Budget 2020:Amendment for providing attribution of profit to Permanent Establishment in Safe Harbour Rules under section 92CB and in Advance Pricing Agreement under section 92CC

Section 92CB of the Act empowers the Central Board of Direct Taxes (Board) for making safe harbour rules (SHR) to which the determination of the arm’s length price (ALP) under section 92C or section 92CA of the Act shall be subject to. As per Explanation to said section the term “safe harbour” means circumstances in which the Income-tax Authority shall accept the transfer price declared by the assessee. This section was inserted in the Act to reduce the number of transfer pricing audits and prolonged disputes especially in case of relatively smaller assessees. Besides reduction of disputes, the SHR provides certainty as well.

Further, section 92CC of the Act empowers the Board to enter into an advance pricing agreement (APA) with any person, determining the ALP or specifying the manner in which the ALP is to be determined, in relation to an international transaction to be entered into by that person. APA provides tax certainty in determination of ALP for five future years as well as for four earlier years (Rollback).

SHR provides tax certainty for relatively smaller cases for future years on general terms, while APA provides tax certainty on case to case basis not only for future years but also Rollback years. Both SHR and the APA have been successful in reducing litigation in determination of the ALP.

It has been represented that the attribution of profits to the PE of a non-resident under clause (i) of sub-section (1) of section 9 of the Act in accordance with rule 10 of the Rules also results in avoidable disputes in a number of cases. In order to provide certainty, the attribution of income in case of a non-resident person to the PE is also required to be clearly covered under the provisions of the SHR and the APA.

In view of the above, it is proposed to amend section 92CB and section 92CC of the Act to cover determination of attribution to PE within the scope of SHR and APA.

With respect to section 92CB, the amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

With respect to section 92CC, the amendment will take effect from 1st April, 2020 and therefore will apply to an APA entered into on or after 1st April, 2020.

[Clauses 43 & 44]

Extract of Relevant Clauses of Finance Bill, 2020

Clauses 43

“Clause 43 of the Bill seeks to amend section 92CB of the Income-tax Act relating to power of Board to make safe harbour rules.

Sub-section (1) of the said section provides that the determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules.

It is proposed to substitute the said sub-section (1) so as to provide that the determination of the income referred to in clause (i) of sub-section (1) of section 9 shall also be subject to safe harbour rules.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.”

Clauses 44

“Clause 44 of the Bill seeks to amend section 92CC of the Income-tax Act relating to advance pricing agreement.

It is proposed to substitute sub-section (1) of the said section so as to provide that the Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the––

(a) arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person;

(b) income referred to in clause (i) of sub-section (1) of section 9, or specifying the manner in which said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident.

It is further proposed to substitute sub-section (2) of the said section so as to provide that the manner of determination of, the arm’s length price referred to in clause (a) of sub-section (1), or the income referred to in clause (b) of sub-section (1), may include the methods referred to in sub-section (1) of section 92C or such methods provided by rules made under this Act with such adjustments or variations, as may be necessary or expedient so to do.

It is also proposed to substitute sub-section (3) of the said section so as to provide that notwithstanding anything contained in section 92C or section 92CA or such methods provided by rules made under this Act, the arm’s length price of any international transaction or the income referred to in clause (b) of sub-section (1), in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.

It is also proposed to substitute sub-section (9A) of the said section so as to provide that the agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the–

(a) arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person;

(b) income referred to in clause (i) of sub-section (1) of section 9, or specifying the manner in which the said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident, during any period not exceeding four previous years preceding the first of the previous years referred to in sub­section (4), and the arm’s length price of such international transaction or the income of such person shall be determined in accordance with the said agreement.

These amendments will take effect from 1st April, 2020.”

Extract of Relevant Amendment Proposed by Finance Bill, 2020

43. Amendment of section 92CB.

In section 92CB of the Income-tax Act, for sub-section (1), the following sub-section shall be substituted, namely:–

“(1) The determination of–

(a) income referred to in clause (i) of sub-section (1) of section 9; or

(b) arm’s length price under section 92C or section 92CA, shall be subject to safe harbour rules.”.

44. Amendment of section 92CC.

In section 92CC of the Income-tax Act,––

(a) for sub-section (1), sub-section (2) and sub-section (3), the following sub-sections shall be substituted, namely:––

“(1) The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the––

(a) arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person;

(b) income referred to in clause (i)of sub-section (1) of section 9, or specifying the manner in which said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident.

(2) The manner of determination of the arm’s length price referred to in clause (a) or the income referred to in clause (b) of sub-section (1), may include the methods referred to in sub-section (1) of section 92C or the methods provided by rules made under this Act, respectively, with such adjustments or variations, as may be necessary or expedient so to do.

(3) Notwithstanding anything contained in section 92C or section 92CA or the methods provided by rules made under this Act, the arm’s length price of any international transaction or the income referred to in clause (b) of sub-section (1), in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.”;

(b) for sub-section (9A), the following sub-section shall be substituted, namely:––

“(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the––

(a) arm’s length price or specify the manner in which the arm’s length price shall be determined in relation to the international transaction entered into by the person;

(b) income referred to in clause (i)of sub-section (1) of section 9, or specifying the manner in which the said income is to be determined, as is reasonably attributable to the operations carried out in India by or on behalf of that person, being a non-resident, during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction or the income of such person shall be determined in accordance with the said agreement.”.

Source- Finance Bill 2020 / Union Budget 2020-21

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