CA Final May 2023 Suggested Answers Paper 6C International Taxation (Old Scheme)

FOR CA FINAL EXAM PREPARATION

CA Final 2023
Suggested Answers ·
Paper 6C International
Taxation (Old Scheme)
EXAM YEAR TYPE

CA Final 2023 Suggested Answers
SUBJECT DATE

Paper 6C International Taxation (Old Scheme) May 2023

Notes · Sample Papers · Previous Year Papers · Mock Tests

m
m .co
c. o

e m
em l a s
s a g

DISCLAIMER
This Suggested Answers hosted on the website do not constitute the basis for evaluation of the

m
m c. o
co
student’s answers in the examination. The answers are prepared by the Faculty of the Board of

. e m
e m
Studies with a view to assist the students in their education. Alternate Answers have bee n

la s
l a s a g
aerrorg or omission is noticed, the same may be brought to the attention of the Director , Board of
incorporated, wherever necessary. While due care is taken in preparation of the answers, if any

Studies. The Council of the Institute is not in any way responsible for the correctness or

otherwise of the answers published herein.

Further, in the Elective Papers which are Case Study based, the solutions have been worked

o m
out on the basis of certain assumptions/views derived from the facts given in the question o r

c
. to work out the solution to the case studies
m
e made or views taken.
language used in the question. It may be possible

la s
g
in a different manner based on the assumptions

a

m
m .co
c. o se
m
s em g la
gla a
a

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 1 of 36

2 FINAL EXAMINATION: MAY, 2023

PAPER 6C: INTERNATIONAL TAXATION
The Question Paper comprises of five case study questions. The candidates are required to
answer any four case study questions out of five.
All questions relate to Assessment Year 2023-24, unless otherwise stated in the
questions/case studies.
Case Study 1
Mega Ltd., Delhi
Mega Ltd. is a subsidiary of Lion Pte. of Singapore which has 60% of the share capital in Mega
Ltd. Pacific inc. of USA has 80% shareholding in Lion Pte. of Singapore. The Board of Directors
of Pacific Inc. decided to sell its entire shareholding in Lion Pte. to Dean Jones Inc. of USA. The
book value of assets of all the companies always exceeded ` 100 crores.
For the financial year 2022-23, Mega Ltd. had to pay interest of ` 70 lakhs to Atlanta Inc. of
Country Z for the rupee denominated bonds issued in February, 2019 and ` 80 lakhs by way of
interest to Indiana Ltd. of Country W in respect of rupee denominated bonds issued in May,
2020. On both the occasions, Mega Ltd. issued rupee denominated bonds outside India after
complying with all the requirements of relevant laws/regulations.
Mega Ltd. required working capital assistance of ` 10 crores and solicited help from its buyer
Mini Pte. of Canada. The total borrowings of Mega Ltd. was ` 20 crores before seeking
assistance from Mini Pte. The goods manufactured by Mega Ltd. are sold by Mini Pte in African
countries. In order to provide working capital assistance, Mini Pte. deposited money in a bank
account and based on that, a bank guarantee was given to advance money to Mega Ltd. by SBI,
Mumbai. The interest on loan was @ 9% per annum. In return for the guarantee, Mega Ltd. had
to pay 0.5% of the loan annually to Mini Pte as guarantee fee. Similar such facility was offered
by Super Inc. Canada at 0.2% of the loan as guarantee fee.
Mega Ltd. sold 50 lakhs units of Goods manufactured for ` 2,000 per unit to Mini Pte during the
previous year 2022-23. Similar goods were sold to others in Canada for ` 2,100 per unit. Mega
Ltd. allowed 3 months credit period to Mini Pte and whereas for other buyers it allowed 1 month
credit period. Cost of capital may be taken as 8% per annum.
The EBITDA of Mega Ltd. for the year ended 31.03.2023 was `·12 crores. Interest paid to SBI
for the loan was ` 95 lakhs and interest in respect of other borrowings from unrelated parties
was ` 300 lakhs for the year ended 31.03.2023.

