Part 5 - FEMA

Foreign Exchange Management Act, 1999 5.47 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Inbound & Outbound Merger – Merger or amalgamation of a Foreign Company with an Indian Company Meaning Inbound cross-border merger would mean that the resultant company would be Indian Company Outbound Cross Border Merger would mean where the resultant company is a foreign company Conditions to be complied with by the resultant company Resultant company would be allowed to issue any security/foreign security to a person resident outside India provided it complies with FDI Regulations including:- • Pricing Guidelines • Entry routes • Sectoral caps • Attendant conditions • Reporting requirements It should also comply with conditions laid down in ODI Regulations for transfer/acquisition of shares in following cases: • Where the foreign company is a JV/ WOS of the Indian company • Where such merger of the JV/WOS results into acquisition of the Step down subsidiary of the JV/ WOS of the Indian party by the resultant company • A person resident in India may acquire or hold securities of the resultant company in accordance with ODI Regulations • A resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme laid down in the Act or rules or regulations framed thereunder. Compliance by office of the foreign/Indian company An office outside India of the foreign company, post- merger shall be deemed to be the branch/office outside India of the resultant company and may undertake any transaction as permitted to a branch/office under the aforesaid Regulations in accordance with relevant3 regulations. An office in India of the Indian company, pursuant to sanction of the Scheme of cross border merger, may be deemed to be a branch office in India of the resultant company and may undertake any transaction in accordance with relevant regulations Guarantees or outstanding borrowings of the foreign/ Indian company The guarantees or outstanding borrowings of the foreign company from overseas sources which become the borrowing of the resultant company or any borrowing from overseas sources entering into the books of resultant company shall conform, within a period of two years, to the External Commercial Borrowing norms or Trade Credit norms or other foreign borrowing norms, as laid down under ECB Regulations4 as applicable. • The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant company shall be repaid as per the Scheme sanctioned by the NCLT in terms of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

FEMA and International Taxation 5.48 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Meaning Inbound cross-border merger would mean that the resultant company would be Indian Company Outbound Cross Border Merger would mean where the resultant company is a foreign company Another condition is that no remittance for repayment of such liability is made from India within such period of two years. However, conditions with respect to end use shall not apply. • Also, the resultant company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with the Act or rules or regulations framed thereunder. • Further, a no-objection certificate to this effect should be obtained from the lenders in India of the Indian company. Acquisition or holding of an asset outside India and in India The resultant company may acquire and hold any asset outside India which an Indian company is permitted to acquire under the provisions of the Act, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed thereunder. Where the asset or security outside India is not permitted to be acquired or held by the resultant company under the Act, rules or regulations, the resultant company shall sell such asset or security within a period of two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated to India immediately through banking channels. Where any liability outside India is not permitted to be held by the resultant company, the same may be extinguished from the sale proceeds of such overseas assets within the period of two years. The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the provisions of the Act, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the Act or rules or regulations framed thereunder. Where the asset or security in India cannot be acquired or held by the resultant company under the Act, rules or regulations, the resultant company shall sell such asset or security within a period of two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of two years shall be permissible.

Foreign Exchange Management Act, 1999 5.49 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Meaning Inbound cross-border merger would mean that the resultant company would be Indian Company Outbound Cross Border Merger would mean where the resultant company is a foreign company Opening of a Bank Account Outside India/ in India The resultant company may open a bank account in foreign currency in the overseas jurisdiction for the purpose of putting through transactions incidental to the cross border merger for a maximum period of two years from the date of sanction of the Scheme by NCLT. The resultant company may open a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of putting through transactions under these Regulations. The account shall run for a maximum period of two years from the date of sanction of the Scheme by NCLT. Valuation The valuation of the Indian company and the foreign company shall be done in accordance with Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016. Miscellaneous (1) Compensation by the resultant company, to a holder of a security of the Indian company or the foreign company, as the case may be, may be paid, in accordance with the Scheme sanctioned by the NCLT. (2) The companies involved in the cross-border merger shall ensure that regulatory actions, if any, prior to merger, with respect to non-compliance, contravention, violation, as the case may be, of the Act or the Rules or the Regulations framed thereunder shall be completed. Reporting The resultant company and/or the companies involved in the cross-border merger shall be required to furnish reports as may be prescribed by the RBI. Deemed approval (1) Any transaction on account of a cross-border merger undertaken in accordance with these Regulations shall be deemed to have prior approval of the Reserve Bank as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016. (2) A certificate from the Managing Director/Whole Time Director and Company Secretary, if available, of the company(ies) concerned ensuring compliance to these Regulations shall be furnished along with the application made to the NCLT under the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016. (13) Acquisition and Transfer of Immovable property outside India Immovable property outside India can be acquired by following persons:

FEMA and International Taxation 5.50 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • Individuals Person Resident in India from a Person Resident outside India Indian Nationals Resident Outside India Foreign Nationals Resident in / Outside India Acquired by a PRI on or before the 8th day of July, 1947 and continued to be held by such person with the permission of the Reserve Bank Acquired by a PRI on a lease not exceeding five years A] From a Person Resident outside India 1. By way of inheritance No restrictions No restrictions No restrictions No restrictions 2. By purchase out of funds held in RFC Account 3. By way of purchase out of LRS remittances 4. Jointly with a relative who is a PROI 5. Out of the income or sale proceeds of assets acquired overseas, other than ODI • From a Person Resident in India A person resident in India can acquire immovable property outside India by way of inheritance or gift or purchase provided PRI has acquired such property as per the foreign exchange provisions in force at the time of such acquisition • Others Branches/Trading Offices Abroad of Indian Companies Foreign Subsidiaries of Indian Companies Foreign Companies Acquired by a PRI on a lease not exceeding five years 1. For their business No restrictions No restrictions No restrictions 2. Residence of their staff PRI may i) transfer such property by way of gift to a person resident in India who is eligible to acquire such property under these rules or ii) by way of sale iii) create a charge on such property. (14) Branch / Liaison / Project Office outside India An Indian entity opening a Branch / Representative / Liaison office outside India is allowed to remit, subject to certain terms and conditions, as under: a. For Initial Expenses – Up to 15% of its average annual sales/income or turnover during the last two accounting years or up to 25% of net worth, whichever is higher.

Foreign Exchange Management Act, 1999 5.51 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication b. For Recurring Expenses – Up to 10% of its average annual sales/income or turnover during the last two accounting years. The overseas office is also permitted to acquire immovable property outside India for its business and for residential purpose of its staff out of the above remittances. (15) Compounding & Contravention under FEMA Contravention, Penalties & Appeals Penalties for contraventions under FEMA are per se monetary in nature. If any person contravenes any provisions, rules, regulations, etc. the penalty imposed can be up to 3 times of the sum involved in contravention; and if the sum of contravention is not ascertainable, penalty can be up to ` 200,000. If the contravention is a continuing one, a further penalty up to ` 5,000 per day may be imposed for every day after the 1st day during which the contravention continues. If any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed u/s. 37A (at present the limit prescribed is ` one crore), then such person is liable to: a. Penalty up to 3 times the sum involved. b. Confiscation of the value equivalent situated in India. c. Imprisonment for a term which may extend to 5 year + fine. The adjudicating officer / competent authorities may also confiscate any currency, security or property in addition to imposing penalty. If a person does not pay up the penalty within 90 days, he is liable for civil imprisonment. There is a right to appeal given at every stage and an appeal against an order of the Adjudicating Authority can be made to the Special Director (Appeals). An appeal against the order of the Special Director (Appeals) can be made to the Appellate Tribunal. An appeal, on questions of law, against the order of the Appellate Tribunal can be made to the High Court. A person preferring an appeal to the Special Director (Appeals) or the Appellate Tribunal can take assistance of a Chartered Accountant or Legal Practitioner. Compounding of Contraventions Powers for compounding of offences – RBI has been given powers for compounding all cases of contraventions other than cases under section 3(a) of FEMA. Cases of contravention under section 3(a) relate to dealing in or transfer of foreign exchange and foreign security to any person other than an authorised dealer. For these, Enforcement Directorate will be responsible. Depending on the sum involved, various officers have been designated to look into applications for compounding. In case where the sum involved in such contravention is • ` 10 lakh or below - The Assistant General Manager of the Reserve Bank of India • More than ` 10 lakh but less than ` 40 lakhs - The Deputy General Manager of Reserve Bank of India; • More than ` 40 lakh but less than ` 100 lakhs - The General Manager of Reserve Bank of India; • ` 100 lakhs or more - The Chief General Manager of the Reserve Bank of India; (Provided further that no contravention shall be compounded unless the sum involved in such contravention is quantifiable) The compounding authority can call for any information, record or any other documents relevant to the compounding proceedings. The compounding authority is required to pass an order within 180 days from the date of application. The sum for which the contravention is compounded has to be paid within 15 days from the date of order of compounding.

FEMA and International Taxation 5.52 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Power of Compounding of Contraventions by Regional Offices / Sub-offices of RBI Power of Compounding of Contraventions by FED Co., Cell, New Delhi Delay in reporting inward remittance received for issue of shares Contraventions relating to acquisition and transfer of immovable property outside India Violation of pricing guidelines for issue of shares Contraventions relating to acquisition and transfer of immovable property in India Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds Contraventions relating to establishment in India of Branch Office, Liaison Office or Project Office Issue of ineligible instruments such as nonconvertible debentures, partly paid shares, shares with optionality clause Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000 Issue of shares without approval of RBI or FIPB respectively, wherever required Delay in submission of Form FC-TRS on transfer of shares from Resident to Non-Resident &Vice versa Receiving investment in India from non-resident or taking on record transfer of shares by investee company, in the absence of certified Form FCTRS Delay in reporting the downstream investment made by an Indian Entity to Secretariat for Industrial Assistance, DIPP. Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by LLP/delay in reporting disinvestment/transfer of capital contribution of profit share between resident and non - resident in case of LLP Gift of equity instruments by a person resident in India to a person resident outside India without seeking prior approval of the RBI. With an intention to ensure more transparency and greater disclosure, RBI has decided to upload summary information in respect of the Compounding Orders passed on or after 1st March, 2020 instead of the Compounding Orders on Bank’s website. (16) Miscellaneous Remittances of proceeds of assets by foreign nationals Remittance of proceeds of assets by a foreign national are allowed where:

Foreign Exchange Management Act, 1999 5.53 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication (i) the person has retired from employment in India; (ii) the person has inherited from a person who was resident in India; (iii) the person is a non-resident widow/ widower and has inherited assets from her/ his deceased spouse who was an Indian national resident in India. However, the remittance should not exceed US$ one million per financial year. The limit will not cover sale proceeds of assets held on repatriation basis. Remittances of balances held in a bank account by a foreign student who has completed his/her studies is also allowed, provided such balance represents proceeds of remittances received from abroad through normal banking channels or rupee proceeds of Forex brought by such person and sold to an authorised dealer or out of stipend/scholarship received from the Government or any organisation in India. All these facilities are not available for citizens of Nepal or Bhutan or a PIO. Remittance of proceeds of assets by NRIs/ PIOs NRIs/PIOs, on submission of documentary evidence, are allowed to remit up to US$ one million per financial year: (i) out of balances in NRO A/c or sale proceeds of assets or assets acquired in India by way of inheritance/legacy; (ii) in respect of assets acquired under a deed of settlement made by either of his/her parents or relative (as defined in Companies Act, 2013); (iii) in cases where settlement is not done by retaining any life interest in the property i.e., during the lifetime of the owner/parent, it would tantamount to regular transfer by way of gift and the remittance of sale proceeds of such property would be guided by the existent instructions on remittance of balance in the NRO A/c. 2

FEMA and International Taxation 5.54 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication * As amended by the Foreign Contribution (Regulation) Amendment Act, 2020 dated 28.09.2020 II. Foreign Contribution (Regulation) Act, 2010* (1) Introduction An Act to consolidate the law to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto. (2) Applicability It extends to whole of India, and also applies to a. Citizens of India who are outside India. b. Associate branches or subsidiaries, outside India, of companies or bodies corporate, registered or incorporated in India. (3) Foreign Contribution FC means donation, delivery, or transfer made by any foreign source of:– a. Any article other than personal gifts of market value not exceeding such sum as may be specified by the Central Government. b. Any currency whether Indian or foreign. c. Any security including foreign security. Notes: This will also cover: a. Contribution received from any person who has in turn received it from a foreign source b. Interest accrued on FC deposited in the bank However, any amount received, by any person from any foreign source in India, by way of fee (including fees charged by an educational institution in India from foreign student) or towards cost in lieu of goods or services rendered by such person in the ordinary course of business, trade or commerce, whether within India or outside India or any contribution received from an agent of a foreign source towards such fee or cost shall be excluded from the definition of foreign contribution. 3.1 Foreign Source It includes:– a. Government of any foreign country or any agency of such Government; b. Any international agency except United Nations or any of its specialised agencies, World Bank, International Monetary Fund or such other agency as the Central Government may, by notification in the Official Gazette, specify; c. Foreign company; d. Corporation, other than foreign company, incorporated outside India; e. A multinational corporation; f. A company where more than 50% of its share capital is held by a foreign government or citizens of a foreign country or foreign entity (includes company, corporations, trusts, societies or other associations of individuals registered in foreign country); g. A foreign trust or foreign foundation and includes trust or foundation mainly financed by a foreign country; and h. Citizen of a foreign country. i. Foreign Trade Union, Society, Club or Other Association. Note: Amount received from a non-resident Indian citizen in foreign currency, would not be treated as foreign source. (4) Restrictions on accepting FC The person having a definite cultural, economic, educational, religious or social programme can accept FC, only if: a. It is registered with the Central Government under this Act or takes prior permission before receiving each contribution.

