Rajeev Mawkin 20th August, 2010

2. Page 2 Direct Tax Code - International Taxation

3. Page 3 Direct Tax Code - International Taxation Due to the heat generated by industry and forums at large, some matters were also referred to PMO for its guidance in principle :- Asset based MAT Treaty Override GAAR SEZ EET Vs EEE NPODue to the heat generated by industry and forums at large, some matters were also referred to PMO for its guidance in principle :- Asset based MAT Treaty Override GAAR SEZ EET Vs EEE NPO

4. Page 4 Residency test Direct Tax Code - International Taxation (1) Under the IT Act 1961:At present as per the section 6(3) of the Income Tax Act, 1961 (�the Act�), a company would be considered to be resident in India if the �control and management� of its affairs are wholly situated in India. Hence, the proposed amendment aims at treating companies to be resident in India even in case where the �control and management� is partly situated in India (2) The objective behind changing the current principle referred to above has not been stated in the Discussion Paper. It is possible that with the changed position, conduit or shell companies that may be set up overseas but which are substantially controlled and managed from India have been sought to be brought into the purview of Indian tax. However, in the process even offshore operating companies having substantial activities / operations overseas may get adversely affected applying the test of partial control and management in India. Accordingly the representation made that and as per the revised discussion paper the test of residence for foreign companies is the place of effective management. The term place of effective management have the same meaning as laid down in the Tenth Schedule of DTC relating to computation of profit of business of operating a qualifying ship similar to tonnage tax scheme in Act. (1) Under the IT Act 1961:At present as per the section 6(3) of the Income Tax Act, 1961 (�the Act�), a company would be considered to be resident in India if the �control and management� of its affairs are wholly situated in India. Hence, the proposed amendment aims at treating companies to be resident in India even in case where the �control and management� is partly situated in India (2) The objective behind changing the current principle referred to above has not been stated in the Discussion Paper. It is possible that with the changed position, conduit or shell companies that may be set up overseas but which are substantially controlled and managed from India have been sought to be brought into the purview of Indian tax. However, in the process even offshore operating companies having substantial activities / operations overseas may get adversely affected applying the test of partial control and management in India. Accordingly the representation made that and as per the revised discussion paper the test of residence for foreign companies is the place of effective management. The term place of effective management have the same meaning as laid down in the Tenth Schedule of DTC relating to computation of profit of business of operating a qualifying ship similar to tonnage tax scheme in Act.

5. Residency Test � Revised Discussion Paper Direct Tax Code - International Taxation Page 5 Residency definition to be brought in line with international practice Concept of Place of Effective Management (POEM) introduced: The place where Board of Directors (BOD)/Executive Director (ED) of the company make decisions; In a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions. Most of the tax treaties recognize the concept of POEM for determination of tie breaker rule for avoidance of the double taxation

