.2020 and 30.6.2023 on investment made in municipal debt
security
(6) Distributed income referred to in section 194LBA(2),
- Interest income of a business trust from a SPV, distributed by business trust to its 5%
NR unit holders
- dividend income of a business trust received or receivable from a SPV exercising the 10%
option to pay tax at concessional rate u/s 115BAA, distributed by business trust to its
NR unit holders
However, if the SPV has not exercised the option to pay tax at concessional rate u/s
115BAA, dividend income would be exempt in the hands of unit holders.
(7) Income received in respect of units purchased in foreign currency of a mutual fund (MF) 20%
specified u/s 10(23D) or of the UTI

(ii) Tax on royalty or fees for technical services in case of non-residents

Where the total income of a foreign company or a non-corporate non- Applicable Rate of
resident includes any income by way of royalty or fees for technical services Tax
(FTS) other than the income referred to in section 44DA

(1) Received from the Government in pursuance of an agreement made by the 20% of such royalty
non-resident/foreign company with the Government or FTS. However, if
(2) Received from the Indian concern in pursuance of an agreement made by DTAA provides for a
the non-resident/foreign company with the Indian concern and the rate lower than 20%,
agreement is approved by the Central Government or where it relates to then, the provisions
industrial policy of Government of India, the agreement in accordance with
of DTAA would
that policy.
apply.

Notes:
1. Special rate of tax is applicable on the abovementioned incomes. The remaining income of the
assessee will be chargeable to tax at normal rates applicable to assessee.
2. No deduction in respect of any expenditure or allowance shall be allowed u/s 28 to 44C and section
57 in computing the above income.

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3. Deduction under Chapter VI-A is not available in respect of abovementioned incomes. However, a
unit of an IFSC can claim deduction u/s 80LA against abovementioned incomes.
4. Exemption from filing return of income u/s 139(1) would be available if total income comprises only
of the income referred in (i) and (ii) and tax has been deducted from such incomes and the rate of
such tax deduction is not less than the rate specified in the above table.

TAX TREATMENT OF ROYALTY & FEES FOR TECHNICAL SERVICES (FTS)

RECEIVED FROM GOVERNMENT/ INDIAN CONCERN IN PURSUANCE OF
APPROVED AGREEMENT

Is right, property or contract effectively connected with PE/Fixed Place of

Profession (FPP) in India?
Yes No

Royalty & FTS would be computed as per Rate of tax@20% u/s 115A
section 44DA under the head “PGBP”; and on gross royalty/FTS
normal rates of tax would apply would apply

No deduction of any
expenditure or allowance
is allowable u/s 28 to 44C
or u/s 57
Accounts & Audit Deduction of
expenditure
Deduction under Chapter
VI-A permissible

Books of Books of No deduction No deduction Exemption

account to account to be in respect of in respect of from filing
be audited & expenses not amount paid return of
maintained Audit Report incurred (other than income u/s
as per to be wholly & reimbursement 139(1), tax
section furnished by exclusively in of actual has been
44AA one month relation to PE/ expenses) by deducted
prior to the Fixed place of PE/Fixed place @20%#
due date of profession in of profession to
return of India HO & other
income offices
#
If tax has been deducted at a rate lower than 20% by availing the beneficial provisions of DTAA, then, no
exemption would be available from filing return of income.

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SPECIAL PROVISIONS FOR COMPUTING TAX ON INCOME OF SPECIFIED FUND

OR FOREIGN INSTITUTIONAL INVESTORS FROM SECURITIES OR CAPITAL GAINS
ARISING FROM THEIR TRANSFER [SECTION 115AD]
S. No. Income Rate of Tax

(a) Income received in respect of securities other than 20% in case of

• income on units referred to in section 115AB i.e., units of Mutual FII,
Fund specified u/s 10(23D) or UTI 10% in case of
specified fund
• Interest referred u/s 194LD

(b) Interest referred u/s 194LD 5%

(c) Income by way of Short term capital gains arising from the transfer of 30%
securities (other than Short term capital gains u/s 111A)

(d) Income by way of Short term capital gains u/s 111A 15%

(e) Income by way of Long term capital gains arising from the transfer of 10%
securities (other than Long term capital gains u/s 112A)

(f) Income by way of long term capital gains u/s 112A exceeding 10%
` 1 lakh

(g) Other income of Specified Fund or FII At normal

rates of tax

Notes:
(1) In case of specified fund, the provision of this section would apply only to the extent of income
that is attributable to units held by NR (not being a PE of a NR in India) calculated in the prescribed
manner.
(2) Where the specified fund is investment division of an offshore banking unit, the provisions of this
section would apply to the extent of income that is attributable to the investment division of such
banking units, calculated in prescribed manner.
(3) No deduction in respect of any expenditure or allowance shall be allowed u/s 28 to 44C and section
57 from income from securities (referred to in (a) and (b) above).
(4) Deduction under Chapter VI-A is not available in case of income from securities, STCG or LTCG arising
from transfer of securities.
(5) Conversion to foreign currency and indexation benefit would not be available while computing
capital gains on transfer of securities.
(6) The provisions of AMT under section 115JEE would not apply to specified fund.
(7) Surcharge and HEC would not be applicable to specified fund in respect of income received from
securities referred to in section 115AD(1)(a) [referred to in (a) and (b) above].

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SPECIAL PROVISION FOR COMPUTING TAX ON NON RESIDENT SPORTSMEN OR

SPORTS ASSOCIATIONS [SECTION 115BBA]
Assessee Income

(a) A sportsman Any income received or receivable by way of—

(including an athlete), (i) participation in India in any game (other than a game the winnings
who is not a citizen of wherefrom are taxable u/s 115BB, being winning from crossword
India and is a NR puzzles, races including horse races, card games and other games
of any sort of gambling or betting) or sport; or
(ii) advertisement; or
(iii) contribution of articles relating to any game or sport in India in
newspapers, magazines or journals;

(b) A NR sports Any amount guaranteed to be paid or payable to such association or

association or institution in relation to any game (other than a game the winnings
institution wherefrom are taxable u/s 115BB) or sport played in India

(c) An entertainer who is Any income received or receivable from his performance in India
not a citizen of India
and is a NR

Notes:

1. The abovementioned incomes would be chargeable to tax @20%. The remaining income of the
assessee will be chargeable to tax at normal rates applicable to assessee.

2. No deduction in respect of any expenditure or allowance shall be allowed under any provisions of
the Act in computing the above income.

3. Exemption from filing return of income u/s 139(1) would be available if his total income during the P.Y.
consisted only of the abovementioned income and tax has been deducted from such incomes.

WITHHOLDING TAX PROVISIONS RELATING TO NON RESIDENTS

Section Nature of payment Rate of TDS

192 Salary Concessional rate

u/s 115BAC/ normal
slab rates if the
individual has
exercised the option
to shift out of the
default tax regime
192A Premature withdrawals from EPF, aggregating to ` 50,000 or more 10%

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194B Income by way of winnings from lotteries, crossword puzzles, card 30%
games and other games of any sort or from gambling or betting of
any form or nature whatsoever, where amount or aggregate of amts
paid to a person > ` 10,000 in a F.Y.
194BA Income by way of winnings from any online game 30%
194BB Income by way of winnings from horse races, where amount or 30%
aggregate of amounts paid to a person > ` 10,000 in a F.Y.
194E Income referred u/s 115BBA to NR sportsmen/sports association or 20%
an entertainer
194G Commission etc. on the sale of lottery tickets, where amt payable to a 5%
person > ` 15,000
194LB Interest payable by infrastructure debt fund to non-corporate NR or 5%
foreign Co.
Distribution of any interest income, received or receivable by a 5%
business trust from a SPV, to its unit holders
Distribution of any dividend income, received or receivable by 10%
business trust from a SPV exercising option to pay tax at concessional
194LBA(2)
rate u/s 115BAA, to its unit holders.
However, if the SPV is not exercising the option to pay tax at
concessional rate u/s 115BAA, dividend income would be exempt in
the hands of unit holders and tax would not be deductible at source
194LBA(3) Distribution of any income received from renting or leasing or letting
out any real estate asset directly owned by the business trust, to its
unit holders At the rates in force
194LBB Investment fund paying income to a unit holder [other than the
income exempted u/s 10(23FBB)].
194LBC(2) Income in respect of investment made in a securitisation trust
(specified in Explanation to section 115TCA)
194LC Interest payable by an Indian Co. or a business trust to a non- 5%
corporate NR or foreign Co.–
- in respect of monies borrowed in foreign currency from sources
outside India
• under a loan agreement between 1.7.2012 and 30.6.2023 or
• by way of issue of long-term infrastructure bonds during the
period between 1.7.2012 and 30.9.2014 or
• by way of issue of long-term bonds including long term
infrastructure bonds between 1.10.2014 and 30.6.2023
as approved by the Central Govt. or

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- in respect of monies borrowed from sources outside India by way

of RDB on or before 30.6.2023
Interest payable by an Indian Co. or a business trust to non-corporate NR 4%
or foreign Co., in respect of monies borrowed by it from a source outside
India by way of issue of any long term bond or RDB between 1.4.2020 and
30.6.2023, which is listed only on a RSE located in any IFSC
Interest payable by an Indian company or a business trust to a non- 9%
corporate NR or foreign Co., in respect of monies borrowed by it from
a source outside India by way of issue of any long term bond or RDB
on or after 1.7.2023, which is listed only on a Recognised Stock
Exchange located in any IFSC
Interest payable by an Indian co. or a business trust to a NR, Nil [Since such int. is
including a foreign Co., in respect of RDB issued outside India during exempt u/s 10(4C),
the period from 17.9.2018 to 31.3.2019 no tax is deductible
u/s 194LC]
194LD On interest payable 5%
- between 1.6.2013 and 30.6.2023 on
• RDB of an Indian Co. or
• Govt. securities or
- between 1.4.2020 and 30.6.2023 on municipal debt securities