The Suggested Answers for Final Paper 6C: International Taxation, in so far as they relate to
questions involving application of the provisions of Indian tax laws, are based on the provisions
of direct tax laws as amended by the Finance Act, 2022.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 2 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 3

Mega Ltd. has been exporting its goods to Chat Ltd. of UK as per the agreement entered into
by them. Every year, the exports exceeded ` 100 crores. Now, due to increased demand of

m
c. o
products of Mega Ltd., the terms of trade between Mega Ltd. and Chat Ltd. had to be revisited

m
and accordingly, a fresh agreement for 7 years was entered into on 10.09.2022. The Board of

.co e m
Directors of Mega Ltd. apprehend that the transfer price adjustment may be required in the light

em
of the fresh agreement entered into by the parties. Based on the pending assessments and
la s
a s g
litigation before Assessing Officer and CIT (Appeals), they want to analyse the possibility of

l
g Managing Director
entering into advance pricing agreement with rollback benefits.
a
aLaxman,
Laxman, the Managing Director of Mega Ltd. is a resident of India. His brother Anand left India
in 2015 for employment in USA and he is a non-resident. Both invested in Real Estate
Investment Trust (REIT) in September, 2020. REIT received dividend of ` 120 lakhs from ABC
Ltd., a special purpose vehicle in which the Business Trust has 90% shareholding. Both Laxman
and Anand have 10% of the units in the Business Trust. ABC Ltd. has not opted for section
115BAA.

m
In December, 2018, Anand bought 600 Global Depository Receipts (GDRs) of Maxima Ltd.,

co
India. These GDRs were issued in accordance with the notified scheme of the Central

.
Government against the company's initial issue of shares. Anand purchased GDRs in foreign

s em
currency through an approved intermediary. In October, 2022 Anand sold 400 GDRs outside

l a
India to Ramesh a citizen and resident of a country outside India and the balance 200 GDRs to

g Ltd.
Ravinder, Marketing Manager ofaMega
Rajini, a resident and but not ordinarily resident in India.

Ravinder, Marketing Manager of Mega Ltd. (looking after business interests in Europe and
America) is born and brought up in USA and is a citizen of USA. His parents and paternal
grandparents were born and brought up in USA but his maternal grandparents were born in
Dhaka, Bangladesh before 1930. He visited India every financial year from 1st November to 31st
January.
Parthiv, CEO of Mega Ltd.

m
co
Parthiv a management graduate from Harvard University was employed in Tomato LLP of

m .
Country S since June, 2014. He came to India on 15.11.2022 and joined as CEO of Mega Ltd.

c. o se
m
Parthiv was in India before he left for overseas education in December, 2010 and was

em la
subsequently employed outside India. There is no income-tax on the salary income earned from

s g
Tomato LLP in Country S. He earned interest income of ` 2,40,000 (net) in Country Q and salary

la a
income of ` 9 lakhs up to the date of his return to India in the financial year 2022-23. Tomato

ag LLP is wholly owned and managed by Deepak and his family who are residents and living in
Mumbai.
Salary income of Parthiv from Mega Ltd. up to 31.03.2023 was ` 13,50,000 (computed as per
provisions of the Income-tax Act, 1961)

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 3 of 36

4 FINAL EXAMINATION: MAY, 2023

Parthiv acquired shares in listed companies which were sold in the financial year 2022 -23, the
details of which are given below:
Name of No. of Date of Cost of Date of Sale FMV as on
company shares acquisition acquisition transfer price (per 31.01.2018
per share share)
Mango Ltd. 200 30.10.2016 ` 2,000 25.01.2023 ` 5,000 ` 4,000
Almond Ltd. 200 10.01.2018 ` 3,000 10.03.2023 ` 3,500 ` 2,500
Walnut Ltd. 100 15.07.2017 ` 2,000 22.03.2023 ` 3,500 ` 3,800
He has paid S TT both at the time of purchase and at the time of sale. Parthiv has opted for the
provisions of section 115BAC.
REQUIRED
Choose the most appropriate alternative for the following MCQs:
1.1 For considering the taxability in India, which of the Double Taxation Avoidance Agreements
would be preferred for deciding the taxability of the transfer of shares of Lion Pte.
Singapore by Pacific Inc. of USA?
(A) India-Singapore DTAA
(B) Singapore-USA DTAA
(C) India-USA DTAA
(D) Both India-Singapore DTAA and India-USA DTAA
1.2 At what rate tax is deductible at source on the interest paid by Mega Ltd. in respect of
rupee denominated bonds for the assessment year 2023-24?
(A) Tax deductible at source@ 5% (plus applicable surcharge and cess) in both the cases
(B) No tax is deductible at source in both the cases
(C) No tax is deductible at source for the interest paid to Atlanta Inc and TDS@5% (plus
applicable surcharge and cess) in respect of interest paid to Indiana Ltd.
(D) No tax is deductible at source for the interest paid to Indiana Ltd. and TDS@5% (plus
applicable surcharge and cess) in respect of interest paid to Atlanta Inc.
1.3 At what rate tax is required to be deducted at source by REIT out of dividend received from
ABC Ltd. distributed to Laxman and Anand?
(A) 10% for Laxman and 20% for Anand
(B) 0% for Laxman and 5% for Anand
(C) 30% for both Laxman and Anand
(D) 0% for both Laxman and Anand means TDS is not to be made on dividend distributed
to Laxman and Anand.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 4 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 5

