PAY INCOME TAX ONLINE

WANT TO PAY INCOME TAX ONLINE

 

FOLLOWING IS THE PROCEDURE

e-Payment facilitates payment of direct taxes online by taxpayers. To avail of this facility the taxpayer is required to have a net-banking account with any of the banks listed below, which are the only banks offering this facility at present.

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Account Holders of Axis Bank State Bank of India Punjab National Bank Indian Overseas Bank Canara Bank Indian Bank Bank of India Corporation Bank State Bank of Bikaner & Jaipur State Bank of Travancore State Bank of Indore Vijaya Bank HDFC Bank Oriental Bank of Commerce State Bank of Patiala Bank of Baroda IDBI Bank State Bank of Mysore Bank of Maharashtra State Bank of Hyderabad State Bank of Saurashtra Union Bank of India Allahabad Bank Dena Bank Syndicate Bank ICICI Bank United Bank of India UCO Bank Central Bank of India Please Click Here

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Procedure for e-payment: 1.     To pay taxes online the taxpayer will select the relevant challan i.e. ITNS 280, ITNS 281, ITNS 282 or ITNS 283, as applicable. 2.     Enter its PAN / TAN as applicable. There will be an online check on the validity of the PAN / TAN entered. 3.    If PAN/ TAN is valid the taxpayer will be allowed to fill up other challan details like accounting head under which payment is made, name and address of TAN and also select the bank through which payment is to be made, etc. 4.    On submission of data entered a confirmation screen will be displayed. If the taxpayer confirms the data entered in the challan, it will be directed to the net-banking site of the bank. 5.     The taxpayer will login to the net-banking site with the user id/ password provided by the bank for net-banking purpose and enter payment details at the bank site. 6.    On successful payment a challan counterfoil will be displayed containing CIN, payment details and bank name through which e-payment has been made. This counterfoil is proof of payment being made.

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CA. VIKAS     KAPAHI

TREASURER

JAB WE MET CA GROUP

INTERNATIONAL TAXATION CASE LAWS

AUTHORITY FOR ADVANCE RULINGS

Book Profits – Minimum Alternate Tax – Public Sector undertaking – Having Foreign Branches - Computation of Profits for MAT – Provision for Taxation made by Foreign Branches to be added back to arrive at Book Profits.

Bank of India, In re [2007] 295 ITR 529 :: 165 Taxman 627 :: 213 CTR 522 (AAR)

Expression ‘income-tax’ is used in section 115JA in a general sense and not with reference to the income- tax chargeable under the provisions of 1961 Act alone and ,therefore, provision made by the foreign branches of the assessee bank for payment of income tax in foreign countries is to be added to book profit in terms of s.115JA.
Facts:

The applicant, a public sector undertaking, filed a return in respect of the assessment year 1997-98 showing “nil” income. But in accordance with the provisions of Section 115 JA of the Act, it computed a book profit and paid applicable taxes on that amount.

Department disallowed a number of claims made by the applicant, namely, provision for leave encashment, fee paid to Master Card, broken period interest, exchange loss, exclusion of profit of foreign branches, etc., and also added provision for taxes made by foreign branches of the applicant-bank, for arriving at book profit under the provision of section 115 JA. The Assessing Officer treated the amount set aside for paying taxes in foreign countries as provision for unascertained liabilities.

CIT (A) confirmed the disallowance and the applicant preferred a second appeal before the ITAT on disallowances of fee paid to Master Card and exchange loss.

With the permission of the Committee on Disputes the applicant, applied to the Authority seeking a ruling on the question whether, for the assessment year 1997-98, the sum of Rs.4,57,57,000, being provision for taxation made by its foreign branches had to be added back to the book profits taxable under section 115JA of the Income- tax Act, 1961.

Ruling:

The Authority ruled:

That as far as determination of book profit and liability to pay minimum tax based on the book profits was concerned, section 115JA was a self contained code. Therefore, in determining the book profits and deemed income, section 115JA prevailed over the other provision of the Act.

That the net profit was arrived at as per the profit and loss account by taking into account the profit made by the foreign branches as well. The profit earned by the foreign branches was an integral part of the net profit.

That in the context in which clause (a) of the Explanation to section 115JA occurred; the expression “income-tax” was referable to profits reflected in the profit and loss account. The expression “income-tax” was used in section 115JA in a general sense and not with reference to the income chargeable under the provision of the Income-Tax, 1961.

No distinction could be drawn between India and foreign income-tax by reference to section 2(43) which defined “tax”. There was no justification to restrict the scope of the expression “income-tax” to Indian income-tax only.

Therefore, the provision of Rs. 4,57,57,000 made by the foreign branches of the applicant for payment of income-tax in those countries was required to be added to the book profit in terms of Section 115JA of the Act.

Cases Referred to:

Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273 (SC).

CIT vs. Indira Balkrishna [1960] 39 ITR 546 (SC).

Dy. Chief Controller of I. & E. vs. K.T.Kosalram [1999] 110 ELT 366 (SC).

Union of India vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC).

HIGH COURT

Non-resident – Business of exploration etc. of mineral oil – Computation – Aggregate amount received by non-resident is chargeable to tax under s. 44BB @ 10 per cent without any deductions like freight and transportation charges – Amount received by the assessee is chargeable as per s. 44BB(2) regardless of income as per ss. 2(24), 5 or 9.

CIT & Anr. vs. Halliburton Offshore Services Inc. (2007) 213 CTR (Uttarakhand) 547

Aggregate amount received by non-resident assessee is chargeable to tax under s. 44BB @ 10 per cent without any deductions like freight and transportation charges.

Facts:

Assessee was a non-resident company and is engaged in the business of exploration etc. of mineral oil. The assessee received reimbursement of freight and transportation charges actually incurred in respect of transportation of equipment to ONGC. The AO added the said reimbursements to the amount received for rendering services as per provisions of s. 44BB to the ONGC and imposed tax thereon @ 10%.

Both CIT(A) as well as the Tribunal held that these charges were freight and transportation charges incurred in respect of transportation of equipment by the assessee to ONGC and did not constitute an income and cannot be added as total income of assessee and on account of liquidated damages from the contract bills raised by the assessee could not be said to have accrued as income to the assessee so as to fall within the ambit of charging provisions of s. 5 of the IT Act.

The revenue filed appeal on the facts as to whether only the income or accrued income is liable to be taken into account for arriving at profits and gains @ 10 per cent under s. 44BB or all the amounts received or deemed to be received are to be taken into account?

Held:

It is clear from the perusal of s. 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the assessee @ 10 per cent. Therefore, the Tribunal fell into error in not appreciating the difference between the amount and the income.

Amount paid or received refers to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under s. 2(24) and s. 5 and s. 9 deal with the income and accrued income and deemed income. Sec. 4 is the charging section of the IT Act and definition as well as the incomes referred in ss. 5 and 9 are for the purpose of imposing the income-tax under s. 143(3).

S. 44BB is a complete code in itself. It provides by a legal fiction the profits and gains of the non-resident assessee engaged in the business of oil exploration @ 10 per cent of the aggregate amount specified in sub-s. (2). It is not in dispute that the amount has been received by the assessee company. Therefore, the AO rightly added the said amount which was received by the non-resident company rendering services as per provisions of s. 44BB to the ONGC and imposed the income-tax thereon.

Cases referred to:

No cases were referred to.

Non-resident – Business of exploration etc. of mineral oil – Computation – Assessee non-resident received a sum from ONGC for supply of spare parts – Entire amount being cost of spare parts supplied by assessee non-resident to ONGC being receipt during the course of business was chargeable to tax under s. 44BB – it was not reimbursement since the assessee himself has claimed 5 per cent handling charges on the original cost of material i.e. spare parts.

CIT vs. B.J. Services Co. Middle East [2007] 213 CTR (Uttarakhand) 545

The entire amount being cost of spare parts supplied by assessee non-resident to ONGC being receipt during the course of business was chargeable to tax under s. 44BB without deduction of so called reimbursement of actual cost of spare parts.

