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India – Taxation September Review.

24 October, 2013

 
 
  • In order to reduce the increasing number of Transfer Pricing (‘TP’) disputes, Section 92CB has been inserted in the Income-tax Act, 1961 (‘ITA’) pursuant to the Finance (No.2) Act, 2009, to provide that determination of arm’s length price will be subject to the Safe Harbour Rules (‘Rules’). “Safe Harbour” means circumstances in which the Indian revenue authorities will accept the taxpayer’s declared transfer price.

    The Rules have now been finalised by the Central Board of Direct Taxes (‘
    CBDT’) as below1:

 

Activity / Sector Recommended Safe Harbour
Software development services & Informationtechnology enabled services

 

Minimum operating profit margin to be:20% where transaction value ≤ INR five billion

22% where transaction value ≥ INR five billion

Knowledge processes outsourcing services Minimum operating profit margin to be 25%
Intra-group loan to wholly owned subsidiary(‘WOS’) where such loan is:

Less than INR 500 million

Greater than INR 500 million

Base rate of State Bank of India as on 30th Juneof the relevant previous year plus

• 150 basis points

• 300 basis points

Corporate guarantee to WOS with amount:• Less than INR one billion

• More than INR one billion and WOS accorded

safest credit rating

Commission / fee rate to be:• ≥ 2% per annum on the amount guaranteed

• ≥ 1.75% per annum on the amount guaranteed

 

Contract research and development (‘R&D’)services relating to software development Minimum operating profit margin to be 30% 
Contract R&D services relating to genericpharmaceutical drugs Minimum operating profit margin to be 29% 
Manufacture and export of core autocomponents Minimum operating profit margin to be 12% 
Manufacture and export of non-core autocomponents Minimum operating profit margin to be 8.5%

 

It is further provided that in implementation of these Rules, the Safe Harbour for the specified sector will be applicable for five assessment years (‘AYs’) beginning from 2013-14. Importantly, the Rules are applicable only where a taxpayer exercises its option to be governed by such Rules, and furnishes details in a specified form (Form 3CEFA) by the due date of filing of Return of Income.

 

  • ITA (as amended by Finance Act, 2013) provided that Tax Residency Certificate (‘TRC’) will be sufficient proof for a non resident (‘NR’) to claim treaty benefits. It was further provided, however, that the NR will be required to furnish such additional information as may be prescribed. CBDT has now prescribed2 that in addition to a TRC, a NR will be required to furnish information in Form No. 10F, which includes key details including status; nationality/country of incorporation; tax identification number in the country of residence; period for which the residential status, as mentioned in TRC, is applicable; and address of the assessee in the country outside India, during the period for which the TRC, is applicable.

    To the extent information required in Form No. 10F is already contained in TRC, the same
    need not be reproduced in Form No. 10F. Further, the NR may be required to provide back-upmaterial in support of information provided in such form.

 

  • In continuation of Finance Minister’s Budget Speech 2013-14, the Government has set up a Tax Administration Reform Commission (‘TARC’) under the chairmanship of Dr. Parthasarathi Shome to review the application of tax policies and tax laws and submit periodic reports for its implementation on a continuous basis.3

    Additionally, the Finance Minister has also constituted a forum under the chairmanship of Dr. Shome for exchange of views between industry groups and the Government on tax related issues/ disputes4.

 

  • As per amendments made to ITA by Finance Act, 2013, the General Anti Avoidance Rule (‘GAAR’) provisions will apply to income arising on or after April 1, 2015 i.e. Financial Year 2015-16/ AY 2016-17. CBDT has now notified rules5 for application of GAAR. These rules, inter alia, provide for certain exemptions from applicability of GAAR and the procedures for application of GAAR by the tax authorities. In terms of these rules, the following transactions/persons are exempt from applicability of GAAR:

    i. Arrangement where tax benefit in relevant AYs in aggregate, to all the parties involved, does not exceed INR thirty million;

    ii. FIIs not availing treaty benefits;

    iii. NR investors in FIIs; and

    iv. Any income accruing/ arising/ deemed to accrue or arise to any person from transfer of investments made before August 30, 2010.

 

Endnotes

1 Notification No. 73 of 2013 [F.No.142/28/2013-TPL]/SO 2810 (E) dated September 18, 2013, issued by Government of India, Ministry of Finance, Department of Revenue.
2 Income-tax (Eleventh Amendment) Rules, 2013; Notification No. 57/2013 [F.NO.142/16/2013-TPL]/SO 2331(E), dated August 01, 2013.
3 Press release dated August 13, 2013 and August 26, 2013, issued by Press Information Bureau, Government of India.
4 Press release dated July 18, 2013, issued by Press Information Bureau, Government of India.
5 Income-tax (17th Amendment) Rules, 2013; Notification No. 75/2013/ [F.No.142/19/2013-TPL], dated September 23, 2013

 

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
[email protected]

 

Abhijit Joshi, AZB & Partners 
[email protected]


Shuva Mandal, AZB & Partners 

[email protected]

 

Samir Gandhi, AZB & Partners
[email protected]


Percy Billimoria, AZB & Partners 

[email protected]

 

Aditya Bhat, AZB & Partners 
[email protected]

 

AZB & Partners Tax Practice Profile in India 

 

Tax Law Firms in India

 

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