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    Over past few decades India has witnessed rapid growth in international business transactions and thanks to Modi Government as the international trade flow has increased dramatically post 2014. Even in the recent DAVOS conference, many CEO’s of international MNC’s have promised to do business in India. Accordingly, the stupendous growth in international business has steered to increase in tax issues as well. Therefore, the topic of Permanent Establishment (‘PE’) has become even more important as many MNC’s establish their subsidiaries, offices, distribution networks, etc in jurisdictions such as BRIC nations. 

    International tax rules have used physical presence to allocate taxing rights. However, by virtue of digital technologies, businesses are able to have a significant economic presence without necessarily having a substantial physical presence. Accordingly, to bring such transactions into Tax bracket, Budget 2018 proposes to expand the scope of the ‘business connection’ test (the equivalent of permanent establishment) by including a ‘significant economic presence test’ (“SEP Test”). Under the SEP Test, download of data or software, or solicitation of business activities through digital means in India could lead to non-residents coming within the tax net. The basic intent behind this SEP test is to expand the Tax bracket without having a fixed place of business or a dependent agent thereto. Hence, the question of existing definition of PE being inconsistent with the underlying tax principles is avoided. Interestingly enough, OECD in the BEPS Action Plan is still evaluating various options to tax the digital economy transactions. 

    Section 43A of Income Tax Act, 1961 (ITA/Act) provides that in case, where assessee has acquired any asset in the previous year from country outside India for the purposes of business or profession, the cost of such asset shall be adjusted because of increase or decrease in liability with change in exchange rate after the acquisition of asset at the time of payment of whole or part of cost of the asset. 

    The increase or decrease in liability and adjustment to the actual cost of the asset shall be made only if the payment is made by the assessee. 

    This adjustment is made only in relation to the actual cost mentioned in Sec 43(1)/Capex mentioned in Sec 35(1)(iv)/ Capex referred to in Sec 35A/ Capex referred to in Sec 36(1)(ix) and cost of acquisition referred to in Sec 50. 

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