On withdrawal of cash in excess of ` 1 crore 2% on amt

Where the recipient is a co-operative society, the higher threshold exceeding ` 1 crore
limit of ` 3 crores is applicable for withdrawals
In case the recipient has not filed return of income for all the 3 - @2% of the sum,
immediately preceding PYs, for which time limit u/s 139(1) has where cash
expired, the sum shall be the amount or aggregate of amounts, in withdrawal >
cash > ` 20 lakhs during the P.Y.
` 20 lakhs but ≤
` 1 crore (` 3
crore, where the
194N
recipient is a co-
operative society)
- @5% of the sum,
where cash
withdrawal > ` 1
crore (` 3 crore,
where the
recipient is a co-
operative society)

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SARANSH Non-resident Taxation

195 Any other sum payable to NR At the rates in force

196A Income on units of a MF specified u/s 10(23D) or from the specified 20%
Co. referred to in section 10(35) payable to non-corporate NR or
foreign Co.
Where a DTAA applies to the payee and if the payee has furnished a tax
residency certificate then, tax thereon shall be deducted @20% or at the
rate or rates of income-tax provided in such agreement for such
income, whichever is lower.
196B Income from units of a MF or UTI purchased in foreign currency 10%
(including LTCG on transfer of such units) payable to an Offshore
Fund
196C Income by way of interest or dividend on bonds of an Indian Co. or 10%
Public Sector Co. sold by the Govt. and purchased by a NR in foreign
currency or GDRs referred to u/s 115AC (including LTCG on transfer
of such bonds or GDRs) payable to a NR
Income of FII from securities (not being income by way of interest 20%
referred u/s 194LD or capital gain arising from such securities)
Where a DTAA applies to the payee and if the payee has furnished a
TRC then, tax thereon shall be deducted @20% or at the rate or rates of
196D income-tax provided in such agreement for such income, whichever is
lower.
Income of specified fund from securities [not being income by way of 10%
interest referred u/s 194LD or capital gain arising from such securities
or income exempt u/s 10(4D)]
Note - In all the above cases, the rate of tax would be increased by surcharge, wherever applicable, and HEC
@4% except in case of deduction of tax at source u/s 196D on income of a specified fund.

© ICAI BOS(A) 169

SARANSH Double Taxation Relief

DOUBLE TAXATION RELIEF

Double This arise from the In order to avoid
taxation (DT) two basic rules that such double
means taxing enables the country of taxation, Double
the same residence as well as Tax Avoidnace
income twice the country where the Agreements
in the hands of source of income come into play.
an assessee. exists to impose tax
namely,

Source Rule Residence Rule

Income taxed in the Country in

which it originates irrespective of Income taxed in the Country in
whether the income accrues to a which the taxpayer is resident
resident or NR

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SARANSH Double Taxation Relief

Double Taxation Relief under the

Income-tax (IT) Act, 1961

Bilateral Relief [Section 90/90A] Unilateral Relief [Section 91]

Agreement with foreign countries or specified

Countries with which no agreement exists
territories

• The CG may enter into an agreement

with the Govt of any country outside
India or specified territory or specified Applicability •Assessee, who is a resident in
association outside India,— India during the P.Y.
•for the granting of relief in respect of
doubly taxed income
•for the avoidance of DT of income
Objective without creating opportunities for
non-taxation or reduced taxation •The income accrues or arises
through tax evasion or avoidance to him outside India.
•for exchange of information for the •The income is not deemed to
prevention of evasion or avoidance accrue or arise in India during
of income-tax the P.Y.
•for recovery of income-tax
•The income in question has
been subjected to income-tax
•Taxability of income would be
in the foreign country in the
Taxability determined based on DTAA or the Conditions
hands of the assessee.
IT Act, 1961, whichever is more
beneficial. •The assessee has paid tax on
the income in the foreign
country.
Charge of •The charge of tax in respect of a
foreign Co. at a rate higher than the •There is no agreement for
tax on relief from DT b/w India and
rate at which a domestic Co. is
foreign chargeable, shall not be regarded as the other country where the
Co. less favourable charge or levy of tax income has accrued or arisen.
in respect of such foreign Co.

•In order to claim DT relief, the NR

Tax to whom such DTAA applies, has to
•Doubly taxed income x
obtain a TRC from the Govt of that Computation
Residency Indian rate of tax or Rate of
country or specified territory.
of Relief tax in the said country,
Certificate • The NR to also provide such other whichever is lower
(TRC) documents and information, as may
be prescribed, for claiming treaty
benefits.

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SARANSH Advance Rulings

ADVANCE RULINGS
No Is the applicant an eligible applicant falling u/s
Cannot make an application for
245N(b)(A)?
advance ruling
Yes
Entitled to make an application
for advance ruling

No further Yes Is the application withdrawn by the applicant

processing within 30 days from the date of application?

No
Whether the question raised in the application
• is already pending before income-tax authorities/ ITAT (except
in case of public sector company, being a notified class of
Board for Advance Yes resident applicant) / Court?
Rulings (BAR) shall not • involves determination of Fair Market Value of any property?
allow the application • relates to a transaction designed prima facie for avoidance of
income-tax?

• Opportunity of being heard to No

be given to the applicant No
Whether application accepted?
• Reasons for rejection to be
given in the order. Yes

Copy of application forward to PC or Commissioner

requiring him to furnish records, if required

BAR to pronounce ruling within 6

months of receipt of application

Copy of advance ruling pronounced

sent to the applicant and to the

Advance Ruling is Yes

Is the advance ruling obtained by fraud/ misrepresentation?
void ab initio

No

Applicant or the AO on the Advance Ruling is valid

directions of PCIT/CIT can file
appeal before the HC
within 60 days from the date of Ruling pronounced by BAR is appealable before the
communication of order High Court (HC)

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SARANSH Advance Rulings

WHO CAN BE AN APPLICANT IN RELATION TO DIFFERENT CLAUSES OF SECTION

245N(a) DEFINING ADVANCE RULING?
S. Applicant u/s Advance Ruling u/s 245N(a) means determination by the AAR in relation to
No. 245N(b)(A)
(i) NR a transaction which has been undertaken or is proposed to be undertaken by
him.
(ii) Resident the tax liability of a NR arising out of a transaction which has been undertaken
or is proposed to be undertaken by a resident applicant with such NR and such
determination shall include the determination of any question of law or of fact
specified in the application.
(iii) Resident of class the tax liability of a resident applicant, arising out of a transaction which has
or category of been undertaken or is proposed to be undertaken by such applicant and such
persons notified determination shall include the determination of any question of law or of fact
by Central Govt. specified in the application.
Note: The Central Govt notified a resident, in relation to his tax liability arising out of one or more
transactions valuing ` 100 crore or more in total.
(iv) Resident of class or an issue relating to computation of total income which is pending before any
category of persons Income-tax Authority or the Appellate Tribunal and such determination or
notified by Central decision shall include the determination or decision of any question of law or
Government fact in relation to such computation of total income specified in the application.
Note: A public sector undertaking has been notified by the Central Govt.
(v) Resident or NR an arrangement, which is proposed to be undertaken by any person being a
resident or a NR, is an impermissible avoidance arrangement as referred to in
Chapter X-A or not.

FEE FOR APPLICATION FOR ADVANCE RULINGS

Category of Category of case Fee
applicant
An applicant Amount of one or more transaction, entered into or proposed to be ` 2 lakhs
referred to in (i) undertaken, in respect of which ruling is sought does not exceed ` 100
or (ii) or (iii) crore.
above Amount of one or more transaction, entered into or proposed to be ` 5 lakhs
undertaken, in respect of which ruling is sought exceeds ` 100 crore but
does not exceed ` 300 crore.
Amount of one or more transaction, entered into or proposed to be ` 10 lakhs
undertaken, in respect of which ruling is sought exceeds ` 300 crore.
Any other In all cases ` 10,000
applicant

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SARANSH Transfer Pricing

TRANSFER PRICING
Chapter X: Special provisions relating to Avoidance of Tax [Transfer Pricing provisions]

Income should arise from Income to be Computation of income as per ALP

computed should have the effect of ↑ing taxable
having regard to income or ↓ing loss computed
International Specified domestic ALP
Transaction transaction (SDT)

Transaction is in the ALP is the price  Nature & class

Transaction Either or nature of- applied/ proposed to of International
between 2 both of a Purchase, sale or be applied in a Transaction and
or more AEs AEs lease of – transaction between SDT
should tangible or persons other than  Class(es) of AEs,
be NRs intangible AEs in functions
property uncontrolled performed,
b Provision of conditions assets employed
services & risks assumed
c Lending or (FAR)
borrowing of  Availability,
money coverage &
d Any other ALP to be computed reliability of data
transaction as per most Factors for required for
having a bearing appropriate method selecting application of
on profits, (MAM) amongst MAM the method
income, losses or prescribed methods  Degree of
assets of AEs comparability
Transaction between the
including a mutual International
agreement or The price so Transaction and
arrangement between determined SDT &
Is more than one No
two or more AEs for is the ALP uncontrolled
price is determined
allocation of cost or transaction
by the MAM?
exp. incurred w.r.t a  Extent to which
benefit, service or reliable &
Yes
facility provided to accurate
any AE. adjustments can
Whether the MAM No Arithmetic be made to a/c
selected is CUP, mean of all for differences
RPM, CPM or values between
TNMM? included in International
Yes the dataset Transaction and
would be SDT &
Does the dataset
the ALP comparable
constructed have 6 No uncontrolled
or more entries?
transaction
Yes
(CUT)
If the transaction Range Concept to be If the
applied i.e., arm’s  Nature, extent &
price is within this transaction
length range starting reliability of
range, the same will price is outside
from 35th percentile assumptions
be deemed to be the this range, the
of the dataset to the required to be
ALP ALP would be
65th percentile of the made in
the median of
dataset to be application of a
constructed the dataset
method

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SARANSH Transfer Pricing

Associated Enterprises (AEs) [Section 92A(1)]

Condition Example
(1) An enterprise which participates, Where A Ltd. directly participates in the management of
directly or indirectly, or through one B Ltd. and B Ltd. directly participates in the management
or more intermediaries, in: of C Ltd. In such situation, A Ltd. has direct participation
• management of the other in management of B Ltd. but has an indirect participation
enterprise, or in management of C Ltd.
• control of other enterprise, or A B C
• capital of other enterprise
In such scenario, both B Ltd. and C Ltd. would be AE of A
Ltd.
(2) If one or more persons participates, Mr. A directly has control in A Ltd. and B Ltd. In such a
directly or indirectly, or through scenario, both A Ltd. & B Ltd. are associated enterprises
one or more intermediaries in: since there is a common person i.e., Mr. A, who controls
• management/control/capital both entities A Ltd. & B Ltd.
of the two different enterprises
Then, those two enterprises are AEs.

