INTERNATIONAL TAXATION FOR BEGINNER

INCOME TAX ACT, 1961
International Taxation
CA Kaustubh Deshpande CA Varad Joshi
1

International Taxation
 Section 6 is important in case of international
taxation, because it will decide the residential status
of Person (Individual, HUF, Company )
 In case of Company place of effective management
are applicable from 1-4-2017 (CBDT issued circular
[No.6 of 2017] with guideline for determining POEM
of Company)
2

Major areas under Scope of NR Taxation
Sr.No. Section Remark
1. 6 Residential Status
2. 195 Tax Deduction at Source
3. 5(2), 7, 9 and 9A Scope of total income
4. Chapter III Income exempt e.g. Sec.10(4)
5. Sec.90,90A,91 Double Taxation Relief
6. Sec.92 to 94A Transfer Pricing Regulation
7. Chapter VIII FA Equalization levy Rules 2016
There are yet more Sections and Chapters that also need to be considered while
dealing with taxation of Non Resident.
3

Applicability of Section 195
A) Payer and Payee
 Any Person responsible for paying
 To non resident not being a company, Or to foreign company
B) Nature of payment
 Any Interest or any other sum chargeable under
the provisions of this Act.
C) When and at what rate
 At the time of Credit or payment (any mode) whichever is earlier deduct
income-tax at the rate in force
D) Income not covered under Section 195
 Interest referred in Sec. 194LB ,194LC and 194LD
 Income chargeable under the head “Salaries”
 Dividend referred in Section 115O
4

Explanation 2 to Section 195
 Finance Act 2012
 It has clarified the obligation to comply with sub
section 1 of Section 195 and
 To make deduction thereunder applies to all persons,
resident or non- resident, whether or not the non-
resident person has a residence or place of
business or business connection in India or any
presence in any manner whatsoever in India.
(Retrospective amendment 1962)
5

Cause and Effect relationship
 As tax is required to be deducted under section 195
only if interest or any other sum is chargeable
 Cause: Any other sum chargeable
 Effect: Tax is required to be deducted us 195
6

…..Continued
 GE India Technology Center Pvt Ltd Vs CIT
Facts:
 Appellants were the distributors of imported pre-packaged shrink
wrapped software from Microsoft.
 ITO (TDS) held that since the sale of software included a licence
to use the same, payments made by the GE to foreign supplier
constituted royalty, which was deemed to accrue or arise in India.
Judgement
The most important expression in Section 195 (1) consists of the words
"chargeable under the provisions of the Act”. If the contention of the
Department that the moment there is remittance the obligation to deduct
TAX (TDS) arises is to be accepted then we are obliterating the words
"chargeable under the provisions of the Act" in Section 195 (1). The
payer is bound to deduct TAX only if the tax is assessable in India. If tax
is not so assessable, there is no question of TDS being deducted.
7

….Continued
 The Karnataka HC pronounced its judgment on an
issue where the whole component of the ‘sum’
payable to the non-resident comprised of ‘income’,
there was no mixed payments – wherein
 The Honorable SC in Transmission Corporation case
was concerned with a situation wherein a mixed
payment was made by the assessee
 Therefore, the SC was dealing with case involving
the issue of apportionment of such ‘sums’ that
required the assessee to invoke Section 195 (2) &
(3).
8

Section 195(2)
 Where the person responsible for making the payment (or a
proportion thereof) is of the opinion that the whole income is
not chargeable in case of recipient, an application to be made
to AO to determine that proportion of such sum so chargeable.
[s.s (2) of sec. 195]
 AO by General or Special order will determine the appropriate
proportion of such sum so chargeable and issues the
Certificate
 Application to be made in form 15C by banking Co. and 15D
by others recipients (carrying on business/ profession in India
through branch for any sum not being int./div. [Rule 29B]
9

Conclusion
 controversial issue with the various High Courts
being of divergent opinions.
 Supreme Court has finally settled the position of law
in case of payments to non-residents by stating that
 if payments are not chargeable to tax in India in the
hands of the non-resident then there is no liability to
deduct Tax at Source
10