6. : Ship Management activities Universal Cargo Carriers - (205 ITR 215-Cal) Meeting of board of directors Radha Rani Holding Pvt. Ltd. 16 SOT 495 (Del) Direct Tax Code - International Taxation Page 6 Case laws on effective place of management: a. It refers to a place from where factually and effectively day to day affairs of the company are managed and controlled as held in the cases of Integrated Container Feeder Services- 96 ITD-371-Mum In the cases, ship management activities are handled by a particular shipping management company, the country of such management company will be considered as �Place of Effective Management� as held in the case of Universal Cargo Carriers in (205 ITR 215-Cal) c. In the case of Radha Rani Holding Pvt. Ltd. 16 SOT 495 (Del) where it was held that in case of non resident company since all the meeting of board of directors were held in Singapore, control and management of the company was situated in Singapore. Residential status�Non-resident�Situs of control and management of company�Under s. 6(3)(ii), a company can be said to be a resident in India if the control and management of its affairs is situated wholly in India during that year�Thus, in the case of a foreign company even if slight control and management is exercised from outside India, it would not fall within the ambit of s. 6(3)(ii) and it would be treated as a nonresident�Expression "control and management" means central control and management and not carrying on of day-to-day business�Assessee company was incorporated in Singapore and all its board meetings have been held in Singapore�Fact that Mrs. G, a director, is a resident in India, is not relevant�Mrs. J, the other member of the board who acted as the chairman of all the meetings of the board during the relevant year, is a resident of Singapore and she has never visited India�Even if one of the board meetings be considered to have been held in India (where it is not at all evidenced), that does not negate the position that usually the meetings of the board of directors of the company are held in Singapore�It cannot be said that Mrs. G is having special power over the other directors and that she controls and manages the entire company simply because she holds 99 per cent shares in the company�What is relevant is the place from where the business is being conducted rather than where it is actually conducted�Assessee might have invested its entire funds in India but so long as such investment decisions were taken outside India, it cannot be said that the "control and management" of its affairs is situated wholly in India�Further, tax residency certificate has been issued by the Singapore taxation authorities in favour of the assessee�Hence, the provisions of s. 6(3)(ii) relating to �control and management� of the company being situated wholly in India are not satisfied and the assessee company was a �non-resident� in India during the year under consideration. Double taxation avoidance�Agreement between India and Greece� Assessee shipping company incorporated in Republic of Panama�Entering into management agreement with Greek company H Ltd.�Under the agreement, H Ltd. given power to appoint and dismiss all the staff of assessee, to control its entire shipping business, to collect and disburse moneys on behalf of the assessee, to appoint agents and sub-agents at its discretion and to enter into all negotiations and contracts on behalf of assessee�The business of assessee is therefore wholly controlled and managed in Greece�Assessee company is therefore a resident in Greece for purposes of Art. II(1)(f) of the Double Taxation Avoidance Agreement and entitled to 50% deduction in respect of tax charged in India under Art. VI thereof�Mere fact that H Ltd. is to render accounts to assessee does not in any way affect the control and management of H Ltd. for purposes of the Art. Case laws on effective place of management: a. It refers to a place from where factually and effectively day to day affairs of the company are managed and controlled as held in the cases of Integrated Container Feeder Services- 96 ITD-371-Mum In the cases, ship management activities are handled by a particular shipping management company, the country of such management company will be considered as �Place of Effective Management� as held in the case of Universal Cargo Carriers in (205 ITR 215-Cal) c. In the case of Radha Rani Holding Pvt. Ltd. 16 SOT 495 (Del) where it was held that in case of non resident company since all the meeting of board of directors were held in Singapore, control and management of the company was situated in Singapore. Residential status�Non-resident�Situs of control and management of company�Under s. 6(3)(ii), a company can be said to be a resident in India if the control and management of its affairs is situated wholly in India during that year�Thus, in the case of a foreign company even if slight control and management is exercised from outside India, it would not fall within the ambit of s. 6(3)(ii) and it would be treated as a nonresident�Expression "control and management" means central control and management and not carrying on of day-to-day business�Assessee company was incorporated in Singapore and all its board meetings have been held in Singapore�Fact that Mrs. G, a director, is a resident in India, is not relevant�Mrs. J, the other member of the board who acted as the chairman of all the meetings of the board during the relevant year, is a resident of Singapore and she has never visited India�Even if one of the board meetings be considered to have been held in India (where it is not at all evidenced), that does not negate the position that usually the meetings of the board of directors of the company are held in Singapore�It cannot be said that Mrs. G is having special power over the other directors and that she controls and manages the entire company simply because she holds 99 per cent shares in the company�What is relevant is the place from where the business is being conducted rather than where it is actually conducted�Assessee might have invested its entire funds in India but so long as such investment decisions were taken outside India, it cannot be said that the "control and management" of its affairs is situated wholly in India�Further, tax residency certificate has been issued by the Singapore taxation authorities in favour of the assessee�Hence, the provisions of s. 6(3)(ii) relating to �control and management� of the company being situated wholly in India are not satisfied and the assessee company was a �non-resident� in India during the year under consideration. Double taxation avoidance�Agreement between India and Greece� Assessee shipping company incorporated in Republic of Panama�Entering into management agreement with Greek company H Ltd.�Under the agreement, H Ltd. given power to appoint and dismiss all the staff of assessee, to control its entire shipping business, to collect and disburse moneys on behalf of the assessee, to appoint agents and sub-agents at its discretion and to enter into all negotiations and contracts on behalf of assessee�The business of assessee is therefore wholly controlled and managed in Greece�Assessee company is therefore a resident in Greece for purposes of Art. II(1)(f) of the Double Taxation Avoidance Agreement and entitled to 50% deduction in respect of tax charged in India under Art. VI thereof�Mere fact that H Ltd. is to render accounts to assessee does not in any way affect the control and management of H Ltd. for purposes of the Art.

7. Page 5 Residency test � Best Practices Direct Tax Code - International Taxation As per OECD commentary (Article 4 para 24) the place of Effective management is the place where key management and commercial decision that are necessary for the conduct of the entity�s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time. Criteria generally adopted to identify place of effective management under treaty are: Where the head & brain is situated Where de facto control is exercised and not where ultimate power of control exist Where director resides Where shareholder make key management & commercial decisions According to Klaus Vogel, place of management exits where management directives are given & not where they take effect.As per OECD commentary (Article 4 para 24) the place of Effective management is the place where key management and commercial decision that are necessary for the conduct of the entity�s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time. Criteria generally adopted to identify place of effective management under treaty are: Where the head & brain is situated Where de facto control is exercised and not where ultimate power of control exist Where director resides Where shareholder make key management & commercial decisions According to Klaus Vogel, place of management exits where management directives are given & not where they take effect.