1.4 Which one of the following statements is correct in respect of "GDRs" sold by Anand to
Ramesh?

m
c. o
(A) Profit from sale of 'GDRs' shall be charged under the head "Income from other

o m
sources".

c
(C) Sale.of 'GDRs' shall not be regarded as "transfer" for the purpose of "Capital Gain". e m
s
(B) Profit from sale of 'GDRs' shall be taxable under the head "Capital Gain".

em
(D)s Profit from sale of "GDRs" shall be charged under the head "Business Income". g l a
l a a
a1.5g What is the residential status of Ravinder for the assessment year 2023-24 under the
Income-tax Act, 1961?
(A) Resident and ordinarily resident
(B) Resident but not ordinarily resident
(C) Non-resident
(D) Resident but could not be determined whether ordinarily resident with the given
information (5 x 2 = 10 Marks)
DESCRIPTIVE QUESTIONS
o m
c
.as per the provisions of the Income-tax Act,
m
You are required to answer the following Descriptive questions:

s ethe assessment year 2023-24.
1.6 Determine the residential status of Parthiv

a
l Mini Pte are Associated Enterprises. Also, compute
1961 and compute his total income for
g
(5 Marks)

a
1.7 Determine whether Mega Ltd. and
the adjustment, if any, to the total income of Mega Ltd. is required in respect of goods
supplied to Mini Pte and the interest paid for the loan availed by Mega Ltd. You may also
consider the impact of EBITA. (5 Marks)
1.8 As the International Tax Manager of Mega Ltd., advise the company regarding the
possibility of entering into advance pricing agreement (including pre-filing consultation)
and on the rollback benefits. (5 Marks)
Solution to Case Study 1

m
m .co
Answers to Q.1.1 to Q.1.5

c. o MCQ No. Correct Option

se
m
em la
1.1 C

las 1.2 C
a g
ag
1.3 D
1.4 C
1.5 C

m .
.co s e m
m
e Accountants of India l a
l a s ag
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 5 of 36

6 FINAL EXAMINATION: MAY, 2023

Answer to Q.1.6
Determination of Residential Status of Parthiv for the AY 2023-24
As per section 6(1), in order to be a resident of India in the P.Y.2022 -23, Parthiv should satisfy
either of the following two conditions -
(1) His stay in India should be for a period of 182 days or more in the P.Y.2022 -23; or
(2) His stay in India should be for a period of 60 days or more in the P.Y.2022 -23 and for a
period of 365 days or more in the four immediately preceding previous years.
Parthiv’s stay in India in the P.Y.2022-23 is 137 days (i.e., 16 days + 31 days +31 days +28
days + 31 days). The question mentions that he left India in December, 2010. Since there is no
information in the question relating to his visits to India thereafter, his stay in India in the four
immediately preceding previous years would be Nil.
Therefore, he does not satisfy either condition (1) or condition (2) for being a resident.
As per section 6(1A), an individual who is a citizen of India would be deemed to be a resident
of India if his total income, other than income from foreign sources, exceed ` 15 lakh during the
relevant previous year and he is not liable to tax in any other country by reason of his domicile
or residence or any other criteria of similar nature.
Parthiv’s total income, other than income from foreign sources, would be ` 17,00,000 for
A.Y.2023-24 as shown below -
Particulars `
Salary income of Parthiv from Mega Ltd. (` 13,50,000 + ` 50,000 standard 14,00,000
deduction not allowable), assuming that salary of `13,50,000 has been
computed as per the regular provisions of the Act
Long-term capital gains (See Working Note below) 3,00,000
17,00,000
Note – It is possible to consider salary income from Mega Ltd. as ` 13,50,000 assuming
that the same has been computed as per section 115BAC, in which case the total income
(excluding income from foreign sources) would be ` 16,50,000.
Mr. Parthiv is not liable to income-tax in Country S in respect of his salary income. Assuming
that he is a citizen of India and that he is also not liable to pay income -tax in respect of
interest income earned in Country Q, he would be deemed resident in India under section
6(1A) for A.Y.2023-24. A deemed resident is, by default, a not ordinarily resident.
In such a case, his total income for A.Y.2023-24 would be ` 17,00,000/` 16,50,000,
depending on the assumption made, as worked out above.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 6 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 7

