Applicability of Section 144C: Reference to dispute resolution panel for Transfer Pricing

Procedure and time limit for reference of Assessment Order to dispute resolution panel for order related to the Transfer Pricing.

CIRCULAR No.09/2013 [File No.142/20/2013-TPL] Dated Dated 19-11-2013

Sub: Clarification in respect of Circular No.5/2010–F.No.142/13/2010–SO (TPL) dated 03.06.2010- regarding.

Section 144C, providing for reference to Dispute Resolution Panel (DRP), was inserted in the Income-tax Act, 1961 by Finance (No.2) Act, 2009. Sub-section (1) of section 144C reads as under: “The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.” 2.

Explanatory Circular for Finance (No.2) Act, 2009 i.e. Circular No. 5 of 2010 dated 03.06.2010, in para 45 has explained the said new section 144C and the consequential amendments made in other sections of Income-tax Act. Para 45.5 of the Circular No.5/2010 dated 03.06.2010 reads as under:

“45.5 Applicability: These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply in relation to assessment year 2010-11 and subsequent assessment years. The Dispute Resolution Panel Rules have been notified by S.O. No. 2958 (E) dated 20th November, 2009.”

In the above extracted Para 45.5 there has been an inadvertent error in stating the applicability of the provisions of section 144C inserted vide Finance (No.2) Act, 2009 that amendments will apply in relation to the assessment year 2010-11 and subsequent assessment years. Accordingly, para 45.5 is replaced with the following:

“45.5. Applicability: Section 144C has been inserted with effect from 1st April, 2009. Accordingly, the Assessing Officer is required to forward a draft assessment order to the eligible assessee, if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. In other words section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009 irrespective of the assessment year to which it pertains. Amendments to other sections of the Income-tax Act referred to in para 45.3 of the circular 5/2010 dated 3rd June, 2010 shall also apply from 1st October, 2009”

TRANSFER PRICING – COMPUTATION OF ARM'S LENGTH PRICE – CLARIFICATIONS ON FUNCTIONAL PROFILE OF DEVELOPMENT CENTERS ENGAGED IN CONTRACT R&D SERVICES WITH INSIGNIFICANT RISK – CONDITIONS RELEVANT TO IDENTIFY SUCH DEVELOPMENT CENTERS – AMENDMENT OF CIRCULAR NO. 3/2013, DATED 26-3-2013 CIRCULAR NO.06/2013 [F NO. 500/139/2012], DATED 29-6-2013

SECTION 92C OF THE INCOME-TAX ACT, 1961 – TRANSFER PRICING – COMPUTATION OF ARM’S LENGTH PRICE – CLARIFICATIONS ON FUNCTIONAL PROFILE OF DEVELOPMENT CENTERS ENGAGED IN CONTRACT R&D SERVICES WITH INSIGNIFICANT RISK – CONDITIONS RELEVANT TO IDENTIFY SUCH DEVELOPMENT CENTERS – AMENDMENT OF CIRCULAR NO. 3/2013, DATED 26-3-2013

CIRCULAR NO.06/2013 [F NO. 500/139/2012], DATED 29-6-2013

It has been brought to the notice of CBDT that there is divergence of views amongst the field officers and taxpayers regarding the functional profile of development centres engaged in contract R&D services for the purposes of determining arm’s length price/transfer pricing. In some cases, while taxpayers insist that they are contract R&D service providers with insignificant risk, the TPOs treat them as full or significant risk-bearing entities and make transfer pricing adjustments accordingly. The issue has been examined in the CBDT.

The Research and Development Centres set up by foreign companies can be classified into three broad categories based on functions, assets and risk assumed by the centre established in India. These are:

1.

Centres which are entrepreneurial in nature;

2.

Centres which are based on cost-sharing arrangements; and

3.

Centres which undertake contract research and development.

While the three categories are not water-tight compartments, it is possible to distinguish them based on functions, assets and risk. It will be obvious that in the first case the Development Centre performs significantly important functions and assumes substantial risks. In the third case, it will be obvious that the functions, assets and risk are minimal. The second case falls between the first and the third cases.

More often than not, the assessee claims that the Development Centre in India must be treated as a contract R&D service provider with insignificant risk. Consequently, the assessee claims that in such cases the Transactional Net Margin Method (TNMM) must be adopted as the most appropriate method.

The CBDT has carefully considered the matter and lays down the following guidelines for identifying the Development Centre as a contract R&D service provider with insignificant risk.

1.

Foreign principal performs most of the economically significant functions involved in research or product development cycle either through its own employees or through its associated enterprises while the Indian Development Centre carries out the work assigned to it by the foreign principal. Economically significant functions would include critical functions such as conceptualization and design of the product and providing the strategic direction and framework;

2.

The foreign principal or its associated enterprise(s) provides funds/capital and other economically significant assets including intangibles for research or product development. The foreign principal or its associated enterprise(s) also provides a remuneration to the Indian Development Centre for the work carried out by the latter;

3.

The Indian Development Centre works under the direct supervision of the foreign principal or its associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development through its strategic decisions to perform core functions as well as monitor activities on regular basis;

4.

The Indian Development Centre does not assume or has no economically significant realized risks. If a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the Indian Development Centre is doing so, then the contractual terms are not the final determinant of actual activities;

5.

In the case of a foreign principal being located in a country/territory widely perceived as a low or no tax jurisdiction, it will be presumed that the foreign principal is not controlling the risk. However, the Indian Development Centre may rebut this presumption to the satisfaction of the revenue authorities. Low tax jurisdiction shall mean any country or territory notified in this behalf under section 94A of the Act or any other country or territory that may be notified for the purpose of Chapter X of the Act;

6.