Facts:

Return of income was filed by the non-resident assessee disclosing Rs. 3,27,770 for computing the amount referred under sub-s. (2) of s. 44BB of the Act, which was 5 per cent of the total receipts towards handling charges on the original cost.

AO found that total amount received by the assessee for supply of spare parts to ONGC was Rs. 69,45,264. Therefore, he took into account the total amount received by the non-resident assessee for supply of spare parts to ONGC under sub-s. (2) of s. 44BB for determining the profits and gains and imposed the tax @ 10 per cent under sub-s. (1) of s. 44BB of the Act.

The CIT(A) held that the assessee was entitled for deduction of Rs. 66,17,495 out of Rs. 69,45,264 as Rs. 66,17,495 was received as cost of materials etc. as the actual reimbursement of expenses of such materials incurred by the assessee in execution of the contract with the ONGC and these reimbursements were on actual basis and were not in any way on a fixed percentage basis. The Tribunal rejected the contentions of the Revenue.

Revenue preferred appeal on the ground as to whether the Tribunal was legally correct in holding the amount received by the non-resident company as reimbursement on account of supply of spare parts cannot be included in the contract receipts for computing taxable profit under s. 44BB?

Held:

Sub-s. (1) of s. 44BB specifically provides that aggregate of amounts specified in sub-s. (2) shall be taken into account, 10 per cent of which shall be deemed to be profits and gains. Sub-s. (2) provides that amounts referred shall be amount paid or payable to the assessee (whether in or out of India) and the amount received or deemed to be received in India on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India.

Explanation appended to s. 44BB provides that for the purpose of this section, plant includes ships, aircrafts, apparatus and equipments used for the purpose of said business and mineral oils include petroleum and natural gas. Thus, the amount received by the assessee on account of supply of spare parts is squarely covered under s. 44BB. Therefore, the AO was right in calculating the 10 per cent of total amount of Rs. 69,45,264, which was received by the assessee non-resident company from the ONGC.

The claim of the assessee that the amount of Rs. 66,17,495 could not be included for the purpose of calculating the amount referred to in sub-s. (2) of s. 44BB as it was reimbursement while the assessee himself has claimed 5 per cent handling charges on the original cost of material i.e. spare parts. Therefore, Rs. 69,45,264 was the cost of spare parts and was duly received by the assessee non-resident company and hence was an amount referred to under sub-s. (2) of s. 44BB as it was a receipt during the course of business.
Cases referred to:

No cases were referred to.

Tribunal Decisions

Residential status of an Individual – Not Ordinarily Resident – Conditions to be satisfied – Amendment in section 6(6) of the Income-tax Act, 1961 by the Finance Act, 2003 not clarificatory or retrospective in nature

DCIT vs. Kapila Singla [2007] 15 SOT 166 (Delhi) Assessment Year 2001-02

An individual can be said to be ‘resident and ordinarily resident’ only when two conditions, viz., (a) he has been resident in India in nine out of ten years preceding relevant previous year, and (b) he has during seven years preceding that year been in India for a period of, or for periods aggregating to at least 730 days, are fulfilled and if either of these two conditions is not fulfilled, individual is said to be ‘not ordinarily resident’. CBDT Circular dated 5-12-1962

Facts

The assessee, an individual, filed the return of income claiming the status to be resident in India. He also claimed exemption under section 10(15)(fa) in respect of interest arising from a fixed deposit in foreign currency.

The A.O. rejected the claim for exemption holding that the assessee had claimed the status of resident, whereas the exemption was available only to an assessee who was a non-resident or not ordinarily resident; and that the fixed deposit in the bank was in Indian rupees and not in foreign currency.

On appeal, the Commissioner (Appeals) held that since the deposits were not in foreign currency, the exemption was not available. As regards the status claimed, the Commissioner (Appeals) agreed with the assessee that he was ‘not ordinarily resident’. In coming to the conclusion that the assessee was not ordinarily resident, the Commissioner (Appeals) examined the assessee’s stay in India for the financial years 1990-91 to 1999-2000 and held that as per section 6(1)(a), the assessee would not be a resident in India for the two financial years, namely, 1995-96 and 1996-97. He, therefore, held that the assessee was not a resident in India in 9 out of the 10 previous years preceding the previous year relevant to the assessment year in appeal and, therefore, according to section 6(6)(a), he would be ‘not ordinarily resident’.

Decision

On revenue’s appeal, the Tribunal held in favour of the assessee as follows:

The word ‘resident’ in the first part of clause (a) of sub-section (6) of section 6 means resident within the meaning of section 6(1); while in the second part of this clause, the words ‘has not during the seven previous years preceding that year been in India’ refer to physical presence of the assessee in India. In order to claim the status of being ‘not ordinarily resident’ under the first part of clause (a), resident in India for less than nine years out of the preceding ten years is sufficient. In order to claim that status under the second part of the clause, the requisite condition is that the aggregate period of the assessee’s physical presence in India during the seven years preceding the relevant accounting year should not have exceeded 729 days. The effect of the two parts of the clause read together is that an individual is said to be ‘resident and ordinarily resident’ only when both the following conditions are fulfilled:

He has been resident in India in nine out of the ten years preceding the relevant previous year; and

He has during the seven years preceding that year been in India for a period of, or for periods aggregating to at least 730 days.

If either of these two conditions is not fulfilled, the individual is said to be not ordinarily resident.

In the instant case, the assessee was physically present in India for the entire 365 days during the previous year, namely, 1-4-2000 to 31-3-2001, having returned to India on 20-2-2000. So, he was a ‘resident’ in India for that year. The enquiry would then have to be made whether he was a ‘resident and ordinarily resident’ or a ‘resident but not ordinarily resident’ in India. Then, the question that arose for consideration was as to whether he was a resident in India in nine out of the ten previous years preceding the relevant previous year. As per the findings given by the Commissioner (Appeals), the assessee was not a resident for the previous years 1995-96 and 1996-97 and for the other eight years he would be resident. He, therefore, did not fulfil the condition that he should be a resident in nine out of ten previous years, falling short by one year. Thus, the first condition for being ‘resident and ordinarily resident’ was not satisfied. As per the legal position, non-fulfilment of one of the two conditions of section 6(6)(a) was sufficient to bring the assessee under the category of ‘not ordinarily resident’. Therefore, the Commissioner (Appeals) was right in his view.


The other condition, namely, that the assessee should have been physically present in India for 730 days or more during the seven years preceding the relevant previous year, was satisfied in the instant case. As per the findings given by the Commissioner (Appeals), the seven years’ period would be the financial years 1993-94 to 1999-2000 and during these years, the assessee was physically present in India for a period aggregating to 1,486 days. Since the assessee had fulfilled only one of the two conditions for being ‘resident and ordinarily resident’, he became ‘resident but not ordinarily resident’ within the meaning of section 6(6)(a).


Section 6(6) had been amended by the Finance Act, 2003, with effect from 1-4-2004 on the lines of the view expressed by the Gujarat High Court in Pradip J. Mehta vs. CIT [2002] 256 ITR 647/123 Taxman 1118. The department’s Circular No. 7 of 2003 which explains the new section says that the amendment was made in order to remove doubts about the interpretation of the section and that it was clarificatory in nature. Nevertheless, it had been made applicable only from 1-4-2004. The amendment could not be held to be clarificatory when the Authority for Advance Ruling AAR No. P5 of 1995, In re [1997] 223 ITR 379/90 Taxman 467 interpreting the provisions of section 6(6)(a) had held the field right from its inception. In fact, even under section 4B(a) of the Indian Income-tax Act, 1922, the same interpretation was accepted by the Courts. Such an interpretation of the provision was in accordance with the speech of the Finance Member in the Central Legislative Assembly while introducing the relevant Amendment Bill and had been adopted in the circular dated 5-12-1962 issued by the CBDT. Therefore, the amendment made in section 6(6) could not be given effect retrospectively.

Cases referred

S. Marimuthu Pillai vs. CIT [1945] 13 ITR 186 (Mad.)

K.M.N.N. Swaminathan Chettiar vs. CIT [1947] 15 ITR 418 (Mad.)