Alternatively, if it is assumed that Mr. Parthiv is not an Indian citizen or that he is liable to
pay income-tax in respect of interest income earned in Country Q, then, the provisions of

m
c. o
section 6(1A) would not apply to him. He would be a non-resident for A.Y.2023-24.

m
co m
In such a case, his total income would comprise of salary earned from Mega Ltd.

.
(` 14,00,000/` 13,50,000, depending on the assumption made) and long-term capital
m s e
s e la
gains of ` 3,00,000. His total income for A.Y.2023-24 would accordingly be ` 17,00,000 /

l a
` 16,50,000, depending on the assumption made.
a g
g Note - Long-term capital gains on sale of shares of listed companies
aWorking
(1) (2) (3) (4) (5) (6) (7) (8)
Name of the No. of Sale FMV as on Lower Cost at Cost of Capital
company shares Price 31.1.2018 of (3) which acquisition gains
and (4) shares Higher of [(3) – (7)]
were (5) and (6) x (2)
acquired
` ` ` ` ` `

o m 3,000 3,000 1,00,000
Mango Ltd. 200 5,000 4,000 4,000 2,000 4,000 2,00,000
Almond Ltd. 200 3,500 2,500
c
. 3,500 2,000 3,500
2,500

e m
s
Walnut Ltd. 100 3,500 3,800 -
Long-term capital gains

gl a 3,00,000

Answer to 1.7
a
Two enterprises would be deemed to be associated enterprises as per section 92A(2), if one
enterprise guarantees not less than 10% of the borrowings of the other enterprise.
Mega Ltd. and Mini Pte are deemed to be associated enterprises, since Mini Pte has given a
constructive guarantee to borrowings of ` 10 crores by Mega Ltd. from SBI, Mumbai, which
represents 33.33% of total borrowings of Mega Ltd.
Adjustment to the total income of Mega Ltd. on account of goods supplied to NRAE Mini

m
Pte, applying CUP method

m c. o
c. o
Particulars Amount per

m
se 2,100
unit (in `)

em la
Sale price per unit to unrelated party in Canada

las Add: Cost of credit for 2 months [` 2,100 x 8/100 x 2/12]
a g 28

ag Arm’s Length Price per unit
Less: Sale price per unit to Mini Pte
2,128
2,000
Arm’s Length Adjustment per unit 128
Total number of units sold to Mini Pte - 50 lakh