8. Residency test � Impact/Issues As per OECD commentary (Article 4 para 24) the place of Effective management is the place where key management and commercial decision that are necessary for the conduct of the entity�s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time. Criteria generally adopted to identify place of effective management under treaty are: Where the head & brain is situated Where de facto control is exercised and not where ultimate power of control exist Where director resides Where shareholder make key management & commercial decisions According to Klaus Vogel, place of management exits where management directives are given & not where they take effect.As per OECD commentary (Article 4 para 24) the place of Effective management is the place where key management and commercial decision that are necessary for the conduct of the entity�s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time. Criteria generally adopted to identify place of effective management under treaty are: Where the head & brain is situated Where de facto control is exercised and not where ultimate power of control exist Where director resides Where shareholder make key management & commercial decisions According to Klaus Vogel, place of management exits where management directives are given & not where they take effect.

9. Factors to support tax residency Chairman of the board is foreign resident and is given a casting vote Regular board meetings in foreign country All decisions carefully recorded to make it clear that decisions were effected at these meetings Day to Day aspect should be undertaken in Foreign country Company should have a foreign bank account Company should keep key legal records in foreign country However, the implications of the aforesaid will differ from country to country. Direct Tax Code - International Taxation Page 9

10. Residency test � Way Forward Criteria generally adopted to identify place of effective management under treaty are: Where the head & brain is situated Where de facto control is exercised and not where ultimate power of control exist Where director resides Where shareholder make key management & commercial decisions Defining �Head� and �Brain� though very crucial yet a big challange. A company incorporated in Greece appoints another company in Singapore to conduct operations of its shipping business. Singapore company manages business in APAC region. Ships chartered from all across the world for international trade by Singapore company. BOD meetings held in Greece only. In such cases, defining head and brain is a big challenge.Criteria generally adopted to identify place of effective management under treaty are: Where the head & brain is situated Where de facto control is exercised and not where ultimate power of control exist Where director resides Where shareholder make key management & commercial decisions Defining �Head� and �Brain� though very crucial yet a big challange. A company incorporated in Greece appoints another company in Singapore to conduct operations of its shipping business. Singapore company manages business in APAC region. Ships chartered from all across the world for international trade by Singapore company. BOD meetings held in Greece only. In such cases, defining head and brain is a big challenge.

11. Page 11 CFC Provisions Direct Tax Code - International Taxation

12. Why CFC rules are needed ? Shift "portable" income to tax heaven subsidiary companies. Income shifted included investment income (interest and dividends) and passive income (rents and royalties), as well as sales and services income involving related parties. Deferment of tax Avoiding of tax indefinitely The CFC are intended to cause current taxation to the shareholder where income is of a sort that could be artificially shifted or was made available to the shareholder. Direct Tax Code - International Taxation Page 12 Indian Income tax on this income is avoided until the tax haven country paid a dividend to the shareholding company. This dividend could be avoided indefinitely by loaning the earnings to the shareholder without actually declaring a dividend. Outbound investment from India � Year USD (in Billions) 2005 4.3 2006 15.0 2007 35.0 Indian Income tax on this income is avoided until the tax haven country paid a dividend to the shareholding company. This dividend could be avoided indefinitely by loaning the earnings to the shareholder without actually declaring a dividend. Outbound investment from India � Year USD (in Billions) 2005 4.3 2006 15.0 2007 35.0

13. Page 13 Concept of CFC Direct Tax Code - International Taxation Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of entities that is not currently taxed to the owners of the entity. The basic mechanism and details vary among jurisdictions. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control. A set of rules generally define the types of owners and entities affected, the types of income or investments subject to current inclusion, exceptions to inclusion, and means of preventing double inclusion of the same income. Why CFC Rules Are Needed The tax law of many countries, including the United States, does not tax a shareholder of a corporation on the corporation's income until the income is distributed as a dividend. Prior to U.S. CFC rules, it was common for U.S. publicly traded companies to form foreign subsidiaries in tax havens and shift "portable" income to those subsidiaries. Income shifted included investment income (interest and dividends) and passive income (rents and royalties), as well as sales and services income involving related parties. U.S. tax on this income was avoided until the tax haven country paid a dividend to the shareholding company. This dividend could be avoided indefinitely by loaning the earnings to the shareholder without actually declaring a dividend. CFC rules may have a threshold for domestic ownership, below which a foreign entity is not considered a CFC Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of entities that is not currently taxed to the owners of the entity. The basic mechanism and details vary among jurisdictions. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control. A set of rules generally define the types of owners and entities affected, the types of income or investments subject to current inclusion, exceptions to inclusion, and means of preventing double inclusion of the same income. Why CFC Rules Are Needed The tax law of many countries, including the United States, does not tax a shareholder of a corporation on the corporation's income until the income is distributed as a dividend. Prior to U.S. CFC rules, it was common for U.S. publicly traded companies to form foreign subsidiaries in tax havens and shift "portable" income to those subsidiaries. Income shifted included investment income (interest and dividends) and passive income (rents and royalties), as well as sales and services income involving related parties. U.S. tax on this income was avoided until the tax haven country paid a dividend to the shareholding company. This dividend could be avoided indefinitely by loaning the earnings to the shareholder without actually declaring a dividend. CFC rules may have a threshold for domestic ownership, below which a foreign entity is not considered a CFC