Deemed Associated Enterprises [Section 92A(2)]

Condition Situation Example
Substantial One enterprise holds 26% or A Ltd. holds 33% of Voting Power in B Ltd. and B Ltd.
voting power more of the voting power, holds 80% Voting Power in C Ltd.
directly or indirectly, in the 33% 80%
A B C
other enterprise.
In above situation, A Ltd. holds 26% or more voting
power in B Ltd., directly and in C Ltd. indirectly (i.e.,
through B Ltd.). Therefore, both B Ltd. & C Ltd. are
deemed associated enterprises of A Ltd.
Substantial Any person or enterprise Mr. A holds 40% of voting power in both X Ltd. and Y
voting power holds 26% or more of the Ltd. where neither X Ltd. has any holding in Y Ltd.
in two voting power, directly or nor Y Ltd. has any holding in X Ltd.
entities by indirectly, in each of two Mr. A
common different enterprises. 40% 40%
person
X Ltd. Y Ltd.
In this situation, since Mr. A directly holds 40% of
voting power in both X Ltd. and Y Ltd., X Ltd. & Y
Ltd. will be deemed associated enterprises.
Advancing of One enterprise advances Book Value of total assets of Y Ltd. is ` 100 crores. X
substantial loan to the other enterprise Ltd. advances loan of ` 60 crores to Y Ltd.
sum of money of an amount of 51% or In this case, X Ltd. advances loan of ` 60 crores to Y

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SARANSH Transfer Pricing

more of the book value of Ltd, which is 60% of the book value of total assets of Y
the total assets of other Ltd. Hence, X Ltd. & Y Ltd. are deemed associated
enterprise. enterprises.
Guaranteeing One enterprise guarantees P Inc. has total loan of 1 million dollars from XYZ
borrowings 10% or more of the total Bank of America. Out of that, A Ltd., an Indian
borrowings of the other company, guarantees 20% of total borrowings in case
enterprise. of any default made by P Inc. In such case, since A
Ltd. guarantees 20% of total borrowings of P Inc., P
Inc. and A Ltd. are deemed associated enterprises.
Appointment One enterprise appoints X Ltd. has 15 directors on its Board. Out of that, Y
of majority more than half of the board Ltd. has appointed 8 directors. In such case, X Ltd.
directors of of directors or members of and Y Ltd. are deemed associated enterprises.
other the governing board, or one
enterprise or more executive directors
or executive members of the
governing board of other
enterprise.
Appointment More than half of the Mr. A appointed 9 directors out of 15 directors of X
of majority directors or members of the Ltd. and appointed 2 executive directors on the board
directors of governing board, or one or of Y Ltd. In such case, since a common person i.e.,
two different more of the executive Mr. A appointed more than half of the directors in X
enterprises by directors or members of the Ltd. and appointed 2 executive directors in Y Ltd.,
same governing board of each of both X Ltd. and Y Ltd. are deemed associated
person(s) the two enterprises are enterprises.
appointed by the same
person(s).
Dependence The manufacture or processing of goods or articles or business carried out by one
on intangibles enterprise is wholly dependent (i.e. 100%) on the know-how, patents, copyrights,
w.r.t which trade-marks, licenses, franchises or any other business or commercial rights of
other similar nature, or any data, documentation, drawing or specification relating to any
enterprise has patent, invention, model, design, secret formula or process, of which the other entity
exclusive is the owner or in respect of which the other enterprise has exclusive rights.
rights
Dependence 90% or more of raw materials and consumables required for the manufacture or
on raw processing of goods or articles carried out by one enterprise, are supplied by the
material other enterprise, or by persons specified by the other enterprise, where the prices and
supplied by other conditions relating to the supply are influenced by such other enterprise.
other
enterprise
Dependence The goods or articles manufactured or processed by one enterprise, are sold to the
on sale other enterprise or to persons specified by the other enterprise, and the prices and
other conditions relating thereto are influenced by such other enterprise.

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SARANSH Transfer Pricing

Control by Where one enterprise is Mr. A and Mr. B are relatives. Mr. A has control over
common controlled by an individual, X Ltd. and Mr. B has control over Y Ltd. Therefore,
individual the other enterprise is also both X Ltd. and Y Ltd. will be deemed associated
controlled by such enterprises.
individual or his relative or
jointly by such individual
and his relatives.
Control by Where one enterprise is
HUF Member of
HUF or controlled by a HUF and the HUF/ Relative of
member other enterprise is member of such
thereof controlled by a member of HUF
such HUF or by relative of a Control Control
member of such HUF or
jointly by such member and A Ltd. B Ltd.
his relative.

A Ltd & B Ltd are deemed associated enterprises.

Interest in a Where one enterprise is a firm, AoPs or Bols, the other enterprise holds 10% or more
firm, AoPs or interest in firm/AoPs/BoIs.
BoIs
Mutual There exists between the two enterprises, any relationship of mutual interest, as may
interest be prescribed.
relationship

INTERNATIONAL TRANSACTION [SECTION 92B]

a transaction
As per section between two or more transaction in the nature
92B, an international associated of:
transaction means enterprises, either or
both of whom are
non-residents; and
•sale/purchase/lease of tangible property; or
•sale/purchase/lease of intangible property; or
•provision of services; or
•lending/borrowing money; or
•any other transaction having a bearing on profits,
income, losses or assets of such enterprises; or
•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.

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SARANSH Transfer Pricing

DEEMED INTERNATIONAL TRANSACTION

Mr. B C Inc.
(Associated
A Ltd (Unrelated
Enterprise
party)
of A Ltd.)

Agreement for sale of Product Agreement for sale of product X

X entered into on 1/6/2023 entered into on 30/5/2023

Transaction between A Ltd. and Mr. B is deemed to be an international transaction

between associated enterprises, whether or not Mr. B is a non-resident.

SPECIFIED DOMESTIC TRANSACTION

Specified Domestic Transaction (SDT) shall mean any of the following transactions, not
being an international transaction

any transfer of
any transaction goods or
referred to in services
section 80A i.e., referred to in However,
inter-unit section 80- these
any
transfer of IA(8) i.e., transactions
transaction, any business
goods and inter-unit any business are not
any business referred to in transacted
services by an transfer of transacted SDT in
transacted any other between a co-
undertaking or goods or between a case the
between the section under operative
unit or services company aggregate
assessee Chapter VI-A society opting
enterprise or between opting for of such
carrying on or section for section any other
eligible eligible section transactions
eligible 10AA, to 115BAE and prescribed
business to business and 115BAB and entered
business and which person with transaction
other business other person with into by the
other person provisions of whom the co-
carried on by business, whom the assessee in
as referred to section 80- operative
the assessee or where the company has the P.Y.
section 80- IA(8) or society has
vice versa, for consideration close does not
IA(10) section 80- close
consideration for transfer connection exceed
IA(10) are connection
not does not ` 20 crore.
applicable
corresponding correspond
to the market with the
value on the market value
date of transfer of goods and
services

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SARANSH Transfer Pricing

METHODS FOR COMPUTING ALP [SECTION 92C]

CUP Resale Price Cost Plus Profit Split Method Transactional Net Margin
Method Method Method (PSM) Method (TNMM)
(RPM) (CPM)

This method This method This method This method is applied Compute Net Profit (NP) margin of
is applied is applied is generally where there is transfer of the enterprise from International
where there where item applied where unique intangibles or in Transaction or specified domestic
are similar obtained from semi-finished multiple International transactions with AE having regard
transaction(s) AE is resold to goods are Transactions or specified to cost incurred/sales effected/ assets
between unrelated sold to AEs domestic transactions employed
unconnected party
parties

Identify Identify the Identify direct Determine combined NP Compute the NP margin realised
price in a Resale Price & indirect cost of the AEs arising out of by the enterprise or unrelated
comparable (RP) at which of production International Transaction enterprise in a CUCT by applying
uncontrolled the item is incurred for or specified domestic the same base
transaction resold to property transactions
(CUCT) unrelated transferred or
party services
provided to
AE

Reduce the RP Determine Evaluate the relative Adjust NP margin realised from
by the normal normal GP contribution of each CUCT to a/c for differences
Gross Profit mark up to enterprise to the earning affecting NP margin in the OM
(GP) margin such costs by of combined NP on the
on CUCT & an unrelated basis of FAR
expenditure enter in
incurred CUCT
(customs
duty) w.r.t.
purchase