Indian Development Centre has no ownership right (legal or economic) on the outcome of the research which vests with the foreign principal and that this is evident from the contract as well as from the conduct of the parties.

The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the guidelines above and shall take a decision based on the totality of the facts and circumstances of the case. In doing so, the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be guided by the conduct of the parties and not merely by the terms of the contract.

The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall bear in mind the provisions of section 92C of the Act and Rule 10A to Rule 10C of the Rules. He shall also apply the guidelines enumerated above and select the ‘most appropriate method’.

The above may be brought to the notice of all concerned.

Reference: Section 92 of the income Tax Act, 1961

Computation of arm’s length price.

 (1) The arm’s length price in relation to an international transaction 81[or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe82, namely :—

(a)  comparable uncontrolled price method;

(b)  resale price method;

(c)  cost plus method;

(d)  profit split method;

(e)  transactional net margin method;

(f)  such other method as may be prescribed83 by the Board.

(2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed84 :

85[Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices:

Provided further that if the variation between the arm’s length price so determined and price at which the international transaction 86[or specified domestic transaction] has actually been undertaken does not exceed 87[such percentage 88[not exceeding three per cent] of the latter, as may be notified88a by the Central Government in the Official Gazette in this behalf], the price at which the international transaction 86[or specified domestic transaction] has actually been undertaken shall be deemed to be the arm’s length price.]

89[Explanation.—For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009.]

90[(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso.]

91[(2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year the proceedings of which have been completed before the 1st day of October, 2009.]

(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that—

(a)  the price charged or paid in an international transaction 92[or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or

(b)  any information and document relating to an international transaction 92[or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or

(c)  the information or data used in computation of the arm’s length price is not reliable or correct; or

(d)  the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D,

the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction 92[or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:

Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm’s length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer.

(4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined :

Provided that no deduction under section 10A 93[or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section :

Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted 94[or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.

 

DOUBLE TAXATION AGREEMENT – AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION WITH FOREIGN COUNTRIES – SWEDEN – AMENDMENT IN NOTIFICATION NO. GSR 705(E), DATED 17-12-1997 NOTIFICATION NO. 63/2013 [F. NO. 505/02/1981-FTD-I]/SO 2459(E), DATED 14-8-2013

SECTION 90 OF THE INCOME-TAX ACT, 1961 – DOUBLE TAXATION AGREEMENT – AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION WITH FOREIGN COUNTRIES – SWEDEN – AMENDMENT IN NOTIFICATION NO. GSR 705(E), DATED 17-12-1997

NOTIFICATION NO. 63/2013 [F. NO. 505/02/1981-FTD-I]/SO 2459(E), DATED 14-8-2013

Whereas a Protocol (hereinafter referred to as the said Protocol) amending the convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on Income and on Capital, which was signed at New Delhi on the 24th June, 1997, was signed on the 7th February, 2013 in Stockholm ;

And whereas, the date of entry into force of the said Protocol is the 16th day of August, 2013, being the thirtieth day after the receipt of the later of the notifications of the completion of the procedures required by the respective laws for the entry into force of this Protocol, in accordance with Paragraph 2 of Article 3 of the said Protocol;

And whereas, Paragraph 2 of Article 3 of the said Protocol provides that the Amending Protocol shall enter into force on the thirtieth day after the receipt of the later of the notifications and shall thereupon have effect forthwith ;

Now, therefore, in exercise of the powers conferred by section 90 of the Income- tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said Protocol, as set out in the Annexure hereto, shall be given effect to in the Union of India with effect from the 16th August, 2013.

Protocol Amending the Convention between the Government of the Republic of India and The Government of The Kingdom of Sweden for The Avoidance of Double Taxation and The Prevention of fiscal evasion with respect to taxes on income and on capital, which was Signed at New Delhi on 24th June, 1997.

The Government of the Republic of India and the Government of the Kingdom of Sweden;

Desiring to conclude a Protocol (hereinafter referred to as “Amending Protocol”) to amend the Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on Income and on Capital, which was signed at New Delhi on 24th June, 1997 and which entered into force on 25th December, 1997 (hereinafter referred to as “the Convention”);

Have agreed as follows:

ARTICLE 1

Article 27 (Exchange of Information) of the Convention shall be deleted and replaced by the following Article:

“ARTICLE 27

EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States shall exchange such information (including documents or certified copies of the documents) as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political sub-divisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2.

2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligations:

(a)

to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b)

to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c)

to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).

4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.”

ARTICLE 2

The following new paragraph shall be added to the Protocol to the Convention after the paragraph titled ” With reference to Article 25:”

“With reference to Article 27:

1. A Contracting State may allow representatives of the competent authority of the other Contracting State to enter the territory of the first-mentioned Contracting State to interview individuals and examine records with the written consent of the persons concerned. The competent authority of the second-mentioned Contracting State shall notify the competent authority of the first-mentioned Contracting State of the time and place of the meeting with the individuals concerned.

2. At the request of the competent authority of one Contracting State, the competent authority of the other Contracting State may allow representatives of the competent authority of the first-mentioned Contracting State to be present at the appropriate part of a tax examination in the second-mentioned Contracting State.

3. If the request referred to in paragraph 2 is acceded to, the competent authority of the Contracting State conducting the examination shall, as soon as possible, notify the competent authority of the other Contracting State about the time and place of the examination, the authority or official designated to carry out the examination and the procedures and conditions required by the first-mentioned Contracting State for the conduct of the examination. All decisions with respect to the conduct of the tax examination shall be made by the Contracting State conducting the examination.”

ARTICLE 3

1. Each of the Contracting States shall notify the other, in writing, of the completion of the procedures required by its law for the entry into force of this Amending Protocol.

2. This Amending Protocol shall enter into force on the thirtieth day after the receipt of the later of these notifications and thereupon have effect forthwith.

