Scheme of Taxation of Non-Residents:

Section 5 of the Income Tax Act, 1961 provides for taxability of income in the hands of Non-Resident. Total

Income of the Non-Resident includes all the income which is received or deemed to be received in India by or on behalf of such person or income accrues or arises or is deemed to accrue or arise in India to the Non-Resident.

Section 7 ibid provides for when income is deemed to be received in India. Section 9 ibid provides for when the income is deemed to accrue or arise in India. Section 9(1)(i) ibid provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India is deemed to accrue or arise in India.

Concept of Agency and its relevance to Business Connection:

As per Explanation 2 to section 9(1)(i) ibid ‘business connection’ shall include:

• any business activity carried out through a person who, acting on behalf of the non-resident has habitually exercise in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident or

• has no such authority, but habitually maintain in India stock of goods or merchandise from which he regularly delivers goods on behalf of the non-resident or

• habitually secure orders in India, mainly or wholly for the non-resident or for the non-resident and other non-residents …….

business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business (first proviso)

To establish the business connection toit is not necessary that all the operations of the business are to be carried in India to constitute business connection. As per Explanation 1 to section 9(1)(i) provides in case where all the operations of the business are not carried out in India the income of the business is deemed to accrue or arise in India to the extent it reasonably attributable to the operations carried out in India.

Combined reading of Explanation 1 and Explanation 2 there exists a business connection through agents, other that of independent status, who undertake activities on behalf of non-resident (Agency PE-Permanent Establishment).

In nutshell, if the activities of agent (dependent) in India contributes to the income of the non-resident, such income is deemed to accrue or arise in India and chargeable to tax accordingly.

The deciding factor in agency is the extent of dependency in carrying on activities in India or on behalf of non-resident in India for determining the chargeability of income in India.

In this context, we analyse two Judicial pronouncements to arrive at a reasonable conclusion on agency transactions of non-residents.

Galileo International Inc vs DCIT 19 SOT 257- ITAT DELHI

Facts:

Galileo International was a tax resident of USA. It was engaged in the business of maintaining and operating a Computerized Reservation System (CRS). The said system would receive, process, store and disseminate data about flight schedules, room availability, fare information and provision for booking capabilities, etc. The assessee entered into a Participating Carrier Agreement (PCA) with various participating airlines for providing them with said CRS services.

To market and distribute the CRS services to the travel agents (TAs) in India, Galileo International (assessee) entered into a Distribution Agreement (DA) with an Indian company. The Indian company in turn entered in to a subscriber’s agreement with various TA to provide them with the access code, equipment, communication link and support services.

The communication between the master computer system of the assessee in USA and TA in India arranged by another organization. The assessee paid remuneration to Indian company for acting as a distributor and to the other company which provided the communication channel.

The assessee was remunerated outside India by the airlines and it did not receive any remuneration from the travel agents.

The assessee filed its return declaring nil income on the ground that it had no operations in India and hence no income is accrue or arise in India.

Department’s contention:

All the activities in respect of bookings made by the TAs in India were completed in India through the hardware installed by assessee at travel agent’s premises; that on that basis income accrued or arose in India under section 5 of Income Tax Act, 1961.

Even under the DTAA, the assessee had a PE in India under article 5 and so the income was taxable as business income under article 7; that the assessee earned income on each segment booked through the computers installed in India and, therefore, the same constituted a PE.

The Assessing Officer further held that 'Indian Company' was a PE of the assessee within the meaning of article 5(4) because it was economically dependent on the assessee for its source of business and its activities were devoted wholly and exclusively for the assessee, and further, it entered into and concluded contracts on the assessee's behalf.

On appeal the CIT(A) upheld the impugned findings. Second appeal made before ITAT.

ITAT Ruling:

The ITAT held that the Indian Company was totally dependent upon the assessee in respect of services to the CRS subscribers in India.