Adjust the Adjust the Adjust the Split the combined NP Compare NP margin relative to
price for price for normal GP amongst the enterprise in costs/sales/assets of the AE with
material functional & mark-up for proportion to market NP margin of uncontrolled party
differences other functional returns; & residual profits in comparable transactions
in terms of differences and other in proportion to their
contract, materially differences relative contribution
credit, affecting GP materially
transport margin in affecting GP
etc. open market mark-up in
(OM) OM

Adjusted Adjusted price Total Costs ALP to be determined on Adjusted NP margin taken into
price is ALP is ALP ↑d by the basis of profit A/c to arrive at ALP
adjusted apportioned
mark up =
ALP

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SARANSH Transfer Pricing

DETERMINATION OF THE MOST APPROPRIATE METHOD

(i) The nature and class of the international transaction or specified domestic
transaction;
(ii) The class, or classes of associated enterprises entering into the transaction and the
functions performed by them staking into account assets employed or to be
employed and risks assumed by such enterprises;

(iii) The availability, coverage and reliability of data necessary for application of the
Factors for method;

selecting (iv) The degree of comparability existing between the international transaction or the
specified domestic transaction and the uncontrolled transaction and between the
the most enterprises entering into such transactions;
appropriate (v) The extent to which reliable and accurate adjustments can be made to account for
difference, if any, between the international transaction or the specified domestic
method transaction and the comparable uncontrolled transaction or between the enterprises
entering into such transactions;
(vi) The nature, extent and reliability of assumptions required to be made in application
of a method.

MANNER OF COMPUTATION OF ARM’S LENGTH PRICE [THIRD PROVISO TO

SECTION 92C(2)]
In case of an international transaction or specified domestic transaction undertaken on or after 1.4.2014,
where more than one price is determined by the most appropriate method, the ALP would be computed
in the prescribed manner specified in Rule 10CA.

Determination of arm’s length price using one of the prescribed methods

As per range concept, if prescribed

The price thus determined is Yes Whether a No conditions are satisfied,
the arm’s length price single price is
arrived at? (or)

By applying Arithmetic Mean in

any other case

•Most appropriate method selected is comparable uncontrolled price method,

When to apply
resale price method, cost plus method or transactional net margin method and
range concept?
•The dataset constructed has six or more entries.
•Arrange the values in the dataset in the ascending order.
•Where the actual transaction price falls within 35th and 65th percentile of the
How to apply? dataset, the value of transaction will be accepted to be arm's length price.
• Where the transfer price does not fall within the above range, then median of
dataset shall be taken as the Arm's Length price.

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SARANSH Transfer Pricing

Range concept not However, if the variation between ALP so

applicable [Rule 10CA(7)] determined and price at which the
•Where the most appropriate international transaction or specified
method is profit split method domestic transaction has actually been
or any other method or the undertaken
dataset has less than 6 entries, •does not exceed such % exceeding 3% of the latter,
•the ALP shall be the as may be notified by the Central Government,
arithmetical mean of all the •the price at which the international transaction or
values included in the dataset. specified domestic transaction has actually been
undertaken would be the ALP

No deduction u/s 10AA or Chapter VI-A would be allowed in respect of the additional income
computed by the AO having regard to the ALP determined by him.

REFERENCE TO TRANSFER PRICING OFFICER [SECTION 92CA]

AO has the option to TPO shall pass
make reference to TPO The order of TPO is
order at least 60 binding on AO and
for computation of days before the
ALP of an international AO shall proceed to
expiry of the time compute the TI in
transaction or specified limit under section
domestic transaction. conformity with the
153 or section 153B ALP determined by
This option is not, for making an order
however, available to TPO.
of assessment by the
the assessee. AO.

After considering the TPO has power to

AO has to take the evidence, documents, etc. rectify his order u/s
previous approval of produced by the assessee and 154 if any mistake
the Principal after considering the apparent from the
Commissioner of material gathered by him, record is noticed. If
Income-tax (PCIT)/ the TPO has to pass an order such rectification is
Commissioner of determining ALP. He has to made, AO has to
Income-tax (CIT) send a copy of his order to rectify the
before making such AO as well as the assessee. assessment order to
a reference. bring it in
conformity with the
same.
The TPO can also determine the ALP of
international transaction not referred by
TPO would serve a the AO for which the transfer pricing
notice to the assessee provisions shall apply as if such transaction
requiring him to is referred to the TPO by the AO.
produce on a date
specified in the notice, •International transaction which is
any evidence on which subsequently identified by the TPO
the assessee relied in during the course of proceedings or
support of the •International transaction in respect of
computation of ALP which the assessee has not furnished the
made by him in relation report from an accountant u/s 92E and
to international such transaction subsequently identified
transaction or specified by the TPO during the course of
domestic transaction. proceeding

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SARANSH Transfer Pricing

ADVANCE PRICING AGREEMENTS [SECTIONS 92CC & 92CD]

Advance An agreement between a taxpayer and a taxing

Pricing authority on an appropriate transfer pricing
Agreement methodology for a set of transactions over a
(APA) fixed period of time in future.

CBDT (with the approval of the Central Government) may enter into an APA
with any person determining

ALP or specifying the manner in income referred to in section 9(1)(i), or

specifying the manner in which said income is
which the ALP is to be determined
to be determined, as is reasonably attributable
of an international transaction to be to the operations carried out in India by or on
entered into by that person behalf of that person, being a non-resident

Provisions of APA to Binding nature of

Validity of APA Not binding of APA
apply APA

The provisions of The APA so entered

the APA shall into shall be binding
on:
override the
provisions of The APA shall be •the person in whose
section 92C valid for such case, and in respect The APA shall not
(Computation of of the transaction in
period as specified be binding if there
relation to which, the
ALP as per most in the agreement, is any change in law
APA has been
appropriate which shall in no entered into; and or facts having
method) or section case exceed five bearing on such
•the the PCIT or CIT
92CA (Reference to consecutive and the income-tax APA.
TPO) which are previous years authorities
applicable for subordinate to him,
determination of in respect of the said
ALP person and the said
transaction.

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SARANSH Transfer Pricing

The application may be filed at

Application for APA
In respect of transactions before the first day of the
which are of continuing nature previous year relevant to the first
from dealings that are already
any time -
assessment year for which the
occuring application is made

In respect of remaining before undertaking the

transactions transaction

Applicable Fee for application for APA

The application has to be accompanied by proof of payment of fees as given below:

Amount of international taxation entered into or proposed to be undertaken in Fee

respect of which agreement is proposed during the proposed period of
agreement
Amount ≤ ` 100 crores ` 10 lakhs
Amount > ` 100 crores but not exceeding ≤ ` 200 crores ` 15 lakhs
Amount > ` 200 crores ` 20 lakhs

Annual in quadruplicate
compliance
for each year covered in the agreement
Report
The assessee shall - within 30 days of the due date of filing income-tax return for that year, or
furnish an annual - within 90 days of entering into an agreement,
compliance whichever is later.
report

The TPO having the jurisdiction over the assessee shall

carry out the compliance audit of the agreement for each of
the year covered in the agreement.
Compliance Audit
of APA [Rule 10P]

The compliance audit report shall be furnished by the TPO

within 6 months from the end of the month in which the
Annual Compliance Report is received by the TPO.

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Roll back in APA Scheme [Section 92CC(9A)]

APA may provide for determining the

ALP or specifying the manner in which ALP income referred to in section 9(1)(i), or specifying the
is to be determined in relation to an manner in which the said income is to be determined, as
international transaction entered into by the is reasonably attributable to the operations carried out in
person India by or on behalf of that person, being a non-resident

during any period not exceeding four PYs preceding

the first of the PYs for which the APA applies in
respect of the international transaction to be undertaken

Meaning of Rollback year

Any previous year, falling within the period not exceeding four previous years, preceding the first of the
five consecutive previous years for which the APA applies.

Conditions for applying for rollback provisions Non-applicability of Rollback provision

 International transaction is same as  If the determination of ALP of the said

international transaction to which APA international transaction for the said year
(other than the rollback provision) applies; has been subject matter of an appeal before
 ROI for the relevant rollback year has been or the Appellate Tribunal and the Appellate
is furnished before the due date u/s 139(1); Tribunal has passed an order disposing of
such appeal at any time before signing of
 Report in respect of international transaction
the agreement
had been furnished u/s 92E;
OR
 the applicability of rollback provision has
been requested by the applicant for all the  the application of rollback provision has
rollback years and the effect of reducing the total income or
increasing the loss, as declared in the ROI.
 the applicant has made an application seeking
rollback.

Time limit for filling application for rollback provision

The applicant may furnish along with the application for advance pricing agreement, the request for
rollback provision with proof of payment of an additional fee of ` 5 lakh.

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Procedure for giving effect to rollback provision of an Agreement

(i) Furnish modified ROI in respect of a rollback year along with the proof of payment of any
additional tax arising as a consequence of rollback provision.
(ii) Furnish modified return in respect of rollback year along with the modified return to be furnished
in respect of first of the previous years for which APA has been requested in the application.
(iii) Withdraw the appeal filed by the applicant, if any, which is pending before the Commissioner
(Appeals), Appellate Tribunal or the High Court for a rollback year, on the issue which is the
subject matter of the rollback provision for that year, to the extent of the subject covered under
APA before furnishing the modified return.
(iv) Withdraw the appeal filed by the AO or the PCIT or CIT, if any, which is pending before the
Appellate Tribunal or the High Court for a rollback year, on the issue which is subject matter of the
rollback provision for that year, to the extent of the subject covered under the agreement within three
months of filing of modified return by the applicant.
(v) The applicant, the AO or the PCIT or the CIT, shall inform the Dispute Resolution Panel or the
Commissioner (Appeals) or the Appellate Tribunal or the High Court, as the case may be, the fact
of an agreement containing rollback provision having been entered into along with a copy of the
same.