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 7 of 36

8 FINAL EXAMINATION: MAY, 2023

Arm’s length adjustment (50,00,000 x ` 128) = ` 6,400 lakhs
Guarantee fee (falls within the meaning of interest) – Arm’s length
adjustment
Guarantee fee paid by Mega Ltd to NRAE – 0.5%
Guarantee fee charged by unrelated party – 0.2%
Arm’s length adjustment = (0.5% -0.2%) x ` 10 crores = ` 3 lakhs
Interest disallowance u/s 94B
Since the interest is paid to SBI, Mumbai, which is an Indian bank (resident in India), there
is no base erosion and profit shifting. Hence, section 94B would not be attracted on payment
of interest to SBI, Mumbai. Further, the provisions of section 94B would not be attracted in
respect of guarantee fee paid to Mini Pte, since the same does not exceed ` 1 crore.
Note - In any case, section 94B would not apply since the interest payable by Mega Ltd.
(including guarantee fee) does not exceed ` 1 crore.
Answer to 1.8
Since Mega Ltd. has undertaken international transactions (being export of goods) with Chat
Ltd. UK (assumed to be its associated enterprise), it is eligible to enter into an Advance Pricing
Agreement.
Mega Ltd. has to make an application in writing requesting for a pre-filing consultation in the
prescribed form to the Director General of Income-tax (International Taxation).
The pre-filing consultation would, amongst other things,-
(i) determine the scope of the APA;
(ii) identify transfer pricing issues;
(iii) determine the suitability of international transaction of export of goods for the APA;
(iv) discuss broad terms of the APA.
The pre-filing consultation, however, shall not –
(i) bind the Board or the person to enter into an APA or initiate the APA process;
(ii) be deemed to mean that the person has applied for entering into an APA.
For entering into APA, Mega Ltd. has to furnish an application in the prescribed form along with
proof of payment of requisite fee as specified, to the Director General of Income -tax
(International Taxation) in case of unilateral agreement and to the competent authori ty in India
in case of bilateral or multilateral agreement. The application may be filed at any time before
1.4.2023, in which case the APA would apply from A.Y.2024-25.
The APA may also provide for determining the arm’s length price or specify the manner in which
arm’s length price shall be determined in relation to the international transaction of export of
goods entered into by Mega Ltd. during the rollback year.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 8 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 9

Mega Ltd. can make an application for rollback for any previous year, falling within a period not
exceeding four previous years, preceding P.Y.2023-24, being the first of the five previous years

m
for which the APA applies.

m c. o
co
However, the international transaction has to be the same as the international transaction to

. e m
which the agreement (other than the rollback provision) applies. In this case, this condition is

em
satisfied since it is for export of goods, and hence, the international transaction is the same.

la s
l a s
Mega Ltd. has to furnish modified return of income in respect of roll back years to which APA
a g
aTheg appeal before Commissioner (Appeals) to the extent of the subject covered under the APA
applies along with proof of payment of additional tax arising as a consequence of roll back
provision.

has to be withdrawn by Mega Ltd. before furnishing the modified return for the said year.
Case Study 2
Autofit Limited
Resident of Country X, Autofit Limited ("Autofit") is engaged in the business of manufacture and
sale of automotive emission test equipment. The Company has established a wholly -owned

m
co
subsidiary in India, AFL India; to help identify customers and carry out market research, as well

.
as play a coordination role between the Parent company and the customers in India. It has an

em
office in Pune India, which maintains stock of goods for storage, display as well as delivery to

a s
third party customers in India. The company considers this activity as preparatory in nature

l
g X is in line with the OECD Model Convention
because all sales order and contracts are negotiated and executed by Autofit in Country X.

a
The DTAA between India and Country
AFL India
For the F.Y.2022-23, AFL India has reported revenue of INR 12,50,00,000 which entirely
comprises of service revenue from Autofit Limited. APL India has reported a net profit of
INR 1,12,00,000 after debiting interest on various loans as detailed below, depreciation and
amortization of INR 23,00,000 and tax of INR 52,00,000. Further, APL India had a disallowed
excess interest of INR 34,00,000 in the Assessment Year 2022-23, as per the EBITDA norms.

m
• Interest on a loan of INR 8 crores availed from AFL UK on 01 Sept. 2022 at an interest rate

m .c o
of 6.6%. Autofit Limited holds 25% voting power in AFL UK and the rest being held by a

c. o m
unrelated joint venture partner. AFL India has no. direct or indirect participation in the

m
management, control or capital of AFL UK;
• Interest on a working capital loan of INR 10 crores availed from the a s ebranch of MNC
s e g lby the Bank on 1 May
a
India

l a
ag
Bank of the UK, at an interest rate of 7.9%. The loan was provided
2022 against a corporate guarantee provided by Autofit;
• Interest on a loan of USD 2 million @5% issued by the New York branch of the Bank of
USA, based on a back-to-back deposit made by Autofit of the same amount. For the FY
2022-23, AFL India paid an interest to the tune of INR 1,05,00,000 on this loan;