3. This Amending Protocol shall remain in effect as long as the Convention remains in effect.

In witness whereof the undersigned, duly authorised thereto by their respective Governments, have signed this Amending Protocol.

Done in duplicate at Stockholm this 7th day of Feb, 2013 in the Hindi, Swedish and English languages, all texts being equally authentic. In case of divergence between the texts, the English text shall be the operative one.

Reference: Section 90 of the income Tax Act, 1961

Agreement with foreign countries or specified territories.

 (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

(a)  for the granting of relief in respect of—

 (i)  income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

(ii)  income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

(b)  for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

(c)  for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

(d)  for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(2A) 60[***]

The following sub-section (2A) shall be inserted after sub-section (2) of section 90 by the Finance Act, 2013, w.e.f. 1-4-2016 :

(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

60a[(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless 60b[a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.]

60c[(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed.]

Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.

Explanation 2.—For the purposes of this section, “specified territory” means any area outside India which may be notified61 as such by the Central Government.]

62[Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.]

DOUBLE TAXATION AGREEMENT – AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION WITH FOREIGN COUNTRIES – ORIENTAL REPUBLIC OF URUGUAY NOTIFICATION NO. 53/2013 [F.NO.500/138/2002-FTD-II]/SO 2081(E), DATED 5-7-2013

SECTION 90 OF THE INCOME-TAX ACT, 1961 – DOUBLE TAXATION AGREEMENT – AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION WITH FOREIGN COUNTRIES – ORIENTAL REPUBLIC OF URUGUAY

NOTIFICATION NO. 53/2013 [F.NO.500/138/2002-FTD-II]/SO 2081(E), DATED 5-7-2013

Whereas, an Agreement between the Government of the Republic of India and the Government of the Oriental Republic of Uruguay for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital was signed in India on the 8th day of September, 2011 (hereinafter referred to as the Agreement);

And whereas, the date of entry into force of the Agreement is the 21st day of June, 2013, being sixty days from the date of the later of the notifications of completion of the procedures as required by the respective laws for entry into force of the Agreement, in accordance with paragraph 2 of Article 31 of the Agreement;

Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that all the provisions of the Agreement between the Government of the Republic of India and the Government of the Oriental Republic of Uruguay for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital, as set out in the Annexure hereto, shall be given effect to in the Union of India with effect from the 1st day of April, 2014.

AGREEMENT

BETWEEN

THE GOVERNMENT OF THE REPUBLIC OF INDIA

AND

THE GOVERNMENT OF THE ORIENTAL REPUBLIC OF URUGUAY

FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION

OF FISCAL EVASION

WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL

The Government of the Republic of India and the Government of the Oriental Republic of Uruguay, desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital and with a view to promoting economic co-operation between the two countries have agreed as follows:

ARTICLE 1

PERSONS COVERED

This Agreement shall apply to persons who are residents of one or both of the Contracting States.

ARTICLE 2

TAXES COVERED

1. This Agreement shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political sub-divisions or local authorities, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property and taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

3. The existing taxes to which the Agreement shall apply are in particular:

(a)

in the case of India:

(i)

the income-ax, including any surcharge thereon;

(ii)

the wealth-tax;
(hereinafter referred to as “Indian tax”);

(b)

in the case of Uruguay:

(i)

the tax on business income (Impuesto a las Rentas de las Actividades Economicas -IRAE);

(ii)

the personal income-tax (Impuesto a las Rentas de las Personas Fisicas -IRPF);

(iii)

the non-residents income-tax (Impuesto a las Rentas de las No. Residentes -IRNR) ;

(iv)

the tax for social security assistance (Impuesto de Asistencia a la Seguridad
Social -IASS); and

(v)

the capital tax (Impuesto al Patrimonio -IP);
(hereinafter referred to as ” Uruguayan tax”).

4. The Agreement shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in their respective taxation laws.

ARTICLE 3

GENERAL DEFINITIONS

1. For the purposes of this Agreement, unless the context otherwise requires:

(a)

the term “India” means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdiction, according to the Indian law and in accordance with International law, including the U.N. Convention on the Law of the Sea;

(b)

the term “Uruguay” means the territory of the Oriental Republic of Uruguay, and when used in a geographical sense includes the airspace, the maritime areas, under Uruguayan sovereign rights or jurisdiction in accordance with International Law and National law;

(c)

the terms “Contracting State” and “the other Contracting State” mean the Republic of India or the Oriental Republic of Uruguay as the context requires;

(d)

the term “person” includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States;

(e)

the term “company” means any body corporate or any entity that is treated as a body corporate for tax purposes;

(f)

the term ” enterprise” applies to the carrying on of any business;

(g)

the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

(h)

the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State except when the ship or aircraft is operated solely between places in the other Contracting State;

(i)

the term “competent authority” means:

(i)

in India: the Finance Minister, Government of India, or his authorized representative;

(ii)

in Oriental Republic of Uruguay the Ministry of Economy and Finance or its authorized representative.

(j)

the term “national” means:

(i)

any individual possessing the nationality or citizenship of a Contracting State;

(ii)

any legal person, partnership or association deriving its status as such from the laws in force in a Contracting State;

(k)

the term “tax” means Indian or Uruguayan tax, as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Agreement applies or which represents a penalty or fine imposed relating to those taxes;

(l)

The term “fiscal year” means:

(i)

in the case of India: the financial year beginning on the 1st day of April:

(ii)

in the case of Uruguay: the calendar year beginning on the 1st day of January for the purposes of individuals and the taxable period of 12 months for other persons.

2. As regards the application of the Agreement at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Agreement applies and any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

ARTICLE 4

RESIDENT

1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a)

he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);

(b)

if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

(c)

if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

(d)

if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. If the State in which its place of effective management is situated cannot be determined, then the competent authorities of the Contracting States shall endeavour to settle the question by mutual agreement.