14. Page 14 Concept of CFC (cont..) Direct Tax Code - International Taxation

15. CFC Regulations � US & UK

16. CFC Regulations � US & UK �

17. CFC provisions- International Perspective Direct Tax Code - International Taxation Page 17

18. CFC � Illustrative Issues

19. Page 19 CFC provisions � Impact/Issues Direct Tax Code - International Taxation Control to be defined in terms of threshold and time period of holding. Threshold above which CFC provisions will apply should be specified. Income from unrelated parties to be specifically excluded. Appropriate direct & indirect expenses to be allowed as deduction while computing income under CFC provisions. Matters relating to accumulated earnings and current earnings should be specified � accumulated earnings not to be taxed till the date CFC provisions come in to force. Distinction between resident foreign company (becoming so due to POEM) and CFC provisions to be provided. Exemption to CFC which distributes certain percentage of income in a year. Exemption to CFC which are not formed with the only motive of tax avoidance. CFC whose shares are listed on a recognized stock exchange outside India to be exempted. List of geographical locations where companies will not be considered as CFC. Computation and mechanism of allowing credit for underlying tax to be specified.Control to be defined in terms of threshold and time period of holding. Threshold above which CFC provisions will apply should be specified. Income from unrelated parties to be specifically excluded. Appropriate direct & indirect expenses to be allowed as deduction while computing income under CFC provisions. Matters relating to accumulated earnings and current earnings should be specified � accumulated earnings not to be taxed till the date CFC provisions come in to force. Distinction between resident foreign company (becoming so due to POEM) and CFC provisions to be provided. Exemption to CFC which distributes certain percentage of income in a year. Exemption to CFC which are not formed with the only motive of tax avoidance. CFC whose shares are listed on a recognized stock exchange outside India to be exempted. List of geographical locations where companies will not be considered as CFC. Computation and mechanism of allowing credit for underlying tax to be specified.

20. Interplay of CFC & POEM concept Direct Tax Code - International Taxation Page 20

21. Direct Tax Code - International Taxation Page 21 Branch Profit Tax Proposed provisions Additional levy of Branch Profit Tax (BPT) @ 15% The same is to be levied on the total income for the financial year as reduced by the amount of income tax thereon Foreign Companies liable to pay branch profit tax (PBT) on total Income reduced by corporate tax Effective tax rate for foreign companies is 36.25% As per Section 100 of DTC provided that every foreign company has to pay branch profit rax as per the rate prescribed in second schedule which is 15% The logic of introducing Branch Profit seems to be that in case of subsidiary company while remitting the amount to foreign holding company dividend distribution tax has to be paid whereas in case of foreign company having branch in India get the profit without any additional tax like DDT. Moreover the rate of tax Indian company is 30% whereas it is 40% in case of foreign company whereas in DTC regime all the company would be taxed at 25% hence to compensate for reduction of tax for foreign company branch profit tax has been introduced. As per Section 100 of DTC provided that every foreign company has to pay branch profit rax as per the rate prescribed in second schedule which is 15% The logic of introducing Branch Profit seems to be that in case of subsidiary company while remitting the amount to foreign holding company dividend distribution tax has to be paid whereas in case of foreign company having branch in India get the profit without any additional tax like DDT. Moreover the rate of tax Indian company is 30% whereas it is 40% in case of foreign company whereas in DTC regime all the company would be taxed at 25% hence to compensate for reduction of tax for foreign company branch profit tax has been introduced.

22. Direct Tax Code - International Taxation Page 22 Branch Profit Tax � Definition of Branch No definition and hence it should be defined to include branches and PE All LO to be excluded except if it is assessed as PE Issues Tax on branch profits, even if undistributed BP tax is part of Second Schedule (C) and not referred in Section 2 (Liability to tax income-tax), hence issue arises about tax credit in foreign country Way-forward To be in line with repatriation profit tax and not additional tax The term �branch� is to be defined Issues : When we compare the definition of �tax� under Income Tax Act 1961 which define tax means Income chargeable under the provision of this act and lately it includes even FBT. Whereas, under DTC the definition of tax means tax chargeable under the provision of this code. Whether branch profit tax can be claimed as underlying tax credit, in the country of residence. Issues : When we compare the definition of �tax� under Income Tax Act 1961 which define tax means Income chargeable under the provision of this act and lately it includes even FBT. Whereas, under DTC the definition of tax means tax chargeable under the provision of this code. Whether branch profit tax can be claimed as underlying tax credit, in the country of residence.