Foreign Contribution (Regulation) Act, 2010 5.55 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication b. It receives FC only through one designated bank account. c. Central Government is kept intimated as to the amount, source and manner in which FC was received and utilised. 4.1 Prior Permission a. Application for prior approval to be made online in Form FC 3B electronically only. b. Prior approval to be donor specific, donee specific and purpose specific. (5) Restrictions on acceptance of foreign hospitality No member of a Legislature or office-bearer of a political party or Judge or Government servant or employee of any corporation or any other body owned or controlled by the Government shall, while visiting any country or territory outside India, accept, except with the prior permission of the Central Government, any foreign hospitality: Provided that it shall not be necessary to obtain any such permission for an emergent medical aid needed on account of sudden illness contracted during a visit outside India, but, where such foreign hospitality has been received, the person receiving such hospitality shall give, within one month from the date of receipt of such hospitality an intimation to the Central Government as to the receipt of such hospitality, and the source from which, and the manner in which, such hospitality was received by him. (6) Registration of the association a. Application for registration shall be submitted electronically in Form FC 3A. The applicant shall upload the signed or digitally signed application along with scanned documents as specified by the Central Government. b. Registration granted shall be valid for 5 years from the date of its issue. c. Application for renewal to be made in Form FC 3C, six months before the date of expiry of the certificate. d. Act provides that registration may be granted, ordinarily within 90 days from the date of receipt of application, however practical experience is that the process takes much longer. e. The Ministry of Foreign Affairs has introduced a new facility “FCRA – Online” to facilitate associations to file their applications for registration and submit statutory forms online. Refer fcraonline.nic.in. f. Recent amendment to the Rules have made it compulsory to file all forms under FCRA electronically and the payment of fees has to be made online through the payment gateway, instead of the earlier requirements of filing hard copies and payment by demand draft or banker’s cheques. g. At the time of seeking prior permission, registration or renewal of registration it is compulsory to submit Aadhar number of Office bearers, directors or of all its office bearers, directors or key functionaries or a Passport copy or the Overseas Citizen of India card for identification in case of a foreigner. (7) Accounts & Audit 7.1 Maintenance of accounts a. Accounts to be maintained on yearly basis from April to March. b. Every person receiving FC shall maintain an account of any FC received and its utilisation. i. Income & expenditure statement, receipt & payment account and balance sheet are to be prepared exclusively in respect of the FC received. ii. Details in Form FC 1 to be maintained where FC relates to articles and foreign securities. 7.2 Designated bank account a. FCRA funds can be received and held only in the designated bank as “FCRA account”

FEMA and International Taxation 5.56 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication in State Bank of India, New Delhi branch, as notified by the central Government. b. Besides the “FCRA account”, such person may also open another “FCRA account” in any scheduled bank of his choice. This can be kept/ utilised for foreign contribution. Such accounts are commonly referred to as field accounts. In such cases, intimation in Form FC–6D shall be furnished electronically to the Secretary, Ministry of Home Affairs within 45 days. c. Designated or field accounts are strictly prohibited from receiving non-FC funds. d. Interest earned out of FC funds should be deposited in designated bank account. 7.3 Audit a. Income & Expenditure account, Receipts & Payment account and Balance Sheet, with report in Form FC 4 duly certified by a CA to be submitted to Home Ministry before 31st of December immediately following the end of financial year. b. Form FC 4 to give details of each contribution received, the source, manner of receipt, purpose of receipt and manner of utilisation. c. Even Nil report has to be submitted. However, where no FC has been received or utilised during a financial year, only FC 4 is required to be submitted, without the need to enclose certificate from Chartered Accountant, income and expenditure statement, receipt and payment account or balance sheet. (8) Total ban on acceptance of foreign contribution & hospitality 8.1 Ban relating to FC applies to a. Candidate for election; b. Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper; c. Public servant, Government servant, judge or employee of any Government corporation; d. Member of any Legislature; e. Political party or office-bearer thereof f. Organisation of political nature; g. Association or company engaged in production or broadcast of audio news or audio visual news or current affairs programmes through any electronic mode or form; h. Correspondent or columnist, cartoonist, editor, owner of the above association or company. 8.2 Ban does not apply to FC received by way of a. Salary, wages or other remuneration, or b. Payment in ordinary course of international trade or commerce, or c. Payment received by an agent of a foreign source in relation to any transaction made by such foreign source with the State or Central Government, or d. Gift or presentation made to a member of any Indian delegation, provided the same is in conformity with the rules framed by the Central Government in this regard, or e. Gift from relative. Gifts exceeding ` 10,00,000 per annum requires intimation to the Central Government in Form FC-1 within 3 months from date of receipt of such gift, or f. Any scholarship, stipend or any payment of like nature, or g. Remittance received in ordinary course of business through official channels. (9) Restriction on administrative expenses Every person, registered or having prior permission, shall not, as far as possible, incur administrative expenses in excess of 20% of the

Foreign Contribution (Regulation) Act, 2010 5.57 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication FC received in that financial year. Rule 5 lays down parameters as to what constitutes administrative expenses. (10) Speculative activity Foreign contribution or any income arising out of it shall not be used for speculative business. Rule 4 specifies the activities that will be treated as speculative in nature. For example investment in mutual funds is not permitted. However, debt based secure investment shall not be treated as speculative. (11) Transfer of FC to other registered or unregistered persons Transfer of FC funds to another person who is not registered or has not obtained prior permission to receive foreign contribution is prohibited. (12) Restriction in the utilisation of foreign contribution a. Central Government may find reasons to believe that a person who has been granted prior permission has contravened the provisions of the Act. Consequently, CG can issue the following directions – - Unutilised foreign contribution shall not be utilised or - Remaining portion of foreign contribution or additional foreign contribution not yet received, shall not be received without prior approval of the Central Government. (13) Inspection & Seizure a. The Central Government has been empowered, to inspect as well as seize the accounts and records if it has reason to believe that any provisions of this Act or any other law relating to foreign exchange has been contravened. b. Central Government may seize and/or confiscate any article, currency or security in relation to which any provision of this Act has been contravened. c. The seized records and accounts are to be released if no proceedings are initiated within six months from the date of seizure. (14) Penalty Nature of Offence Penalty Additional Fine False statement or representation or concealment of material facts for obtaining registration or prior permission Imprisonment up to 6 months and/or fine --- Violating prohibitory orders in respect of any articles or currency or security Imprisonment up to 3 years and/or fine Additional fine equivalent to market value of article or the amount of currency or security in respect of which prohibitory order is passed Accepting or assisting in accepting FC in contravention of this Act Imprisonment up to 5 years and/or fine --- Any other failure not specifically dealt with in the Act Imprisonment up to 1 year and/or fine ---

FEMA and International Taxation 5.58 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • A person who has been convicted more than once for offence relating to acceptance or utilisation of FC is prohibited from accepting any FC for a period of 5 years. • Any person convicted of an FC offence relating to any article, currency or security would also be liable to fine up to 5 times the value of the article or currency or ` 1,000 whichever is more, if article or currency is not available for confiscation. • Compounding of certain offences is now possible. (15) Declaration of receipts of foreign contribution Any person/organisation who has been granted a certificate of registration or prior permission shall place its audited financial statement of accounts on its official websites or on the FCRA website within nine months from the end of the relevant financial year. (16) Change of designated bank account, name, address, aim, objects or key members of the association Any person/association who has been granted a certificate of registration under section 12 or prior permission under section 11 of the Act shall intimate electronically online in respective form, within 45 days of any change in its name, address, nature, aims, objects, registration with local/ relevant authorities or any change in the original key members reported in the application for grant of registration/prior permission/ renewal of registration. (17) All FCRA services online In order to improve the existing services relating to FCRA, to speed up processing and disposal of cases and to bring transparency, Ministry of Home Affairs has brought all the FCRA Services online. The followings new forms have been notified under the Foreign Contribution (Regulation) Amendments Rules, 2015: New Form Notified Purpose Old Form No. FC1 Intimation of receipt of Foreign Contribution by way of Gift/ as Articles / Securities / by candidate for Election 1. FC 7 – Article 2. FC 8 – Securities 3. FC 9 – Candidate for Election FC2 Application for Foreign Hospitality FC2 FC-3A – Registration FC-3B – Prior Permission FC-3C – Renewal Application for FCRA R e g i s t r a t i o n / P r i o r Permission/ Renewal 1. FC 3 – Registration 2. FC 4 – Prior Permission 3. FC 5 – Renewal FC4 Intimation for Annual Return FC 6 – Annual Return FC-6A – Change of Name or its Address FC-6B – Change in nature/aims/objects FC-6C – Change in bank/branch/designated account number FC-6E – Change in key members of association Intimation for Change of Association name/ Address / FC Receipt Bank/Designated and/ or Utilisation Bank Account/ Key members

Foreign Contribution (Regulation) Act, 2010 5.59 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication New Form Notified Purpose Old Form No. FC-7 – Application for surrender of certificate of registration (18) Registration to be suspended The Registration of a person may be suspended by government for a period not exceeding 360 days. (19) Surrender of Registration Certificate A person may suo-moto request to surrender the registration certificate. The Central Government can grant such permission if – – The Government is satisfied post an inquiry, that the person has not contravened the provisions of the Act – Assets created out of foreign contribution and the management of such contribution has been vested in the authority as prescribed by the government

FEMA and International Taxation 5.60 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication III. International Taxation Taxation of Non-Residents (1) Test of Residence A. Individuals • An individual is regarded as ‘Resident’ of India if: i. He stays in India for 182 days or more during a previous year; OR ii. He stays in India for 60 days or more during a previous year, and 365 days or more during the 4 years preceding that previous year. The short period of stay in India of “60” days, however gets extended to 182 days (i.e., even though an individual is in India for 365 days or more during preceding 4 previous years) in respect of an Indian citizen who leaves India in any previous year for employment or as a member of the crew of an Indian Ship or in case of an Indian citizen or a person of Indian origin who being abroad, comes on visit to India in any previous year; However, w.e.f. 1.4.2021 the requirement of 182 days has been reduced to 120 days for an Indian citizen or a person of Indian origin who being abroad, comes on visit to India in any previous year and having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year. Further, such person shall be treated as ‘Resident - Not Ordinarily Resident’ if his stay in India is 120 days or more but less than 182 days. Citizenship is governed by the Citizenship Act, 1955, as amended by the Citizenship (Amendment) Act, 2019. If such individual’s total income, other than income from foreign sources is upto ` 15 lakhs, such individuals would qualify to be Non-Resident if their stay in India is less than 182 days. Further, in case of an individual being citizen of India and member of crew of foreign bound ship leaving India, the period or periods of stay in India, in respect of such voyage shall be determined in terms of Rule 126. • An individual – Deemed Residency test in India if: An individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. Explanation to Section 6 defines the term “income from foreign sources” to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India. • An individual is regarded as ‘Resident but not Ordinarily Resident’ if: i. He is a non-resident in India in 9 out of 10 previous years preceding the previous year; OR ii. He has stayed in India for 729 days or less during 7 years preceding the previous year. OR iii. He is a citizen of India, or a person of Indian origin who being abroad, comes on visit to India during the previous year and has stayed in India in all 120 days or more but less than 182 days. OR

Taxation of Non-Residents 5.61 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication iv. He is a citizen of India who is deemed to be resident in India under clause (1A) of Section 6. • An individual is regarded as ‘Non-Resident’ if He does not satisfy any of the conditions mentioned above. The above provisions dealing with residential status have been succinctly summarized in the below flowchart : Flowchart to determine Residential Status of Individuals Individual Period of stay condition Period of stay > 182 days in PY Period of stay > 60 days in PY + > 365 days in preceding 4 PYs Non-Resident Yes Yes No No Yes No No Indian Citizen left India in PY as: • As member of Indian ship crew • For purpose of employment o/s India Yes No No Being o/s India, coming to India on visit by Indian Citizen or PIO Modified condition: Period of stay > 182 days in PY + > 365 days in preceding 4 PYs Total income (other than income from foreign sources) > 15 lakhs Yes No Non-Resident No Modified condition: Period of stay > 120 days in PY + > 365 days in preceding 4 PYs Indian Citizen + Not liable to tax in foreign country + Total income (other than income from foreign sources) > 15 lakhs Yes Yes No Resident Resident Resident Non-Resident No Yes No Yes Been NR for 9/10 PY; or Period of stay < 729 days in preceding 7 PYs Period of stay < 182 days in PY ROR RNOR The above determination can lead to a situation where Individuals can become resident of India and another country. In such a case, determination of residential status would be determined as per the tie-breaker test under the applicable treaty which is depicted below:

FEMA and International Taxation 5.62 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Permanent Home Centre of Vital interests Habitual abode Nationality Mutual agreement Neither state Both states B. HUF/FIRM/AOP i. Resident – They are regarded as resident, even if part ‘control and management of its affairs’ is in India. [Note: An HUF will be ‘Resident but not ordinarily resident’ if it is a resident and its manager fulfils condition as mentioned in A above] ii. Non-resident – They will be regarded as non-resident, if control and management is wholly outside India. C. Company An Indian company is always treated as resident in India. In respect of foreign company the criteria to determine residential status changed from “Control & Management of its affairs is situated wholly in India” to “Place of Effective Management – POEM in that year, is in India” and the same applicable w.e.f. A.Y. 2017-18. POEM is a place where key management and commercial decisions necessary for the conduct of the business as a whole are made. It is not sufficient to hold Board Meetings & AGM in the overseas jurisdiction. POEM shall be considered to be in India if BOD are standing aside and powers of management are exercised by Holding Company or any other person resident in India. Key Management Personnel such as CEO/CFO etc., should be resident of overseas jurisdiction where the foreign company is located. CBDT has clarified vide Circular No. 8 of 2017 dated 23rd February, 2017 that POEM provisions under Section 6(3)(ii) shall not apply to a company having turnover or gross receipts of INR 50 crores or less in a financial year. The CBDT has issued final guidelines for determination of POEM (guiding principles) on 24th January, 2017 vide Circular No. 6 of 2017 which will apply only when the turnover or gross receipts exceeds INR 50 crores. The rules have been provided distinctly for a company engaged in active business outside India and for other companies other than those that are engaged in active business outside India.

Taxation of Non-Residents 5.63 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Simplified flowchart providing a snapshot of the key features of the guiding principles is set out below : Company engaged in Active Business outside India Conditions: (i) Passive Income is not more than 50% of its total income; and (ii) Less than 50% of its total assets are situated in India; and (iii)Less than 50% of total number of employees are situated in India or are resident in India; and (iv)The payroll expenses incurred on such employees is less than 50% of its total payroll expenditure; Majority Board Meetings outside India Yes Yes No No POEM outside India POEM in India 2-Step Analysis Stage 1 - Identification or ascertaining the person(s) who actually make the key management and commercial decision for conduct of the company’s business as a whole Stage 2 - Determination of place where these decisions are in fact being made Points to be noted: i. If on facts and circumstances it is established that Board of Directors (‘BOD’) are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person (s) resident in India → POEM in India ii. Merely because BOD follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Pay roll functions, Accounting, HR functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; not to constitute BOD of companies standing aside. iii. For determining if company is engaged in ABOI, the average of the data of the previous year and two years prior to be considered. In case company in existence Place where management decisions are taken more important than place where decisions are implemented Guiding Principles for determining POEM: i. Location where board regularly meets and make decisions is POEM. Points to be noted: BOD retains and exercises its authority to govern│| BOD in substance makes key management and commercial decisions necessary for the conduct of the business as a whole | Mere formal holding of BOD meetings at a place not conclusive for determination of POEM | If key decisions by directors are in fact being taken in a place other than place of formal meetings then such other place relevant for POEM |│Incase of de facto delegation, place of meeting of delegated authority to be POEM ii. Delegation of Authority to executive committee or key members. Points to be noted: Location where members of the executive committee are based and where

FEMA and International Taxation 5.64 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication committee develops and formulates the key strategies and policies for mere formal approval by the full board, often considered as POEM | Delegation of authority may be de jure (by means of a formal resolution or Shareholder Agreement) or de facto (based upon the actual conduct of BOD and the executive committee) iii. Location of Head Office. Points to be noted: Single location of senior management and their support staff and location publically known as principal place of business or HQ is POEM│| If decentralized senior management, then head office is where these senior managers- (i) are primarily or predominantly based or (ii) normally return to following travel to other locations or (iii) meet when formulating or deciding key strategies and policies for the company as a whole│| If senior management participate in meetings using technology, head office is normally place of highest level of management and their direct support staff│| In situations where the senior management is so decentralised that it is not possible to determine the head office with a reasonable degree of certainty, the location of head office would not be of much relevance in determining POEM iv. Use of Technology. Points to be noted: No longer necessary for the persons taking decision to be physically present at a particular location, therefore physical location of BOD meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made |│Place where the directors or the persons taking the decisions or majority of them usually reside may be relevant factor v. Circular Resolution or Round Robin Voting. Points to be noted: Frequency of use, type of decisions made and location of parties involved are to be considered for POEM |│Location of proposer of decision alone not to be relevant but based on past for a shorter period, then data of such period to be considered. iv. Where accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the PY in India, then, data of the accounting year that ends during the relevant PY and two accounting years preceding it to be considered.

Taxation of Non-Residents 5.65 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication practices and general conduct to be used for determination of POEM│| Location of person who has the authority and who exercises the authority to take decisions considered more important than location of proposer vi. Decisions by Shareholders. Points to be noted: Decisions made by SH on matters reserved for SH decision under company laws not relevant for determination of POEM eg. dissolution, liquidation, issue of shares, etc |│SH involvement could through a formal arrangement by way of shareholder agreement etc. or by way of actual conduct turn into effective management│| Whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-tocase basis only vii. Routine operational decisions. Points to be noted: Day to day routine operational decisions undertaken by junior and middle management not relevant for POEM│| The operational decisions relate to oversight of day-to-day business operations and activities of a company whereas key management and commercial decision are concerned with broader strategic and policy decision |│Where person responsible for operational decision is also responsible for the key management and commercial decision to distinguish the two type of decisions and assess POEM All the above factors are not to be seen in isolation but to be seen as a whole in order to determine effective management.

FEMA and International Taxation 5.66 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication The key features of the guiding principles are set out below: i. Shareholder decisions ii. Examples of management and commercial decisions iii. Delegation of authority to make key decisions iv. Circular resolution v. Following group policy (to determine if the Board has stepped aside and not exercising its powers) vi. Clarification on determination of value of assets (to determine whether a company is engaged in active business) vii. Clarification on computation of income (to determine whether a company is engaged in active business) viii. Clarification on determination of number of employees (to determine whether a company is engaged in active business) ix. Data of prior years for determining if company is engaged in active business x. Situations which by itself does not establish effective management xi. Prior approval required for initiating proceedings for holding a company incorporated outside India as a resident of India on the basis of POEM xii. Exclusion of interest income in case of banks or other public financial institutions. (2) Tax Incidence A. Resident & Ordinarily Resident – Global Income is taxable. B. Resident but not Ordinarily Resident – Income earned/ received in India; or income which accrues or arises or is deemed to accrue or arise in India or income arising abroad out of business controlled in or profession set up in India is taxable. C. Non-Resident – Only income earned/ received/accrued/arising in India and income deemed to accrue or arise in India is taxable. (3) Investment income of a Non-residents A. Interest income received by a nonresident from Government or from any other person in India is taxable in India. Interest received by non-resident in certain case In terms of section 9(1)(v)(c) of the Act if any interest is payable by the branch offices of non-resident foreign banks to either the head office or to any other branch offices outside India, of the non-resident, then such interest shall be deemed to accrue or arise in India. Thus, the branch office in India shall be obligated to deduct tax at source on such interest payable. Interest so remitted shall be attributable to Indian Permanent Establishment (PE) as a separate and distinct person of non-resident of which it is a PE, in addition to its other income arising and accruing in India. B Dividend income Any income by way of dividend from shares or income received in respect of the units of a Mutual Fund specified under section 10(23D) or from the Administrator of the specified undertaking as defined; or from the specified company received by non-resident is taxable subject to the respective treaty relief, if any. Deduction u/s. 57 will be allowed to the shareholder only in respect of interest expense for purchase of such investments, with an overall limit of 20% of dividend income. C. Exempt Investment Income Following types of investment income are exempt: 1. Interest on NRE account paid or credited to individual non-residents Indian who are

Taxation of Non-Residents 5.67 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication permitted by RBI to maintain such account. Section 10(4)(ii) (including person who may be ‘Resident’ in India as per Income Tax law, but are resident outside India under FEMA). 2. Section 10(15)(iic) – In the case of an individual or a Hindu Undivided Family, interest on such relief bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf. 3. Interest paid by a scheduled bank on RBI approved foreign currency deposit, FCNR & RFC A/c to non-resident or Not Ordinarily Resident is exempt. [Section 10(15)(iv)(fa)]. 4. Any interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after the 1-4- 2005, in an Offshore Banking Unit referred in section 2(u) of the Special Economic Zones Act, 2005 is exempt under section 10(15) (viii). 5. Any income by way of interest payable to a non-resident by a unit located in an International Financial Services Centre (IFSC) in respect of monies borrowed by it on or after the 1st day of September, 2019 is exempt under section 10(15)(ix). 6. Any gains arising because of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by nonresident, shall be ignored for the purposes of computation of full value of consideration under section 48. 7. Any income received by a non-resident from portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such nonresident, in an account maintained with an Offshore Banking Unit, in any IFSC, to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India to be exempt under section 10(4G). 8. Section 10(23FE) – Any income of specified person in the nature of dividend, interest or long-term capital gains arising from an investment made in India on or after the 1st day of April, 2020 but on or before the 31st day of March, 2024 and which is held for at least three years. The Specified person’ means: a) Wholly owned subsidiary of Abu Dhabi Investment Authority, which is resident of Abu Dhabi and makes investment, directly or indirectly, out of the fund owned by the Government of the Abu Dhabi. b) Sovereign wealth fund and pension fund which satisfies prescribed conditions. 9. Section 10(23FBC) - Any income of a unit holder received from Category III AIF or from transfer of units in Category III AIF which is located in IFSC of which all the units are held by non-residents and if consideration to the extent of income in respect of units held by non-resident is paid in convertible foreign currency. D. Special Tax Rate and Surcharge applicable on Investment Income of nonresident Tax Rates Sections 115A to 115AD prescribe tax rates for various types of investment income of different non-resident entities. However, if the nonresident is covered by a particular DTAA, he may apply the rates prescribed under that DTAA, if beneficial, without any surcharge and education cess. This position has been upheld in the case of Sunil V. Motiani vs. ITO (ITA No. 276/Mum/2012). 1. Section 115A – Income tax payable on income derived by non-resident by way of: i. Dividend – 20% subject to applicable surcharge & education cess; ii. Interest received from Government or an Indian concern on monies borrowed or debt incurred in foreign currency – 20% subject to applicable surcharge & education cess;

FEMA and International Taxation 5.68 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication iii. Interest received from a notified Infrastructure Debt Fund referred to in section 10(47) – 5% and shall be increased by applicable surcharge & education cess (Section 194LB); iv. Interest income payable by a Specified Company or business trust to a nonresident/foreign company is liable to deduct income-tax @ 5%, subject to applicable surcharge & education cess. This section is applicable if interest is paid or payable at approved rate. The interest should be in respect of monies borrowed in foreign currency from a source outside India – • Under a loan agreement (at any time on or after 1st July, 2012 and 1st July, 2023 or • By way of issue of long-term bonds including long-term infrastructure bonds (at any time on or after 1st October, 2014 but before 1st July, 2023 (Section 194LC) v. Interest income payable by way of issue of long-term bond or rupee denominated bond on or after 1 April 2020 but before 1 July 2023 which is listed only on a recognized stock exchange located in any International Financial Services center is liable to deduct income-tax @ 4%. vi. Interest paid to a Foreign Institutional Investor or Qualified Financial Investor on or after 1st June, 2013 but before 1st July, 2023 on account of investment made by them in Rupee denominated bonds of Indian currency or Government securities and in case of interest paid to them on account of investment made in municipal debt securities on or after 1st April 2020 but before 1st July, 2023, will be liable to tax at a concessional rate of 5%, subject to applicable surcharge & education cess (Section 194LD). vii. Income by way of interest received by the business trust from SPV is not taxable in the hands of the trust. [section 10(23FC)]. However, when such interest is distributed by business trust to unit holders, who are NR or foreign company, withholding tax @5% shall be applicable. [Section 194LBA(2)]. It is clarified that TDS, under section 194LBA of the Act, by business trust on dividend income paid to unit holder shall not apply in respect of income of the nature referred to in Section 10(23FC)(b) of the Act, if the SPV referred to in the said clause has not exercised the option under section 115BAA of the Act. There seems to be mistake apparent in section 194LBA as the intent is that TDS shall not be applicable if the SPV has exercised the option under section 115BAA. Therefore, clarity on this aspect needs to be awaited. viii. Income received by a business trust being a Real Estate Investment Trust (REIT) by way of renting, or leasing or letting out any real estate owned directly by such business trust is not taxable in the hands of such REIT [Section 10(23FCA)]. However, when such income is distributed by REIT to unit holders, who are NR or foreign company, withholding tax shall be as per Rates in Force which should be 30% increased by applicable surcharge and education cess [Section 194LBA(3)] ix. Income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under section 10(23D) or of the Unit Trust of India is taxable at the rate of 20% subject to

