Section 176: special measures for transactions with notified jurisdictional areas

Introduction

Transactions with a person in a notified jurisdictional area can trigger special transfer-pricing treatment, evidence duties, deemed income and a higher withholding-rate rule. The jurisdiction must actually be notified, and each consequence has its own conditions.

Key takeaways

Notifying a jurisdictional area

The Central Government may, by notification, specify any country or territory outside India as a notified jurisdictional area for transactions with any assessee, having regard to the lack of effective exchange of information with that jurisdiction.

Deemed associated enterprise and international transaction

Where an assessee enters into a transaction in which one party is located in a notified jurisdictional area, irrespective of anything else in the Act:

• all parties to the transaction are deemed to be associated enterprises within the meaning of Section 162;
• any transaction of the nature described in Section 163(1) and (2) is deemed to be an international transaction within the meaning of Section 163, and the transfer pricing provisions of Sections 161, 162, 163, 165 (except the benefit of variation under Section 165(3)(a)(ii)), 166, 167, 171, 172 and 173 apply accordingly.

Disallowance of deductions

No deduction is allowed for a payment to a financial institution located in a notified jurisdictional area, unless the assessee furnishes a prescribed-form authorisation letting the Board (or an income-tax authority on its behalf) seek relevant information from that financial institution.

No deduction is allowed for any other expenditure or allowance (including depreciation) arising from a transaction with a person located in a notified jurisdictional area, unless the assessee maintains the prescribed documents and furnishes the prescribed information.

Unexplained sums received from a notified jurisdictional area

If, in a tax year, the assessee has received or credited any sum from a person located in a notified jurisdictional area, and either does not explain the source of that sum in the hands of that person (or the beneficial owner, if different), or the Assessing Officer is not satisfied with the explanation given, the sum is deemed to be the assessee's income for that year.

Higher TDS rate

Where a person located in a notified jurisdictional area is entitled to receive any sum, income or amount on which tax is deductible under Chapter XIX-B, tax must be deducted at the highest of: the rate or rates in force; the rate specified in the relevant provisions of the Act; or 30%.

Key definitions

"Person located in a notified jurisdictional area" includes a resident of that area, a non-individual person established there, and a permanent establishment there of any other person. "Permanent establishment" has the meaning assigned in Section 173(c), and "transaction" has the meaning assigned in Section 173(e).

Step-by-step flow for applying Section 176

1. 1

   Is a party to the transaction located in a notified jurisdictional area?

   A resident of the area, a non-individual established there, or a permanent establishment there, in an area notified by the Central Government.

   • No: Section 176 does not apply.
   • Yes: Go to the next step.
2. 2

   Apply transfer pricing

   All parties are deemed associated enterprises, and the transaction is deemed an international transaction. Sections 161, 162, 163, 165, 166, 167, 171, 172 and 173 apply, but without the benefit of the Section 165(3)(a)(ii) variation band.

3. 3

   Is a deduction claimed for a payment or expenditure?

   • Payment to a financial institution there: Allowed only if the prescribed authorisation is furnished to let the Board seek information from that institution.
   • Other expenditure or allowance, including depreciation: Allowed only if the prescribed documents are kept and the prescribed information is furnished.
4. 4

   Was any sum received from or credited by such a person?

   • Source not explained, or explanation not satisfactory: The sum is deemed income for that tax year.
5. 5

   Is tax deductible under Chapter XIX-B on a sum payable to such a person?

   • Yes: Deduct tax at the highest of: the rates in force, the rate specified in the Act, or 30%.

Practical checklist

Glossary

Notified jurisdictional area

A foreign country or territory specified by Central Government notification for inadequate information exchange.

Beneficial owner

The person whose underlying ownership of a sum can matter to the source-explanation test.

Frequently asked questions