23. Direct Tax Code - International Taxation Page 23 Transfer Pricing - Definition of Associated Enterprises (AE) The threshold limits for determination of AE proposed to be reduced Modifications to AE definition General definition of AE i.e. direct or indirect participation in management, control or capital is omitted Changes in the threshold limits are tabulated below: Section 113(5) of the DTC defines the term Associated Enterprises (�AE�). Section 92E of the Act defines the term AE. The provisions of DTC defining AE contain comparatively lower threshold limits. The objective of reducing the threshold appears to be to widen the applicability of transfer pricing regulations amongst taxpayers. However, much lower threshold (e.g. 10% direct or indirect shareholding) would result into undue hardship on small taxpayers. In the international scenario, most of the countries have higher threshold for applicability of transfer pricing rules. Countries such as China, Germany, Russia and South Africa have equity holding limit in the range of 20 to 40 percent whereas countries such as UK, Canada, France, Italy, Japan and Korea have threshold limit of more than 50 percent holding for applicability of transfer pricing regulations. Section 113(5) of the DTC defines the term Associated Enterprises (�AE�). Section 92E of the Act defines the term AE. The provisions of DTC defining AE contain comparatively lower threshold limits. The objective of reducing the threshold appears to be to widen the applicability of transfer pricing regulations amongst taxpayers. However, much lower threshold (e.g. 10% direct or indirect shareholding) would result into undue hardship on small taxpayers. In the international scenario, most of the countries have higher threshold for applicability of transfer pricing rules. Countries such as China, Germany, Russia and South Africa have equity holding limit in the range of 20 to 40 percent whereas countries such as UK, Canada, France, Italy, Japan and Korea have threshold limit of more than 50 percent holding for applicability of transfer pricing regulations.

24. Direct Tax Code - International Taxation Page 24 Safe Harbour Arm�s Length Price Determination of arm�s length price will be subject to safe harbour rules as may be framed by the Board. Safe harbor rules may not be applicable across all industries/transaction types Selection of transfer pricing cases for scrutiny is to be based on a risk management strategy as may be framed by the Board The strategy will not be disclosed to the taxpayer or any member of the public Safe Harbour Provides a measure of relief to taxpayers If the safe harbor provisions are set up at inordinately high levels or ranges, then taxpayers would continue to face litigation The global losses and financial crunch faced by the Group as such at present would also need consideration whilst exploring adherence with the safe harbor regulations The Safe Harbour provisions provide that the circumstances in which the Income Tax authorities will accept transfer pricing declared by the assessees there is no doubt that this brings clarity both for tax administrator and tax payers and would reduce litigation. For instance, it would allow tax payer to know that for a specific service or industry, what mark-up should be maintained on costs Though the �Safe Harbor� provisions provide a degree of certainty to taxpayers, particularly to non-residents investing in India, but the international community is divided on account of demerits associated with it, viz, difficulty in quantification of safe harbor, acceptance of safe harbor rules by one jurisdiction in another jurisdiction which may give rise to double taxation, create tax planning opportunities . In view of above, it is expected that the CBDT would give due consideration to all aspects associated with the �Safe Harbour� rules before notifying the same Section 92CB of Act has introduced w.e.f. 1.4.2009 whereby the power to Board has been given to make safe harbour rules but till today no such rules in this regard has been given by Board. The Safe Harbour provisions provide that the circumstances in which the Income Tax authorities will accept transfer pricing declared by the assessees there is no doubt that this brings clarity both for tax administrator and tax payers and would reduce litigation. For instance, it would allow tax payer to know that for a specific service or industry, what mark-up should be maintained on costs Though the �Safe Harbor� provisions provide a degree of certainty to taxpayers, particularly to non-residents investing in India, but the international community is divided on account of demerits associated with it, viz, difficulty in quantification of safe harbor, acceptance of safe harbor rules by one jurisdiction in another jurisdiction which may give rise to double taxation, create tax planning opportunities . In view of above, it is expected that the CBDT would give due consideration to all aspects associated with the �Safe Harbour� rules before notifying the same Section 92CB of Act has introduced w.e.f. 1.4.2009 whereby the power to Board has been given to make safe harbour rules but till today no such rules in this regard has been given by Board.