Taxation of Non-Residents 5.69 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication applicable surcharge & education cess. x. Income other than Profits & Gains of Business of Alternative Investment Fund (Category I or II) is not taxable in the hands of fund [Section 10(23FBA)]. However, income accruing or arising to or received by non-resident unit holder of an investment fund is taxable at the rates in force (section 194LBB). Application for lower deduction of tax can be made under section 197 (amended in the Finance Act, 2016). The Finance Act 2023 has further through amendment included Tax under section 194LBA(2) making the same eligible for lower deduction at lower rate. xi. Income received by a non-resident investor in respect of an investment in a securitization trust, withholding tax at rates in force at the time of credit of such income or at the time of payment thereof shall be applicable. (Provisions of Section 194LBC are effective from 1st June 2016). Application for lower deduction of tax can be made under section 197 (amended in the Finance Act, 2016). (4) Specific incomes of Non-residents i. Section 196A - Tax on non-resident or foreign company in respect of any income from units of mutual fund is 20% subject to applicable surcharge & education cess. The Finance Act 2023 has proposed to provide that tax deducted would be rate which is lower of the rate of 20% and the rate or rates provided under tax treaty with countries, subject to furnishing of tax residency certificate. ii. Section 196B - Tax on overseas financial organisation (approved by SEBI) in respect of income by way of long-term capital gains arising on sale/repurchase of units of mutual fund/UTI purchased in foreign currency is 10% subject to applicable surcharge & education cess. [Section 115AB]. iii. Section 196C - Tax on non-resident in respect of interest on bonds of an Indian company issued in accordance with Central Government notification, on bonds of a public sector company sold by the Government, and purchased in foreign currency; and long-term capital gains on sale of such bonds/Global Depository Receipts is 10% subject to applicable surcharge & education cess. [Section 115AC]. iv. The Finance Act, 2021 has amended section 115AD to include within its scope the Category-III AIF which is located in IFSC (Specified Funds) and Investment division of an offshore banking unit being Category-I FPI (IOBU) referred to under Section 10(4D). Tax on approved Foreign Institutional Investor (FII)/ Foreign Portfolio Investor (FPI) is as follows: • Income by way of interest on securities – 20% (and 10% in case of Specified Funds / IOBU) • Income by way of dividend on shares – 20% (and 10% in case of Specified Funds/IOBU) • Short-term capital gain on sale of other securities – 30% • Short-term capital gain on sale of listed shares with STT, units – 15% • Long-term capital gain on sale of other securities – 10% • Long-term capital gain on sale of listed shares and securities with STT, units – 10% subject to grandfathering (Refer 13 H hereinbelow for further details) • Interest referred to in section 194LD – 5% [Section 115AD] Further, definition of the term “Capital Asset” has been amended to provide that securities held by FIIs in accordance with the SEBI regulations

FEMA and International Taxation 5.70 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication will be regarded as Capital Asset and not as stock-in-trade. v. Income of non-resident sportsman (who is not citizen of India) or sports associations or institutions, by way of participation in India in any game other than section 115BB or sports; or advertisement; or contribution of articles in newspapers, magazines or journals, is chargeable to tax @ 20% subject to applicable surcharge and education cess [section 115BBA]. vi. Income of Non-Resident entertainer (who is not citizen of India) such as musicians, radio, television or theatre artists) arising from performance in India, is chargeable to tax @ 20% subject to applicable surcharge & education cess [section 115BBA]. viii. Winnings from lotteries, crossword puzzles, or race including horse race (not being income from activity of owning and maintaining race horse) or card game and other game of any sort or from gambling or betting of any form or nature or net winnings from online game is chargeable to tax @ 30% subject to applicable surcharge & education cess [section 115BB and section 115BBJ]. viii. Deemed accrual of receipts – At present, a receipt of money or immovable property or specified movable property (in excess of the specified amount) without consideration or for inadequate consideration is taxed in the hands of the recipient under section 56(2)(x). With the insertion of Section 9(1)(viii), receipt by a person outside India from a person resident in India on or after the 5th day of July, 2019 shall be deemed to accrue or arise in India. This provisions have been extended to Not Ordinarily Resident vide Finance Act 2023. However, the existing exceptions provided in section 56(2)(x) continue to apply to such receipts. ix. Summary of withholding tax applicable on dividend income received by Non-Resident under the Income-tax Act, 1961 Section (chargeability of income) Section (withholding of tax) Nature of Income Rate of TDS (Payee is any other non-resident) Rate of TDS (Payee is a foreign company) Section 115AC Section 196C Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency 10% 10% Section 115AD Section 196D Dividend income of FPIs/ Specified Funds/IOBU from securities 20%* - FPIs 10% - Specified Funds/IOBU 20%* - FPIs 10% - Specified Funds/IOBU Section 115E Section 195 Dividend income of nonresident Indian from shares of an Indian company purchased in foreign currency. 20%* – Section 115A Section 195 Dividend income of a nonresident in any other case 20%* 20%* * However, in a case to whom a particular DTAA applies, TDS shall be deducted at the rate as stated above or the rate as per the applicable DTAA, whichever is lower upon furnishing of a tax residency certificate.

Taxation of Non-Residents 5.71 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication (5) Salary income of Non-resident during short stay in India Any remuneration received by foreign citizen as an employee of a foreign enterprise for services rendered by him in India is exempt, provided the following conditions are fulfilled— a. The foreign enterprise is not engaged in any trade or business in India; b. His stay in India does not exceed in the aggregate a period of 90 days in such previous year; and Such remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act [Section 10(6)(vi)]. (6) Business Income of Non-resident a. Income from business of operation of ship taxable at 7.5% of the gross receipts from such business [section 44B]. b. Income from business of providing services or facilities in connection with plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils including petroleum and natural gas is taxable at 10% of gross receipt from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. No set off of unabsorbed depreciation and brought forward losses will be allowed when the profits are taxed as per the provisions of presumptive taxation scheme (introduced by Finance Act 2023). [section 44BB]. c. Income from business of operation of aircraft taxable at 5% of the gross receipts from such business [section 44BBA] d. Income of foreign company from business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government is chargeable at 10% of the gross receipts from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. Such income tax return will be subject to scrutiny assessment. No set off of unabsorbed depreciation and b/f losses will be allowed when the profits are taxed as per the provisions of presumptive taxation scheme (introduced by Finance Act 2023) [section 44BBB] e. In any other case, for computing the business income of non-resident, expenditure in the nature of head office expenses is allowable at least of: • Up to 5% of the adjusted income as specified in section; or • Actual expenditure attributable to business in India [section 44C]. f. Income from storage of crude oil in India – Exemption under section 10(48A) Any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil there-from to any person resident in India shall not be included in the total income, if, – – Such storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government; and – Such agreement or arrangement are notified by the Central Government. g. Foreign Companies engaged in mining of diamonds – Income shall not be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities which are confined to display of uncut and unassorted diamonds in any notified special zone.

FEMA and International Taxation 5.72 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication Expansion of scope of business connection The current Explanation 2 to section 9(1)(i) relates to the definition of business connection through dependent agents. With an objective to align with Article 12 of the Multilateral Instrument (MLI) forming part of the BEPS Project to which India is a signatory, Explanation 2(a) has been substituted. It now extends the scope of business connection to include any business activity carried on through an agent that habitually concludes contract or habitually plays a principal role leading to conclusion of contract by that non-resident and the contracts are: – In the name of that non-resident; or – For the transfer of ownership of, or for granting the right to use of, the property owned by that non-resident or that nonresident has the right to use; or – For the provision of services by that nonresident – The exclusion in the existing Explanation 2(a) for activities limited to the purchase of goods for the non-resident is now deleted. The impact of this exclusion is to be read along with Explanation l(b) of the same section which states, “in the case of nonresident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.” With effect from 1 April 2022, the above business shall not include business connection in India on account of significant economic presence. Significant economic presence resulting in Business Connection The Finance Act, 2018 inserted Explanation 2A to section 9(1)(i) w.e.f. 1st April 2019 to clarify that the SEP of a non-resident in India shall constitute “business connection” in India. While existing Explanation 2A is omitted, a new Explanation 2A with modified definition of SEP has been inserted which defines SEP to include transactions in respect of any goods, services or property carried out by a non-resident with any person in India. Further, systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India will also result in SEP. For this purpose, the threshold limit of interactions resulting into SEP are prescribed in Rule 11UD. The words “through digital mean” in erstwhile Explanation 2A are deleted. Consequently, interactions with users in India by any means shall constitute SEP. Clause (a) of Explanation 1 to section 9(1)(i) provides that only such part of income from business which is reasonably attributable to the operations carried out in India is considered deemed to accrue or arise in India. A corresponding change in clause (a) of Explanation 1 to section 9(1)(i) is made to provide that the provisions contained therein shall not apply to the business having business connection in India on account of SEP. It is also provided that the newly inserted Explanation 3A relating to income attributable to the operations carried out in India shall also apply to cases where business connection is established through SEP. Clause (iib) is inserted in section 295(2)(b) to empower the Board for making rules to provide for the manner in which and the procedure by which the income shall be arrived at in the case of transactions or activities of a non-resident. This amendment would apply irrespective of whether or not:- (i) the agreement for such transaction or activities is entered in India; or (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India The following shall be regarded as significant economic presence of the non-resident in India with effect from the 1 April 2022. – Transaction in respect of any goods, services or property carried out by a non-resident

Taxation of Non-Residents 5.73 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed (prescribed limit - INR 2 crores); or – Systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India as may be prescribed (prescribed limit - 3,00,000 users). In such cases, only so much of income as is attributable to above transaction or activities shall be deemed to accrue or arise in India. Section 9A-Provisions for NR Fund Managers Fund managers in India not to constitute Business Connection in India. Section 9A has been inserted w.e.f. April 1, 2016 which states that – a. In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund, and b. An eligible investment fund shall not be said to be resident in India for the purpose of section 6 merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India. The above relaxation is subject to fulfilment of conditions as spelled out in Section 9A(3). Further, one of the conditions for an investment fund to be eligible for the special regime is that the monthly average of its corpus shall not be less than INR 100 crore. Where the fund has been established or incorporated in the previous year, instead of the monthly average condition for eligibility, the corpus of fund is required to be not less than INR 100 crore at the end of period of 12 months from the last day of the month of incorporation. It is provided that the monthly average condition for eligibility shall not apply in the year in which the fund is being wound up. Section 9A(8A) has been inserted to provide relaxation or modification as may be prescribed from the conditions specified u/s 9A(3) and 9A(4) if such fund manager is located in an IFSC and has commenced its operations on or before the 31/03/2024. As a measure of providing certain relaxation in the above conditions It is provided • that for the purpose of calculation of the aggregate participation or investment in the fund, directly or indirectly, by Indian resident, contribution of the eligible fund manager during first three years up to INR 250 million shall not be taken into account; • to allow the offshore fund to satisfy the aforesaid corpus condition where the fund has been established/incorporated in the previous year, within twelve months from the last day of the month of its establishment/ incorporation. Further, for the application of section 9A, the CBDT has prescribed Rule 10V, Rule 10VA and Rule 10VB for providing guidelines, taking approvals and filing annual statements in order to comply with certain conditions stated u/s 9A. (7) Indirect Transfer of Shares The Finance Act, 2012 had inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia, included insertion of Explanation 5 in section 9(1)(i) w.e.f. 1-4-1962. The Explanation 5 clarified that ‘an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Proviso to Explanation 5 has been inserted to clarify that Explanation 5 shall not apply to