P.B.I. Bava vs. CIT [1955] 27 ITR 463 (Travancore - Cochin)

Authority for Advance Ruling AAR No. P5 of 1995, In re [1997] 223 ITR 379/90 Taxman 467 (AAR) and
v. Pradip J. Mehta vs. CIT [2002] 256 ITR 647/123 Taxman 1118 (Guj.)

Taxability of a Non-Resident Technician employed in India by a Non-Resident Company – Company liable to tax u/s 44B – Whether conditions under Article 15 of the DTAA between India and Russia are satisfied – Matter remanded back to the CIT(A)

Zarubezhneft vs. ACIT [2007] 17 SOT 1 (Delhi) Assessment Years 2004-05 and 2005-06

‘Z’ was a joint stock company incorporated in Russia – Assessee, who was a non-resident, was appointed as technician in India by ‘Z’. Assessee claimed that remuneration received by him from employer for his work in India was not taxable in India in view of article 15 of DTAA between India and Russian Federation. Assessing Officer held that out of three conditions laid down in article 15(2) of DTAA, assessee did not fulfil condition laid down in clause (c) of article 15(2) inasmuch as employer ‘Z’ was assessed in India under provisions of section 44BB on basis that it had a permanent establishment (PE) in India. Assessing Officer further held that since ‘Z’ was assessed in India under provisions of section 44BB, remuneration paid to assessee had to be presumed to be borne by PE of ‘Z’ and, therefore, remuneration received by assessee from ‘Z’ was taxable in India. On appeal, Commissioner (Appeals) confirmed said order. Before Tribunal assessee pleaded that he was never asked to prove fulfilment of condition as laid down in article 15(2)(c) and if given a chance assessee could prove that remuneration paid to him was not borne by PE or fixed base of employer in India. In view of contention of assessee matter was restored back to file of Commissioner (Appeals) to enable assessee to prove fact that remuneration was not borne by PE of employer in India.

Decision

The Tribunal remanded the matter back to the CIT(A) as follows:

All the three conditions as laid down in article 15(2) of the DTAA had to be fulfilled to claim exemption in respect of remuneration received by the assessee, a non-resident in India. There was no dispute to the extent that conditions with regard to clauses (a) and (b) of article 15(2) were fulfilled. The dispute was only with respect to the condition laid down in clause (c) of article 15(2). According to clause (c) of article 15(2) of the DTAA, the employee to claim exemption from tax in India has to establish that his remuneration is not borne by the PE or fixed base which the employer has in India. Thus, it would be one of the three essential conditions for the assessee to show that the remuneration received by him in India was not borne by the PE or fixed base of the employer in India.

The A.O. as well as Commissioner (Appeals), both had presumed that as the employer on its PE in India had been assessed under the provisions of section 44BB, the assessee’s remuneration was borne by the PE of the employer. However, against this presumption it was the case of the assessee that it could be proved by him that remuneration was not borne by the PE of the employer in India.

Therefore, the instant issue required to be restored back to the file of the Commissioner (Appeals) to enable the assessee to prove the fact that remuneration was not borne by the PE of the employer in India.

Cases referred

Sedco Forex International Inc. vs. CIT [2005] 279 ITR 1/147 Taxman 382 (Uttaranchal) and

CIT vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320/[2004] 134 Taxman 109 (Uttaranchal).

Taxability of French technicians rendering services to a French company in India – Liability to deduct TDS u/s 192 – Whether Non-Resident Co. an "assessee in default"

Prid Foramer S.A. vs. ACIT [2007] 15 SOT 562 (Delhi) Assessment Year 1988-89

Assessee was a non-resident company incorporated in France. Assessee entered into manning and management contracts with ONGC and deputed expatriates for providing drilling services to ONGC. Assessee paid salary to expatriates but did not deduct tax at source on said payment – Assessing Officer therefore, treated assessee, as ‘assessee in default’, under section 201 for non-deduction of taxes on salaries of expatriates. Since all expatriates were in India in previous year for less than 183 days and salary was paid to them by non-resident company and not by a permanent establishment in India and assessee had not claimed deduction of salary in its income-tax return, the assessee satisfied all three conditions of exemption in terms of article XIV(2) of DTAA between India and France for earning exemption from levy of tax on salaries and wages of expatriates. Therefore, assessee-company could not be treated as ‘assessee in default’ u/s 201 in respect of remuneration of expatriates.

Facts

The assessee, a non-resident company, was incorporated in France. The assessee entered into manning and management contracts with ONGC and deputed expatriates for providing drilling services to ONGC. The assessee paid salary to expatriate but did not deduct tax at source on said payment.

The A.O. framed the assessment of the assessee for the relevant assessment year and applied provisions of section 44BB and took presumptive net profit of 10% on manning and management contracts. The A.O. also proposed to levy interest on assessee u/s 201 for non-deduction of tax on amount of salary paid to expatriates.

The assessee submitted that since in the earlier years the assessments were made under section 44D, wherein no expenses were allowed, the assessee was under the impression that in the instant year also the assessment would be made accordingly which in turn would help the assessee to satisfy all the conditions laid down under article XIV of the DTAA with France and the employees would, therefore, earn exemption.

The A.O. rejected the submissions of the assessee and levied interest u/s 201 by holding that because the assessment on the assessee having been made u/s 44BB, while computing business profits, the salary of the expatriates was deemed to have been deducted and, as such, the assessee was liable to deduct tax at source from the amount of salary paid to expatriates.

On appeal, the Commissioner (Appeals) confirmed the action of the A.O.

On appeal before the Tribunal, the assessee contended that section 44BB has a non obstante clause and has a limited application with one deemed fiction of presumptive net profit of 10 per cent of gross proceeds, and no further deeming fiction can be introduced for interpretation of article XIV(2) of DTAA with France. There cannot be fiction over fiction more so when there cannot be assumption of deeming salary as having been deducted with the language of article XIV(2)(c), which is very specific and provides for actual deduction of remuneration.

Decision

The Tribunal held in favour of the assessee as follows:

Under article XIV(2), three conditions are required to be satisfied and satisfied cumulatively for earning exemption from levy of tax on salaries and wages. Undisputedly, the duration of stay of expatriate employees in India was less than 183 days. The remuneration was also paid by or on behalf of employer, who was not a resident of other contracting State. The Assessing Officer had declined the assessee’s claim on the plea that condition (c) of article XIV(2) of the DTAA, with regard to remuneration having been deducted in computing the profit of permanent establishment (PE) chargeable to tax in that other contracting State, was not satisfied.

It is quite evident from the computation of total income that the assessee had not claimed any deduction of salary and remuneration of expatriate employees with respect to activities carried out at ONGC rigs. While framing the assessment, the Assessing Officer had applied provisions of section 44BB and taken presumptive net profit of 10% on manning and management contracts instead of as fee for technical services following the CBDT instructions. The claim for non-taxability of remuneration was made under section 201 proceedings with reference to article XIV(2) of DTAA with France.

Article XIV(2)(c) provides for twin conditions that there must be permanent establishment and the remuneration must not be deducted in computing the profit of PE in India. As the assessee had not claimed the remuneration in its audited profit and loss account nor in the return of income filed along with the income-tax returns, in such circumstances, sub-clause (c) was negatively fulfilled to enable the assessee to claim exemption from liability to tax in respect of salary of such expatriate employees. The remuneration having not been claimed by the assessee in its profit and loss account prepared with reference to its permanent establishment in India had not been disputed either by the Assessing Officer or by the Commissioner (Appeals). The only plea of lower authorities was that section 44BB assumed deducibility and liability of all the expenses including remuneration paid to expatriates.

Section 44BB has a non obstinate clause and has a limited application with one deemed fiction of presumptive net profit of 10% of gross proceeds; no further deeming fiction can be introduced for interpretation of article XIV(2) of DTAA with France. The expression ‘deducted’ as used in article XIV(2)(c), means ‘actually deducted’ and ‘ostensive deducted’ while computing the profit of permanent establishment. It cannot be equated to or extended by fiction ‘deeming to have been deducted’. As no salary was actually claimed in audited accounts in India while computing the chargeable profit, it could not be deemed to be deducted when no claim was made for such deduction.