Cause and Effect
 After referring to all Landmark Judgements we should
 Under stand the cause then we can comply with effect as per
Section 195
 To understand the chargeability, we should refer to Section 4, 5
and 9 along with Sec.90(2) for DTAA
11

Scope of Total Income- Non Resident
 Section 5 (2) of Income Tax Act’1961
 Income is received or deemed to be received in India
 Income is accrued or deemed to accrue or arise in India
Explanation 2: Income which is already included on the basis of
accrual basis Should not be considered on receipt basis.
Section 7 deals with income deemed to be received in India
Section 9 deals with Income deemed to accrue or arise in India
12

Section 9 (v, vi, vii)
Nature of Income payable Deemed to accrue or arise
Income by way of Interest payable by
[Sec.9(v)]
a) Government
b) Resident- (Exception business
outside India)
c) Non Resident- used for business
carried out in India
Income by way of Royalty payable by
[Sec.9(vi)]
Same is case with technical fees
payable [Sec.9(vii)]
a) Government
b) Resident- (Exception business
outside India)
c) Non Resident- used for business
carried out in India
13

Landmark Case laws
 GRASIM INDUSTRIES LTD Bombay High Court 332 ITR 276 : (2011)
Income deemed to accrue or arise in India—Fees for technical services—
Services not rendered in India—By an agreement petitioner No. 2, a US
company, agreed to render to petitioner No. 1, an Indian company, outside India
certain engineering and other related services in relation to the sponge iron plant
set up by the latter—Petitioner No. 2 was to deliver to the petitioner No. 1 the
designs, drawings and data outside India—Income received by the non-resident
by way of payment from a resident Indian for technical services rendered to him
would be subject to the Indian income tax only if it satisfies the twin test namely,
that the income was received in respect of services (i) rendered in India, and (ii)
utilized in India or has such a live link with India that it can be treated as accrued
or arisen in India income received by petitioner No. 2 cannot be deemed to have
arisen or accrued in India because the services under the agreement were not
rendered within India though the drawings, designs received from petitioner No.
2 may have been utilized by petitioner No. 1 in India—Law requires both the
conditions to be satisfied viz, services rendered in India and utilized in India—
Income was not therefore chargeable to tax in India In our considered view, the
expression "such person" appearing in sub-cl. (b) of s. 9(1)(vii) refers to the
recipient of the income and not to the payee.
14

….continued
 In Titan Industries Ltd. v. ITO [2007] 11 SOT 206 (Bang.),
where the assessee, Titan Industries Ltd., a resident
company, made payment of fees for technical services
for getting its patent name registered in Hong Kong
through a firm of professionals of Hong Kong. It was held
that the services rendered by the professionals of Hong
Kong had been utilized by the assessee outside India
and since the patent was registered outside India for
making an income from a source outside India, the
payment was covered in the exception provided in
section 9(1)(vii)(b) of the Act, due to which, the assessee
was not required to deduct tax at source and since the
fees were not taxable in India
15

Explanation to Section 9
 Finance Act 2010
 Income of a non-resident shall be deemed to accrue
or arise in India under clause (v) or clause (vi) or
clause (vii) of sub-section (1) and shall be included
in the total income of the non-resident, whether or
not,—
 (i) the non-resident has a residence or place of
business or business connection in India; or
 (ii) the non-resident has rendered services in India.
16

Sec.9 (i)
 Income accruing whether directly or indirectly
 From any asset , property or source of income
located in India
 Through transfer of capital of asset Situated in India
 Or Business connection in India
 We have not dealt with Sec. 9 (ii, iii, iv) because it
deals with Salaries and dividend paid by Indian
company which is exception to Sec.195 (1)
17

Rates in Force
 Section 2(37)
 [(iii) for the purposes of deduction of tax under
section 195, the rate or rates of income-tax specified
in this behalf in the Finance Act of the relevant year
or the rate or rates of income-tax specified in [an
agreement entered into by the Central Government
under section 90, or an agreement notified by the
Central Government under section 90A, whichever is
applicable by virtue of the provisions of section 90,
or section 90A, as the case may be];]
18