ARTICLE 5

PERMANENT ESTABLISHMENT

1. For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

(a)

a place of management;

(b)

a branch;

(c)

an office;

(d)

a factory;

(e)

a workshop;

(f)

a sales outlet;

(g)

a warehouse in relation to a person providing storage facilities for others;

(h)

a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and

(i)

a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. (a) A building site or construction, installation or assembly project or supervisory activities in connection therewith constitutes a permanent establishment only if such site, project or activities last 183 days or more.

(b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within the country for a period or periods aggregating more than 90 days within any 12-month period.

4. Notwithstanding the preceding provisions of this Article the term “permanent establishment” shall be deemed not to include:

(a)

the use of facilities solely for the purpose of storage, display of goods or merchandise belonging to the enterprise;

(b)

the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display;

(c)

the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d)

the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

(e)

the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

(f)

the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 7 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person:

(a)

has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are .limited to those mentioned in paragraph 4 which, if exercised through a fixed plate of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph, or

(b)

has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise;

(c)

habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself.

6. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 7 applies.

7. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.

8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

ARTICLE 6

INCOME FROM IMMOVABLE PROPERTY

1. Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State.

2. The term “immovable property” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats and aircrafts shall not be regarded as immovable property.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

ARTICLE 7

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State.

4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be inaccordance with the principles contained in this Article.

5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.

ARTICLE 8

SHIPPING AND AIR TRANSPORT

1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in International traffic shall be taxable only in that State.

2. If the place of effective management of a shipping enterprise is aboard a ship, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship is a resident.

3. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an International operating agency.

ARTICLE 9

ASSOCIATED ENTERPRISES

1. Where

(a)

an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

(b)

the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of the State – and taxes accordingly – profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Agreement and the competent authorities of the Contracting States shall if necessary consult each other.

3. The provisions of paragraph 2 shall not apply where judicial, administrative or other legal proceedings have resulted in a final ruling that by actions giving rise to an adjustment of profits under paragraph 1, one of the enterprises concerned is liable to penalty with respect to fraud, gross negligence or wilful default.

ARTICLE 10

DIVIDENDS

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed 5 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term “dividends” as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

ARTICLE 11

INTEREST

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State, provided that it is derived and beneficially owned by:

(a)

the Government, a political sub-division or a local authority of the other Contracting State; or

(b)

(i) in the case of India, the Reserve Bank of India, the Export-Import bank of India, the National Housing bank; and
(ii) in the case of Uruguay, Banco Central del Uruguay, Banco de la Republica Oriental del Uruguay, Banco Hipotecario del Uruguay; or

(c)

any other institution as may be agreed upon from time to time between the Competent authorities of the Contracting States through exchange of letters.

4. The term “interest” as used in this Article means income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.

ARTICLE 12

ROYALTIES AND FFES FOR TECHNICAL SERVICES

1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.

3. (a) The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

(b) The term “fees for technical services” as used in this Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel.

4. The provisions of paragraph 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. (a) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

(b) Where under sub-paragraph (a) royalties or fees for technical services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for technical services relate to services performed, in one of the Contracting States, the royalties or fees for technical services shall be deemed to arise in that Contracting State.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.

ARTICLE 13

CAPITAL GAINS

1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State.

3. Gains from the alienation of ships or aircraft operated in International traffic, or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.

4. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.

5. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State.

6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5, shall be taxable only in the Contracting State of which the alienator is a resident.

ARTICLE 14

INDEPENDENT PERSONAL SERVICES

1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that except in the following circumstances when such income may also be taxed in the other Contracting State:

(a)

if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income us is attributable to that fixed base may be taxed in that other State; or

(b)

if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any period of 12 months; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.

ARTICLE 15

DEPENDENT PERSONAL SERVICES

1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a)

the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and

(b)

the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and

(c)

the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in International traffic, by an enterprise of a Contracting State may be taxed in that State.

ARTICLE 16

DIRECTORS’ FEES

Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

ARTICLE 17

ARTISTES AND SPORTSPERSONS

1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or a sportsperson in his capacity as such accrues not to the entertainer or sportsperson himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.

3. The provisions of paragraphs 1 and 2, shall not apply to income from activities performed in a Contracting State by entertainers or sportspersons if the activities are substantially supported by public funds of one or both of the Contracting States or of political sub-divisions or local authorities thereof. In such a case, the income shall be taxable only in the Contracting State of which the entertainer or sportsperson is a resident.

ARTICLE 18

PENSIONS

Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

ARTICLE 19

GOVERNMENT SERVICE

1. (a) Salaries, wages and other similar remuneration, other than a pension, paid by a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State.

(b) However, Salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

(i)

is a national of that State; or

(ii)

did not become a resident of that State solely for the purpose of rendering the services.

2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State.

(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.

3. The provisions of Articles 15, 16, 17 and 18 shall apply to Salaries, wages and other similar remuneration and to pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political sub-division or a local authority thereof.

ARTICLE 20

PROFESSORS, TEACHERS AND RESEARCH SCHOLARS

1. A professor, teacher or research scholar who is or was a resident of the Contracting State immediately before visiting the other Contracting State for the purpose of teaching or engaging in research, or both, at a university, college or other similar approved institution in that other Contracting State shall be exempt from tax in that other State on any remuneration for such teaching or research for a period not exceeding 2 years from the date of his first arrival in that other State.

2. This Article shall apply to income from research only if such research is undertaken by the individual in the public interest and not primarily for the benefit of some private person or persons.

3. For the purposes of this Article, an individual shall be deemed to be a resident of a Contracting State if he is resident in that State in the fiscal year in which he visits the other Contracting State or in the immediately preceding fiscal year.