It further held that the booking would take place in India on the basis of the presence of such seamless CRS. On the basis of booking made by the TAs in India, the income generated to the assessee. But for the booking, no income accrued to the assessee. The assessee was not to receive the payment only for display of information but the income would accrue only when the booking was completed at the desk of the subscriber's computer. In such a situation, there was a continuous seamless process involved, at least part of which was in India and, hence, there was a business connection in India.

The assessee operates the CRS system which was the source of revenue and part of such system existed in India thus there was a business connection established in India and hence the income in respect of the booking which took place from the equipment in India could be deemed to accrue or arise in India and hence taxable in India.

Key observation:

Since part of the booking function was operated in India which directly contributed to the earning of revenue, the activities carried out by the assessee in India were in no way of 'preparatory or auxiliary' character. Thus, the exception provided in article 5(3) would not apply and the assessee would be deemed to have a PE in India

Points to be pondered:

If an agent works exclusively for a single principal, it would establish that the agent is economically dependent on the principal, though it is not conclusive, which could result in existence of dependent agency or agency PE.

DCIT vs Elitecore Technologies (P) Ltd 80 taxmann.com 6 – ITAT AHMEDABAD

Facts:

The assessee is engaged in the business of developing software products. It has utilized the services of non-resident agents for marketing of the products and assistance in procuring sales orders abroad. Assessee has not deducted tax at source on commission paid to non-resident agents on the contention that it is not chargeable to tax in India.

The Assessing Officer was not satisfied with genuineness of commission payment on the ground that there was no material to justify the reasonableness of commission payment and evidence pertaining to services rendered by the non-resident agents having nexus with the assessee business was not available. [though there is no agreement with non-resident agents the invoices and purchase order raised by the them are available]

Assessing Officer Contention:

In view of the provisions of Section 9(1)(i) of Income Tax Act, 1961, income of the non-resident from though or from any business connection in India or any source in India is deemed to accrue or arise in India, and under section 5(2)(b)ibid income deemed to accrue or arise in India is also taxable in India. Since the right to receive the commission income accrued in India, the income is deemed to accrue or arise in India.

CIT(A) observations:

The Supreme Court in CIT vs Toshoku Ltd 125 ITR 525 and CIT vs R.D. Aggarwal and Co 56 ITR 20 held that commission paid to non-residents for securing orders outside India is not taxable in India and hence no tax is required to be withheld on the same. Further, Hon’ble Supreme Court in GE India Technology Center Pvt Ltd 372 ITR 456 held that the provisions of section 195 of Income Tax Act,1961 are not applicable if the payments are not taxable in India. As the payment of foreign commission is not taxable in India, the provisions of section 195ibid are not applicable.

ITAT observations:

Relied on the judgement in DCIT vs Welspun Corporation Ltd 77 taxmann.com 165- ITAT Ahd where it was held that the consideration for which the payment made to the commission agent is obtaining of the orders and not any services per se. The consideration is computed on the basis of business procured. Obviously, if there are no business generated for the principal, the agent gets nothing.

The consideration paid to the agent is also based on the business procured and the agency agreements do not provide for any independent, standalone or specific consideration for these services. The services rendered under the agreement cannot, therefore, be considered to be technical services in nature or character.

Deeming fiction under section 9(1)(i) read with proviso thereto holds the key, and lays down that only to the extent that which the operations of such a business is carried out in India, the income from such a business is taxable in India. When no operations of the business are carried on in India, there is no taxability of the profits of such a business in India either.

The profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out.

Points to be pondered:

Generating business or securing orders is an entrepreneurial activity and cannot, by any stretch of logic, be treated as a technical service per se. The point of time when commission agent's right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to section 9(1)(I).

Conclusion:

Amount paid to non-resident agents who operate independently/ who carries on activity of procuring orders outside India doesn’t leads to business connection or rendering of technical services in India.