PENALTY FOR FAILURE TO COMPLY WITH TP PROVISIONS

Section Nature of default Penalty
270A(9) Failure to report any international transaction or deemed 200% of the tax payable
international transaction to which the provision of Chapter X on under-reported
applies would constitute ‘misreporting of income’ income
271BA Failure to furnish a report from an accountant as required under ` 1 lakh
section 92E
271G Failure to furnish information or document as required by 2% of the value of the
Assessing Officer or CIT(A) u/s 92D(3) within 10 days from the international
date of receipt of notice or extended period not exceeding 30 days, transaction or specified
as the case may be. domestic transaction
for each failure
271AA (1) Failure to keep and maintain any such document and 2% of the value of each
information as required by section 92D(1)/(2); such international
(2) Failure to report such international transaction or specified transaction or specified
domestic transaction which is required to be reported; or domestic transaction
(3) Maintaining or furnishing any incorrect information or
document.
Notes:
 The penalty u/s 271AA is in addition and not in substitution of penalty u/s 271BA.
 If the assessee proves that there was reasonable cause for the failure, no penalty would be
leviable under section 271BA, 271G and 271AA.

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SECONDARY ADJUSTMENT [SECTION 92CE]

•The determination of transfer price in accordance

Primary adjustment (PA) with the arm’s length principle resulting in an
to a transfer price increase in the TI or reduction in the loss, as the
case may be, of the assessee.

•An adjustment in the books of accounts of the

assessee and its AE to reflect that the actual
Secondary adjustment allocation of profits between the assessee and its
AE are consistent with the TP determined as a
(SA) result of PA, thereby removing the imbalance
between cash account and actual profit of the
assessee.

Where the primary adjustment to TP:

•has been made suo motu by the assessee in his ROI or
Cases where •made by the AO has been accepted by the assessee; or
secondary •is determined by an APA or
adjustment has to be
•is made as per the Safe harbour rules or
made by the assessee
•is arising as a result of resolution of an assessment by way
of the MAP under an agreement entered into u/s 90 or
90A for avoidance of double taxation.

No requirement of secondary adjustment in certain cases

If primary adjustment made in any P.Y. The primary adjustment is made in respect
OR
does not exceed ` 1 crore of A.Y.2016-17 or an earlier A.Y.

Actual value
Arms’ Length
of
Excess Money Price in primary
international
adjustment
transaction

If not repatriated within such time, it

The excess money or has to be repatriated to
would be deemed as advance to such AE
part thereof which is India within the prescribed
and interest on such advance would be
available with the AE limit
computed in prescribed manner.

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Time limit for repatriation of excess money or part thereof [Rule 10CB(1)]
Case Time limit for Period from which
repatriation of excess interest is chargeable
money i.e., on or on excess money or part
before 90 days from thereof which is not
repatriated
(i) Where primary adjustment to transfer the due date of filing the due date of filing of
price has been made suo-motu by the of return u/s 139(1) return u/s 139(1)
assessee in his ROI
(ii) If primary adjustment to transfer price as the date of the said the date of the said order
determined in the order of the AO or the order
appellate authority has been accepted by
the assessee
(iii) Where primary adjustment to transfer
price is determined by an APA entered
into by the assessee u/s 92CC for a P.Y. -
• If the APA has been entered into on the date of filing of the due date of filing of
or before the due date of filing of return u/s 139(1) return u/s 139(1)
return for the relevant P.Y.
• If the APA has been entered into on The end of the month the end of the month in
or after the due date of filing of return in which the APA has which the APA has been
for the relevant P.Y. been entered into entered into
(iv) Where option has been exercised by the the due date of filing the due date of filing of
assessee as per safe harbor rules u/s 92CB of return u/s 139(1) return u/s 139(1)
(v) Where the primary adjustment to the the date of giving the date of giving effect
transfer price is determined by a resolution effect by the A.O. by the A.O. under Rule
arrived at under MAP under a DTAA has under Rule 44H to 44H to such resolution
been entered into u/s 90 or 90A such resolution

Rate of interest for the purpose of computation on interest on excess money [Rule 10CB(2)]
Rule 10CB(2) prescribes the rate at which the per annum interest income shall be computed in case
of failure to repatriate the excess money or part thereof within the above time limit.

Case Rate
Where international transaction is At the one year marginal cost of fund lending rate of SBI as on 1st
denominated in Indian rupee April of the relevant previous year + 3.25%
Where international transaction is At six month London Interbank Offered Rate (LIBOR) as on 30th
denominated in foreign currency September of the relevant previous year + 3.00%

Note – The rate of exchange for the calculation of the value of international transaction denominated in
foreign currency shall be the TTBR of such currency on the last day of the previous year in which such
international transaction was undertaken.

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Option to pay additional income-tax, if the excess money not repatriated

Where the excess money or part Where additional income-tax is so

thereof has not been repatriated
within the prescribed time, the paid by the assessee, he will not be
assessee has the option to pay required to make secondary
additional income-tax @ 20.9664% adjustment and compute interest
(i.e., tax@18% plus surcharge@12%
plus cess@4%) on such excess money from the date of payment of such
or part thereof. tax.

Limitation of interest deduction [Section 94B]

Is the borrower an Indian company or a PE of a Foreign company?
Yes No

Is the borrower a bank or Insurance Yes Section 94B would not apply
company or notified NBFC?
No
Is the lender a PE in India of a non-
resident engaged in the business of Yes
banking?
No
Does the interest paid to NR AE exceed No
` 1 crore?
Yes Meaning of Excess interest
Excess Interest not allowable as
deduction
Interest paid or payable to non-resident associated
Disallowed interest can be carried enterprise* in excess of 30% of EBITDA or interest
forward for 8 AYs for deduction against paid or payable to AE for that previous year,
PGBP income to the extent of maximum whichever is lower
allowable interest expenses

*“Total interest paid or payable” may be interpreted as interest paid or payable to non-resident
associated enterprise as per the intent expressed in section 94B(1) and also the Explanatory
Memorandum to the Finance Bill, 2017.

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FUNDAMENTALS OF BEPS
ACTION-1 ACTION-2 ACTION-3 ACTION-4 ACTION-5
Addressing the Neutralise the Strengthen CFC Interest deductions Counter harmful tax
tax challenges of effects of hybrid Rules and other financial practices
the digital mismatch payments
economy arrangements

ACTION-6 ACTION-7 ACTION-8 ACTION-9 ACTION-10

Preventing treaty Prevent the artificial Transfer pricing Transfer pricing Transfer pricing
abuse avoidance of PE
status

ACTION-11 ACTION-12 ACTION-13 ACTION-14 ACTION-15

Measuring and Disclosure of Re-examine Making dispute Developing a
monitoring BEPS aggressive tax transfer pricing resolution more multilateral
planning documentation effective instrument
arrangements

Note – Some of the significant BEPS Action plans are discussed herein below:

ACTION PLAN 1: ADDRESSING THE CHALLENGES OF THE DIGITAL ECONOMY

OECD Recommendation Provisions incorporated in Indian Tax Laws
(i) Modifying existing Equalisation Levy
Permanent Equalisation levy@6% is attracted on the amount of consideration for
Establishment (PE) specified services received or receivable by a non-resident not having PE in
rule to provide India or providing services not effectively connected with PE in India,
whether an enterprise from:
engaged in fully de- • a resident in India who carries on business or profession or
materialized digital • from a non-resident having PE in India.
activities would The resident or non-resident having PE in India has to deduct equalisation
constitute a PE if it Levy@6% from consideration for specified services paid to non-resident
maintained significant and remit the same to the Central Government within the prescribed time.
digital presence in Equalisation levy@2% would be chargeable on the amount of consideration
another country's received or receivable by an e-commerce operator from e-commerce
economy supply or services made or provided or facilitated by it -
(ii) A virtual fixed place of (i) to a person resident in India; or
business PE when the (ii) to a non-resident in the following specified circumstances -
enterprise maintains a (a) sale of advertisement, which targets a customer, who is resident in
website on a server of India or a customer who accesses the advertisement though
another enterprise internet protocol address located in India; and

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located in a (b) sale of data, collected from a person who is resident in India or
jurisdiction & carries from a person who uses internet protocol address located in India;
on business through or
that website. (iii) to a person who buys such goods or services or both using internet
protocol address located in India
(iii) Imposition of a final Further, section 194-O provides that where sale of goods or provision of
withholding tax on services of an e-commerce participant is facilitated by an e-commerce
certain payments for operator through its digital or electronic facility or platform, such e-
digital goods or commerce operator is liable to deduct tax at source @1% of the gross
services provided by a amount of such sales or services or both.
foreign e-commerce Significant economic presence
provider. Significant economic presence of a non-resident in India shall also
(iv) Imposition of an constitute business connection in India. Significant economic presence
equalisation levy on means-
consideration for Nature of transaction Condition
certain digital (a) in respect of any goods, services Aggregate of payments arising
transactions received or property carried out by a from such transaction or
by a non-resident from non-resident with any person transactions during the
a resident or non- in India including provision of previous year should exceed
resident having PE in download of data or software in ` 2 crores.
the other contracting India
state. (b) systematic and continuous The number of users should
soliciting of business activities be atleast 3 lakhs.
or engaging in interaction with
users in India

ACTION PLAN 2 - NEUTRALISE THE EFFECTS OF HYBRID MISMATCH

ARRANGEMENTS
exploits a under the laws
A hybrid of an entity to achieve
difference in of two or more
mismatch is an or an double non-
the tax tax
arrangement that instrument taxation
treatment jurisdictions

Hybrid mismatch arrangements are sometimes used to achieve unintended double

non-taxation or long-term tax deferral in one or more of the following ways -
Creation of two deductions for a single borrowal

Generation of deductions without corresponding income inclusions

Misuse of foreign tax credit

Participation exemption regmies

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ACTION PLAN 4: INTEREST DEDUCTIONS AND OTHER FINANCIAL PAYMENTS

Locating third party

The OECD is debt in high tax
concerned countries; BEPS Action Plan 4 calls
that for the development of
multinational recommendations for the
groups are Using intra-group loans design of domestic rules to
able to erode to achieve interest prevent tax base erosion
their tax base deductions in excess of
through the use of interest
(i.e., reduce the group’s actual third
their taxable party interest expense; expense and other financial
profits) with payments that are
interest Using related party or economically equivalent to
expense, for third party debt to interest.
example by: finance the production
of exempt or deferred
income.