ARTICLE 21

STUDENTS

1. A student who is or was a resident of one of the Contracting States immediately before visiting the other Contracting State an who is present in that other Contracting State solely for the purpose of his education or training, shall besides grants and scholarships be exempt from tax in that other State on:

(a)

payments made to him by persons residing outside that other State for the purposes of his maintenance, education or training; and

(b)

remuneration which he derives from an employment which he exercises in the other Contracting State if the employment is directly related to his studies.

2. The benefits of this Article shall extend only for such period of time as may be reasonable or customarily required to complete the education or training undertaken, but in no event shall any individual have the benefits of this Article, for more than six consecutive years from the date of his first arrival for the purposes of his education or training in that other State.

ARTICLE 22

OTHER INCOME

1. Items of income of a resident of a Contracting State, wherever arising, not dealt within the foregoing Articles of this Agreement shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt within the foregoing articles of this Agreement and arising in the other Contracting State may also be taxed in that other State.

ARTICLE 23

TAXATION OF CAPITAL

1. Capital represented by immovable property referred to in Article 6 owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State.

2. Capital represented by movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or by movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, may be taxed in that other State.

3. Capital represented by ships and aircraft operated in International traffic and by movable property pertaining to the operation of such ships and aircraft shall be taxable only in the Contracting State of which the enterprise owning such property is a resident.

4. All other elements of capital of a resident of a Contracting State shall be taxable only in that State.

ARTICLE 24

METHODS FOR ELIMINATION OF DOUBLE TAXATION

Double taxation shall be eliminated as follows:

1. In India:

(a)

Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Uruguay, India shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in Uruguay.
Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable to the income which may be taxed in Uruguay.

(b)

Where a resident of India owns capital which, in accordance with the provisions of the Agreement may be taxed in Uruguay, India shall allow as a deduction from the tax on wealth of that resident an amount equal to the capital tax paid in Uruguay.
Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable to the capital which may be taxed in Uruguay.

(c)

Where in accordance with any provision of the Agreement income derived or wealth owned by a resident of India is exempt from tax in India, India may nevertheless, in calculating the amount of tax on the remaining income or wealth of such resident, take into account the exempted income or wealth.

2. In Uruguay:

(a)

Where a resident of Uruguay derives income which, in accordance with the provisions of this Agreement, may be taxed in India, Uruguay shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in India.
Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable to the income which may be taxed in India.

(b)

Where a resident of Uruguay owns wealth which, in accordance with the provisions of the Agreement may be taxed in India, Uruguay shall allow as a deduction from the tax on capital of that resident an amount equal to the Wealth tax paid in India.
Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable to the wealth which may be taxed in India.

(c)

Where in accordance with any provision of the Agreement income derived or capital owned by a resident of Uruguay is exempt from tax in Uruguay, Uruguay may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.

ARTICLE 25

NON-DISCRIMINATION

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.

3. Except where the provisions of paragraph 1 of Article 9, paragraph 7 of Article 11, or paragraph 6 of Article 12, apply, interest, royalties, fees for technical services and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned State.

4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.

5. The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description.

ARTICLE 26

MUTUAL AGREEMENT PROCEDURE

1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Agreement, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 25, to that of the Contracting State of which he is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Agreement. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Agreement. They may also consult together for the elimination of double taxation in cases not provided for in the Agreement.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives, of the competent authorities of the Contracting States.

ARTICLE 27

EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States shall exchange such information (including documents or certified copies of the documents) as is foreseeably relevant for carrying out the provisions of this Agreement or of the domestic laws concerning taxes covered by this Agreement insofar as the taxation thereunder is not contrary to the Agreement. The exchange of information is not restricted by Articles 1 and 2.

2. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including Courts and Administrative Bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes covered by the Agreement. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public Court proceedings or in judicial decisions.

3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation:

(a)

to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b)

to supply information (including documents or certified copies of the documents) which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c)

to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).

4. If information is requested by a Contracting State in accordance with this article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

ARTICLE 28

ASSISTANCE IN THE COLLECTION OF TAXES

1. The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Articles 1 & 2. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article.

2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political sub-divisions or local authorities, insofar as the taxation thereunder is not contrary to this Agreement or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

3. When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the other Contracting State, that revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

4. When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State. That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that other State even if at the time when such measures are applied, the revenue claim is not enforceable in the first mentioned State or is owed by a person who has a right to prevent its collection.

5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to a revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to that revenue claim under the laws of the other Contracting State.

6. Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall only be brought before the Courts or Administrative Bodies of that State. Nothing in this Article shall be construed as creating or providing any right to such proceedings before any Court or Administrative Body of the other Contracting State.

7. Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be

(a)

in the case of a request under paragraph 3, a revenue claim of the first-mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or

(b)

in the case of a request under paragraph 4, a revenue claim of the first-mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection

The competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request

8. In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation:

(a)

to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b)

to carry out measures which would be contrary to public policy (ordre public);

(c)

to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice;

(d)

to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State.

ARTICLE 29

LIMITATION OF BENEFITS

1. The provisions of this Agreement shall in no case prevent a Contracting State from the application of the provisions of its domestic laws and measures concerning tax avoidance or evasion.

2. Except as otherwise provided in this Article, a person (other than an individual), which is a resident of a Contracting State and which derives income from the other Contracting State shall be entitled to all the benefits of this Agreement otherwise accorded to residents of a Contracting State only if such a person has the qualifications as defined in paragraph 2 and meets the other conditions of this Agreement for the obtaining of any of such benefits.