The last decade has seen unprecedented growth in India’s financial services sector. It employs over 3 million people, constitutes about 5% of the GDP and has an estimated market capitalization of over US$ 200 billion. As India experiences continued economic growth, the financial sector could generate about 10-11 million jobs and a GDP contribution of US$ 350 to US$ 400 billion by 2020¹ . With a sustained growth and rapid development in technology and infrastructure, an increasing share of financial services would get centralized. McKinsey & Company’s market assessment report estimates potential of about 6 million centralized jobs across multiple service roles.

Several developed countries have successfully established high-tech financial hubs, which over time have catered as international financial services centers. These centers provide suitable regulatory regimes and create a business environment to promote talent and increase capital flow. As they develop they create significant economic value for their respective domestic economies, e.g. financial services in London and New York account for 10% of the GDP and about 5% of jobs. Emerging financial services centers like Singapore and Hong Kong have achieved similar levels of concentration of economic activity over short periods of time.

With the above background the author has made an attempt to analyze the present status of IFSC Regulations and how India is positioned itself to capture the Global opportunities.

What is IFSC?

An international financial services centreprimarily caters to customers outside the jurisdiction of domestic economy, dealing with flows of finance, financial products and services across borders

Section 2(q) of Special Economic Zones Act, 2005 has defined “International Financial Services Centre” means an International Financial Services Centre which has been approved by the Central Government under sub-section (1) of section 18

The provisions of Section 18 of the SEZ Act, 2005 is been reproduced for ready reference

Setting up of International Financial Services Centre

18. (1) The Central Government may approve the setting up of an International Financial Services Centre in a Special Economic Zone and prescribe the requirements for setting up and operation of such Centre :

Provided that the Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.

The Central Government may, subject to such guidelines as may be framed by the Reserve Bank, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and such other concerned authorities, as it deems fit, prescribe the requirements for setting up and the terms and conditions of the operation of units in an International Financial Services Centre.

Present Regulatory Architecture

It can be observed from the above diagram that the IFSC related activities are governed by several Regulators based on the nature of activities being undertaken.

Reserve Bank of India (RBI) regulates the IFSC Banking Units (IBU) as a Banking Regulator and also regulates the Foreign Exchange control Regulations.

Insurance Regulatory and Development Authority of India (IRDAI) regulates the activities of Insurance companies in IFSC

Securities and Exchange Board of India (SEBI) regulates the operations of intermediaries dealing in Securities and Commodities and their derivatives

Pension Fund Regulatory and Development Authority (PFRDA) regulates the operations of entities dealing in such funds and having operations in IFSC

Subsequent to the below regulatory developments India has set up first IFSC in Gujarat International Finance Tec-City Company Limited (GIFT City), Gandhi Nagar, Gujarat, India. For more details of GIFT city, the reader may refer to the website http://giftgujarat.in

What are the services an IFSC can provide?

?Fund-raising services for individuals, corporations and governments

?Assetmanagement and global portfolio diversification undertaken by pension funds, insurance companies and mutual funds

?Wealthmanagement

?Globaltax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.

?Globaland regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching

?Riskmanagement operations such as insurance and reinsurance ?Mergerand acquisition activities among trans-national corporations

What does an IFSC require?

IFSCs such as Dubai International Financial Centre and Shanghai International Financial Centre, which are located within SEZs, have six key building blocks:

?Rationallegal regulatory framework

?Sustainable local economy

?Stablepolitical environment

?Developed infrastructure

?Strategiclocation

?Goodquality of life

Keeping the above issue in sight, the Indian Government has made many changes and is making efforts to create sustainable and conducive environment to attract the global players to India.