Double Taxation Avoidance Agreement
 Section 90 of Income Tax Act empowers the government to enter into
DTAA
 Government enters into agreement not only for avoiding double
taxation but also for exchange of information
 The Supreme Court in CIT Vs P.V.A.L Chettiar observed that in case of
any conflict between provisions of the agreement and the Act,
provisions of agreement would prevail over the Act.
 Above ratio is clear from Sec.90(2) -Provisions of this Act shall apply to
the extent they are more beneficial to that assesse subject to 90(2A) –
applicable from April 2017
19

Background of DTAA
 There are different Models developed over a period of time based on
which treaties are drafted.
 Models helps to maintain uniformity in the format of treaties
 OECD (Organisation of Economic Co-operation and Development), UN
(United Nations) and US are more few such models.
 OECD model emphasis taxation on residential status as against UN
Model emphasis source model
 Most of India’s treaties are based on UN Model
20

Structure of DTAA
 In General terms , DTAA can be divided into six groups for analyses:
 Scope of Provisions: Article 1-Personal Scope, 2- Taxes Covered, 3-
Entry into force and termination. These provisions decide the
person, taxes and time period of treaty
 Definition provisions: General definitions , Residence and
Permanent Establishment ,
 Substantive Provisions: generally Article 6 to 22 deals with
categories of income and about its taxation between two contracting
states ( Exemption Method)
 provision for elimination of double taxation (Credit Method)
 Anti Avoidance provisions : AE, Exchange of information
 Miscellaneous provisions : Non-Discrimination, Diplomats,
21

Section 90 (4)
 Finance Act 2012 w.e.f 01st April 2013
 Non resident to whom the agreement referred to in Sec.90(1) applies,
shall not been entitled to claim relief under such agreement unless Tax
Residency Certificate is furnished.
 Notification 2188(E) dated 17th September 2012 provides the format
and details of information required in the same.
22

Countries with which no DTAA
 Section 91 deals with taxation relief in case of income from country
with which India does not have treaty
 Section 91(1) deals with resident and 91(2) deals with non-resident.
 Therefore, in case of international taxation 91(2) will be important.
 Credit will be available for lower of average of Indian tax rate or foreign
tax rate whichever is lower
23

Section 206AA- PAN applicability
 Finance Act 2016 introduced Section 206AA(7) where it is mentioned
that this section shall not apply to non-resident , not being company or
to a foreign company in respect of
 194LC
 Rule 37BC – if deductee (NR) furnishes the details and documents
specified in sub rule (2) to the deductor
 Name, e-mail id, contact number
 Address – Resident
 TRC
 Tax Identification Number
If these documents or information is provided then 206AA is not
applicable
24

Transfer Pricing Regulation
 BASIC INRODUCTION
 Introduction of Transfer Pricing Regulation is one of the best internal
control to ensure that the entity having associate enterprise (as defined
in Act) outside India is not paying low taxes by manipulating the prices
paid or received for transaction encounter with AE.
 Indian Government has introduced Rules and Sections in Finance Act
2001 to regulate this activity.
 As per Section 92 any income arising from international transaction
shall be computed according to principle of arm’s length price.
25

Important Concepts
 International transaction is defined in Section 92B.
 International transaction means “a transaction between two or more
associated enterprises, either or both of whom are non-residents, in the
nature of purchase, sale, or provision of services……”
 Section 90(2) considers the deemed transaction –Imposed transaction
 The term Associate Enterprise has been defined by Section 92A.
Associate Enterprise is identified based on Management, Control or
Capital
 However 92A(2) provides the 13 clauses in which two enterprises shall
be deemed to be AE.
 E.g. One enterprise holds directly or indirectly shares carrying not less than 26% of voting
power
 One enterprise guarantees not less than ten percent of total borrowings of the other
enterprise
26

Compliance
 Every person who has entered into an international
transaction during pervious year shall obtain report
from accountant and furnish such report on or
before 3oth November .
 The arm’s length price in relation to an international
transaction shall be determined by any of the
following methods:
27
1 CUP 4 PSM
2 RPM 5 TNMM
3 CPM 6 Other Method