Section 44BB provides for special provision for the taxation of foreign (employer) company with regard to mineral oil operations by introducing a non obstante clause that provisions for deduction of expenses as per sections 28 to 41, 43 and 43A are inapplicable and are overridden and by further providing a legal fiction by deeming 10% of proceeds as presumptive net profits in computing the income from business.

The cumulative effect of non obstante clause and legal fiction is that no expenses incurred in the business of earning the income shall be allowed for deduction in computing the business profits and 10% of proceeds irrespective of actual results shall be deemed to be presumptive 10% profits of business chargeable to tax. Where an assessment is made on an estimated basis or on the basis of rate applied as per legal fiction, there is no assumption that the expenses for each head had been considered and allowed much less said to be deducted.

7) Moreover, the provisions of section 44BB are applicable to the computation of profits of the (employer) foreign company and the fiction contained in the said section cannot be applied for interpreting the provisions of article XIV(2), which are applicable to the personnel. It is quite clear that the provisions of the DTAA override the provisions of the Act and even if there is a legal fiction provided in section 44BB, it cannot restrict the meaning and ambit of exemption provisions of article XIV(2) of DTAA with France. Moreover, it is well-settled that if the language of the statute is clear and unambiguous, words must be understood in their plain meaning. The wordings of the DTAA must be construed according to its literal and grammatical meaning, whatever the result may be. The word ‘deducted’ cannot be equated with the word ‘deductible’ or interpreted as deemed to be deducted or borne by Permanent Establishment.

In view of the above discussion, the assessee-company could not be treated as ‘assessee in default’ under section 201 in respect of remuneration of the expatriates, who fulfilled all the conditions of exemption in terms
of article XIV(2) of DTAA with France.

Hence, the appeal was allowed.

Cases referred

i. CIT vs. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 (SC)
ii. Mancheri Puthusseri Ahmed vs. Kuthiravattam Estate Receiver [1996] 6 SCC 185 and
iii. CIT vs. Moon Mills Ltd. [1966] 59 ITR 574 (SC).

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STEPS TO CREATE A COMPANY

Steps to be taken to get incorporate a new company:-

 

Steps to be taken to get a new company incorporated:

Select, in order of preference, at least one suitable name upto a maximum of six names, indicative of the main objects of the company.

Ensure that the name does not resemble the name of any other already registered company and also does not violate the provisions of emblems and names (Prevention of Improper Use Act, 1950) by availing the services of checking name availability on the portal.

Apply to the concerned RoC to ascertain the availability of name in eForm1 A by logging in to the portal. A fee of Rs. 500/- has to be paid alongside and the digital signature of the applicant proposing the company has to be attached in the form. If proposed name is not available, the user has apply for a fresh name on the same application.

After the name approval the applicant can apply for registration of the new company by filing the required forms (that is Form 1, 18 and 32) within six months of name approval

Arrange for the drafting of the memorandum and articles of association by the solicitors, vetting of the same by RoC and printing of the same.

Arrange for stamping of the memorandum and aticles with the appropriate stamp duty.

Get the Memorandum and the Articles signed by at least two subscribers in his/her own hand, his/her father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person.

Ensure that the Memorandum and Article is dated on a date after the date of stamping.

Login to the portal and fill the following forms and attach the mandatory documents listed in the eForm


Declaration of compliance - Form-1


Notice of situation of registered office of the company - Form-18.


Particulars of the Director's, Manager or Secretary - Form-32.


Submit the following eForms after attaching the digital signature, pay the requisite filing and registration fees and send the physical copy of Memorandum and Article of Association to the RoC

After processing of the Form is complete and Corporate Identity is generated obtain Certificate of Incorporation from RoC.

Additional steps to be taken for formation of a Public Limited Company:

To obtain Commencement of Business Certificate after incorporation of the company the public company has to make following compliance

File a declaration in eForm 20 and attach the statement in lieu of the prospectus(schedule III) OR

File a declaration in eForm 19 and attach the prospectus (Schedule II) to it.

Obtain the Certificate of Commencement of Business.

Additional steps to be taken for registration of a Part IX Company:

The Part IX Company is required to file eForm 37 and eForm 39 apart from filing eForm 1, 18 and 32.

The company is required to file eForm 1 first and then the company can file all the other eForms (18, 32, 37 and 39) simultaneously or separately

 

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CA. VIKAS     KAPAHI

GUIDANCE NOTE ON TRANSFER PRICING

Notes on Transfer Pricing Guidance Note:

Every person who has entered into an international transaction
during a previous year shall obtain a report from an accountant
and furnish such report on or before the specified date in the
prescribed form. “Specified date” means , the 31st day of October

The object of this guidance note is to provide guidance to
accountants in discharging their responsibilities under section
92E of the Act. It intends to -

(i) assist in understanding the respective responsibilities of
the assessee enterprise and the accountant;
(ii) guide the accountant as to the nature and scope of
information to be obtained by him from the assessee
enterprise to enable him to conduct the examination;
(iii) provide guidance on the verification procedures to be
adopted by the accountant for giving the report and the
prescribed particulars in the annexure thereto; and
(iv) explain the circumstances where a disclosure or
qualification or disclaimer may be required from the
accountant while giving his report.

there must be an international
transaction. Secondly, such international transaction must be
between two or more associated enterprises either or both of
whom are non-residents.

even if a transaction entered into
between an enterprise with a person other than an associated
enterprise, it shall be deemed to be a transaction between
associated enterprises if there exists a prior agreement in relation
to the relevant transaction between such other person and the
associated enterprise or the terms of the relevant transaction are
determined in substance between such other person and the
associated enterprise.

adjustments
should be made only if it results in an increase of the income
returned by the assessee.

Assessing Officer shall not make
any adjustment to the arm’s length price determined by the
taxpayer, if such price is up to 5% less or up to 5% more than the
price determined by the Assessing Officer. In such cases, the
price declared by the taxpayer is to be accepted.

Section 92D provides that every person who has been a party to
an international transaction, during a previous year, shall keep
and maintain such information and documents, prescribed by the
Board, as will assist the Assessing Officer to compute the income
arising from that transaction, having regard to the arm’s length
price.

The requirement to keep and maintain such information and
documents with respect to an international transaction has,
however, been waived in the case of those persons who have
entered into international transactions the aggregate value of
which, as recorded in the books of account, does not exceed one
crore rupees - rule 10D(2).

Board has stipulated that the prescribed information
and documents be kept and maintained for a period of eight
years from the end of the relevant assessment year - Rule 10D
(5)

Section 92E does not stipulate that only the statutory auditor
appointed under the Companies Act or other similar statute
should perform the examination. The examination can, therefore,
be conducted either by the statutory auditor or by any other
chartered accountant in practice.

The issue of a report under section 92E, being a recurring
assignment for expressing a professional opinion, the accountant
accepting the assignment should communicate with the
accountant who had done the examination in the earlier year, as
provided in the Chartered Accountants Act.

The accountant should obtain from the assessee a letter of
appointment for conducting the examination.such an appointment letter should
be signed by the person competent to sign the return of income in
terms of the provisions of section 140

The appointment of the accountant in the case of a company
need not be made at the general meeting of the members. It can
be made by the Board of Directors or even by any officer, if so
authorised by the Board in this behalf. The appointment in the
case of a firm or a proprietary concern can be made by a partner
or the proprietor or a person authorised by the assessee. It is
possible for the assessee to appoint two or more chartered
accountants for carrying out the examination, in which case, the
report will have to be signed by all the chartered accountants. In
case of disagreement, they can give their reports separately.

The Act does not prohibit a relative or an employee of the
assessee being appointed as an accountant under section 92E. It
may, however, be noted that as per a decision of the Council
(reported in the Code of Ethics under clause (4) of Part I of
Second Schedule), a chartered accountant who is in employment
of a concern or in any other concern under the same
management cannot be appointed as an auditor of that concern.
Therefore, an employee of an assessee or an employee of a
concern under the same management cannot examine the
accounts and records of an assessee under section 92E. It may
also be noted that under the Second Schedule to the Chartered
Accountants Act, if a member gives a report under section 92E in
the case of a concern in which he and / or his relatives have
substantial interest, it will be necessary for him to disclose his
interest in the audit report.