25. Direct Tax Code - International Taxation Page 25 Advanced Pricing Agreement (APA) Key features Arm�s length price to be determined by the Board Board empowered to make further adjustments APA sought to be binding on the taxpayer and the Income-tax authorities APA is valid for maximum of 5 consecutive financial years APA shall not be binding in case of change in facts Subject to timely disposal, APAs are expected to considerably reduce uncertainty regarding arm's length pricing International approach (Multilateral APA/ Bilateral APA/ Unilateral APA Section 107 of DTC provides for Advance Pricing Agreement (�APA�) regime. APA is a mechanism wherein Board will enter into an agreement with a taxpayer for determining the arm's length price in relation to the international transactions which may be entered into by the taxpayer with AEs 2. However, neither relevant section of DTC nor discussion paper clarifies that whether the Board is required to obtain Central Government approval to formulate the scheme of APA on onetime basis or approval for each and every APA on a case-to-case basis. If the Board is required to obtain Central Government approval for each individual APA that the Board proposes to enter into, it may enhance the internal administrative burden and procedural delays. In the process of entering into APA with the Board, the taxpayer may be required to share technical and confidential information with the tax authorities. Provisions of DTC do not provide for confidentiality of such information from third parties and extent of sharing of such data for field audit. Assurance on the confidentiality of such information would encourage taxpayer to share relevant information with the Board. Unilateral APA � Between taxpayer & tax admin of country of operation Bilateral APA � Between taxpayer, tax admin of country of operation and tax admin of another foreign country. Multilateral APA � Between taxpayer, tax admin of country of operation & tax admin of various other countries.Section 107 of DTC provides for Advance Pricing Agreement (�APA�) regime. APA is a mechanism wherein Board will enter into an agreement with a taxpayer for determining the arm's length price in relation to the international transactions which may be entered into by the taxpayer with AEs 2. However, neither relevant section of DTC nor discussion paper clarifies that whether the Board is required to obtain Central Government approval to formulate the scheme of APA on onetime basis or approval for each and every APA on a case-to-case basis. If the Board is required to obtain Central Government approval for each individual APA that the Board proposes to enter into, it may enhance the internal administrative burden and procedural delays. In the process of entering into APA with the Board, the taxpayer may be required to share technical and confidential information with the tax authorities. Provisions of DTC do not provide for confidentiality of such information from third parties and extent of sharing of such data for field audit. Assurance on the confidentiality of such information would encourage taxpayer to share relevant information with the Board. Unilateral APA � Between taxpayer & tax admin of country of operation Bilateral APA � Between taxpayer, tax admin of country of operation and tax admin of another foreign country. Multilateral APA � Between taxpayer, tax admin of country of operation & tax admin of various other countries.

26. GAAR � Proposals The Direct Taxes Code Bill, 2009 (DTC) proposes to introduce GAAR in India to curtail tax avoidance GAAR to be invoked on satisfaction of prescribed conditions: an arrangement to obtain a tax benefit transactions not at arm�s length misuse or abuse of the provisions of DTC Lacking commercial substance defined to include situations where there is a: Significant tax benefits without significant effect upon business risk or net cash flows Legal substance or effect differs from legal form It involves or includes: Round trip financing Any accommodating or tax indifferent party 1. The DTC provides General Anti Avoidance Rules (GAAR) under section 112. Under GAAR, the Commissioner is empowered to declare an arrangement as an impermissible avoidance arrangement (IAA) if : the whole, or a part of the arrangement has been entered with the objective of obtaining tax benefit or creates rights and obligations not normally created in arm�s length transactions or results in direct or indirect misuse or abuse of the provisions of DTC lacks commercial substance in whole or part or Round Trip Financing : It is defined u/s 113 (19) to include financing in which funds are transferred among the parties to the arrangement & the transfer of funds would result directly or indirectly tax benefit to the parties of GAAR Accommodating Party as defined u/s 113(1) of DTC means � a party to an arrangement who as a direct or indirect result of participation, derives any amount in connection with the arrangement which would (i) be included in his total income which would have been otherwise included in the total income of another party or vice versa (ii) be treated as deductible expenditure or allowable loss by the party which would have otherwise constituted a non deductible expenditure Concept of tax mitigation against tax avoidance not considered. 1. The DTC provides General Anti Avoidance Rules (GAAR) under section 112. Under GAAR, the Commissioner is empowered to declare an arrangement as an impermissible avoidance arrangement (IAA) if : the whole, or a part of the arrangement has been entered with the objective of obtaining tax benefit or creates rights and obligations not normally created in arm�s length transactions or results in direct or indirect misuse or abuse of the provisions of DTC lacks commercial substance in whole or part or Round Trip Financing : It is defined u/s 113 (19) to include financing in which funds are transferred among the parties to the arrangement & the transfer of funds would result directly or indirectly tax benefit to the parties of GAAR Accommodating Party as defined u/s 113(1) of DTC means � a party to an arrangement who as a direct or indirect result of participation, derives any amount in connection with the arrangement which would (i) be included in his total income which would have been otherwise included in the total income of another party or vice versa (ii) be treated as deductible expenditure or allowable loss by the party which would have otherwise constituted a non deductible expenditure Concept of tax mitigation against tax avoidance not considered.