Brief of Regulatory Developments in India

01-03-2015       Press Release issued by PIB for setting up first IFSC in Gandhi Nagar, Gujarat

02-03-2015       RBI has issued FEMA (IFSC) Regulations, 2015

27-03-2015       SEBI has issued SEBI (IFSC) Guidelines, 2015

27-03-2015     Ministry of Finance (Department of Financial Services) has issued notification for giving many relaxations to the Insurance Companies from various provisions of Insurance Act, 1938

27-03-2015     Ministry of Finance (Department of Financial Services) has issued notification IRDAI (Regulation of Insurance Business in Special Economic Zone) Rules, 2015 for permitting insurance companies to set up operations in IFSC

01-04-2015     RBI has framed schemeto all Scheduled Commercial banks (including foreign banks)for setting up IFSC Banking Units (IBU)

06-04-2015       IRDAI has issued guidelines titled IRDAI (IFSC) Guidelines, 2015

08-04-2015     Ministry of Commerce and Industry has issued notification permitting setting up of IFSC under SEZ Act, 2005 and rules made thereunder and also notified suitable application form for setting up such IFSC units

17-03-2016     SEBI has amended the guidelines to include the Commodity Derivatives for IFSC operations

28-11-2016     SEBI has issued guidelines to Stock Exchanges and Clearing Corporation to set up their operations in IFSC

10-04-2017     RBI has issued Directions to the IBUs to carry on the clearing operations in IFSC without forming separate entity and also permitted to open SNRRA for local expenses

13-04-2017     SEBI has further amended the guidelines to include the Derivatives on Equity Shares for IFSC operations

27-04-2017       SEBI has further amended the guidelines to permit IBUs to carry on TCM and PCM activities for Stock exchanges/ Clearing Corporation in IFSC as well as domestic activities

FEMA Regulations:

RBI,inter alia, has framed around 27 Regulations under FEMA, concerning various activities between Residents in India and Non Residents.

Foreign Exchange Management (International Financial Service Centre) Regulations, 2015 (“FEMA Regulations”) deals with the permissible transactions in IFSC as per Foreign Exchange Management Act, 1999

As per Regulation 3 of FEMA Regulations, any financial institution or branch of a financial institution set up in the IFSC and permitted/recognized as such by the Government of India or a Regulatory Authority shall be treated as a person resident outside India and accordingly any transaction taken place between such IFSC entity and Residents in India needs to comply with other regulations framed under FEMA, 1999

As per Regulation 4 of FEMA Regulations, a financial institution or branch of a financial institution shall conduct such business in such foreign currency and with such persons, whether resident or otherwise, as the concerned Regulatory Authority may determine

As per Regulation 5 of FEMA Regulations read with Section 1(3) of FEMA, 1999 all other regulations framed under FEMA are not applicable to the IFSC in case the activities are carried with in the IFSC and subject to these FEMA Regulations.

Commercial banks are allowed to open IBUs within IFSC, which are deemed as overseas branches. Such IBUs can trade in foreign currencies in overseas markets and also with Indian banks, raise funds in foreign currency as deposits and borrowings from non-resident sources and provide loans and liability products for clients.

SEBI Regulations

As per SEBI (IFSC) Guidelines, 2015 any intermediary located in IFSC viz., a stock broker, a merchant banker, a banker to an issue, a trustee of trust deed, a registrars to an issue, a share transfer agent, an underwriter, an investment adviser, a portfolio manager, a depositary participant, a custodian of securities, a foreign portfolio investor, a credit rating agency, or any other intermediary or any person associated with the securities market, as may be specified by the Board from time to time, can deal in securities, commodities and their derivatives in a Foreign Jurisdiction [as defined in clause 2(f)]

All the entities willing to set up operations in IFSC shall be first registered with SEBI as an intermediary as per respective regulations framed by SEBI and shall comply with all the applicable regulations including IFSC regulations.

In case of Stock Exchanges, Clearing Corporations and Depositories, willing to carry on IFSC activities shall form separate Subsidiary Companies (holding at least 51% of paid-up Equity ‘share capital) and the balance shares can be held by any other stock exchange, clearing corporation or Depository, (whether Indian or foreign jurisdiction),as the case may be.