An accountant responsible for writing or the maintenance of the
books of account of the assessee should not examine such
accounts. This principle will apply to the partner of such an
accountant as well as to the firm in which he is a partner. In view
of this, an accountant who is responsible for writing or the
maintenance of the books of account, his partner or the firm in
which he is a partner should not accept the examination
assignment under section 92E in the case of such an assessee.

Similarly, an internal auditor of the assessee cannot conduct the
examination if he is an employee of the assessee. If the internal
auditor is working in his professional capacity (as an independent
accountant not being an employee of the assessee), he can
conduct the examination. However, an accountant or a firm of
accountants appointed as tax consultants of the assessee can
conduct the examination under section 92E.

In the case of an examination, the accountant is required to
express his opinion as to whether the assessee has maintained
the proper information and documents, as prescribed, in respect
of the international transactions entered into by him. As regards
the statement of particulars to be annexed to the report, he is
required to give his opinion as to whether the particulars are true
and correct. In giving his report the accountant will have to use
his professional skill and expertise and apply such tests as the
circumstances of the case may require, considering the contents
of the report.

The report by the accountant given under Section 92E sets forth
such particulars as have been prescribed in Form 3CEB. In order
that the accountant may be in a position to explain any question
which may arise later on, it is necessary that he should keep
detailed notes about the evidence on which he has relied upon
while conducting the examination and also maintain all his
working papers. Such working papers should include his notes on
the following, amongst other matters:
(a) work done while conducting the examination and by
whom;
(b) explanations and information given to him during the
course of the examination and by whom;
(c) decision on the various points taken;
(d) the judicial pronouncements relied upon by him while
making the report;
(e) certificates issued by the client / management letters; and
(f) annexure to Form No.3CEB duly filled in and
authenticated by the client.

If the assessee is unable to obtain relevant information in respect
of the overseas branches duly certified by the overseas
Accountant, the relevant facts should be suitably disclosed and
reported upon.

Ninety per cent or more of the raw materials and consumables
required for the manufacture or processing of goods or articles
carried out by one enterprise, are supplied by the other enterprise
or by persons specified by the other enterprise, and the prices
and other conditions relating to the supply are influenced by such
other enterprise.
90% criteria should be applied
exclusively to raw materials and consumables used for
manufacturing and processing only.

A transaction is considered to be a cross-border transaction if it
originates in one courtry and get concluded in another country. A
cross-border transaction may or may not be an international
transaction within the meaning of Chapter X of the Act. Similarly,
a transaction which is not a cross-border transaction may still be
an international transaction for the purpose of the said chapter if it
falls within the ambit of the definition of “international transaction”.
For example, it may be assumed that there are two US
companies which are associated enterprises. If the Indian
subsidiary of one such US (holding) company enters into a
transaction with the Indian branch or the permanent
establishment in India of the other US company, this transaction,
even through it has originated, executed and concluded within
India, shall be an international transaction as it is between two
associated enterprises and one of the party is a non-resident.


In alternative, assume that there is an Indian company which is
the holding company of two Indian (subsidiary) companies. The
two Indian companies are associated enterprises since they are
subsidiaries of a common holding company. If one such Indian
subsidiary company enters into a transaction with the foreign
branch of the other Indian subsidiary company, such transaction
shall not be regarded as an international transaction. In this
case, even though the transaction is between two associated
enterprises, both the parties to the transaction are residents. For
a transaction to be regarded an international transaction, either or
both the parties must be non-residents.

Even where a transaction is between two non-resident associated
enterprises, the provisions of chapter X of the Act shall apply so
long as the income arising therefrom is assessable within the
perview of the Act. It is possible that an international transaction
between two associated enterprises, both of whom are nonresidents,
may not attract the provisions of chapter X of the Act if
the income from such transction is not taxable in India and falls
outside the scope of total income assessable under the Act.

The steps involved in the determination of the arm’s length price
can be summarised as follows :
(i) identification of the “international transaction”;
(ii) identification of an “uncontrolled transaction” - Rule 10A
(a);
(iii) identification and comparison of specific characteristics
embodied in international transactions and uncontrolled
transactions - Rule 10B (2);
(iv) finding out whether uncontrolled transactions and
international transactions can be compared by
reconciling/resolving differences, if any - Rule 10B (3);
(v) ascertaining the most appropriate method by applying the
tests laid down - Rule 10C;
(vi) determination of the arm’s length price by applying the
method chosen - Rule 10B (1).

Rule 10C(1) lays down the general guidelines in the selection of
the most appropriate method. The Rule states that the method to
be selected shall be the one best suited to the facts and
circumstances of each international transaction and that provides
the most reliable measure of the arm’s length price.

Further, the
selection of the most appropriate method shall be for each
particular international transaction. though the reference is to apply the
most appropriate method to each particular transaction, keeping
in view, the definition of the term ‘transaction’, the most
appropriate method may be chosen for a group of similar
transactions.

Rule 10C(2) lists the specific factors that should be taken into
account in the process of selecting the most appropriate method.
These factors are as under:
(i) nature and class of international transactions;
(ii) class or classes of associated enterprises and the
functions performed by them taking into account the
assets employed or to be employed and risks assumed
by such enterprises;
(iii) availability, coverage and reliability of data. For instance,
data relating to transactions entered into by the
enterprise itself would be more reliable than the data
relating to transactions entered into by third parties;
(iv) the degree of comparability and
(v) the extent to which reliable and accurate adjustments can
be made to account for the difference between the
transactions.

an “uncontrolled transaction” to mean “a
transaction between enterprises other than associated
enterprises, whether resident or non-resident”. In other words,
these are “transactions between enterprises that are independent
enterprises with respect to each other”. An uncontrolled
transaction can, therefore, be between:
•a resident and a non-resident; or
•a resident and a resident; or
•a non-resident and a non-resident.

When comparing international transactions and uncontrolled
transactions, Rule 10B (2), lays down the criteria for
comparability. This process is not quantitative but qualitative and
involves exercise of judgment. The criteria listed in Rule 10B are:
•distinctive nature of the property transferred or services
provided;
•functions performed taking into account the assets employed
or to be employed;
•risks assumed by the respective parties;
•contractual terms of the transaction;
•market conditions;

Distinctive nature of the property and services
•quality of product/services;
•value of the transactions;
•presence of intangibles like brand name, trade marks etc.;
•material/physical features.

Functions performed
•design and development of product
•sourcing of materials
•manufacturing
•warehousing
•sales and distribution
•technical services

Risk analysis
Transactions that are proposed to be compared should be
analysed for aggregate risk-content and risk-apportionment
37
between parties. Some of the significant risks present in a
normal transaction are:
Nature of risks Particulars
1. Financial risk
a. Capital contribution
b. Method of funding
c. Funding of losses
2. Product risk
a. Design and development of
product
b. Up-gradation of product
c. After Sales Service
d. Risks associated with R & D
e. Product liability risk
f. Intellectual property risk if any
3. Market risk
a. Development of market including
advertisement and product
promotion etc.
b. Fluctuations in demand and prices.
c. Credit and collection risk
4. Entrepreneurial
risk
a. Any understanding between
associated enterprises on the
transaction flow.

Contractual terms
The important contractual terms governing the execution and
performance of the transactions should be determined to gauge
whether transactions are comparable or not.
•terms of delivery
•CIF, C&F, FOB etc
•terms of payment
•discount, if any
•credit period
•warranty period
•installation services

Market conditions
•geographical location and size
•regulatory laws and government orders
•level of competition
•nature of market whether wholesale/retail
•overall economic development

Comparability
to determine whether the
uncontrolled transactions and international transactions are
comparable at all. If there are no differences, the transactions
are comparable straightaway. If the differences can be adjusted
with reasonable accuracy, then the transactions are comparable,
subject to adjustments. If, however, the differences cannot be
adjusted with reasonable accuracy, the transactions are to be
ignored and the search for comparable transactions would need
to commence all over again.