Proposed -Section 94B- Interest on debts-
 The provision shall be applicable to an Indian company, or a permanent establishment
of a foreign company being the borrower who pays interest more than one crore
rupees in respect of any form of debt issued to a non-resident or to a permanent
establishment of a non-resident and who is an ‘associated enterprise’ of the borrower.
Further, the debt shall be deemed to be treated as issued by an associated enterprise
where it provides an implicit or explicit guarantee to the lender or deposits a
corresponding and matching amount of funds with the lender.
 Interest expenses claimed by an entity to its associated enterprises shall be restricted
to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA)
or interest paid or payable to associated enterprise, whichever is less.
 The provisions shall allow for carry forward of disallowed interest expense to eight
assessment years immediately succeeding the assessment year for which the
disallowance was first made and deduction against the income computed under the
head “Profits and gains of business or profession to the extent of maximum allowable
interest expenditure.
28

Proposed - Transfer Pricing Adjustment
 As per Section 92 of the Act, income arising from an international transaction or specified
domestic transaction is to be computed having regard to arm’s length price. Accordingly, where
such transactions are not entered at arm’s length price as defined in Section 92C of the Act, a
transfer pricing adjustment is made to the income of the tax payer, unless the adjustment leads
to decrease in taxable income or increase in losses (upto INR 1 crore). Such transfer pricing
adjustment is called ‘Primary adjustment’.
 Reflecting Arm’s Length Profit in Books
 The proposed Section 92CE(1) provides that in certain specified cases of such primary
adjustment, the transfer price should be adjusted not only for tax purpose but also commercially.
Accordingly, it is proposed that when a primary adjustment is made to taxable income of the
assesse, a corresponding secondary adjustment should also be made between the assesse and
its Associated Enterprise (“AE”) in their books of accounts to ensure that books of accounts
reflect arm’s length price as the transaction value or transfer price.
 The provisions relating to secondary adjustment to be made in books are proposed to be
applied in cases where the primary adjustment is –
 a) made suo moto by the taxpayer in his return of income; or b) made by the Assessing Officer
and accepted by the assesse; or
 c) determined by an advance pricing agreement entered into by the assesse; or d) made as per
the safe harbour rules; or
29

..continued
 e) arising as a result of mutual agreement procedure under a double
taxation avoidance agreement.
 This implies that the books need to be adjusted only in cases of accepted
Transfer Pricing adjustments by the taxpayer.
 Reflecting Arm’s Length Cash Balance through Repatriation
 The proposed Section 92CE(2) provides that where a primary adjustment
is made to transfer prices, the taxpayer should recover the amount of
difference between arm’s length price and original transfer price i.e. the
amount of primary adjustment from AE. Such amount of adjustment
should be recovered from the AE and repatriated to India within
prescribed timeframe, failing which, it will be deemed as if the assesse
has provided advance to its AE and accordingly imputed arm’s length
interest at prescribed rate on such advance would be considered as
income of the taxpayer
30

Equalisation Levy Rules 2016
 Finance Act 2016 has inserted separate Chapter VIII
 CBDT has issued notification in May 2016 stating that provisions
relating to Equalisation levy will be effective from 1st June 2016.
 Therefore, 6% levy will be applicable on all specified services provided
by Non resident not having PE on or after 1st June 2016.
 This levy is to be deducted and deposited with Government
 Specified services means online advertisement, digital advertising
space or service for the purpose of online advertisement
 CBDT has also notified Rules for procedural framework
 Equalisation levy deducted during calendar month -7th of
immediately Following Month
 Annual Return is to be filed on or before 30th June following FY
31

Sec.40 (a) (i)
 the following amounts shall not be deducted in
computing the income chargeable under the head
"Profits and gains of business or profession",—
 In case of any assessee
 i) Interest or, royalty, fees for technical services any sum
chargeable under this Act, which is payable
 Outside India or
 In India to non resident, not being a company or foreign
company
on which tax is deductible at source under Chapter XVII-B and such tax
has not been deducted or, after deduction, has not been paid during the
previous year, or before filing return u/s 139.
32

Sec.40 (a) (iii)
 any payment which is chargeable under the head
"Salaries", if it is payable—
(A) outside India; or
(B) to a non-resident,
and if the tax has not been paid thereon nor
deducted there from under Chapter XVII-B;]
33