In line with the The total interest paid in

recommendations of excess of 30% of its earnings
OECD BEPS Action Plan before interest, taxes,
Section 94B of the depreciation and
4, section 94B of the
Income-tax Act, 1961: amortization (EBITDA) or
Income-tax Act, 1961
Addressing Thin interest paid or payable to
provides a cap on the
Capitalization associated enterprise for that
interest expense that can
be claimed by an entity to previous year, whichever is
its associated enterprise. less, shall not be deductible.

ACTION PLAN 5 – COUNTER HARMFUL TAX PRACTICES

The Action 5 Report is one of the four BEPS minimum standards. The minimum standard of the
Action 5 Report consists of two parts.
One part relates to preferential tax regimes, where a peer review is undertaken to identify
features of such regimes that can facilitate base erosion and profit shifting, and therefore have
the potential to unfairly impact the tax base of other jurisdictions.

The second part includes a commitment to transparency through the compulsory spontaneous
exchange of relevant information on taxpayer-specific rulings which, in the absence of such
information exchange, could give rise to BEPS concerns.

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The nexus approach has been

Accordingly, section
recommended by the OECD For this purpose,
115BBF provides that
under BEPS Action Plan 5. “developed” means
where the total income
Section 115BBF This approach requires atleast 75% of the
of the eligible assessee
of the Income- attribution and taxation of expenditure should
includes any income by
income arising from be incurred in India
tax Act, 1961: way of royalty in respect
exploitation of Intellectual by the eligible
of a patent developed
In line with property (IP) in the assessee for any
and registered in India,
nexus approach jurisdiction where substantial invention in respect
then such royalty shall
of BEPS Action 5 research and development (R of which patent is
be taxable @10% (plus
& D) activities are undertaken granted under the
applicable surcharge
instead of the jurisdiction of Patents Act, 1970.
and cess).
legal ownership.

ACTION PLAN 6: PREVENTING TREATY ABUSE

OECD Minimum LoB clause incorporated in Indian Tax Treaties
Standard
Given the risk to LoB clause in India-Mauritius Tax Treaty
revenues posed by treaty • On 10.5.2016, the India-Mauritius tax treaty was amended and for the first
shopping, countries time, it has been provided that gains from the alienation of shares
have committed to acquired on or after 1.4.2017 in a company which is a resident of India
ensure a minimum level may be taxed in India.
of protection against
• The tax rate on such capital gains arising from 1.4.2017-31.3.2019
treaty shopping by
should, however, not exceed 50% of the applicable tax rate on capital
including in their
gains in India.
treaties:
• LOB clause provides that a resident of a Contracting State shall not be
(i) the combined
entitled to the benefits of 50% of the tax rate applicable in transition
approach of
period if its affairs are arranged with the primary purpose of taking
Limitation of
advantage of concessional rate of tax.
Benefits (LOB)
and Principal • A shell or a conduit co. claiming to be a resident of a Contracting State
Purpose Test shall not be entitled to this benefit.
(PPT) rule, • A shell or conduit co. is any legal entity falling within the meaning of
(ii) the PPT rule alone, resident with negligible or nil business operations or with no real and
or continuous business activities carried out in that Contracting State.

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(iii) the LOB rule LoB clause in India-Singapore Tax Treaty

supplemented by a • Capital gains on sale of shares of an Indian company by a resident of
mechanism that Singapore was taxable only in Singapore, if such shares were acquired
would deal with before 1.4.2017.
conduit financing
• The India-Singapore tax treaty has been amended to provide that
arrangements not
capital gains on alienation of shares acquired on or after 1.4.2017 would
already dealt with
be taxable in a similar manner as laid out in India-Mauritius tax treaty,
in tax treaties.
subject to LoB clause.
• The transition period benefit is also similar to that contained in India-
Mauritius Tax Treaty.

BEPS ACTION PLAN 7: PREVENT THE ARTIFICIAL AVOIDANCE OF PE STATUS

OECD Recommendation Provisions incorporated in the Income-tax
Act, 1961

Review of definition of PE Expanding the scope of business connection

(BC) u/s 9(1)(i) of Income-tax Act, 1961
Upto From A.Y.2019-20
To prevent tax avoidance
A.Y.2018-19
BC is BC also includes any business
established, activity carried through a
By way of By way of inter alia, person who, acting on behalf of
Commissionaire Fragmentation of where a the NR, habitually concludes
Arrangements business activities person contracts or habitually plays
acting on the principal role leading to
behalf of NR conclusion of contracts by the
has and NR. Such contracts should be -
Modification of Introduction of anti-
habitually (i) in the name of the NR; or
Article 5(5) to fragmentation Rule
exercises the (ii) for transfer of ownership of,
include a person to prevent
authority to or for the granting of right
who habitually fragmentation of
conclude to use, property owned by
plays a principal functions which are
contracts on that NR or that the NR has
role leading to otherwise a whole
behalf of the the right to use; or
conclusion of activity to avail
NR.
contracts in the benefit of exemption (iii) for provision of services by
definition of agent that NR

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BEPS ACTION PLAN 13 RE-EXAMINE TRANSFER PRICING (TP) DOCUMENTATION

OECD Minimum Standard Provisions incorporated in the Income-tax
Act, 1961

Standardised approach to TP documentation Provisions in the IT, Act, 1961

Master File Local File CBC Report Section 92D Section 286

Standardised Transactional Information

information info specific relating to Maintenance & CBC Reporting
relevant for to each global Furnishing of requirement and
all MNE country in allocation of Master File related matters
group detail MNE’s
members covering income & Maintenance of Requires
regarding related party taxes paid; & prescribed aggregate
global transactions indicators of information and information w.r.t.
business the location documents amount of
operations of the eco. revenue, P&L
& TP activity within before income-
policies the MNE tax, amount of
group income-tax paid
and accrued,
To be delivered by MNEs To be filed in stated capital, no.
directly to local tax the tax of employees,
administrations residence nature and details
jurisdiction of of main business
ultimate activity of each
parent entity constituent entity
etc.

ACTION PLAN 14 – MAKING DISPUTE RESOLUTION MORE EFFECTIVE

The BEPS Action 14 Minimum Standard seeks to improve the resolution of tax-related disputes between
jurisdictions. Inclusive Framework jurisdictions have committed to have their compliance with the
minimum standard reviewed and monitored by its peers through a robust peer review process that seeks
to increase efficiencies and improve the timeliness of the resolution of double taxation disputes.

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Objective of measures developed under Action 14 of BEPS Project

Minimize unintended double

Minimize the risks of uncertainty
taxation

through

Consistent and proper Effective and timely resolution of disputes

implementation of tax treaties regarding their interpretation or
application through MAP

The Action 14
Minimum Standard
consists of elements
and best practices, •preventing disputes;
which assess a •availability and access to MAP;
jurisdiction’s legal and •resolution of MAP cases;
administrative •implementation of MAP agreements.
framework in the
following four key
areas:

ACTION PLAN 15 DEVELOPING A MULTILATERAL INSTRUMENT (MLI)

The MLI helps fight against BEPS by implementing tax treaty-related measures developed through the
BEPS Project in existing bilateral treaties in a synchronized and efficient manner to –
• prevent treaty abuse,
• improve dispute resolution
• prevent the artificial avoidance of PE status
• neutralize the effects of hybrid mismatch arrangements.
Structure of the MLI
Just as bilateral tax treaties are agreements, the MLI is also a similar instrument and its interpretation
will be governed by the principles laid down by VCLT. Following are the 7 parts and 39 articles in the
MLI. Articles 3 to 17 are recognised as substantive provisions.
Part Particulars Article
Part I Scope and Interpretation of terms Article 1-Article 2
Part II Hybrid Mismatches Article 3-Article 5
Part III Treaty Abuse Article 6-Article 11

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Part IV Avoidance of PE Status Article 12-Article 15

Part V Improving Dispute Resolution Article 16-Article 17
Part VI Arbitration Article 18-Article 26
Part VII Final Provisions Article 27- Article 39

Key organs
Covered Tax
Compatibility Clause Reservation Clauses Minimum Standard
Agreement

Covered Tax Agreements

The MLI is flexible instrument which modifies tax treaties that are “Covered Tax Agreements”. A
Covered Tax Agreement is an agreement for the avoidance of double taxation that is in force between
Parties to the MLI and for which both Parties have made a notification that they wish to modify the
agreement using the MLI.

Compatibility Clauses – Bridge between the DTAA and the MLI

• The compatibility clause is to ensure that there is no conflict between the two treaties i.e. the
DTAA and the MLI. This is because of the uniqueness of the MLI, which is not a standalone treaty
as it operates alongside the bilateral tax treaties.
• If there is a possible conflict that may arise between the two treaties i.e., the DTAA and the MLI,
the compatibility clause would resolve this conflict.
• Further, the compatibility clause also gives options to parties to leave an existing provision of the
DTAA undisturbed, if the existing provision serves the desired objective with which a particular
provision of the MLI was placed to.