27. Direct Tax Code - International Taxation Page 27 GAAR � Powers given to revenue authorities to disregard, combine or re-characterise any part or whole of a transaction / arrangement GAAR further supported by specific anti-abuse rules (SAAR) in circumstances such as payment to associated persons in respect of expenditure, international transaction not at arm�s length, transactions resulting in transfer of income to non-residents and avoidance of tax in certain transactions GAAR to override the provisions of the tax treaties Onus is on the taxpayer to prove that a tax benefit was not the main purpose of the arrangement 1. Once treated as impermissible avoidance arrangement (IAA), look through is permitted by � disregarding the whole or part of the IAA treating related or accommodating or connected parties as one and the same person reallocating amongst parties or re-characterizing any accrual, receipt, expense, deduction, rebate, etc. whether revenue or capital re-characterizing debt to equity or vice versa 2. GAAR provisions are welcome but there appears to be a lot of subjectivity in the current provisions which could lead to harassment of tax payers. For example, the definition of the terms �IAA� and the term �lacks commercial substance� is very wide and subjective. 3. By allowing a re-characterization of debt and equity, the intention appears to bring in �thin capitalization� rule. A safe harbor or guidance as to what would be a threshold debt-equity ratio has not been prescribed. 1. Once treated as impermissible avoidance arrangement (IAA), look through is permitted by � disregarding the whole or part of the IAA treating related or accommodating or connected parties as one and the same person reallocating amongst parties or re-characterizing any accrual, receipt, expense, deduction, rebate, etc. whether revenue or capital re-characterizing debt to equity or vice versa 2. GAAR provisions are welcome but there appears to be a lot of subjectivity in the current provisions which could lead to harassment of tax payers. For example, the definition of the terms �IAA� and the term �lacks commercial substance� is very wide and subjective. 3. By allowing a re-characterization of debt and equity, the intention appears to bring in �thin capitalization� rule. A safe harbor or guidance as to what would be a threshold debt-equity ratio has not been prescribed.

28. GAAR- Revised Discussion Paper Direct Tax Code - International Taxation Page 28 Refer with Slide no. 30 � Suggestions & way forward - Certain safeguards should be provided - Certain threshold above which GAAR will be applicable DRP institution should be strengthened on the lines of an Appellate body. Some threshold to be provided even in case appeal is to be made to DRP. Commercial expediency and ALP should form fundamental principles of acceptance for any transaction � GAAR not to be invoked in such cases If GAAR invoked in case of one tax payer, corresponding relief should be allowed to other party to the transaction. AAR to be essentially provided to reduce protracted litigation GAAR provisions not to be invoked in case any transaction or arrangement has been approved by courts.Refer with Slide no. 30 � Suggestions & way forward - Certain safeguards should be provided - Certain threshold above which GAAR will be applicable DRP institution should be strengthened on the lines of an Appellate body. Some threshold to be provided even in case appeal is to be made to DRP. Commercial expediency and ALP should form fundamental principles of acceptance for any transaction � GAAR not to be invoked in such cases If GAAR invoked in case of one tax payer, corresponding relief should be allowed to other party to the transaction. AAR to be essentially provided to reduce protracted litigation GAAR provisions not to be invoked in case any transaction or arrangement has been approved by courts.

29. GAAR �

30. Page 30 GAAR � Impact/Issues Direct Tax Code - International Taxation Suggestion: GAAR to apply only to arrangements between related parties No fishing / roving enquiry to be allowed Provide for compensatory adjustment to the other party Like UAE LOB : An entity which is resident of a contracting state shall not be entitled to the benefit of treaty if the main purpose of one of the creation of entity was to obtain the benefit of treaty that would not be otherwise available. The case of legal entities not having bona fide business activities shall be covered by LOB article. Singapore LOB : A shell / conduit company that claims that it is a resident of contracting state shall not be entitle to the benefit this treaty and shell and conduit company is defined as resident of a contracting state is deemed to be shell / conduit company it it�s total annual expenditure in that contracting state is less than S $ 200000 or INS Rs. 50 lacs as the case may in the immediately preceding previous year. Suggestion: GAAR to apply only to arrangements between related parties No fishing / roving enquiry to be allowed Provide for compensatory adjustment to the other party Like UAE LOB : An entity which is resident of a contracting state shall not be entitled to the benefit of treaty if the main purpose of one of the creation of entity was to obtain the benefit of treaty that would not be otherwise available. The case of legal entities not having bona fide business activities shall be covered by LOB article. Singapore LOB : A shell / conduit company that claims that it is a resident of contracting state shall not be entitle to the benefit this treaty and shell and conduit company is defined as resident of a contracting state is deemed to be shell / conduit company it it�s total annual expenditure in that contracting state is less than S $ 200000 or INS Rs. 50 lacs as the case may in the immediately preceding previous year.