3. A person of a contracting state is a qualified person for a fiscal year only if such a person is either:

(a)

Governmental entity; or

(b)

a company incorporated in either of the Contracting States, if-

(i)

the principal class of its shares is listed on a recognised stock exchange as defined in paragraph 6 of this Article and is regularly traded on one or more recognised stock exchanges, or

(ii)

at least 50% of the aggregate vote or value of the shares in the company is owned directly or indirectly by one or more individuals residents of either of the Contracting States or/and by other persons incorporated in either of the Contracting States, atleast 50% of the aggregate vote or value of the shares or beneficial interest of which is owned directly or indirectly by one or more individuals residents of either of the Contracting States; or

(c)

a partnership or association of persons, at least 50% or more of whose beneficial interests is owned by one or more individuals residents of either of the Contracting States or/and by other persons incorporated in either of the Contracting States, at least 50% of the aggregate vote or value of the shares or beneficial interest of which is owned directly or indirectly by one or more individuals residents of either of the Contracting States; or

(d)

A charitable institution or other tax exempt entity whose main activities are carried on in either of the Contracting States.

Provided that the persons mentioned above will not be entitled to the benefits of the Agreement if more than 50% of the person’s gross income for the taxable year is paid or payable directly or indirectly to persons who are not residents of either of the Contracting States in the form of payments that are deductible for the purpose of computation of tax covered by this Agreement in the person’s state of residence (but not including arm’s length payment in the ordinary course of business for services or tangible property and payments in respect of financial obligations to a bank incurred in connection with a transaction entered into with the Permanent Establishment of the bank situated in either of the Contracting States).

4. The provisions of paragraphs 2 and 3 shall not apply and a resident of a Contracting State will be entitled to benefits of the Agreement with respect to an item of income derived from the other State, if the person actively carries on business in the State of residence (other than the business of making or managing investments for the resident’s own account unless these activities are banking, insurance or security activities) and the income derived from the other Contracting States is derived in connection with or is incidental to that business and that resident satisfies the other conditions of this Agreement for the obtaining of such benefits.

5. A resident of a Contracting State shall nevertheless be granted the benefits of the Agreement if the Competent Authority of the other Contracting State determines that the establishment or acquisition or maintenance of such person and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the Agreement.

6. For the purposes of this Article the term ‘recognised stock exchange’ means

(a)

in India, any stock exchange which for the time being is recognized by the Central Government under section 4 of the Securities Contracts (Regulation) Act, 1956; and

(b)

in the Oriental Republic of Uruguay, the Bolsa de Valores de Montevideo and the Bolsa Electronica de Valores S.A; and

(c)

any other stock exchange which the Competent Authorities agree to recognise for the purposes of this Article.

7. Notwithstanding anything contained in this Article, a person shall not be entitled to the benefits of this Agreement if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to avoid taxes to which this Agreement applies.

ARTICLE 30

MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS

Nothing in this Agreement shall affect the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special agreements.

ARTICLE 31

ENTRY INTO FORCE

1. The Contracting States shall notify each other in writing, through diplomatic channels, of the completion of the procedures required by the respective laws for the entry into force of this Agreement.

2. This Agreement shall enter into force sixty days after the date of the later of the notifications referred to in paragraph 1 of this Article

3. The provisions of this Agreement shall have effect:

(a)

In India,

(i)

in respect of income derived in any fiscal year beginning on or after the first day of April next following the calendar year in which the Agreement enters into force; and

(ii)

in respect of wealth which is held on the last day of any fiscal year on or after the first day of April next following the calendar year in which the Agreement enters into force;

(b)

In Uruguay,

(i)

in respect of income derived in any fiscal year beginning on or after the first day of January next following the calendar year in which the Agreement enters into force;

(ii)

in respect of capital which is held on the last day of any fiscal year on or after the first day of January next following the calendar year in which the Agreement enters into force.

ARTICLE 32

TERMINATION

This Agreement shall remain in force indefinitely until terminated by one of the contracting State. Either Contracting State may terminate the Agreement, through diplomatic channels, by giving notice of termination at least six months before the end of any calendar year beginning after the expiration of five years from the date on which the Agreement enters into force. In such event, the Agreement shall cease to have effect:

(a)

In India,

(i)

in respect of income derived in any fiscal year on or after the first day of April next following the calendar year in which the notice is given; and

(ii)

in respect of wealth which is held on the last day of any fiscal year on or after the first day of April next following the calendar year in which the notice is given;

(b)

In Uruguay,

(i)

in respect of income derived in any fiscal year on or after the first day of January next following the calendar year in which the notice is given; and

(ii)

in respect of capital which is held on the last day of any fiscal year on or after the first day of January next following the calendar year in which the notice is given.

IN WITNESS WHERE OF the undersigned, duly authorized thereto, have signed this Agreement.

DONE in duplicate at New Delhi this 8th day of September, 2011, each in the Hindi, Spanish and English languages, all texts being equally authentic. In case of divergence of interpretation, the English text shall prevail.

PROTOCOL

At the signing today of the Agreement between the Republic of India and the Oriental Republic of Uruguay for the Avoidance of Double Taxation and the prevention of Fiscal Evasion with respect to Taxes on Income and on Capital, the undersigned have agreed upon the following provisions, which shall form an integral part of the Agreement:

I.

It is understood that the last sentence of paragraph 1 of Article 4 (Resident) does not exclude from the scope of this agreement, any person who is liable to tax, in the Oriental Republic of Uruguay by virtue of the application of the principle of territorial source.

II.

With reference to Article 8(Shipping and Air Transport), it is understood that, profits derived by a transportation enterprise which is a resident of a Contracting State from the use, maintenance, or rental of containers (including trailers and other equipment for the transport of containers) used for the transport of goods or merchandise in International traffic shall be taxable only in that Contracting State unless the containers are used solely within the other Contracting State.

III.