Transactions entered into by
associated enterprises with unrelated party (called “internal
40
comparables”) would provide more reliable and accurate data as
compared to transactions by and between third parties (called
“external comparables”). OECD’s Guidelines on Transfer Pricing
recognizes the fact that external comparables are difficult to
obtain and, also, it may be incomplete and difficult to interpret.
Hence for these reasons, internal comparables are preferred to
external comparables.

Rule 10B(4) provides that the data to be used in analysing the
comparability of an uncontrolled transaction with an international
transaction shall be the data relating to the financial year in which
the international transaction has been entered into. The proviso
to Rule 10B(4), further states that data relating to a period of not
more than 2 years preceding such financial year may also be
considered, if such data reveals facts which could have an
influence on the determination of the price in an international
transaction.

Power of Assessing Officer
According to section 92C (3), the Assessing Officer may himself
proceed to determine the arm’s length price if any of the following
conditions are satisfied:
(i) the price charged or paid in an international transaction
has not been determined on the basis of the most
appropriate method.
41
(ii) any information and document relating to an international
transaction has not been kept and maintained as
mandated.
(iii) the information or data used in computation of the arm’s
length price is not reliable or correct.
(iv) the assessee had failed to furnish, within the specified
time, any information or document which he was required
to furnish.

METHODS OF COMPUTATION OF ARM’S LENGTH PRICE
uncontrolled transaction’ means a
transaction between enterprises other than
associated enterprises, whether resident or
non-resident;

Comparable Uncontrolled Price Method (CUP
Method)

The OECD in its Transfer Pricing Guidelines observes as under :
“This method is particularly good where an independent
enterprise sells the same product or service as is sold between
two associated enterprises”.
“The uncontrolled transactions should reflect goods of a similar
type, quality and quantity as those between the associated
enterprises, and relate to transactions taking place at a similar
time and stage in the production/distribution chain, with similar
conditions applying.”
The steps involved in the application of this method are:
(i) Identify the price charged or paid for property transferred
or services provided in comparable uncontrolled
transaction or a number of such transactions;
(ii) Adjust such price to account for the differences if any,
between the international transaction and the comparable
uncontrolled transaction or between enterprises entering
into such transaction which could materially affect the
price in the open market;
(iii) The adjusted price is taken to be the arm’s length price;
(iv) The arm’s length price is compared with the price
charged in the international transaction;
(v) If the price charged in the international transaction is
lower than the arm’s length price or the price paid in the
international transaction is higher than the arm’s length
price then an adjustment is to be made to the price
charged or paid in the international transaction by the
amount of such variance.

The following points are to be noticed:
The presence or absence of any specific
features in the uncontrolled transaction as compared to
the international transaction is to be adjusted for. These
features are to be evaluated in mathematical terms or
absolute numbers. This is a subjective process based on
objective facts.
If after the adjustment to the uncontrolled transactions, a
range of figures are available, an arithmetical average of
such range of figures will have to be arrived at and
adopted as the arm’s length price.
It may be noted that the averaging is permissible only if a
range of arm’s length prices have been arrived at under
any one particular method and not by adopting different
methods.

Resale Price Method (RPM)
Typical transactions where the resale price method may be
adopted are distribution of finished products or other goods
involving no or little value addition.
The OECD in its Transfer Pricing Guidelines has observed as
under :
“It is generally accepted amongst most tax authorities that the
Resale Price method is applicable and preferable where the entity
performs basic sales, marketing and distribution functions. (i.e.
where there is little or no value added by the reseller prior to the
resale of the goods acquired from related parties). The method is
applicable even with differences in products, as long as the
functions performed are similar. It is less useful where goods are
further processed or incorporated into other products.”

The steps involved in the application of this method are:
(i) identify the international transaction of purchase of
property or services;
(ii) identify the price at which such property or services are
resold or provided to an unrelated party;
(iii) deduct the normal gross profit margin derived by the
enterprise from the resale price of such property or
services. The normal gross profit margin is that margin
which the enterprise would earn from purchase of the
similar product from an unrelated party and the resale of
the same to another unrelated party.
(iv) deduct also expenses incurred in connection with the
purchase of goods from the price so arrived;
(v) adjust the prices so computed for the differences
between the uncontrolled transaction and the
international transaction. These differences could be
functional and other differences including differences in
accounting practices. Further these differences should
be such as would materially affect the amount of gross
profit margin in the open market;
(vi) the adjusted price arrived at is the arm’s length price for
the property purchased or service obtained;
(vii) substitute the arm’s length price for the price charged in
the international transaction and make adjustments to the
income returned accordingly.
Note : In steps (ii) and (iii) above only internal comparables are
mentioned. An enterprise can also use external comparables
and do the computation.

The following points are to be noticed:
(i) The resale price method is to be adopted only when
goods purchased from an associated enterprise are
resold to unrelated parties. For sales made to an
associated enterprise, this method would be inapplicable.
For the sales made to an associated enterprise, the
Comparable Uncontrolled Price Method or any other
appropriate method may be adopted. Thus two different
methods may be applicable for transactions that together
may constitute an integral part of a business activity;
The reference is to the gross profit margin derived from
sale of same or similar property. The reference is thus
not to the overall gross profit margin but to the gross
profit margin from individual transactions. It may be
difficult to identify and arrive at the gross profit margin
from individual transactions;

One has to arrive at the normal gross profit margin.
There may be situations where multiple normal gross
profit margins arise from comparable uncontrolled
transactions. In such case, the correct procedure would
be to apply each of such gross profit margins on the
International transaction and arrive at the arm’s length
purchase price. The arithmetical mean of the purchase
prices so arrived would be the arm’s length price.
The rule contemplates the gross profit margin of either
the transaction entered into by the enterprise or of an
unrelated enterprise in uncontrolled transactions. If there
is a variation in the gross profit margins of these
enterprise, the gross profit margin of the enterprise is to
be preferred, being an internal comparable;
The expenses incurred by the enterprise in connection
with the purchase of the property are to be further
reduced. The gross profit margin may have been arrived
at after taking into account such expenses. The purpose
of this method is to arrive at the arm’s length price of the
purchases. In this method, this purchase price is arrived
at by beginning from the resale price and reducing
therefrom the normal gross profit margin as the first step.
If the arm’s length price of the purchase is arrived at by
stopping at this step itself, the resulting figure would be
inclusive of the expenses incurred by the enterprise
which have been taken into account in arriving at the
gross profit. It is therefore necessary to arrive at the
correct arm’s length price to further reduce such
expenses.
Adjustments have to be made also for accounting
practices apart from functional and other differences.
Some of the differences in accounting practices may be
because:
(a) sales and purchases have been accounted for
inclusive of taxes or exclusive of taxes;
(b) method of pricing the goods namely, FOB or CIF;
(c) fluctuations in foreign exchange.