FEMA and International Taxation 5.74 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication any asset or capital asset, being investment held by a non-resident, directly or indirectly, in a Foreign Institutional Investor (as referred to in section 115AD Explanation clause (a)) and registered as Catergory-I or Category-II Foreign Portfolio Investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (retrospectively applicable from AY 2012-13). A new proviso has been inserted to Explanation 5 w.e.f 1st April 2020 which provides for exemption from the applicability of indirect transfer provisions to investments held directly or indirectly in (only) Category I FPIs. However, the Finance Act 2020 has also provided for a grandfathering of the exemption with respect to investments held in Category I FPIs or Category II FPIs prior to September 2019. It is now provided that the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets (without reducing the liabilities) exceeds the amount of 10 crore rupees; and represents at least 50% of the value of all the assets (without reducing the liabilities) owned by the company or entity, as the case may be. The value of assets shall be Fair Market Value (to be computed as per method notified in the rules). It is further clarified that the term “specified date” shall be the last date of the previous accounting period of the company/entity or, in cases where the total book value of the assets on date of transfer exceeds the book value on the last day of previous financial year by 15%, then the specified date shall be the date of transfer. However, ‘book value’ of the assets is to be considered as against ‘FMV’ in case where the date of transfer is taken to be the ‘specified date’ as above. (8) Taxation of Royalty & Fees for Technical Services (FTS) received by Non-residents A. Royalties and fees for technical services received by non-residents (not being company) or a foreign company (provided income is not attributable to a permanent establishment in India) from an Indian concern or the Government are taxed at a uniform rate of 10%. The date of agreement under which such income is received will henceforth be irrelevant [section 115A(1)(b)]. Section 9(1)(vi) of the Act defines the taxability of royalty income in India and had defined royalty to include transfer of all or any rights (including the granting of licence) in respect of patent, invention, model, design and secret formula or process or trademark or similar property. The definition of ‘Royalty’ is now modified to even include consideration received from the sale, distribution or exhibition of cinematographic films under its scope. Section 9(1)(vii) of the Act defines FTS, as fees for rendering of Managerial, Technical or Consultancy services. It is interesting to note that these three categories of services do not include ‘commercial services’ such as services provided by Commission Agents, Freight & Forwarders, Transportation services and similar other services. The relaxation of not filing Return of Income is available only in respect of dividend income (referred to in section 115- A), Interest Income (referred to in section 115A), receipts in the nature of royalty and fees for technical services on which tax has been deducted as per rates specified under section 115A [section 115A(5)]. B. Royalties and fees for technical services received by non-resident (not being company) or a foreign company from an Indian concern or the Government in pursuance of agreement entered after 31-3-2003, if the non-resident has a Permanent Establishment in India or renders

Taxation of Non-Residents 5.75 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication professional services from a fixed place shall be taxed on net income [section 44DA]. C. Any income by way of royalty or fees for technical services arising to any foreign company (as may be notified by the Central Government from time-to-time) under an agreement entered into with that Government for providing services in connection with security of India is exempt [section 10(6C)]. (9) Provisions to promote International Financial Services Centres (IFSC) In order to encourage IFSCs, certain tax incentives have been provided as follows – The transfer of a bond or Global Depository Receipt (GDR) referred to in section 115AC(l), or rupee denominated bond· of any Indian company, or derivative, executed by a non-resident on a recognised stock exchange located in any IFSC shall not be considered as a transfer under newly inserted section 47 (viiab) if the consideration for the transfer is paid in foreign currency. As a result, capital gains from such transaction would not be taxable. Further, a unit located in an IFSC, which derives its income solely in convertible foreign exchange, shall be liable to AMT at a reduced rate of 9% as against 18.5%. Incentives to IFSC/IFSC Units A. Increase in the quantum of deduction for IFSC units Currently, profit-linked deduction is available to units of an IFSC of (i) 100 percent of income for first five years, and (ii) 50 percent of income for the next five years. To incentivize operation of units in IFSC, amendment made to increase the quantum of deduction for IFSC units under section 80LA to 100 percent of income for any 10 consecutive years out of 15 years, beginning from the year of obtaining the requisite permission for setting up the unit. B. Restriction for no deduction under Chapter VI-A not to apply to IFSC units Currently, interest and other specified income of NRs and foreign companies is taxed on gross basis under section 115A, and no deduction is available in relation to such income under Chapter VI-A, which inter alia includes section 80LA, that gives tax deduction to an IFSC unit. It is amended to provide that the conditions in sub-section (4) of section 115A will not apply to deduction allowed under section 80LA to a unit of an IFSC. C. Exemption for interest payable to a NR The amendment made to provide an exemption under section 10 for interest payable to an NR by an IFSC unit in respect of monies borrowed by it on or after 1 September 2019. D. Exemption for transfer by category III AIF / Investment division of an offshore banking unit being Category-I FPI The benefit of newly inserted exemption provision i.e. section 10(4D) for transfer of a capital asset referred to u/s 47(viiab) on a recognized stock exchange located in IFSC is extended to category III AIF which is located in IFSC of which all the units are held by NRs and Investment division of an offshore banking unit being Category-I FPI which has commenced its operations on or before the 31st day of March, 2024 which fulfils such conditions including maintenance of separate accounts for its investment division, established or incorporated in India and deriving income solely in convertible foreign exchange: The type of capital asset covered under the exemption is proposed to be widened to include such other securities as may be notified by the CGT.

FEMA and International Taxation 5.76 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication E. Transaction not regarded as transfer u/s 47(viiac) in relation to Indian resulting fund located in IFSC. The Finance Act, 2021 had inserted new sub-clause (viiac) under section 47 to provide that the transfer of capital asset from Non-resident original fund to Indian resulting fund located in IFSC would not be regarded as transfer. Similar exemption is provided to the unit holders of the original fund that receives similar right in resulting fund under Section 47(viiad). Finance Act 2023 has extended the date for transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund in case of relocation to 31st March, 2025 from current limitation of 31st March, 2023 retrospectively from AY 2023-24. F. Section 10(4E) provides exemption to income arising from transfer of nondeliverable forward contract entered into with an offshore banking unit of IFSC subject to certain condition as may be prescribed. G. Section 10(4F) provides exemption to royalty or interest income derived by non-resident on account of lease of an aircraft by a unit in IFSC subject to certain condition as may be prescribed if the unit has commenced operation on or before 31-03-2024. H. New section 10(4G) inserted to provide exemption to any income received by a non-resident from portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident, in an account maintained with an Offshore Banking Unit, in any IFSC, to the extent income accrues or arises outside India and is not deemed to accrue or arise in India I. The Finance Act, 2021 had amended section 115AD to include within its scope the Category-III AIF which is located in IFSC (Specified Funds) and Investment division of an offshore banking unit being Category-I FPI (IOBU) referred to under Section 10(4D). The concessional rate of tax on approved for specified funds and IOBU is as follows: • Income by way of interest on securities – 10% • Income by way of dividend on shares – 10% J. No tax on income distributed by specified mutual funds The amendment made towards that no additional tax will be payable on income distributed on or after 1 September 2019 by a mutual fund on its income derived from transactions made on a recognised stock exchange located in any IFSC, subject to the following conditions: – Mutual fund is located in an IFSC. – Mutual fund derives income (received or receivable) solely in convertible foreign exchange. – All the units of the mutual fund are held by NRs. K. Tax Incentives In case of Non-Residents, Income on transfer of off shore derivative instruments (ODI) (commonly known as participating notes) entered into with IFSC Banking units (IBU) is exempted from tax under section 10 (4E). Presently, income from investments made by the IBU’s is taxed twice – at the time of receipt by the IBU and at the time of distribution to non-resident Overseas Derivative Instrument holders. To remove double taxation, in the hands of IBU as well as non-resident ODI holders, Finance Act 2023 has provided exemption on the income distributed by the IBU to Non-Residents, provided the income is taxed in the hands of the IBU. (10) Double Taxation Relief – Section 90 / 90A All provisions discussed above are subject to DTAA entered into with various countries or with any specified association in a specified territory

Taxation of Non-Residents 5.77 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication outside India. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the taxpayer would be applicable. In order to claim treaty benefits the non-resident taxpayer shall be required to provide certificate of his being a resident of country outside India, i.e., a Tax Residency Certificate (TDC. Such non-resident would also need to provide such other documents and information, ‘as may be prescribed’. In furtherance of this provision, Form 10F prescribes the information to be provided by a taxpayer. However, a taxpayer may not be required to provide the information in Form 10F, or any part thereof, if the necessary information is already contained in the Tax Residency Certificate. Further, Now, it is mandatory to furnish Form 10F electronically. However, for certain category of Non-resident Taxpayers who are not having PAN and not required to have PAN as per relevant provisions of Income-tax Act,1961 are exempted from mandatory electronic filing of Form 10F till 31st March 2023 which is now extended to 30th September 2023. Finance Act, 2017 has inserted Explanation 4 in both sections, clarifying that where any ‘term’ used in an agreement entered into under subsection (1) of sections 90 and 90A of the Act, is defined under the said agreement, the said term shall be assigned the meaning as provided in the said agreement and where the term is not defined in the agreement, but defined in the Act, it shall be assigned the meaning as defined in the Act or any explanation issued by the Central Government. Section 90(1) empowers the Central Government to enter into Double Taxation Avoidance Agreement (DTAA) with the Government of any country outside India. One of the main purposes of a DTAA is to prevent double taxation of income. Similarly, section 90A(1) empowers any specified association in India to enter into DTAA with any specified association in the specified territory outside India. Recently, India has signed, ratified and deposited the Multilateral Instrument (MLI) with OECD, along with its list of Covered Tax Agreements (CTAs) sought to be modified by the MLI. The same will have effect on some of India’s DTAA with effect from 1st April 2020. The Article 6(1) of the MLI provides for addition of an amended Preamble in tax treaties. Now, section 90(1)(b) and section 90A(1)(b) are amended to incorporate the language of the Preamble of the MLI as follows: “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory)”. (11) Special provisions for computation of capital gains on shares & debentures of Indian companies First proviso to section 48 provides that while computing capital gains/loss, if any, on sale of shares or debentures purchased by a nonresident in foreign currency, the sale proceeds, expenditure on transfer and cost of acquisition of such shares or debentures must be converted in the same currency in which the original investment was made. Resultant capital gains/ loss then needs to be reconverted into rupee to arrive at taxable capital gains/loss. The benefit of indexation will not be available in such cases. (12) Special provisions for NRIs – Chapter XIIA A. Section 115C i. “Non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not a “resident”. A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. ii. “Investment Income” means any income derived from a foreign exchange asset.

FEMA and International Taxation 5.78 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication iii. “Foreign Exchange Asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to, in convertible foreign exchange. iv. “Specified asset” means any of the following assets, namely:— • Shares in an Indian company; • Debentures or deposits with an Indian company, not being a private company; • Any security of the Central Government; • Other notified assets (no such asset has yet been notified). B. Section 115D & Section 115E – Computation of Income Particulars Investment Income LTCG Deduction for expenses Not allowed As per normal provision, Indexation not allowed Chapter VI-A deduction Not allowed Not allowed Tax Rate 20% 10% The above rates are subject to applicable surcharge and education cess. C. Section 115F – Exemption of long-term Capital Gains Capital Gains arising from transfer of foreign exchange asset, is exempt from tax if the following conditions are fulfilled: i. The asset transferred must be a long-term capital asset; ii. Net consideration must be invested in certain specified assets; iii. Investment to be made within 6 months of transfer; iv. If only a portion of the net consideration is reinvested, then proportionate exemption is allowed; v. New asset must be held for at least three years. D. Section 115G – Option not to file income tax return NRI need not file an income tax return if – i. His total income consists only of investment income or income by way of long-term capital gains or both; and ii. TDS has been deducted from such income as per the provision of Income-tax Act. E. Section 115H – Continuation of benefit after NRI becomes resident Chapter XIIA shall continue to apply to investment income even after NRI becomes a resident, if he furnishes a declaration along with return of income to that effect. The benefit shall continue to apply to him in relation to such income until the transfer or conversion into money of such asset. This benefit does not apply to dividend income from shares. F. Section 115I – NRI may opt out of Chapter XIIA A non-resident Indian may elect not to be governed by the provisions of Chapter XII-A for any assessment year by furnishing a written declaration to Assessing Officer with his return of income. If he does so, his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act. G. Section 112 – Tax on long term Capital Gains The existing provisions of clause c of sub-section (1) of section 112 provides for tax rate of 10% on long term capital gains arising on transfer of unlisted securities in case of a non-resident (not being a company) or a foreign company. With effect from A.Y. 2017-18, this section is also made applicable to transfer of shares of a company not being a company in which public are substantially interested.