With reference to Article 8 (Shipping and Air Transport), it is understood that, interest on investments directly connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft if they are integral to the carrying on of such business, and the provisions of Article 11 (Interest) shall not apply in relation to such interest.

IV.

With reference to Article 8 (Shipping and Air Transport) and Article 13(Capital gains), it is understood that notwithstanding anything contained therein read with the domestic law of the Contracting States lead to a situation where an income is not taxable in the resident State, the source State shall retain the right to tax such income.

V.

It is understood that the provisions of Article 25 (Non-discrimination) shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which a company of other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar company of that first mentioned State, nor as being in conflict with the provisions of paragraph 3 of Article 7 (Business Profits).

VI.

With reference to Article 27 on Exchange of Information, it is understood that India may share the information received under paragraph 1 of that Article from Uruguay in respect of a resident of India, with other law enforcement agencies of Government of India or its Parliament.

VII.

With reference to Article 31 (Entry into Force), it is understood that the provisions of Article 27 (Exchange of Information) shall have effect, relating to any fiscal year, next following the calendar year in which the Agreement enters into force.

IN WITNESS WHEREOF, the undersigned, being duly authorized by their respective Governments, have signed this Protocol.

Done in duplicate at New Delhi, this 8th day of September , 2011, in the English, Spanish and Hindi languages, all texts equally authentic. In case of divergence between the texts, the English text shall prevail.

Reference: Section 90 of the income Tax Act, 1961

Agreement with foreign countries or specified territories.

. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

(a)  for the granting of relief in respect of—

 (i)  income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

(ii)  income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

(b)  for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

(c)  for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

(d)  for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

The following sub-section (2A) shall be inserted after sub-section (2) of section 90 by the Finance Act, 2013, w.e.f. 1-4-2016 :

(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

 [(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless  [a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.]

 [(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed.]

Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.

Explanation 2.—For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government.]

 [Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.]

Income Tax Settlement Commission

INCOME TAX SETTLEMENT COMMISSION
Tax Settlement Commission, a quasi judicial body, was set up under section 245B of Income-tax Act 1961. It has been set up as a result of recommendations made by Direct Taxes Enquiry Committee (Popularly known as Wanchoo Committee). The objective of setting up of this Commission is to settle the tax liabilities in complicated cases avoiding endless and prolonged litigation and consequential strain on investigational resources of Income-tax Department. This commission comprises persons of integrity and outstanding ability, having special knowledge of and experience in, problems relating to direct taxes and business accounts.
COMPOSITION :
The Settlement Commission consists of a Chairman, Vice-Chairmen and Members. However, the number of Vice-Chairmen and members in the Settlement Commission is decided by the Central Government. The jurisdiction, powers and authority of the Commission shall vest in the hands of Chairman, in case of Principal Bench, and in the hands of Vice-chairman, in case of Additional Bench. At present, four Benches of the Commission are functioning. The Delhi Bench is known as the Principal Bench and the Benches at Mumbai, Calcutta and Chennai are known as the Additional Benches.
SETTLEMENT COMMISSION AND APPEAL :
The application for settlement can be made only during the pendency of the assessment proceedings, whereas an appeal can be filed only after conclusion of assessment proceedings, against an order of assessment. For approaching the settlement commission, an applicant is required to disclose income which he has not disclosed before the Income Tax Department and also to pay applicable tax and interest on it before filing the application. No such conditions are needed for filing an appeal.
ELIGIBILITY FOR FILLING OF APPLICATION:
An applicant can approach the Income Tax Settlement Commission in respect of a particular assessment year only if no assessment order is passed by the concerned income tax authority and the statutory time-limit for passing of assessment order for that year has not lapsed. The proceedings are considered to be pending from the first day of the assessment year and it is not needed that a return of income is filed or a notice for scrutiny is issued before failing of application.
An applicant have to disclose an additional amount of income tax before the Commission which is at least Rupees ten lakhs. This does not include the amount of interest chargeable on such tax. For cases involving Search and seizure assessment proceedings, the additional amount of income tax to be disclosed is at least Rupees fifty lakhs.
How to calculate additional income TAX:
• In case the applicant has not furnished return, tax shall be calculated on the income disclosed in the application as if it is the total income and such tax shall be the additional amount of income tax payable.
• In case applicant has furnished a return, additional income shall be calculated as under.
Total income returned A
Add : income disclosed in settlement commission B
Total c
Additional amount of income tax = tax on C-tax on A
• If the income so disclosed relates to more than one previous year,
The applicant shall aggregate income by using above methods.
• While in a case where assessment proceeding is pending u/s 153A, for all the seven years (1 year relevant to p.y when search is conducted and 6 a.y. immediately preceding the assessment year) putting together , the limit of 50 lakhs in aggregate should be fulfilled. If the applicant is filling application for lesser number of years the additional tax in aggregate should be 50 lakhs.

• Aggregation should be income and not offering of loss. CIT vs Express Newspapers Ltd.

• An application can be made by an assessee for settlement before the Commission only once in a lifetime

• There are other procedural requirements such as payment of prescribed fees and informing the concerned Assessing officer on the same date till the prescribed Form no.34 BA.

HOW TO FILL APPLICATION:
Settlement application is to be filed only in the prescribed Form No.34-B notified under the Income Tax Rules, 1962, which is to be signed by the applicant himself. The application can be made personally or by post. The applicant or his authorized representative can make application in person. Application can also be sent by registered post addressed to the Secretary of the concerned Bench of the income tax Settlement Commission.

The application should be accompanied by the proof of payment of additional Tax and interest under section 234B and 234C on it. The interest on the additional tax is chargeable till the date of admission of the application.

The application has to be accompanied by a copy of Challans of payment of tax which have to be attested by the applicant.