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 9 of 36

10 FINAL EXAMINATION: MAY, 2023

• Interest on delayed payments @7% made to AFL China, amounting to INR 1,07,00,000 for
the FY 2022-23. Autofit holds 25% voting power in AFL China. Autofit appoints more than
half of the directors on the board of AFL China;
Mr. Bernard, an employee of Autofit Limited
During the FY 2022-23, Autofit Limited deputed one of its employees, Mr. Bernard, to India, to
assist with installation of Auto fit's products at one of its customers' premises. He came to India
for the first time on 24th April 2022 and left India on 30th November 2022.
New manufacturing unit
Autofit Limited is setting up a new manufacturing unit under a new subsidiary in India - AFL
Precision. It is intended that AFL Precision would avail new beneficial tax rate of 18% under
section 115BAB of the Income-tax Act, 1961. For the set-up of the manufacturing facility, AFL
Precision has awarded a composite contract to AFL Sweden, another wholly -owned subsidiary
of Autofit Limited. The entire consideration of the contract is split between (i) design
consultancy, (ii) offshore supply of equipment and (iii) local supplies and installation.
REQUIRED
Choose the most appropriate alternative for the following MCQs:
2.1 Which of the following statement is correct regarding Mr. Bernard's presence in India
during the F.Y. 2022-23? Assume that at present, Autofit does not have a fixed place PE
in India and DTAA between India and country X is in line with OECD convention-
(A) Mr. Bernard's presence in India, being less than 12 months, would not create Autofit's
Permanent Establishment ('PE') in India
(B) Mr. Bernard's presence in India, being more than 183 days, would create Autofit's PE
in India
(C) Mr. Bernard will be eligible for short stay exemption because his stay in India did not
exceed 300 days
(D) Mr. Bernard will be eligible for short stay exemption only if Autofit declares that it has
a PE and claims the salary expense as a deduction from the income offered for tax
2.2 Given the facts regarding Mr. Bernard and assuming that Autofit Limited does not have a
Fixed place PE in India, how many minimum number of days of Mr. Bernard's presence in
India during the previous year would constitute a PE, if the DTAA between India and
Country X is in line with the UN Model Convention 2017?
(A) 1 day
(B) 182 days
(C) 183 days
(D) 184 days

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 10 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 11

2.3 Which of the following measures proposed under the Base Erosion and Profit Shifting
(BEPS) initiative of the OECD may restrict Autofit in claiming exemption from Permanent

m
Establishment as activities being preparatory or auxiliary in nature?

o m
(A) Limitation of Benefit (LoB) rule
c. o
.c e m
s
(B) Anti-fragmentation rules

e m l a
s g
(C) Controlled Foreign Company (CFC) rules

l a a
a2.4g InInternational
(D) Principal Purpose Test (PPT) rule
which of the following circumstance, in cases AFL India is constituent entity of 'Autofit'
Group, the provision of furnishing of report in respect of international group
shall apply if the total consolidated group revenue
(A) In the accounting year exceeds ` 5,500 crores.
(B) In the preceding accounting year exceeds ` 5,500 crores.
(C) In the preceding accounting year exceeds ` 6,400 crores.
(D) In the accounting year exceeds ` 6,400 crores.

m
c. o
2.5 Autofit is considering obtaining an Advance Ruling in respect of some transactions it
proposes to undertake in India and for seeking clarity on the aspect of PE in India. Which
m by the Board of Advance Ruling may
epronounced
s
of the following statement is incorrect in regard to Advance Rulings?

la60 days from the date of communication of that ruling
(A) Autofit, if aggrieved by the ruling
g
(B) Autofit can withdraw theaapplication within 30 days from the date of the application
appeal to the High Court within

(C) Autofit can file application only in relation to Eligible transactions it has undertaken
and not in relation to those it proposes to undertake
(D) The ruling is binding on the Principal Commissioner and authorities subordinate to
him. (5 x 2 = 10 Marks)
DESCRIPTIVE QUESTIONS

m
You are required to answer the following descriptive questions:

m .co
c. o
2.6 Please advise Autofit Limited on whether maintenance of stock of goods solely for storage,

m
se
display and delivery by AFL India would constitute Permanent Establishment in India.

em a
Would your answer be different, if India's DTAA with Country X was in line with the UN

as
Model Convention, 2017?
g l (3 Marks)

l a
ag
2.7 Based on the details provided in respect of interest paid by AFL India during the FY 2022-
23, determine the amount of interest permissible as deduction while computing income
under the head "Profits and gains of business or profession", as per the EBITDA norms.
Provide brief reason for the treatment of each item of interest regarding the limitation of
interest deduction computation. (7 Marks)