Certain Co-related Points
 Return of income not to be filed in certain cases.
 Sec. 115G It shall not be necessary for a non-
resident Indian to furnish under sub-section (1) of
Section 139 a return of his income if—
 his total income in respect of which he is assessable
under this Act during the previous year consisted
only of investment income or income by way of long-
term capital gains or both; and
 the tax deductible at source under the provisions of
Chapter XVII-B has been deducted from such
income
34

……continued
 Exchange rate: Rule 26 –For the purpose of
deduction of tax at source on any income payable in
foreign currency, the rate of exchange for the
calculation of the value --- Telegraphic Transfer
buying rate on the date on which tax is required to
be deducted
 Note: TT means the rate or rates adopted by SBI for buying
such currency.
 Note: It is interesting that for computing the total income of the
recipient that the TT buying rate as on the last day of the
financial year is to be applied under Rule 115. Because of this
it is possible that though tax is deducted at source correctly
the tax liability may arise on application of Rule 115.
35

…..continued
 Sec.203 required that every person deducting tax at
source shall furnish to the payee the Certificate in
prescribed form 16 and 16 A
 Sec.206 requires the payer to furnish return in
prescribed format and time
 The payer or payee can apply to Authority for
Advance ruling for knowing the rate of TDS--- which
is not possible in case of other TDS provisions
36

Form 15 CA and 15 CB
 Some of the key changes for furnishing form
15CA & 15CB that have come into effect from 01st
April’2016 are as follows:
 1. Both forms 15CA and 15CB are to be filed
online
 Earlier only form 15CA had to be filed online but now
form 15CB i.e. certificate by a Chartered Accountant
is also to be filed online.
37

 2. Changes in requirement for filing form 15CA & 15CB
 There are situations where Forms 15CA/CB will not be required at
all:
 No forms 15CA & 15CB will be required to be furnished by an individual
for remittance which does not require RBI approval under Liberalised
Remittance Scheme.
 The list of payments where there is no requirement for forms 15CA,
15CB has been expanded under Rule 37BB. Following are the new
entries in the specified list where no forms 15CA CB are required:
 Advance Payment against import
 Payment towards import-Settlement of Invoice
 Imports by diplomatic missions
 Intermediary Trade
 Import below Rs. 5,00,000/- (For use by ECD offices)
38

 There are situations where no forms 15CB will be
required:
 Form 15CB will not be required till the aggregate of
remittances during the financial year does not
exceed Rs. 5 lakhs.
 Form 15CB will also not be required where
order/certificate of lower/no deduction is taken from
the Jurisdictional Assessing Officer us 195(2),
195(3), 197 of the Income Tax Act’1961.
 Form 15CB is also not required where the remittance
is not chargeable to tax.
39

Procedure for submission of Form 15CA Online w.e.f.
01.04.2016
 There is change in the Procedure for filing Form 15CA. New Procedures is given
here under for submitting FORM 15 CA from 01.04.2016
 Step 1:- Generate Signatures with the DSC Management Utility provided by the
Income Tax Department and USB token / pfx file for each Form for submitting
FORM 15CA.
 Step 2:- Login with USER ID /Password and date of Birth/ incorporation on
Incometaxindiaefiling.gov.in and navigate to the menu “e-File” → “Prepare and
Submit Online Form (Other than ITR)” Upload signature file and → Select “Form
15CA”.
 Step 3:- Click on “Form 15CA” tab and Select the appropriate part (“PART-A”,
“PART-B”, PART-C” or “PART-D”) based on the remittances as applicable.
Step 4:- Fill in the details and click the “Submit” button. Errors, if any, will be shown
on the right panel of the Form.
 Step 5:- On successful validation, Click on Submit.
 On successful submission it will be sent to the E Mail Id on record and receipt can
be generated from →My Account → View Form 15CA → Select the
Acknowledgement No. and print
40

 Penalty of Rs. 1 lakh for each default of non-
filing for forms 15CA/CB will be applicable.
 Now there is an option for withdrawal of Form
15CA before payment. Form 15CA can be
withdrawn within 7 days of submission of the
online form.
41

Q & A
42
Questions
& Answers
JOSHI APTE & Co.
Chartered Accountants

43
THANK YOU

INTERNATIONAL TAXATION FOR BEGINNER

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