Taxation of Non-Residents 5.79 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication H. Section 112A – Computation of tax on long term Capital Gains in respect of listed equity shares, etc. Please refer capital gains section for this. (13) Mandatory quoting of PAN (other documents as may be prescribed) by non-resident to avoid tax withholding at higher rate Provisions of mandatory requirement of PAN as per Section 206AA are as follows: • The payee should furnish its PAN to the payer, failing which the payer would be liable to withhold tax at the higher of following rates – i. At the rate specified in the relevant provision of this Act; or ii. At the rate or rates in force; or iii. At the rate of 20%. • The Revenue Officers are prohibited from issuing any certificate for NIL withholding or lower withholding of taxes if the application filed u/s. 197 for this purpose does not contain the PAN of the payee. • Declaration furnished u/s. 197A shall not be valid unless the person furnishes his PAN in such declaration. • The PAN of the payee must be referred in all correspondence, Acts, vouchers and other documents exchanged between the parties. PAN would be required if tax is ‘deductible’. In case where tax treaty provisions are more beneficial and because of access to treaty (for accessing treaty TRC is MUST) tax is not deductible, the provisions of section 206AA would not be applicable. Higher rate of tax prescribed by Income-tax Act cannot override Tax Treaty Rate: Pune ITAT in case of DDIT vs. Serum Institute of India Limited, ITA No. 792/PN/2013 dated 30-3-2015 (A. Y. 2011-12) has addressed the uncertainty - whether provisions of Section 206AA override section 90(2) which provides tax treaty shelter to non-residents. The Tribunal held that while section 206AA is not a charging section, it contains procedural provisions dealing with collection of taxes and hence, section 206AA which provides for a higher rate of tax (20%) in cases where PAN details are not provided, does not override section 90(2) of the Act. Further, as per 206AA(7) of the Act, the provisions of section 206AA will not apply to non-resident not being a company or to foreign company in respect of: i) payment of interest on long-term bonds as referred to in section 194LC and ii) any other payment subject to such conditions as may be prescribed. Therefore, all payments to non-residents would not attract higher rate of TDS u/s. 206AA on furnishing of alternative documents as may be prescribed by CBDT. As per Notification No. 53/2016 dated 24th June 2016 issued by CBDT, Rule 37BC has been inserted. Further the Income-tax (17th Amendment) Rules, 2020 has amended Rule 37BC to also include “dividend income”. The provision of Rule 37BC which reads as under: “37BC. Relaxation from deduction of tax at higher rate under section 206AA.- 1. In the case of a non-resident, not being a company, or a foreign company (hereafter referred to as ‘the deductee’) and not having permanent account number the provisions of section 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical services dividend and payments on transfer of any capital asset, if the deductee furnishes the details and the documents specified in sub-rule (2) to the deductor. 2. The deductee referred to in sub-rule (1), shall in respect of payments specified therein, furnish the following details and documents to the deductor, namely :-

FEMA and International Taxation 5.80 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication i) name, e-mail id, contact number; ii) address in the country or specified territory outside India of which the deductee is a resident; iii) a certificate of his being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate; iv) Tax Identification Number of the deductee in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.” As per Rule 37BC, details required therein should be required to be obtained to avoid higher rate of deduction of tax i.e. 20% as per Section 206AA of the Act. The Income-tax (19th Amendment) Rules, 2020 w.e.f 10-08-2020 has inserted new Rule 114AAB which specifies that provisions of Sec. 139A for mandatory obtaining PAN shall not apply in the case where the non-resident does not earn any income in India, other than the income from investment in Category I or Category II Alternative Investment Fund [AIF] located in IFSC in India. The TDS on such income is deducted by Specified Fund in accordance with Sec. 194LBB and the non-resident furnishes the specified details and documents to the Specified Fund, class or classes of persons. (14) Applicability of Section 115JB to Foreign Companies Provisions of MAT shall not apply to foreign company if such foreign company i. Is a tax resident of country (or a specified territory) with which India has tax treaty and such foreign company doesn’t have PE in India; or ii. The foreign company belongs to a country with which India doesn’t have tax treaty and is not required to seek registration under any law for the time being in force relating to companies. This is a retrospective amendment and takes effect from 1st day of April, 2001. The Finance Act, 2021 has amended section 115JB to provide that No MAT is payable on dividend received by a foreign company on its investment in India which is chargeable to tax at the rate or rates specified in Chapter XII. (15) Disclosure by Resident Indian of overseas assets and authority to sign any overseas account and other financial interests Resident and Ordinarily Resident Indians having overseas assets or having an authority to sign any overseas account, etc. will have to disclose such facts in Return of Income in Schedule FA. The provision will also apply in a situation where resident is otherwise not required to file return of income; however, in the situation referred above, it will be mandatory for such Resident Indian to file Return of Income. This requirement does not apply to individuals who are Non-resident or Resident but Not Ordinarily Resident. 2

Transfer Pricing 5.81 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication IV. Transfer Pricing (1) Substantive Provisions 1. Section 92(1) provides that: i) There must be “income arising”; ii) Such income must arise from an “international transaction” or a “specified domestic transaction” (“SDT”); iii) Such income shall be computed having regard to the “arm’s length price” (“ALP”). 2. Further, allowance for any expenses or interest arising from such transactions, or cost sharing arrangements is also to be determined having regard to ALP. 3. If the application of the ALP results in reducing the chargeable income or increasing the loss from an Indian Incometax perspective, then the Transfer Pricing Regulations shall not apply. 4. The term “international transaction” is defined in section 92B. The salient features of this definition are as under : i) Use of word “means” shows that it is an exhaustive definition; ii) The term “transaction” is defined in an inclusive manner in section 92F(v); iii) The transaction has to be between two or more “associated enterprises” (“AEs”), which is defined in section 92A; iv) At least one of the parties to the transaction must be a “non-resident”. As per section 2(30), for the purposes of section 92, the term “non-resident” includes a resident but not ordinarily resident; v) The transaction may be for purchase, sale, transfer, lease or use of tangible or intangible property, provision of services and includes - a) Cost sharing arrangement, for the allocation or apportionment of, or contribution to any cost or expense incurred in connection with a “benefit, service or facility” provided; b) Capital financing, including borrowing, lending, guarantee, purchase or sale of marketable securities, etc.; or c) Business restructuring or reorganisation, irrespective of whether it has a bearing on the profit, income, losses or assets of the enterprises at the time of the transaction or at any future date; or d) Any other transaction having a bearing on profits, income, losses or assets of the assessee. Further, “intangible property” is defined in the Explanation to Section 92B to include intangible assets relating to marketing, technology, artistic, data processing, engineering, customer, contract, human capital, location, goodwill, etc., along with examples of each of these types of intangible assets. vi) Section 92B(2) deems a transaction of the assessee with an unrelated enterprise to be an international transaction between two associated enterprises, if there exists a prior agreement between such unrelated enterprise and an AE of the assessee, irrespective of whether the unrelated party is a resident or a non-resident. 5. The term “enterprise” is defined in section 92F(iii) to mean a “person” including a “permanent establishment” of a person who is, or has been or is proposed to be

FEMA and International Taxation 5.82 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication “engaged in” certain specified activities. Such activity or business may be carried on directly or through one or more of the units or divisions or subsidiaries, which may be located at the same place where the enterprise is located or at a different place(s). 6. The term “Permanent Establishment” is defined to include a fixed place of business through which the business of the enterprise is wholly or partly carried on. 7. As defined in Section 92A(1), an “enterprise” is an AE, if: i) It participates directly or indirectly in the management, control or capital of the other enterprise . . . . . Situation 1 – Direct Participation Participates in Co A management or Co B capital or control Situation 2 – Participation through Intermediary Participates in Co A Co C management or Co B capital or control Intermediary Or, ii) Any person who participates in the management, control or capital of an enterprise, also participates in the management, control or capital of the other enterprise. Co A Participates in Participates in management or management or capital or control capital or control Co C AE Co B As per Section 92A(2), in respect of the following circumstances, two enterprises shall be deemed to be AEs: Section Different situations AE Relationship 92A(2) (a) A holds at least 26% of the voting power of B; or (A & B are AEs) 92A(2) (b) A holds at least 26% of the voting power of B & C; or (B & C are AEs) 92A(2) (c) A advances a loan to B, constituting at least 51% of the book value of total assets of B; or (A & B are AEs) 92A(2) (d) A guarantees at least 10% of the total borrowings of B; or (A & B are AEs) 92A(2) (e) A appoints, more than half the directors of B; or one or more executive directors of B; or (A & B are AEs) 92A(2) (f) A appoints, more than half the directors of B & C; or one or more executive directors of B & C; or (B & C are AEs) 92A(2) (g) The manufacture or processing of goods or articles or business carried on by A is wholly dependent on the use IPRs (knowhow etc.) belonging to B or in respect of which B has exclusive rights; or (A & B are AEs)

Transfer Pricing 5.83 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication 92A(2) (h) At least 90% of the raw materials and consumables required for the manufacturing or processing of goods or articles carried out by A, are supplied by B or by persons specified by B, where the prices and other conditions relating to the supply are influenced by B; or (A & B are AEs) 92A(2) (i) The goods manufactured or processed by A are sold to B or persons specified by B, where the prices and other conditions relating thereto are influenced by ‘B’; or (A & B are AEs) 92A(2) (j) Where A is controlled by B (an individual) and C is controlled by B or his relative or jointly by B and his relative; or (A & C are AEs) 92A(2) (k) Where A is controlled by B HUF, and C is controlled by a member of B HUF or by a relative of a member of B HUF or jointly by such member and his relative; or (A & C are AEs) 92A(2) (l) Where A is a firm, AOP or BOI and B holds at least 10% interest in A; or (A & B are AEs) 92A(2) (m) There exists any relationship of mutual interest between A and B as may be prescribed. (No relationship prescribed as yet) (A & B are AEs) Mere participation by A in the management, control or capital of B or the commonality of control, management or capital of A and B may not be sufficient to make A and B associated enterprises unless one or more of the conditions specified in the above table are satisfied. 8. Section 92BA defines the term “Specified Domestic Transaction”. The salient features of this definition are as under: i) Use of word “means” shows that it is an exhaustive definition; ii) It covers the following transactions, not being international transactions, where aggregate value of such transactions exceeds ` 20 crores – a) Any transaction, referred to in section 80A or section 80-IA(8), relating to transfer of goods or services between eligible and non-eligible undertakings or units of the same entity, dealing with deductions under sections 10A, 10AA, 10B, 10BA or in any other provisions of Chapter VIA; b) Any business transacted between the assessee and any other person as referred to in section 80-IA(10); c) Any transaction referred to in any other section under Chapter VIA or section 10AA, to which the provisions of sections 80-IA(8) or 80-IA(10) are applicable; d) Any business transaction between the persons referred to in subsection (6) of section 115BAB; e) Any business transaction between the persons referred to in subsection (4) of section 115BAE (inserted by Finance Act 2023) f) Any other transaction as may be prescribed.

FEMA and International Taxation 5.84 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication 9. The term “Arm’s Length Price” (“ALP”) is defined in section 92F(ii) to mean— i) The price which is applied or is proposed to be applied, ii) In a transaction between persons other than AEs, iii) In uncontrolled conditions. 10. Section 92C provides the mechanism of determining the ALP by any of the following six methods: i) Comparable uncontrolled price method: (CUP) a) Comparison of price charged or paid for property transferred or services provided in a comparable uncontrolled transaction. b) Used mainly in respect of transfer of goods, provision of services, intangibles, loans, provision of finance. ii) Resale price method: (RPM) a) Considers the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to an unrelated enterprise. b) Used mainly in case of distribution of finished goods or other goods involving no or little value addition. iii) Cost plus method: (CPM) a) Considers direct and indirect costs of production incurred in respect of property transferred or services provided and an appropriate markup. b) Used mainly in respect of provision of services, joint facility arrangements, transfer of semifinished goods, long- term buying and selling arrangements. iv) Profit split method: (PSM) a) Considers combined net profit of the AEs arising from the international transaction and is split amongst them; b) Used mainly in report of transactions involving integrated services provided by more than one enterprise, transfer of unique intangibles, multiple inter-related transactions, which cannot be separately evaluated. v) Transactional net margin method: (TNMM) a) Considers net profit margin realised by the enterprise from an international transaction entered into with an AE. b) Used in respect of transactions for provision of services, distribution of finished products where resale price method cannot be adequately applied, transfer of semi-finished goods. vi) Any other method as prescribed: a) “Other Method” as per Rule 10AB has been prescribed. b) Any method which takes into account the price which has been or would have been charged or paid, for similar uncontrolled transaction, under similar circumstances, considering all relevant facts. 11. The most appropriate method from the above methods, taking into consideration the nature or class of the transaction, functions performed and such other factors as laid down in Rule 10B, shall be applied for determining the ALP in the manner given in Rule 10C. 12. In a case where the range concept as per Rule 10CA does not apply, and the variation between the ALP determined and the transfer price does not exceed the notified