The stock exchange shall have minimum networth of Rs. 25 Crores initially and shall enhance it to Rs. 100 Crores over a period of 3 years from the date of approval. Similarly Clearing Corporation shall have initial networth of Rs. 50 Crores and to be enhanced to Rs. 300 Crores, over a period of 3 years. Also the Depository shall have initial networth of Rs. 25 Crores and shall enhance it to Rs. 100 Crores over a period of 3 years.

Many provisions of SEBI related to depositories, stock exchanges, clearing corporations operating in IFSC are not applicable as per exemptions given under Rule 6 of SEBI Guidelines

Pursuant to the IFSC Guidelines, depositories, stock exchanges, clearing corporations operating in IFSC shall adopt the broader principles of governance prescribed by International Organization of Securities Commissions (IOSCO) and principles for Financial Market Infrastructures (FMI) and such other governance norms as may be specified by the SEBI, from time to time

As per clause7, the stock exchanges operating in IFSC are permitted to deal in following types of securities and products in such securities in any currency other than Indian rupee, with a specified trading lot size on their trading platform subject to prior approval of the SEBI:

• Equity shares of a company incorporated outside India;
• Depository receipt(s);
• Debt securities issued by eligible issuers;
• Currency and interest rate derivatives;
• Index based derivatives;
• Such other securities as may be specified by the Board.

SEBI has prescribed Commodity Derivatives as “other securities” under the aforesaid clause. Also SEBI has prescribed Derivatives on equity shares of a company incorporated in India, by Foreign Portfolio Investors as “other securities” under the aforesaid clause

Further, it also provides that SEBI registered Foreign Portfolio Investors (FPIs), operating in IFSC, and eligible entities, which are incorporated and operating in IFSC, shall be eligible to trade in such derivatives on equity shares.

Market Wide Position Limit (MWPL) for such derivatives on equity shares shall be as prescribed by SEBI from time to time.

Earlier this year, the SEBI simplified the IFSC onboarding process for FPIs and eligible foreign investors as under:

?Noadditional documentation and/or prior approval required for SEBI registered FPIs ?Atradingmember may rely on the due diligence already carried out by :

-a SEBI registered intermediary for FPIs

- a bank operating in IFSC for eligible foreign investors

As per latest amendment dated 27-04-2017, SEBI has permitted IBUs to carry on the operations both in Domestic market and Foreign Jurisdiction as Single entity, thereby paving way for more IBUs to enter into the IFSC operations. Also the IBUs are permitted to open Special Non-Resident Rupee Account in India to meet the administrative expenses in INR

Conclusion:

While many reforms in the area of IFSC have been brought by India, there are certain things still to be done. Some of these issues have been addressed in speech titled “Macro and Micro Drivers of Business Potential of IFSCs in India”, by Dr. Urjit R. Patel, Governor of RBI – January 11, 2017² – at Gandhinagar, Gujarat, regarding other steps to be taken, inter alia, micro ecosystem in IFSC, a modern complementary legal infrastructure that is sufficiently supportive of the swift resolution of conflicts and disputes arising from the settlement/enforcement of complex international financial contracts. The contract should be of international standard and enforceable in the court of law and preferably similar to ISDA documentation

In addition he has opined to have a unified financial regulatory framework providing for a single regulator for IFSC could contribute to better regulation and supervision of the financial entities in the IFSC. While individual regulators can supervise the entities initially when the size of the business is small, a unified regulator would be necessary to pay undivided attention to the IFSC. Work on the design of such a framework should begin soon so as to be able to implement this in time.

Once India implements many of the above reforms and pave the way for effective economic and regulatory reforms, India is poised to play key role in the global economic activity and also provide lot of support for the Economic Development in India and employment generation to the tune of 1 Million ³ Jobs in India.

