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International Tax Newsletter - Summer 2011 - INDIA: Finance Act 2011 — Amendments Relevant To International Taxation

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As presented by the Finance Minister of India, several amendments pertinent to international taxation introduced by the Finance Act 2011 are summarized below.

TRANSFER PRICING 

Under the existing provisions of section 92C, if the variation between the arm's length price determined by the assessing officer and the price at which the international transaction has actually been undertaken by the assessee does not exceed 5% of the latter, the price at which the international transaction took place shall be deemed to be the arm's length price. As per the amended provisions, 5% has been substituted by "such percentage as may be notified by the Central Government" — i.e., a variable standard. The amended provisions are effective beginning in FY 2011-12.

  • The filing date for Income Tax Returns for corporate assessees whose accounts are required to be audited under the provisions of section 92E (Transfer pricing) has been extended to 30 November from 30 September.
  • A new subsection (2A) in section 92CA (Transfer pricing) provides that "[i]f any international transaction other than the international transaction referred by the Assessing Officer comes to the notice of the transfer pricing officer during the course of assessment proceedings, the same will be treated as an international transaction referred by the Assessing Officer," so apparently it may be addressed immediately by the transfer pricing officer. This rule takes effect from 1 June 2011.

COUNTER MEASURES FOR TRANSACTIONS WITH PERSONS IN A NOTIFIED JURISDICTIONAL AREA

In order to discourage transactions by a resident tax assessee with a person residing outside India in a jurisdiction which does not effectively exchange information with India, anti-avoidance measures have been introduced in new Section 94 A, effective from 1 June 2011, as follows:

  • The Central Government may notify any country or territory outside India, having regard to the lack of effective exchange of information.
  • If an assessee transacts with any person of the notified area then all the parties to the transaction shall be deemed to be Associated Enterprises and the transaction shall be deemed to be an international transaction and, accordingly, Transfer Pricing Regulations will apply.
  • No deduction in respect of payments to a Financial Institution will be allowed unless the assessee furnishes authorization to the board or any other Income Tax Authority to seek information from the Financial Institution.
  • No deduction in respect of expenses arising from a transaction with a person located in the notified area shall be allowed unless the assessee maintains prescribed documents and furnishes prescribed information.
  • If any sum is received from the notified area, the onus is on the assessee to explain the source of money, failure of which may lead to treating the same as income.
  • Any payment made to a person of the notified area will be subject to tax withholding at the rate applicable as per the Act or 30%, whichever is higher.

International Tax Newsletter - Summer 2011

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