Transfer Pricing 5.85 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication percentage, (presently allowable variance is 1% of transfer price in case of wholesale trading and 3% of transfer price in all other cases), then the transfer price is deemed to be the ALP. 13. Application of range concept: Where CUP, RPM, CPM or TNMM are used as most appropriate method and a dataset of at least six comparable uncontrolled transactions is obtained using any of these methods, the arm’s length range will be computed as the range beginning from the 35th percentile of the dataset (arranged in an ascending order) and ending at the 65th percentile. The transfer price will be considered to be at ALP if it is within the arm’s length range so derived. If however, the value of the transaction is outside the aforesaid percentile range, the ALP of a transaction shall be taken to be at median or 50th percentile of the dataset. In all the other cases where the range concept is not applicable, ALP will be determined based on the arithmetical mean. 14. Use of multiple year data Use of multiple year data has been permitted for transactions entered into after 31st March 2014. Provisions for use of multiple year data is tabulated as under. Also, for the purpose of below table: Y-0: Current year for the year of transaction Y-1: A year prior to current year Y-2: Two year prior to current year Particulars Most Appropriate Method Applied RPM, CPM and TNMM CUP / PSM Data to be used for selection of comparable uncontrolled transactions • If Y0 data is available – Y0 data • If Y0 data is not available at the time of filing the return– Y-1 data If Y0 data becomes subsequently available at the time of the assessment, then such data is to be used. If Y0 data subsequently available at the time of assessment and the uncontrolled transaction for Y0 is not comparable to the controlled transaction then that entity will be excluded from the dataset of comparables even if it had carried out comparable uncontrolled transaction in Y-1 or Y-2. Rule 10B(5) is not clear Data to be used for computation of ALP • If Y0 data is available – The data of Y0 and either or both of Y-1 and Y-2, in which comparable uncontrolled transactions were entered into • If Y0 data is not available - The data of Y-1 and if comparable uncontrolled transactions were entered into in Y-2, then, the data of Y-2. Single year data Manner of computation of the margin as per the MAM Weighted average price of the comparable uncontrolled transaction for the relevant years out of Y0, Y-1 and Y-2, computed by assigning weights to the quantum of sales/cost/assets employed or the respective base depending on the PLI selected. Not Applicable

FEMA and International Taxation 5.86 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication 15. Section 92C(3) provides that an Assessing Officer (“AO”), after having provided an opportunity to the assessee of being heard, may determine the ALP, on the basis of material or information in his possession, if he is of the opinion that, i) The price charged or paid in an international transaction or SDT has not been determined in accordance with the transfer pricing provisions, or ii) If any information and document relating to an international transaction or SDT has not been maintained in accordance with the provisions, or iii) If the information and data used in computation of ALP is not reliable or correct, or iv) If the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice under section 92D(3). Under such circumstances, the AO may recompute the total income of the assessee having regard to the ALP so determined. In such cases – i) No deduction under sections 10A, 10AA or section 10B or under Chapter VI-A is allowed in respect of the amount of addition to total income. ii) The income of the AE, from which tax has been deducted or was deductible under Chapter XVIIB, shall not be recomputed by reason of such determination. 16. The AO also has powers under section 92CA to refer the transactions to a Transfer Pricing Officer (TPO) with previous approval of the CIT. The TPO would then pass an order determining the ALP after hearing the assessee. Thereafter, the AO will compute the total income having regard to the ALP determined by the TPO. The CBDT has issued revised guidelines for references to TPO, the role of TPO and related issues vide instruction No. 3/2016 dated 10th March, 2016. The guidelines inter alia provides that where the AO has not made any reference to the TPO then the determination of the ALP should not be carried out by the AO and AO should record the same in the body of the assessment order that due to the Board instructions in the matter, the transfer pricing issue has not been examined at all. The AO while completing his assessment where a reference to the TPO was made, are bound to compute the total income of the assessee in conformity with the ALP determined by the TPO. The TPO is empowered to determine ALP of an international transaction or SDT noticed by him in the course of transfer pricing proceedings, even where the said transaction was not referred to him or where the transfer pricing report was not furnished by the assessee. The TPO is also permitted to exercise powers of survey under section 133A of the Act. 17. Secondary Adjustment: i) Section 92CE was introduced by Finance Act, 2017 with effect from AY 2018-19 to provide that where a primary adjustment to the transfer price has been made either by the assessee himself or by the AO or as per the APA or safe harbour rules or Mutual Agreement Procedure, then, the assessee shall make a secondary adjustment in his and the AE’s books of account, so to align with the transfer price determined as above. This provision is intended to remove the difference between the cash account and actual profit of the assessee. ii) The above provisions shall not apply if –

Transfer Pricing 5.87 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication a) The amount of primary adjustment in any year does not exceed ` 1 crore b) The primary adjustment is in respect of AY 2016-17 or earlier. iii) The excess money on account of the primary adjustment, i.e., difference between ALP and transfer price, is required to be repatriated to India within the prescribed time. If not so repatriated, it will be deemed to be advance made by the assessee to its AE and interest shall be computed on the same in the prescribed manner. The said notional interest is Secondary Adjustment. iv) With effect from 1 September 2019: • Assessees have been given an option to pay a one-time additional tax of 18 percent on the excess money or part thereof, in case cash is not repatriated in India within the prescribed time limit. • No tax credit or tax deduction for such additional tax will be available to the taxpayer or any other person. • Notional interest under the secondary adjustment will not apply from the date of payment of additional tax. v) With effect from AY 2018-19, • The provisions of secondary adjustment will apply only on those APAs that are signed on or after 1 April 2017. However, if any tax refund arises on giving effect to the proposed retrospective amendment, such refund will not be granted. • Cash repatriation can be made either in full or in part. • Cash repatriation can be made from any AE that is a non-resident in India. 18. Safe Harbour Rules: Section 92CB provides for the determination of ALP subject to safe harbour rules. Safe harbour is defined to mean circumstances in which the Income-tax authorities shall accept the transfer price declared by the assessee. Rules 10TA to 10TG contain the procedure for adopting the safe harbour, conditions to be met for eligibility, the transfer price to be adopted, the compliance procedure etc. The prescribed safe harbour margin/price, based on which the transfer price declared by an eligible assessee shall be accepted by the TPO. Safe harbour rules to cover determination of profit attributable to a PE • The safe harbor rules [under section 92CB read with Rule 10TA to 10TF] have been expanded to cover profits attributable [under section 9(1)(i) of the Act] to a PE. This will be applicable for AY 2020–21, and subsequent assessment years. • The term “safe harbor” has been expanded to include the income-tax authorities shall accept the transfer price or income, deemed to accrue or arise under section 9(1)(i), as the case may be, declared by the assessee. • The above consequential amended made in the explanation to section 92CB(2). 19. Section 94A, inter alia, provides that if an assessee enters into a transaction where one of the parties to the transaction is a person located in a “notified jurisdictional area” (NJA) then all the parties to the transaction to be deemed to be AE and any transaction entered into with them to be regarded as an international transaction

FEMA and International Taxation 5.88 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication and transfer pricing provisions to apply accordingly. Currently there is no country in the NJA. 20. Limitation of interest deduction: Section 94B has been introduced by Finance Act, 2017 with effect from AY 2018-19 to limit the deduction of interest in certain cases. i) Where an Indian company or Permanent Establishment (“PE”) of a foreign company in India borrows from its AE and incurs interest or similar payment exceeding ` 1 crore on the same, which is deductible in computing income under the head “Profits and Gains from Business or Profession”, and total interest paid or payable by the borrower exceeds 30% of its EBITDA, then such excess or the interest paid or payable to the AE, whichever is lower, shall be disallowed. ii) Where debt is issued by a third party lender against implicit or explicit guarantee or deposit provided by the AE, such debt shall be deemed to be issued by the AE. iii) Excess interest disallowed in a particular year can be carried forward for a period of 8 assessment years immediately succeeding the first assessment year in which it was computed, and allowed as a deduction against the business profits, subject to the limit of maximum allowable interest of 30% of EBITDA. iv) These provisions shall not apply to an entity engaged in the business of banking or insurance or non-banking financial companies as may be notified (inserted by Finance Act 2023). v) Further, in a situation – – where the borrower is an Indian company/ Indian PE of a foreign company and – lender is the Indian PE of a nonresident engaged in the business of banking, – then the provisions of deemed AE (and consequently the disallowance of interest deduction) under section 94B will not apply. (2) Procedural Provisions 1. Section 92D provides that every person who has entered into an “international transaction” or SDT shall keep and maintain the prescribed information and documents which shall be maintained for the prescribed period of 8 years from the end of the assessment year (“AY”). 2. With effect from AY 2017-18, any person, being a constituent entity of an international group, shall also keep and maintain such information and documents in respect of an international group as may be prescribed. Section 92D read with Section 286 provides for the requirement to furnish a countryby-country report (CbCr) to the prescribed Income-tax authority in such manner and form that will be prescribed. The Income Tax (2nd Amendment) Rules, 2020 has amended Rule 10DA w.e.f 01-04-2020 to prescribe the manner in which information and documents is to be maintained and furnished by constituent entity of international group. In the Finance Act, 2018, the following amendments were made in CbCr with a view to improve the effectiveness and reduce the compliance burden of such reporting: The time allowed to the parent entity or Alternate Reporting Entity (ARE), which is resident in India, for furnishing the CbCr is now extended to twelve months from the end of reporting accounting year. The accounting year in respect of which the financial and operational results are required to be reflected in the report. The Constituent entity of an MNE group, which is resident in India, having a nonresident parent shall also furnish CbCr in

Transfer Pricing 5.89 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication case its parent entity outside India has no obligation to file the CbCr report in the latter’s country or territory; The time allowed for furnishing the CbCr, in the case of constituent entity resident in India, having a non-resident parent shall be twelve months from the end of reporting accounting year The due date for furnishing of CbCr by the ARE of an international group whose parent entity is outside India will be the due date specified by that country or territory. ARE must furnish the CbCr with the tax authority of the country or territory of which it is resident The abovementioned amendments would apply retrospectively with effect from 1st April 2017 (AY 2017-18) Due date of CbCR clarified for ARE It has been clarified with retrospective effect from assessment year 2017-18 that in case of an ARE resident in India, the due date of filing CbCR by the ARE in India will be 12 months from the end of the accounting year of the ultimate parent entity, which is not a resident in India. Where the Country-by-Country Report (CbCr) must be filed? CbCr are generally to be filed where the headquarter of the parent company exists. However, if the country where the headquarter of the parent company exists has not implemented CbCr, MNEs should file CbCr in the country where their most significant activities occur and where CbCr is implemented. This is to be made available to tax authorities in all jurisdictions in which the MNE operates. CbCr will give tax administrations a global picture of the operations of MNE Groups. CbCr might be a tough task, but it can provide the tax authorities information to perform high level transfer pricing risk assessments and to evaluate other BEPSrelated risks. Therefore, MNE Groups should now adopt a consistent and harmonised approach for preparing their master file and local files as well as CbC reporting and be prepared for a more detailed information or document requests during an audit. Master file to be filed by every constituent entity • Transfer pricing documentation provisions have been amended to provide that every constituent entity of an international group will be required to file a master file even when there is no international transaction undertaken by such constituent entity. • The assessing officer or CIT(A) cannot obtain master file from the taxpayer. • Penalties for defaults in Master File and CbC reporting Failure to submit the master file by the due date Rs.5,00,000/- Provision of inaccurate particulars in the CbC report Rs.5,00,000/- Failure to Submit or late submission of a CbC report • INR 5,000 per day (where the delay does not exceed one month) • INR 15,000 per day (where the delay exceeds one month) • INR 50,000 per day (for continued default after the issuance of a penalty notice) 3. The AO/CIT may require an assessee, in the course of any proceedings under the Act, to furnish the prescribed information

FEMA and International Taxation 5.90 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication or documents within 10 days from date of receipt of the notice, extendable by a further period of 30 days at the discretion of the AO/ CIT. 4. Every person who has entered into an international transaction is required to obtain an accountant’s report in Form 3CEB one month prior to the due date for filing of return of income, i.e., October 31. 5. The time limit for passing orders by the AO where a reference is made to the TPO for determining the ALP is as under: Particulars Time limit In respect of normal assessment For assessments relating to AY 2018-19 – 30 months from the end of the AY For assessments relating to AY 2019-20 and AY 2020-21 – 24 months from the end of the AY For assessment relating to AY 2021-22 21 months from the end of the AY For assessment relating to AY 2022-23 and subsequent years – 24 months from the end of the AY In case of reopened assessments For notice served on or after 1-4- 2019: 24 months from the end of the FY in which notice under section 148 is served. In case of order under sections 254, 263, 264 For order received or passed, as the case may be, on or after 1-4-2019: 24 months from the end of FY in which the order under sections 254, 263 or 264 is received or passed, as the case may be, by the concerned authority Particulars Time limit In case of search or requisition cases For assessments relating to AY 2018-19 – 30 months from the end of the FY in which the last authorisation for search or requisition was executed. For assessments relating to AY 2019-20 and subsequent years – 24 months from the end of the FY in which the last authorisation for search or requisition was executed. 6. W.e.f. 01-04-2022, revisionary powers u/s 263 have been proposed to be extended to PCCIT or the CCIT or the PCIT or CIT (who is assigned the jurisdiction of transfer pricing) qua transfer pricing orders passed by the TPO u/s 92CA. (3) Advance Pricing Agreement (APA) Sections 92CC and 92CD provide for a framework for Advance Pricing Agreement (APA). The salient features of the APA mechanism inter alia include the following: 1. CBDT can enter into any APA, for determination of the ALP or specifying the manner in which ALP is to be determined, with any person undertaking or contemplating to undertake an international transaction. 2. The manner of determination of ALP in such cases shall be any method as prescribed under Rule 10C with necessary adjustments or variations. 3. The ALP of any international transaction, which is covered under such APA, shall be determined in accordance with the APA. 4. The APA will be valid for such previous years as specified in the agreement, but not exceeding five consecutive previous years. 5. The APA will be binding only on the person and the Commissioner (including Income Tax