Cost Plus Method (CPM)
Typical transactions where the cost plus method may be adopted
are:
(a) provision of services;
(b) joint facility arrangements;
(c) transfer of semi finished goods;
(d) long term buying and selling arrangements.
The OECD in its Transfer Pricing Guidelines states as follows :
“This method is particularly useful where semi-finished goods are
sold between associates, where there are long term buy and
supply arrangements, or in the case of the provision of services
or contract manufacturing, particularly where these are of a
subsidiary or peripheral nature”.
The steps involved in the application of this method are:
(i) Determine the direct and indirect cost of production in
respect of property transferred or service provided to an
associated enterprise.
(ii) Identify a comparable uncontrolled transaction or a series
of transactions with an unrelated party for same or similar
property or service.
(iii) Determine gross profit mark-up in the comparable
uncontrolled transaction.
(iv) Adjust the gross profit mark-up to account for functional
and other differences between the international
transaction and the comparable uncontrolled transaction.
(v) The direct and indirect cost of production in the
International transaction is to be increased by such
adjusted gross profit mark-up.
(vi) The resultant figure is the arm’s length price;
(vii) The actual price charged in the international transaction
is to be compared with the arm’s length price and
adjustment made to the income accordingly.
In this method, the direct and indirect costs of production
are to be identified. The terms ‘direct’ or ‘indirect’ costs
are however not defined.
In identifying and adopting the direct and indirect cost,
the following factors would also have to be borne in mind:
(a) utilisation of the plant; for example, if the plant
has been under utilised the method of absorbing
fixed costs may have to be suitably adjusted;
(b) method of absorbing costs; absorption costing
method is normally to be preferred.
(c) in abnormal situations, marginal-costing
principles may have to be applied; for example,
substantial degree of under utilisation of plant
facilities. Thus incremental costing or marginal
costing can be used as a basis if the transactions
represent a disposal of marginal functions.
(iii) This method is to be adopted only in cases of supply of
property or services to an associated enterprise. This
method is not to be applied when the enterprise is in
receipt of property or services from an associated
enterprise.
(iv) Even under this method, the gross profit mark-up is to be
adjusted for differences in accounting norms adopted by
the enterprise.
(v) In identifying the comparables, one should depend more
upon the similarities of functions performed and less on
the product or service similarities.
Profit Split Method (PSM)
Typical transactions where the profit-split method may be used
are transactions involving:
(a) integrated services provided by more than one
enterprise;
(b) transfer of unique intangibles;
(c) multiple inter-related transactions, which cannot be
separately evaluated.
The observations of the OECD, in its Transfer Pricing Guidelines,
on this method are as follows :
“This method aims to determine what division of total profits
independent enterprise would expect in relation to the relevant
transactions. The profits should be split on an economically valid
basis that reflects the functions and risks of each of the parties. In
order to apply this method, it is necessary to identify the total
profit arising from the related party transactions and split that
profit between the parties according to their respective
contributions.”
The steps involved in the application of this method are to :
(i) determine the combined net profit of all associated
enterprises engaged in the international transactions;
(ii) evaluate relative contribution made by each of them with
regard to:
(a) functions performed;
(b) assets employed;
(c) risks assumed;(a,b,c are collectively called FAR)
(d) reliable external market data indicating how such
Contribution would be evaluated.
(iii) split the combined net profit in proportion to the relative
net contribution.
(iv) The profit so apportioned is taken to arrive at the arm’s
length price in relation to the international transaction.
Alternative approach
A two-tier allocation may also be adopted as follows :
(i) Partial allocation of the net profit to each enterprise so as
to provide it with a basic return appropriate to the type of
the international transaction entered into;
(ii) the remainder of the net profit to be allocated on the
basis of the evaluation of the relative contribution made
and
(iii) the total net profit from such a two-term allocation is
taken to arrive at the arm’s length price in relation to the
international transaction.
The following points are to be noticed:
(a) The rule itself provides an alternative method to arrive at
the arm’s length price being the two-tier profit split method
If in either of the alternatives, a range of figures is
available, the arithmetical mean of such figures may be
adopted as the arm’s length price. It may however not be
possible to adopt the arithmetical mean of the two
alternatives.
(b) Under the two-tier split-method, the basic rate of return
may have to be adopted having regard to the profits
compared to the net worth of the enterprise. Such rate of
return may not be uniform for all the associated
enterprises involved in the transaction.
(c) This is the only method for which the Rule itself has
prescribed the types of transaction to which it may be
applicable.
(d) Even though the computation proceeds with the profits
from a transaction, the purpose is only to arrive at the
arm’s length price of a transaction. It is only by
substituting the arm’s length price for the price in the
international transaction that an adjustment may be made
to the income returned.

Transactional Net Margin Method (TNMM-Most Widely Usable Method by Indian Inc. )

Typical kinds of transactions where the transactional net margin
method may be used are:
(a) provision of services;
(b) distribution of finished products where resale price
method cannot be adequately applied;
(c) transfer of semi finished goods.

The steps involved in the application of this method are:
(i) Identify the net profit margin realised by the enterprise
from an International Transaction. The net profit margin
may be computed in relation to costs incurred or sales
effected or assets employed or any other relevant base;
(ii) Identify the net profit margin from a comparable
uncontrolled transaction or a number of such transactions
having regard to the same base;
(iii) The net profit margin so identified is adjusted to take into
account the differences if any between the international
transaction and the comparable uncontrolled transaction.
The differences should be those that could materially
affect the net profit margin in the open market;
(iv) The adjusted net profit margin is taken into account to
arrive at the arm’s length price in relation to the
international transaction.

The following points are to be noticed in the application of the
transactional net margin method:
(a) Different bases of arriving at the net profit are
recognised. The same basis of arriving at the net profit
margin is to be adopted year after year, unless
circumstances justify an alternate base being adopted.
This would ensure consistency and hence comparability
would become meaningful;
(b) Whichever base is selected in determining the net profit
margin in an international transaction, the same basis is
to be adopted for arriving at the net profit margin in the
comparable uncontrolled transaction;
(c) The net profit is not a derivative of the product / service
alone, but a derivative of various processes, namely,
nature of market, cost practices, the price of intangibles
etc. Hence, it would be very essential that appropriate
comparables are identified for this method.
(d) Net profit, for example, can be influenced by a number of
factors a few of which could be:
(i) threat of new entrants
(ii) management efficiency
(iii) individual strategies
(iv) cost of capital
(v) business experience
(vi) obsolescence due to change in demand /
technology
(vii) method of depreciation
(e) The selection of the comparable transaction therefore
becomes very crucial, and consistency is critical;
(f) The accounting treatment of expenses and depreciation
is also a critical factor in finding a comparable. Unlike the
preceding method, the rule does not explicitly provide for
adjustment on account of differing accounting practices.
Nevertheless, such differing practices would have to be
factored in;
(g) Some of the ratios that can be used for determining the
arm’s length price under the method are:
(i) ratio of net profit before tax to sales
(ii) ratio of net profit before interest & tax to sales
(iii) ratio of cash profit to sales
(iv) ratio of net profit before tax to shareholders’
funds
(v) ratio of net profit before interest & tax to assets.
(vi) Berry ratio - ratio of operating cost to operating
revenue.

Most appropriate method
(1) For the purposes of sub-section (1) of section
92C, the most appropriate method shall be
the method which is best suited to the facts
and circumstances of each particular
international transaction, and which provides
the most reliable measure of an arm’s length
price in relation to the international
transaction.
(2) In selecting the most appropriate method as
specified in sub-rule (1), the following factors
shall be taken into account, namely:-
(a) the nature and class of the
international transaction;
(b) the class or classes of associated
enterprises entering into the
transaction and the functions
performed by them taking into
account assets employed or to be
employed and risks assumed by such
enterprises;
(c) the availability, coverage and
reliability of data necessary for
application of the method;
(d) the degree of comparability existing
between the international transaction
and the uncontrolled transaction and
between the enterprises entering into
such transactions;
(e) the extent to which reliable and
accurate adjustments can be made to
account for differences, if any,
between the international transaction
and the comparable uncontrolled
transaction or between the
enterprises entering into such
transactions;
(f) the nature, extent and reliability of
assumptions required to be made in
application of a method. [Rule 10C]

No particular method is suitable in every possible situation. It is
not possible to provide specific rules that will cover every case.
While selecting the most appropriate method, the factors
prescribed in Section 92C of Income tax Act 1961 and Rule
10C(2) should be considered.

Although it is difficult to prescribe general principles for choice of
most appropriate method, the following broad categorisation may
be considered as already indicated under each of the respective
methods :
(i) Comparable uncontrolled price method may be used in
case of loans, royalties, service fee, transfer of tangibles,
etc.
(ii) Resale price method is most useful in case of marketing
operations of finished products, especially in case of
distributors not performing significant value addition to
the product.
(iii) Cost plus method is normally used where raw materials
or semi-finished goods are sold; where joint facility
agreements or long-term buy-and-supply arrangements,
or the provision of services are involved;
(iv) Profit split method is normally used in cases where the
transactions involve provision of integrated services by
more than one enterprise; and
(v) Transactional net margin method could be used in
majority of the cases including transfer of semi-finished
goods; distribution of finished products where
applicability of resale price method appears to be
inappropriate and transaction involving provision of
services.