Country By Country Reporting – Implementation Guidance:

Currently, CBCR compliances has become a matter of concern for all multinational enterprises (MNE). The Organization for Economic Cooperation and Development (OECD) as part of the BEPS project has been issuing guidance to the action points specified by it. Recently on 6 April 2017, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting (‘the Guidance’) which has addressed five new issues:

• The definition of terms “related party revenues” & “revenue” used in the CbCR;
• The definition of total consolidated group revenue;
• The accounting principles for determining the existence of and membership in a group;
• Treatment of major shareholding; and
• Transitional filing options for MNE groups.

1. Definition of related party and revenues

The Guidance clarifies that the revenue referred to in Table 1 of CbCR shall include extraordinary income and gains from investment activities. While this may not necessarily reflect just the operating results of the constituent entities, it would at least do away with the ambiguity on what constitutes ‘extraordinary income’ and varying yardsticks that MNE groups would apply.

The Guidance further mentions that “related parties” in Table 1 of CbCR, which are defined as “Associated Enterprises” in the Action 13 report should be interpreted as ‘Constituent Entities’ listed in Table 2 of the CbCR. In the Indian context, this is defined in section 286 of the Income Tax Act 1961 (‘the Act’) largely aligned to the OECD definition in the Action 13 report which includes permanent establishments and does not give any leeway in terms of materiality of a company in terms of the group size.

2. Definition of the total consolidated group revenue

The Guidance clarifies that for determining the total consolidated group revenue (to see if the threshold of EUR 750 million is breached by a MNE group), all of the revenue reflected in the consolidated financial statements should be used. Further, in line with the definition of revenues for Table 1, the Guidance also provides that the jurisdictions are allowed to require inclusion of extraordinary income and gains from investment activities in the total consolidated group revenue if such inclusion is called for under the applicable accounting rules.

The applicable accounting standard therefore could either push companies into the realms of CbCR or save it from having to comply with CbCR filing.

Country By Country Reporting – Implementation Guidance:

Currently, CBCR compliances has become a matter of concern for all multinational enterprises (MNE). The Organization for Economic Cooperation and Development (OECD) as part of the BEPS project has been issuing guidance to the action points specified by it. Recently on 6 April 2017, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting (‘the Guidance’) which has addressed five new issues:

• The definition of terms “related party revenues” & “revenue” used in the CbCR;
• The definition of total consolidated group revenue;
• The accounting principles for determining the existence of and membership in a group;
• Treatment of major shareholding; and
• Transitional filing options for MNE groups.

1. Definition of related party and revenues

The Guidance clarifies that the revenue referred to in Table 1 of CbCR shall include extraordinary income and gains from investment activities. While this may not necessarily reflect just the operating results of the constituent entities, it would at least do away with the ambiguity on what constitutes ‘extraordinary income’ and varying yardsticks that MNE groups would apply.

The Guidance further mentions that “related parties” in Table 1 of CbCR, which are defined as “Associated Enterprises” in the Action 13 report should be interpreted as ‘Constituent Entities’ listed in Table 2 of the CbCR. In the Indian context, this is defined in section 286 of the Income Tax Act 1961 (‘the Act’) largely aligned to the OECD definition in the Action 13 report which includes permanent establishments and does not give any leeway in terms of materiality of a company in terms of the group size.

2. Definition of the total consolidated group revenue

The Guidance clarifies that for determining the total consolidated group revenue (to see if the threshold of EUR 750 million is breached by a MNE group), all of the revenue reflected in the consolidated financial statements should be used. Further, in line with the definition of revenues for Table 1, the Guidance also provides that the jurisdictions are allowed to require inclusion of extraordinary income and gains from investment activities in the total consolidated group revenue if such inclusion is called for under the applicable accounting rules.

The applicable accounting standard therefore could either push companies into the realms of CbCR or save it from having to comply with CbCR filing.

The Guidance also specifically recognizes that in the case of financial entities, gross amounts from transactions may not be recorded in their financial statements, the item(s) considered similar to revenue under the applicable rules should be used in the context of financial activities. The Guidance captures a specific example of interest rate swap wherein revenue is reported on a net basis and the same is what would be used to determine the total consolidated group revenue.