Transfer Pricing 5.91 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication authorities subordinate to him) in respect of the transaction in relation to which the agreement has been entered into. 6. The APA will not be binding if there is any change in law or facts having bearing on such APA. 7. CBDT can declare, with the approval of Central Government, any APA as void ab initio, if it finds that the APA has been obtained by fraud or misrepresentation of facts. 8. For the purpose of computing any limitation period the period beginning with the date of such APA and ending on the date of order declaring the agreement void ab initio to be excluded. However, if after the exclusion of the aforesaid period, the period of limitation referred to in any provision of the Act is less than sixty days, such remaining period to be extended to sixty days. 9. Rules 10F to 10T and Rule 44GA prescribe the manner, form, procedure and any other matter generally in respect of the APA. 10. If an application is made by a person for entering into such an APA, all assessment proceedings shall be deemed to be pending in case of such a person. 11. Where a person who has entered into an APA and prior to entering into an APA has furnished a return of income for the previous year to which the APA applies, such person is required to furnish a modified return within a period of three months from the end of the month in which the said APA was entered. 12. If the assessment or reassessment proceedings for an assessment year to which the APA applies are pending on the date of filing of modified return, the AO shall proceed to complete the proceedings in accordance with the APA taking into consideration the modified return so filed. The period of limitation of completion of proceedings in such case to be extended by one year. 13. If the assessment or reassessment proceedings for an assessment year to which the APA applies have been completed before the expiry of period allowed for furnishing of modified return, and a modified return is filed, the AO can assess or reassess or recompute the total income in accordance with the APA. The period of limitation for completion of such assessment or reassessment to be one year from the end of the financial year in which the modified return is furnished. 14. Rollback mechanism: The APA may also apply to previous years preceding the first previous year for which the APA applies as per the rollback mechanism. Salient features of the mechanism are: i) Definition of “rollback year” to mean any previous year, falling within the period not exceeding four previous years, preceding the first of the previous year covered by APA. ii) The international transaction must be the same as the international transaction to which the agreement (other than the rollback provision) applies. iii) The return of income along with Form 3CEB for the relevant rollback years have been furnished by the applicant before the due date. iv) The applicant has requested for applicability of rollback provision for all rollback years in which said international transaction has been undertaken, in Form 3CEDA along with a fee of ` 50 lakhs. v) The rollback provision shall not be provided for a rollback year if a) The determination of ALP of the said international transaction for the said year has been subject

FEMA and International Taxation 5.92 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement; b) The application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year. 15. Summary of the rules pertaining to the APA Scheme are as under: i) Unilateral, bilateral and multilateral APAs may be entered into. ii) For unilateral APA, application will have to be filed with the Director General of Income Tax (International Taxation), for bilateral and multilateral APA, application to be filed with the Competent Authority. iii) Application for pre-filing consultation can be made in Form 3CEC to the DGIT. An anonymous pre-filing can be done where the name of the applicant assessee need not be given. However, the name of the authorised representative appearing on behalf of the assessee will have to be given. iv) After conclusion of the hearing of pre-filing application, the assessee if it so desires may file the final APA application. The final APA application is to be filed in Form 3CED along with payment of the fees. v) The hearing of the APA is a continuous process and involves site visit at the premises of the applicant. vi) In respect of one time transaction, APA can be filed before undertaking the transaction. However, in case of transaction of a continuing nature it shall be filed before the first day of the previous year relevant to the first assessment year for which the application is made. vii) The applicant may withdraw the application of the APA in Form 3CEE at any time before the finalisation of terms of the APA. No refund of the fees will be granted in such cases. viii) The APA will be entered into by the CBDT with the assessee after approval from the Central Government. ix) The APA may be revised if – a) There is a change in the critical assumptions or failure to meet the conditions contained in the APA; b) There is a change in the law that modifies any matter covered in the APA but is not of a nature which renders the APA to be nonbinding; c) There is a request from competent authority in the other country requesting revision of agreement, in case of bilateral or multilateral agreement x) The assessee who has entered into an APA is required to file an annual compliance report to the DGIT in Form 3CEF within 30 days of the due date of filing the income tax return for that year or within 90 days of entering into the APA whichever is later. The DGIT shall forward the copy to the CIT and the TPO having jurisdiction over the assessee. xi) The TPO will carry out a compliance audit for each year covered in the agreement. The time limit for completion of the same is 6 months from the end of the month in which the annual compliance report is filed.

Transfer Pricing 5.93 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication xii) The APA may be cancelled if – a) The compliance audit has resulted in finding of failure on part of the assessee to comply with the terms of the APA, or b) There is failure to file the annual compliance report in time, or c) Annual compliance report contains material errors, or d) Assessee does not agree to the revision of the APA xiii) For bilateral and multilateral APAs, the AE would be required to initiate the APA process in the other country. APA provisions to cover determination of profit attributable to a PE • The scope of the Advance Pricing Agreement (APA) provisions to include determination of profit attributable [under section 9(1)(i) of the Act] to a Permanent Establishment (PE). The benefit of the rollback can also be availed by such PEs. • The provisions will apply to an APA entered into on, or, after 1 April 2020. Assessment order giving effect to APA In case of years covered under the APA, for which the assessment or reassessment has been completed by the due date of modified return, it is now amended to restrict the powers of the assessing officer to modify the assessment order only to give effect to the terms of the APA. (4) Penal Provisions 1. Section 270A Section 270A is applicable with effect from AY 2017-18 for levy of penalty in cases of underreporting and misreporting of income. However, failure to report any international transaction or deemed international transaction or SDT shall be regarded as a case of misreporting of income. The penalty leviable is as under: Under-reporting of income 50% of tax payable Under-reporting of income results from misreporting of income 200% of tax payable The section provides for grant of immunity from imposition of penalty and initiation of prosecution proceedings, on an application being made to the AO, if tax and interest payable based on the assessed income has been paid within specified period and no appeal has been preferred. However, no such immunity is available in case of misreporting of income. The section now provides for levy of penalty in such a case where a return of income has been filed for the first time in response to a notice under section 148. In such a case, if the income assessed is greater than the maximum amount, which is not chargeable to tax, then it will be considered that he has under reported his income. In such a case, the amount of under-reported income shall be computed in the following manner: - In case of a company, firm or local authority, the assessed income itself would be considered as under-reported income. - In other case, the excess of assessed income over the maximum amount not chargeable to tax would be considered as under-reported income. This amendment is applicable retrospectively with effect from 1 April 2017 and will accordingly apply from AY 2017-18. 2. Section 271AA If the assessee – • Fails to keep and maintain the prescribed information and documents or;

FEMA and International Taxation 5.94 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication • Fails to report any international transaction which is required to be reported, or; • Maintains or furnishes any incorrect information or documents. Penalty equal to 2% of the value of the transaction may be levied for each failure. 3. Section 271BA Failure to furnish the accountant’s report may attract penalty of ` 1,00,000/-. 4. Section 271G Failure to furnish the required information and documents may attract penalty of 2% of the value of the transaction for each failure. The power to levy this penalty has also been conferred on the TPO. 5. Section 273B The penalties u/ss. 271AA, 271BA and 271G may not be levied if the assessee establishes reasonable cause for the said failures. (5) Transfer Pricing Rules The Central Government has notified rules for giving effect to the provisions of sections 92C, 92D and 92E of the Act. The gist of the said rules, to the extent not already discussed above, is as under: 1. Rule 10A defines terms used in the rules for determining ALP, i.e., uncontrolled transaction, property, services and transaction. 2. Rule 10B(1) elaborates the manner of determining ALP under each of the methods described in section 92C(1). 3. Rule 10B(2) lays down parameters to be considered in comparing an international transaction or a SDT with an uncontrolled transaction, i.e., i) Contractual terms ii) Specific characteristics of property transferred, or services provided iii) Functions performed, risk assumed, and assets employed iv) Market conditions, which may include location and size of market, government regulations in force, level of competition, etc. 4. Rule 10B(3) provides for adjustment to eliminate material differences between an international transaction or SDT and an uncontrolled transaction, affecting the prices. 5. Rule 10B(4) provides that for the purpose of comparing international transaction or SDT and uncontrolled transaction the data for the relevant financial year or immediately preceding two years be used. However, in respect of transactions entered into after 31st March 2014, multiple year data is permitted to be used as described in point A.14 above. 6. Rule 10C recognises that there cannot be a single method which may be appropriate under all circumstances. It lays down various factors to be considered for determining the most appropriate method in a particular international transaction or SDT. 7. Rules 10D(1) and 10D(3) prescribe that the information and documents required to be maintained by every person who has entered into international transaction or SDT, supported by authentic documents. 8. Rule 10D(2) grants exemption from maintaining prescribed information and documents, if the aggregate value of international transactions, as recorded in the books of account, does not exceed ` 1 crore. 9. Rule 10D(2A) lays down the minimum documents to be maintained by an assessee opting for safe harbour rules. 10. Rule 10D(4) requires that the information and documents be contemporaneous. 11. Rule 10DA prescribe the information and documents to be furnished and maintained by constituent entity of international group as defined u/s 286. 2

Equalisation Levy 5.95 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication The Finance Act, 2016 introduced a new Chapter VIII called Equalisation Levy (‘EL’) which came into force from 1st June, 2016. Further its scope got extended substantially by the Finance Act, 2020. “Equalisation Levy” means the tax leviable on consideration received or receivable for any “specified service” as defined under the Chapter and on consideration received or receivable for “e-commerce supply or services” made or provided or facilitated on or after the 1st day of April, 2020. Any income which is chargeable to tax as royalty or fees for technical services shall not be included as income for the purpose of Equalization Levy. (1) Charge of Equalisation Levy 1. EL on Specified Services: Equalisation Levy is applicable at 6% of the amount of consideration for any specified service received or receivable by a person, being a non-resident from— i. A person resident in India and carrying on business or profession; or ii. A non-resident having a permanent establishment (‘PE’) in India. Key definitions: a. The term ‘specified service’ is defined to mean online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf. b. The term ‘online’ means a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network. V. Equalisation Levy Exceptions to the above: a. The non-resident providing the specified service has a PE in India and the specified service is effectively connected with such PE; b. The aggregate amount of consideration in a previous year does not exceed one lakh rupees; or c. Where the payment is not for the purposes of carrying out business or profession. The person making the payment is liable for the deposit of EL to the Government treasury and all related compliances viz., the filing of EL return, etc. The CBDT has notified the Equalisation Levy Rules, 2016, which lay down the procedural framework for implementation, including prescribing forms for filing of annual return and appeals. 2. EL on ‘e-commerce supply or services’: Equalisation Levy is also applicable at 2% of the amount of consideration received or receivable after 1st April 2020 by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it i. to a person resident in India; or ii. to a non-resident in certain specified circumstances; or iii. to a person who buys such goods or services or both using internet protocol address located in India. Exceptions to the above are: i. Where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services

FEMA and International Taxation 5.96 R7ima5ine Celebrating 1949 - 2023 BCAS REFERENCER 2023-24 61 Years of Continuous Publication is effectively connected with such permanent establishment; ii. Where the equalisation levy is leviable under section 165; or iii. Sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than two crore rupees during the previous year. Consideration received or receivable from e-commerce supply or services shall include: i. consideration for sale of goods irrespective of whether the e-commerce operator owns the goods ii. consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator. This levy is applicable on the online sale of goods or online provision of services or a combination of both by the non-resident e-commerce operator. (2) Definitions i. E-commerce operator- A non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. ii. E-commerce supply or servicesa. online sale of goods owned by the e-commerce operator; or b. online provision of services provided by the e-commerce operator, or c. online sale of goods or provision of services or both, facilitated by the e-commerce operator.; or d. any above combinations of activities iii. Specified circumstances would meana. sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and b. sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India iv. Online sale of goods and online provision of services shall include one or more of the following activities taking place online: a. Acceptance of offer for sale; b. Placing the purchase order; c. Acceptance of the purchase order; d. Payment of consideration; or e. Supply of goods or provision of services, partly or wholly (3) General Exemption Section 10(50) of the Income-tax Act provides an exemption from income-tax on incomes arising from any specified service provided after 1st April 2016 or arising from any e-commerce supply or services chargeable to EL and made or provided or facilitated on or after 1st April 2020 and chargeable to Equalisation Levy. Any income in the nature of royalty or fees for technical services, which is chargeable to tax (not just liable to tax), on application of the provisions of the Act and relevant treaty, shall not be included as income for the purpose of Equalization Levy. • The above exclusions result in the following hierarchy for taxability of such incomes/ payments: a. Royalty or fees for technical services chargeable to tax under the Act read along with the treaty; b. EL on specified services as per Section 165; c. EL on e-commerce supply or services165A;