The application is also to be accompanied by the evidence of payment of the prescribed fee.At present the Amount of the fee is Fixed at Rs. 500/-.
PROCEDURE ON RECEIPT OF APPLICATION :
An application can be rejected by the Commission during the course of proceedings under section 245D (1) within 14 days of filling of the Settlement application if applicant does not fulfill required conditions mentioned above.. If the application is not rejected by the Commission within 14 days, it is deemed to have been admitted by it.
After the application has been admitted, the Commission calls for the report of the Commissioner of Income Tax under section 245D (2B). The Commission may treat an application as valid by passing an order under Section 245D (2C), If the report of the Commissioner is not received within the period of 30 days from the day the letter from the Commission is received by the Commissioner, or on the basis of satisfaction of the Commission, on the basis of the report of the Commissioner. The order of the Commission is to be passed within 15 days of the expiry of the period of 30 days given to the Commissioner for submitting the report.

The Commission is required to give an opportunity to the applicant before treating the application as invalid under Section 245D (2C).

Once an application has been held as valid, the Commission forwards the confidential part of the application to the Commissioner calling for his report under Rule 9 of the Income Tax Settlement Commission (procedure) Rules, 1997. This report is to be submitted by the Commissioner within 45 days. The Commission can allow further time, if needed by the Commissioner depending upon the facts of the case. Upon receipt of the Rule 9 Report, a copy of the same is sent to the applicant by post for submitting rejoinder on such report. A copy of rejoinder sent by the applicant is shared with the Commissioner.

The officers of the Commission then issue notice and fix hearing on a particular day and at a specified time. On the day of hearing, the applicant or his authorised representative and the Commissioner of Income Tax (or Assessing Officer) or his representative, namely Commissioner of Income Tax (Departmental Representative) appear before the Bench of the Settlement Commission. The Commission may ask the parties to further produce documents and submission. It may also ask the Commissioner to carry out further inquiry

After considering both sides, the Commission then passes the final settlement order under Section 245D (4), in writing. The settlement order provides for the terms of settlement which includes determining the amount of additional tax and interest thereon and the manner of payment. It also provides for levy of penalty, or waiver from penalty under the Income Tax Act or the Wealth Tax Act. The Settlement order under Section 245D (4) can be rectified by the Commission to correct mistakes apparent from records within 6 months of the order. However, where the effect of the rectification is to alter the tax liability of the applicant, due opportunity has to be given to the applicant as also the Commissioner.

Challenging the order of the settlement commission:

It can be challenged in court of law by filling a writ petition when
• Principles of natural justice violated
• Mandatory procedural requirements of law were not complied with.

Wealth tax settlement

Wealth tax settlement are similar to provisions contained in the income tax law except that there is no requirement of any minimum amount of additional wealth tax payable.

Thank you for reading

CA Tarannum Khatri

Rate of TDS of Payment of Interest to Non Resident under Section 195 of Income Tax Act

Rate of TDS on payment of interest or other sum chargeable to Income Tax to non resident or foreign company not being company  has to deduct income-tax thereon at the rates in force. Person has to deduct the TDS at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income then also person has to deposit the TDS on such amount. Following payment to non resident are not covered under section 195 of Income Tax Act.

  • Salary Payment to Non Resident
  • Payment of dividend as referred to in section 115O and
  • Payment of interest on Loan take in foreign curreny after 1st July 2012 under under a loan agreementor by by way of issue of long-term infrastructure bonds covered under section 194LC and Payment of interest to NRI on infrastructure debt fund under section 194LB of income tax act. In these case TDS rate on interest payment will be 5%.

TDS Rate Chart for Payment to NRI

S. No Nature of Income or Payment to NRI Rate of TDS
1 Payment of Interest on Infrastructure Debt Fund U/s 194LB 5%
2 Payment of interest on Loan take in foreign curreny on long-term infrastructure bonds covered under section 194LC 5%
3 Interest Income From NRO Account 30%
4 Income from Winning from Horse race and Gambling or lotteries 30%
5 Payment of Interest by Govt or Indian Concern 20%
6 Income from Long term capital gain 20%
7 Income from Short Term Capital Gain 30%
8 Income from Securites on which STT is paid u/s 111A 15%
9 Payment of fee for Techinal Services and Royalty u/s 115A 10%
10 Payment of fee for Techinal Services and Royalty for agreement between 01/06/1997 to 31/05/2005 20%
11 Payment of Any other Income for which no TDS rate is prescribe then TDS Rate Like Payment of Rent 30%
12 Payment of Any other Income for which no TDS rate is prescribe then TDS Rate for Foreign Companies will be 40%
13 Income by way of long-term capital gains u/s115E 10%
14 Any income from investment or income from long-term capital gains of an asset other than a specified asset u/s 115E 20%
15 Payment of income by way of  interest payable  by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency 20%
Note: Education cess of 3% will be applicable in all cases

The obligation to comply with section 195 and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

  1. a residence or place of business or business connection in India; or
  2. any other presence in any manner whatsoever in India.

When No TDS Deduction on Payment to NRI

If NRI believes that some of the income is not chargeable under the act then NRI can apply for exemption from TDS deduction to Assessee Officer and if AO is satisfied the he can issue certificate for same. NRI can make an make an application to AO for no TDS deduction in Form 15C and 15D under rule 29B of Income Tax Rules. Also as per section 197 of the income tax act and Rule 28, NRI can make an application in Form 13 for lower or no deduction in case of NRI is liable for NIL or lower Income Tax.

Reference: Section 195 of the Income Tax Act, 1961

TDS on Payment of Interest to Non Resident 

195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode:

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

Explanation 1—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

 (i)  a residence or place of business or business connection in India; or

(ii)  any other presence in any manner whatsoever in India.

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).

(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.

(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.]

(6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.

(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.