Reservation Clauses – ‘Opt-Out’ Mechanism

• The reserved provisions of MLI shall not apply to a CTA if either of the parties makes a
reservation.
• Reservations under treaties, introduce flexibility in treaty negotiations, so that States come
forward to be a signatory to such multilateral conventions.
• The general rule of multilateral instrument is that its parties are bound by the entire instrument
unless the parties make a reservation.
• The MLI enables states to opt-out of the provisions, either entirely or partially, by introducing a
mechanism of reservations.
• However, reservations concerning minimum standard provisions under the MLI can be made only on
limited situations and subject to satisfying certain conditions.

Mandatory Minimum Standards

The objective of the minimum standard provisions is to ensure that these anti-abuse provisions will
help eliminating the treaty shopping mechanism and consequentially the elimination of double non-

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taxation scenarios by tax-evaders. The minimum standards under the MLI, therefore, achieve certain
consistency amongst the existing tax treaties. These minimum standard provisions, which have to be
incorporated in the tax treaties, help in combating tax avoidance.
Out of the four minimum standards prescribed under the BEPS action plan i.e.
Action 5 - Countering Harmful Tax Practices
Action 6 - Treaty abuse prevention mechanism
Action 13 - Country by Country Reporting
Action 14 - Effective Dispute Resolution Mechanism
Action 6 and Action 14 solutions are specifically provided as a minimum standard provision under the
BEPS MLI. With regards to Action 5 and Action 13, the solutions are to be incorporated under
domestic laws.
However, in a case where the Contracting States together agree to reflect the minimum standard
provisions specified under the MLI into their existing DTAA, then, such treaty partner may opt-out of the
minimum standards under the MLI.

Entry into Force of MLI

 The Multilateral Convention to implement tax treaty related measures to prevent Base Erosion
and Profit Shifting (BEPS) was signed by India at Paris, France on 7th June, 2017.
 India had ratified the said Convention and had deposited the instrument of ratification along-with
the list of Covered Tax Agreements, reservations and notifications (India’s Position under the said
Convention) to the Depositary on 25th June, 2019.
 The date of entry into force of the said Convention for India is 1st October, 2019, being the first
day of the month following the expiry of a period of three calendar months beginning on 25th June,
2019, being the date of deposit by India of the instrument of ratification.
 The earliest date when the provisions of this Convention can take effect in India is 1 st April, 2020
(six months from 1st October, 2019, the date of entry into force for India)

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APPLICATION AND INTERPRETATION OF

TAX TREATIES
BASIC PRINCIPLES OF INTERPRETATION OF A TREATY
Golden Rule - Subjective Teleological The Principle of Liberal Integrated Reasonable-
Objective Interpretation or Purposive Principle of Contemporanea Construction Approach ness &
Interpretation Interpretation Effectiveness Expositio consistency

Any term or word Treaty to be interpreted A treaty’s terms are Any provision should
should be so as to facilitate the normally to be interpreted not be interpreted in
interpreted keeping attainment of its aims on the basis of their isolation; rather the
its objective or and objectives. This meaning at the time the entire treaty should
ordinary or literal approach is also known treaty was concluded. be read as a whole to
meaning in mind. as “Objects & Purpose” However, this is not a arrive at its object &
Method. universal principle. purpose.

Terms of treaty to be A treaty It is a general principle of Treaties should be given an

interpreted according to the should be construction with respect interpretation in which the
common intent of the interpreted to treaties that they shall be reasonable meaning of
contracting parties at the in a manner liberally construed so as to words and phrases is
time treaty was concluded. to have carry out the apparent preferred, and in which a
The intention must be effect rather intention of the parties. consistent meaning is given
ascertained from the words than make it to different portions of the
used in the treaty and the void. instrument.
context thereof.

Extrinsic Aids to Interpretation of a Tax Treaty

Provisions in Parallel Tax International Protocol Preamble Mutual Agreement

Treaties Articles/Essays/Reports Procedure [MAP]

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OVERVIEW OF MODEL TAX CONVENTION

Article OECD Model Convention vis-à-vis UN Model Convention
Common paras & Significant differences
Chapter I : Scope of the Convention
1 Persons
Fiscally transparent
covered Collective
entity - Income derived
investment
Resident of CS - by or through a fiscally
vehicles -
For application transparent entity under
Provision dealing
of treaty, a the tax law of either CS to
with the
person has to be be considered to be
application of
a resident of one income of a resident of a
the UN Model
or both of the CS, to the extent such
Convention to
Contracting income is treated, for
“Collective
States (CSs). purposes of taxation by
investment
that State, as the income
vehicles".
of a resident of that State.

2 Taxes  Taxes on income and capital - The Model Conventions apply to taxes on
covered income and on capital imposed on behalf of a CS or of its political subdivisions
or local authorities, irrespective of the manner in which they are levied.
 Coverage of taxes - Taxes on income and on capital covers:
Taxes imposed Taxes included
• on total • taxes on gains from alienation of movable or
income immovable property
• on total • taxes on total amounts of wages or salaries paid
capital by enterprises
• on elements of • taxes on capital appreciation
income or of
capital
Chapter II: Definitions
4 Resident  Resident of either CS - A taxpayer has to demonstrate that he is a resident of
one or both CSs to be able to gain access to a tax treaty and avail benefits
thereunder.
 Meaning of “Resident of a Contracting State” - Any person who, under the laws
of that State, is liable to tax therein by reason of that person’s:

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Place of
incorporation Domicile
(POI)

Place of
Residence
Management

Any other
similar
criterion

This term, however, does not include any person who is liable to tax in that State
in respect only of income from sources in that State or capital situated therein.
Note - OECD MC does not contain reference to place of incorporation.
 Tie-breaker Rule
In case of individuals
Where an individual is a resident of both CSs as per domestic tax laws of that CS,
then, his residential status shall be determined by applying the tie-breaker rule in the
following sequence:

Centre of vital
Permanent Home Habitual abode
interests

Mutual agreement
between Competent Nationality
Authorities of the CSs

In case of companies
• Dual residence arises where one CS attaches importance to POI and the other CS
to the POEM.
• The tie-breaker test involves a case by case approach considering the number of
tax avoidance cases involving dual resident companies.
• Request has to be made by the tax payer through Article 25 (MAP).
• Competent Authorities will rely on range of factors to resolve the question of
dual residency.

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5 Permanent  Meaning of PE [Article 5(1)]

establish- • There should be an “enterprise”.
ment (PE) • Such enterprise should be carrying on a "business";
• There should be a "place of business (POB)";
• Such place of business (POB) should be at the disposal of the enterprise (may be
owned/rented but must be one which the enterprise has the effective power to
use);
• The POB should be "fixed", i.e., it must be established at a distinct place with a
certain degree of permanence.
• The business of the enterprise is carried on wholly or partially through this fixed
POB.
A PE does not exist unless all the aforesaid conditions are satisfied.
 Specific inclusions in the meaning of PE [Article 5(2)]

a
a mine, branch
A place of
oil/gas well,
management

PE
quarry etc.

an
a workshop
office
a
factory

 Expansion of scope of Agency PE

• Agency PE targets activities done by a dependent agent of the enterprise in the
Source State (SS).
• Dependent agent PE now includes instances when an agent habitually concludes
contracts, or habitually plays the principal role leading to the conclusion of
contracts routinely concluded without material modification by the enterprise.
• In UN Model Convention, PE is constituted even if the person does not
habitually conclude contracts nor plays the principal role leading to the
conclusion of such contracts, but habitually maintains in that State, a stock of
goods or merchandise from which that person regularly deliver goods or
merchandise on behalf of that enterprise.
 PE of an Insurance Enterprise
UN Model Convention OECD Model Convention
UN MC has an additional Article 5(6) In the absence of similar Article in
relating to insurance. An insurance the OECD MC, a PE of an insurance
enterprise of a CS is deemed to have a PE in enterprise is to be determined in
the other CS if it collects premiums in the accordance with Article 5(1) or 5(2).
territory of that other CS or insures risks
situated therein through a person.

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Chapter III : Taxation of Income

7 Business  Right of CS to tax business profits (BPs)
profits OECD UN Model Convention
Model
Convention
BPs of an enterprise can only be taxed by the Residence State (RS). Right of Source
State (SS) to tax BPs of an enterprise only exists if a PE exists in its jurisdiction.
Once a PE is  The attribution principle is amplified by a limited Force of
proven, the Attraction rule (FOA).
SS can tax  The FOA rule implies that when a foreign enterprise sets up a
only such PE in SS, it brings itself within the fiscal jurisdiction of that
profits as are State to such a degree that profits that the enterpise derives
attributable therefrom, whether through the PE or not, can be taxed by it
to the PE (i.e., the SS).
 Accordingly, if the enterprise carries on business in the other
CS through a PE, the profits of the enterprise may be taxed in
the other CS but only so much of them as is attributable to:
(a) that PE;
(b) sales in that other CS of goods or merchandise of the same
or similar kind as those sold through that PE; or
(c) other business activities carried on in that other State of the
same or similar kind as those effected through that PE.
11 Interest  Right of CSs to tax interest
Para of Right of CS to tax interest
Article
1 Confers the right to RS to tax interest
2 Confers right to the SS to tax interest.
Generally, interest is taxed in the SS at a given rate on gross
basis.
However, if the beneficial owner of the interest is a resident of
the other CS, the tax so charged ≤ specified % of the gross
interest.
The specified % as per OECD MC is 10%, but the UN MC leaves
this % to be established through bilateral negotiations.
 Definition of interest in OECD & UN MCs - Interest means income from debt
claims of every kind,
• whether or not secured by mortgage and
• whether or not carrying a right to participate in the debtor’s profits.