        3. Accounting principles/ standards for determining the existence of and membership of group

For the purpose of determining the constituent entities of a group, the Guidance recommends companies having their shares listed in a public stock exchange to follow the consolidation rules in the accounting standards already used by the group. For other companies, the OECD has provided an option to either use local GAAP of the jurisdiction of the ultimate parent entity or IFRS unless the jurisdiction of the ultimate parent entity mandates the use of a particular accounting standard.

The choice of a particular accounting standard becomes important in terms of the following;

• Which entity/ group would an entity be considered as part of for determining the group revenue.

• Whether an investment fund company would be required to consolidate its financial statements.

4. Treatment of major shareholding

The Guidance leaves it to the prevailing accounting standard to determine how much of the revenue of the entity is to be included in the groups consolidated financials where minority interest exists. A pro-rata basis or 100 % of the entities revenues could be used for the revenue threshold reporting revenues in the relevant Tables.

5. Transitional filing options for MNEs

OECD recommends that countries implement CbCR for periods commencing January 2016 for which the last day of filing the CbCR is 12 months from the end of the fiscal year (‘Applicable Deadline’). For countries that are not aligned with these dates, transitional issue arises. To overcome this, jurisdictions may accommodate voluntary filing of CbCR in their jurisdiction of tax residence (‘parent surrogate filing’). The Guidance also lists out countries which have already enabled the parent surrogate filing for fiscal periods commencing on or after 1 January 2016 in their jurisdictions which inter alia include countries such as China, United States of America (‘US’) and Japan.

The Guidance also provides that, inter alia, where the CbCR filing has been undertaken by the ultimate parent entity (‘UPE’) or surrogate parent entity (‘SPE’) resident in a particular jurisdiction before the Applicable Deadline, and there exists a qualifying competent authority agreement between UPE/ SPE tax jurisdiction and that of the constituent entities’ tax jurisdiction, then there ought to be no filing obligations in the constituent entities’ jurisdiction.

An issue that Indian MNE Groups may have to immediately grapple with is what happens with respect to constituent entities resident of tax jurisdictions which are yet to sign the MCAA but have CbCR filing obligations which fall before the Indian filing deadline of 30 November 2017 (one such example could be China).

Updated -UN TP Manual:

On 7 April, 2017, United Nations (UN) has published updated TP Manual that contains new chapters on intra-group services, cost contribution arrangements and on the treatment of intangibles; the updated UN TP manual incorporates developments relating to Base Erosion and Profit Shifting (BEPS) project including revised guidance on documentation and business restructuring. The updated version has been divided into 4 parts for better clarity –

1. Transfer pricing in a global environment,
2. Substantive guidance on arm’s length principle,
3. Practical implementation of TP regime and
4. Country practices;

The following are the new chapters that are incorporated as part of the updated UN TP Manual:

Intra-group services

The chapter is based on the rationale that if specific group members do not need the activity and would not be willing to pay for it if they were independent, the activity cannot justify a payment, and further, any incidental benefit gained solely by being a member of an MNE group, without any specific services provided or performed, should be ignored.

The concept of benefit test is explained under various situation such as services are provided to meet specific need of AE and when centralized services are provided along with examples. The Chapter states the 4 situations where charge is not justified as benefit test is not met viz. shareholder activities, duplication of services, benefit arising only out of passive association with MNE group and incidental benefit giving appropriate examples.

The chapter also elaborates upon various method to determine arm's length price, direct and indirect charge mechanism and allocation keys. The Chapter provides for 2 safe harbour mechanisms for low value services and minor intra-group expenses.

Cost contribution arrangements

The Chapter covers issues such as value of CCA contributions, treatment of government subsidies, predicting expected benefits, CCA entry, withdrawal and termination and CCA guidelines and

Key Topics Covered:

• FEMA
• INCOME TAX
• COMPANIES ACT, 2013
• GST
• AUDIT
• LABOUR LAWS

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.