DOCUMENTATION AND VERIFICATION
Type of information and documents
Rule 10D(1) lays down 13 different types of information and
documents that a person has to keep and maintain. Broadly,
these information and documents may be classified into three
types:
(i) enterprise-wise documents – These are documents that
describe the enterprise, the relationships with other
associated enterprise, the nature of business carried out,
etc. This information is, largely, descriptive [clauses (a)
to (c)]
(ii) transaction-specific documents – These are documents
that explain the international transaction in greater detail.
It includes information with regard to each transaction
(nature and terms of the contract, etc.), description of the
functions performed, assets employed and risks assumed
by each party to the transaction, economic and market
analyses, etc. This information is both descriptive and
quantitative in nature [clauses (d) to (h)].
(iii) Computation related documents – These are documents
which describe and detail the methods considered, actual
working assumptions, policies etc., adjustments made to
transfer prices and any other relevant information, data,
document relied for determination of arm’s length price
[clause (i) to (m)].

Ownership, profile and business
A description of the ownership structure of the assessee
enterprise with details of shares or other ownership interest
held therein by other enterprises [clause (a), Rule 10D(1)]

Where the person is a firm or an association of persons, the
names of the partners of the firm or members of the association
of persons and their profit sharing ratios have to be stated.
Similar details, to the extent applicable, need to be furnished
when the person is a body of individuals, trust, Hindu undivided
family, etc. The description of the ownership structure should be
stated as at the day on which one person became an associated
enterprise of another and as at every other day on which there
was change in the ownership interest of that other enterprise.

The regulations require the assessee to maintain information
regarding the shareholding pattern.

The accountant shall verify that the assessee maintains
information regarding enterprises having direct or indirect
ownership interests, through intermediaries, in the assessee
enterprise. The accountant may rely on representation from the
management with regard to the veracity of the same.

A profile of the multinational group of which the assessee
enterprise is a part along with the name, address, legal
status and country of tax residence of each of the
enterprises comprised in the group with whom international
transactions have been entered into by the assessee, and
ownership linkages among them [clause (b), Rule 10D(1)]

it may be advisable to maintain, amongst other things, corporate brochures,
catalogues and other similar printed and / or electronic material
that describe:
•The principal line(s) of business in which the group is
engaged, such as manufacturing of electronic goods, trading
in chemicals, wholesale trade in food grains,
pharmaceuticals, etc.;
•Geographical areas in which the group 1 operates;
•Summarised global financials and other details such as
capital invested, assets employed, turnovers achieved,
incomes earned, profits made / losses incurred, etc.

With respect to each of the associated enterprises in the group
with whom the assessee has entered into international
transaction have been conducted, the following specific details
must be maintained:
•Name;
•Address;
•Legal status (company, limited liability partnership, firm, etc.);
•Country of tax residence;
•Ownership linkages between the assessee and the
associated enterprise.
Sometimes, the establishment of ownership linkages between the
assessee and other associated enterprises is a problem for the
reason that sufficient reportable information is not available. In
such cases, the assessee will have to provide only the
information that is available with him.

The remarks of the OECD in their Transfer Pricing Guidelines on
this issue merits reference:
“Tax administrators further should not require
taxpayers to produce documents that are not in
the actual possession or control of the taxpayer
or otherwise reasonably available, e.g.,
information that cannot be legally obtained, or
that is not actually available to the taxpayer
because it is confidential to the taxpayer’s
competitor or because it is unpublished and
cannot be obtained by normal enquiry or market
data.”

The assessee is required to maintain a document that describes
the profile of the multinational group. The member may exercise
his professional judgment to determine whether the profile
prepared by the assessee provides sufficient information
regarding the group, pertinent to transfer pricing. Some of the
information that may be contained in the profile are as follows :
•the name and place of incorporation of the immediate parent
company.
•the name and place of incorporation of the ultimate parent
company.
•the major product lines, services offered by the group.
•a brief description of the technology, brands or other
intangibles owned by the group.
•names of major competitors.
Any other information regarding the group that may be pertinent
to the transfer pricing analysis.

The assessee is also required to provide a list of associated
`enterprises from within the group, with whom the assessee has
entered into international transactions( Except one which have been covered above which are part of multinational group). The following details are
required to be maintained by the assessee :
•name of the group entity (associated enterprise)
•address of the group entity
•legal status
•country of tax residence.

The assessee is not required to maintain this information in
respect of other associated enterprises i.e. enterprises that are
not its group entities but are deemed to be associated enterprises
by virtue of provisions of clauses (c) to (m) of section 92A(2).

The accountant should obtain written representation from
management providing him with name, address, legal status and
country of tax residence of each of the enterprises comprised in
the group with whom international transactions have been
entered into by the assessee, and ownership linkages among
them.

The accountant should check the register of
members maintained by the assessee under section 150 of the
Companies Act, 1956 and the voting rights corresponding to the
shares of the associated company.

A broad description of the business of the assessee and the
industry in which the assessee operates, and of the business
of the associated enterprises with whom the assessee has
transacted [clause (c), Rule 10D (1)]

This explanation could typically cover areas such as:
•the business model used;
•technologies employed;
•products manufactured, traded;
•markets addressed and competition faced;
•geographic dispersion of manufacturing facilities; etc.

The broad description of the industry in which the assessee
operates will include reports about the industry, which are
available in the public domain. This could be material published
in business newspapers, trade journals and magazines, etc. all of
which provide a macro-economic perspective to the industry.

The assessee has to determine whether by virtue of clauses (c)
to (m) of Section 92A(2) certain enterprises shall be deemed as
associated enterprises. The accountant shall conduct the
following checks to verify if the assessee has conducted due
diligence in determining whether an entity is an associated enterprise or not.
Clause (c): The accountant should check the register of loans
and investments maintained by the assessee under section 372A
of the Companies Act, 1956
Clause (d): The accountant shall obtain details of all the
guarantees pertaining to the borrowing from the management
and representation for its completeness thereof.
Clause (e): The accountant shall obtain a representation from
management detailing composition and appointment of the
members of board of directors or governing board, Executive
Directors and Executive Member of the governing board. Further
the member shall check the Register of Directors maintained by
the company under section 303 of the Companies Act, 1956.
Clause (f): The accountant shall obtain a representation from the
management detailing composition and appointment of the
members of board of directors or governing board, Executive
Directors and Executive Member of the governing board. Further
the member shall check the Register of Directors maintained by
the both companies under section 303 of the Companies Act,
1956.
Clause (g): The accountant shall obtain a representation from the
management to the fact that enterprise is wholly dependent upon
the intangible assets such as know-how, patents, copyrights,
trademarks, licenses, franchises, or other commercial rights of
similar nature, or any data, documentation, drawing or
specification relating to any patent, invention, model, design,
secret formula or process, of which the other enterprise is the
owner or has exclusive right.
Clause (h): The accountant shall obtain the details of all the
purchases of raw material and consumable requirement made by
the assessee and compute the party wise share of business i.e.
party-wise purchases. He shall obtain representation from the
management to the fact that the information provided is correct
and complete.
Clause (i): The accountant shall obtain a representation from the
management to the fact that enterprise sold the goods or articles
manufactured or processed by it, are sold to the other enterprise
or to persons specified by the other enterprise, and the prices
and other conditions relating thereto are influenced by such other
enterprise
Clause (j): The accountant shall obtain a representation from
management providing details of controlling interests in all the
affiliated parties so as to determine the common controlling
interest in two companies.
Clause (k): The accountant shall obtain a representation from
management providing details of controlling interests in all the
affiliated parties so as to determine the common controlling
interest in two companies.
Clause (l): The accountant shall obtain the partnership of AOP
agreement in order to determine whether the any enterprise holds
not less than ten per cent interest in other firm, association of
persons or body of individuals.
Clause (m): The accountant shall obtain a representation from
management to the effect that there exists or does not exist
between the two enterprises, any relationship of mutual interest in
case any such relationship is prescribed by CBDT. The
accountant shall exercise his professional judgement and due
diligence to verify that the same is prima facie correct. Page 90