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 Specific inclusions in the definition of interest as per OECD & UN MCs

• income from government securities
• income from bonds or debentures
• premiums and prizes attaching to such securities, bonds or debentures.
Note - Interest does not include penalty charges for late payment .
12 Royalties OECD Model UN Model Convention
Convention
Right of Royalty arising in SS and Royalty may also be taxed in the SS.
CS to tax beneficially owned by However, if the beneficial owner is a
royalty resident of the RS is resident of the RS, the tax charged by
income taxable only in RS. Thus, SS ≤ the specified %, (to be established
RS has exclusive right to through bilateral negotiations) of gross
tax royalty income. royalty.
Definition Definition of Royalty does Royalty includes:
of Royalty not include: (a) rentals for films or tapes used for
(a) rentals for radio or TV broadcasting and
films/tapes used for (b) equipment rentals like rentals for
radio/ TV industrial, commercial or scientific
broadcasting; and equipment.
(b) rentals for industrial,
commercial or
scientific equipment.
12A FTS The UN MC has a specific article pertaining to Fees for Technical Services (FTS).
There is no specific reference to FTS in OECD MC.
 Right of CS to tax FTS [UN Model]
Para of Right of CS to tax FTS
Article
1 Confers right to the RS to tax FTS. However, does not state that FTS
is exclusively taxable in the RS.
2 Establishes the right of the SS to tax FTS in accordance with its
domestic law, subject to limitation on the max. rate of tax on gross
amount of fees, to be established through bilateral negotiations, if
the beneficial owner is a resident of the other CS.
 Meaning of FTS [UN Model]
FTS means payments for managerial, technical or consultancy services
Exclusions from the meaning of FTS:
i payment to an employee
ii payment for teaching in an or by an educational institution
iii payment by an individual for services for personal use

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12B Income Article 12B was added to the United Nations Model Tax Convention in its 2021
from update to preserve the domestic law taxing rights for States from which payments
Automated for automated digital services are made. There is no article in the OECD MC
Digital corresponding to Article 12B.
Services  Right of CS to tax income from automated digital [UN Model]
Para of Right of CS to tax income from automated digital services
Article
1 Confers right to the RS to tax income from automated digital services
arising in a CS. However, does not state that FTS is exclusively
taxable in the RS.
2 Establishes the right of the SS to tax income from automated digital
services in accordance with its domestic law, subject to the specified
percentage of the gross amount of payments underlying the income
from automated digital services, to be established through bilateral
negotiations, if the beneficial owner is a resident of the other CS.
 Meaning of Automated digital services [UN Model]
Automated digital services any service provided on the Internet or another
electronic network, in either case requiring minimal human involvement from
the service provider.
Specific inclusions:
i online advertising services
ii supply of user data
iii online search engines
iv online intermediation platform services
v social media platforms
vi digital content services
vii online gaming
viii cloud computing services
ix standardized online teaching services
13 Capital This Article provides for the taxation of income arising from transfer of a capital
gains asset, including transfer of shares.
 Right of CS to tax income from Capital Gains
• The right to tax capital gains may be exclusively with the RS, or shared between
the RS and SS.
• The Article does not specify what is a capital gain and how is to be computed,
this being left to the applicable domestic law.
• The Article contains rules for taxation of gains from alienation of different assets
such as immovable property, immovable property forming part of a PE, ships &
aircrafts, etc.
• In respect of shares, OECD and UN MCs are identical. Rights are conferred to
the SS if more than 50% of the value of shares during the preceding 365 days is

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derived directly or indirectly from immovable property in such SS. Otherwise, the
Residence State would have the exclusive right to tax.
• UN MC allows a State to tax gains from the alienation of rights granted under the
law of that State as long as these rights allow the use of resources that are
naturally present in that State and that are under the jurisdiction of that State.
• Both UN and OECD Model convention gives exclusive right to Residence State in
case of gains from the alienation of any property other than covered in the other
paragraphs of this Article.
14 Independent This Article present only in the UN MC deals with the taxation of income derived by
personal a person for professional or specified services which are offered in the SS through
services some presence.
 Right of CS to tax income from professional services (IPS) [UN MC]
Right of Income derived by a resident of a CS in respect of professional
RS services or other activities of an independent character is taxable
only in the RS.
Right of SS In the following circumstances, however, IPS may also be taxed in the
other CS (i.e., the SS):
Circumstance Extent of income taxable in SS
If he has a fixed base Only so much of the income as is
regularly available to attributable to that fixed base may be
him in the SS for the taxed in the SS.
purpose of performing
his activities
If his stay in the SS is Only so much of the income as is derived
for a period > 183 days from his activities performed in the SS
in any 12 month period may be taxed in that State
commencing or ending
in the fiscal year
concerned
 Definition of “Professional Services” [UN MC]
The term "professional services" includes especially independent scientific, literary,
artistic, educational or teaching activities as well as the independent activities of
physicians, lawyers, engineers, architects, dentists and accountants.
Note – OECD MC does not contain a separate article on IPS. The same is dealt with
as “Business Profits (Article 7)” under the OECD MC.
21 Other This Article deals with taxation of items of income which are not specifically taxable
income under any other specific Article [i.e., upto Article 20].
(OI)

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OECD Model UN Model Convention

Convention
Right to tax OI Exclusive right to Contains an additional para, Article 21(3),
tax is with the RS. which provides that SS may also tax other
income.
Right to tax Article 21(2) of both OECD and UN MC provides that for
income [other income effectively connected with a PE maintained in a CS by a
than income resident of the other CS, taxation is governed by the provisions
from of Article 7 (Business Profits).
immovable Additionally, UN Model provides that if the
property] aforesaid income is effectively connected
effectively with a fixed base situated in a CS by a
connected with resident of the other CS, taxation would be
PE governed by the provisions of Article 14
(IPS).
Chapter V : Methods for the Elimination of Double Taxation
23A/ Exemption In many cases, the application of tax treaty may result into double taxation (DT) for
23B method/ tax payers. In such a case, Articles 23A and 23B provide for the mechanism through
Credit which tax credit/exemption may be available in the RS for taxes deducted in the SS.
Method  Two approaches for elimination of DT under MCs:
Exemption method (Article 23A) Credit method (Article 23B)
Tax exemption may be available in Tax credit may be available in the RS for
the RS for taxes deducted in the taxes deducted in the SS.
SS.
These methods are not mutually exclusive and there may be cases where a treaty may
adopt exemption method for certain types of income and credit method for other
incomes.
 Juridical DT and Economic DT:
Juridical DT Economic DT
Meaning The same income or Two different persons are taxable in
capital is taxable in the respect of the same income or capital
hands of the same
person by more than one
State
Example FTS may be taxable in In respect of dividend distributed by a
the hands of the Co., DDT may be payable by the Co. in
recipient both in the RS SS, whereas the dividend may be taxable
as well as in SS, based on in the hands of the shareholder of the
the domestic laws of the other CS, on the basis of his residence.
CSs.

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Type of Articles 23A & 23B The Articles do not address Economic
DT address Juridical DT. DT. If two States wish to solve problems
addressed of economic DT, they must do so in
by Article bilateral negotiations.
23A &
23B
Chapter VI : Special Provisions
25 Mutual Where a tax payer believes that the treatment accorded by either or both CSs is not
agreement in accordance with the provisions of the tax treaty, this Article provides for dispute
procedure resolution through bilateral negotiations between competent authorities (CAS) of
(MAP) both CSs.
OECD Model UN Model Convention
Convention
Request for The taxpayer may Alternative A - Taxpayer has to approach
MAP make a request to RS or the country of his nationality
either CS Alternative B - Reference to an arbitration
process as part of MAP. The decision
arrived at through the process is binding
unless a person directly affected does not
accept it.
Time limit Stipulates a time limit An arbitration may be initiated if the
of 2 years from the competent authorities (CAS) are unable to
date when all the reach an agreement on a case within 3 years
information required from presentation of that case [Alternative B]
by the CAS in order
to address the case
need to be provided
to both CAS.
Who can Arbitration must be Arbitration must be requested by the CAS
request for requested in writing of one of the CS. Once such a request is
Arbitration? by the person who made, the taxpayer will be notified
initiated the case [Alternative B]
Departure No specific The CAS may depart from the arbitration
from provision for decision if they agree to do so within 6
arbitration departure from months after the decision has been
by CAS arbitration. communicated to them [Alternative B]
26 Exchange of  Purpose of Article 26
information In order to complete tax cases, a country may require certain info which may be
(EOI) available with the treaty partner.
Article 26 provides for:
• the info which may be exchanged

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• the manner in which such a request has to be made.

 Importance of Article 26:
• facilitates effective exchange of information between CSs.
• curtails cross-border tax evasion and avoidance,
• curtails the capital flight that is often accomplished through tax evasion &
avoidance. This is particularly relevant in the perspective of developing countries.
 Similar provisions contained in OECD and UN MCs
• A CS cannot be expected to provide confidential financial info to another CS
unless it has confidence that the info will not be disclosed to unauthorized
persons.
• A CS can avoid the EOI obligations by showing that the info pertains to
communication between an attorney and his client which is protected from
disclosure under domestic law.
• Lack of interest or use in such info cannot, however, form the basis for a CS to
not co-operate with the EOI obligations.

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DIRECT TAX LAWS

& INTERNATIONAL
TAXATION

The Institute of Chartered

Accountants of India
(Set up by an Act of Parliament)

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The Institute of Chartered Accountants of India
ICAI Bhawan, A-29,
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