31. Direct Tax Code - International Taxation Page 31 Definition of Income Deemed to accrue or arise in India Existing Provision Income deemed to accrue or arise in India directly or indirectly Includes Income arising from a transfer of a Capital Asset situated in India Proposed Provisions Income deemed to accrue or arise in India directly or indirectly Through or from transfer directly or indirectly of Capital Asset situated in India Intention of the proposed legislation Tax the transfer of shares of the overseas holding company which is intended to be transferred Shares of the Indian company But the intention seems to have far-reaching implications Taxing the genuine transfer or genuine corporate reorganization The term �transfer� in relation to a capital asset is defined in sub-section 287 of section 284 and the modes of transfer are provided in clauses (a) to (p) there under. It may be mentioned that, only direct modes of transfer have been provided in the Code. However, clause (d) under section 5(1) refers to �the transfer, directly or indirectly, of a capital asset situate in India�. As indirect transfer in relation to a capital asset is not defined under the Code and referring to it for the purpose of deemed accrual of income in India would have severe unintended consequences. The deeming provision appears to be very wide. 2. It is not uncommon for foreign multinational companies to invest in operating subsidiaries in India through step down subsidiaries. In the present dynamic economic scenario of global takeovers, restructuring, etc, it is possible that the shareholding of the ultimate foreign parent company (of the Indian company) changes substantially without any change in the shareholding of the immediate holding company holding shares in the Indian company. In terms of the Code, �indirect transfer of capital asset situated in India� could be said to have occurred in such cases. Such transactions should not be subject to tax in India in view of that the situs of shares being actually transferred is not in India. It may be noted that the as per section 1 of Direct Tax Code 2009 extend to whole of India. Such a deeming provision, if enacted, would severely impact the inflow of investments into India due to the uncertainty involved in taxation. Genuine transfer of holdings should not be doubted. Benchmarks may be laid down in this regard.The term �transfer� in relation to a capital asset is defined in sub-section 287 of section 284 and the modes of transfer are provided in clauses (a) to (p) there under. It may be mentioned that, only direct modes of transfer have been provided in the Code. However, clause (d) under section 5(1) refers to �the transfer, directly or indirectly, of a capital asset situate in India�. As indirect transfer in relation to a capital asset is not defined under the Code and referring to it for the purpose of deemed accrual of income in India would have severe unintended consequences. The deeming provision appears to be very wide. 2. It is not uncommon for foreign multinational companies to invest in operating subsidiaries in India through step down subsidiaries. In the present dynamic economic scenario of global takeovers, restructuring, etc, it is possible that the shareholding of the ultimate foreign parent company (of the Indian company) changes substantially without any change in the shareholding of the immediate holding company holding shares in the Indian company. In terms of the Code, �indirect transfer of capital asset situated in India� could be said to have occurred in such cases. Such transactions should not be subject to tax in India in view of that the situs of shares being actually transferred is not in India. It may be noted that the as per section 1 of Direct Tax Code 2009 extend to whole of India. Such a deeming provision, if enacted, would severely impact the inflow of investments into India due to the uncertainty involved in taxation. Genuine transfer of holdings should not be doubted. Benchmarks may be laid down in this regard.

32. Direct Tax Code - International Taxation Page 32 Definition of Income Deemed to accrue or arise in India � Implications Indirect transfer of a Capital Asset situated in India has a wider meaning It may tax the transactions which have taken place outside India between two nonresidents. It may tax the transactions relating to Global reorganization though the transactions may not have any impact in India. Way-forward Existing provisions to be maintained. Definition of the term indirectly to ensure that genuine transfers are not brought to tax Strengthen Limitation of Benefits clause (LOB) in the respective treaties to overcome treaty shopping Reference to �indirect transfer of capital asset situated in India� should be excluded from the deeming provisions under section 5(1)(d). Any tax evasion scheme or arrangement would stand covered under the GAAR provisions in the DTC. 2. In the alternative, the term �indirect transfer of capital asset situated in India� should be clearly defined giving specific instances of the type of indirect transfers proposed to be covered.Reference to �indirect transfer of capital asset situated in India� should be excluded from the deeming provisions under section 5(1)(d). Any tax evasion scheme or arrangement would stand covered under the GAAR provisions in the DTC. 2. In the alternative, the term �indirect transfer of capital asset situated in India� should be clearly defined giving specific instances of the type of indirect transfers proposed to be covered.

33. Page 33 Treaty Override Direct Tax Code - International Taxation As the DTC is later in point of time and as such existing DTAA could be rendered otious. This would result in higher rate of taxation on royalty, FTS which are taxed in source country at concessional rate. 2. It has been represented that such general treaty override is against the spirit of Vienna convention. The Vienna Convention on the laws of treaties has noted in its preamble that the principle of PACTA SUNT SERVANDA is universally recognized. It is a legal maxim which is mentioned in Article 26 of Vienna Convention which means � Every treaty is binding upon the parties to it and it must be performed in good faith�. 3. Some countries have adopted in their constitution that once a tax treaty has been signed, it will supersede all tax laws of the land of that country. As the DTC is later in point of time and as such existing DTAA could be rendered otious. This would result in higher rate of taxation on royalty, FTS which are taxed in source country at concessional rate. 2. It has been represented that such general treaty override is against the spirit of Vienna convention. The Vienna Convention on the laws of treaties has noted in its preamble that the principle of PACTA SUNT SERVANDA is universally recognized. It is a legal maxim which is mentioned in Article 26 of Vienna Convention which means � Every treaty is binding upon the parties to it and it must be performed in good faith�. 3. Some countries have adopted in their constitution that once a tax treaty has been signed, it will supersede all tax laws of the land of that country.

34. Treaty Override- Revised Discussion Paper Act or treaty, whichever is more beneficial, shall apply Limited Treaty Override - Tax Treaty not to have preferential status where the GAAR is invoked; or when CFC provisions are invoked; or when Branch Profits Tax is levied Limited Treaty Override in line with international practice Direct Tax Code - International Taxation Page 34

36. Indirect transfer of capital asset Direct Tax Code - International Taxation Page 36