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 11 of 36

12 FINAL EXAMINATION: MAY, 2023

2.8 Examine whether the Assessing Officer (AO) can challenge the allocation of composite
price paid by AFL Precision to AFL Sweden, between various components (supply of
designs, offshore supply of equipment and onsite supply and installation) under the GAAR
provisions. Enumerate the conditions to be satisfied for the GAAR provisions to be invoked.
Can the AO examine the arrangement under any Specific Anti-avoidance Rules instead of
GAAR? (5 Marks)
Solution to Case Study 2

Answers to Q.2.1 to Q.2.5
MCQ No. Correct Option
2.1 A
2.2 D
2.3 B
2.4 C
2.5 C or D

Note – MCQ 2.5 requires the candidates to choose the incorrect statement in regard to Advance
Rulings in respect of some transactions proposed to be undertaken by Autofit and for seeking clarity
on the aspect of PE in India. The statements in both options (C) and (D) are incorrect.
Answer to 2.6
Autofit Ltd. is a Country X company, which has a DTAA with India in line with OECD Model
Convention.
Article 5(2) of OECD Model Convention specifically includes an office in the definition of PE.
However, as per Article 5(4), PE shall be deemed not to include maintenance of a stock of goods
or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery,
provided that such activity is of a preparatory or auxiliary character.
Autofit Ltd. has an office in Pune. However, it would not constitute a PE, since office in Pune is
to maintain stock of goods solely for storage, display and delivery of goods to third party
customers in India, and these activities are of preparatory or auxiliary character since all the
sales orders and contracts are negotiated and executed directly by Autofit in Country X.
Test of the existence of PE as per UN Model Convention
If the India’s DTAA with Country X is in line with the UN Model Convention, PE shall be deemed
not to include maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage and display. Under UN Model Convention, “delivery” of goods does
not qualify as an exception to the definition of PE.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 12 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 13

Since the office in Pune of Autofit maintains stock of goods for also delivery to third party
customers in India, it may constitute PE in India.

m
c. o
Answer to 2.7

m
co m
Section 94B is applicable to an Indian company or a permanent establishment of a foreign

.
company in India, being the borrower who pays interest in respect of any form of debt issued
m s e
s e la
by-

l a a g
a• g byguarantee
• non-resident, being an associated enterprises (AE) of such borrower; or
a lender which is not an AE but where the AE provides either implicit or explicit
to such lender or deposits a corresponding and matching amount of funds with
the lender, then such debt would be deemed to have been issued by an AE.
However, section 94B is not applicable in case of interest paid in respect of a debt issued by a
lender which is a PE in India of a non-resident, being person engaged in the business of banking.
Computation of permissible deduction under the head “Profits and gains from business
or profession” of AFL India for A.Y. 2023-24

(i) Interest on loan to AFL UK [` 30,80,000 (` o m x 6.6% x 7/12)]
Particulars ` in lakhs

c
[AFL UK is not an associate enterprise of. AFL India since AFL India
8 crores -

e m
capital of AFL UK. Also, Autofit a
l s
has no direct or indirect participation in the management, control or

India, does not hold 26% orgmore of the voting power in AFL UK.
a
Ltd., 100% holding company of AFL

Hence, the amount of interest paid on such debt is not to be
considered for the purpose of section 94B.]
(ii) Interest to Indian branch of MNC Bank of UK [` 72,41,667 (`10 -
crores x 7.9% x 11/12)]
[Disallowance u/s 94B is not applicable on interest paid for loan
issued by Indian branch of a non-resident bank]
(iii) Interest of ` 1,05,00,000 to New York branch of the Bank of USA 1,05,00,000

m
co
[Since AFL India is a wholly owned subsidiary of Autofit, both are

m .
c. o
associated enterprises. The debt issued by New York branch of Bank

m
se
of USA would be deemed as issued by Autofit, being the AE, since

em la
such loan is given based on deposits made by Autofit. Hence, the

s g
amount of interest paid on such debt has to be considered for the

la (iv) Interest on delayed payment of ` 1,07,00,000 to AFL China a
purpose of section 94B.]

ag 1,07,00,000
[Autofit Ltd. is an associated enterprise of AFL China, since it
appoints more than half of the directors on the board of AFL China.
Autofit Ltd. is the holding company of AFL India. Since Autofit Ltd.

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 13 of 36

14 FINAL EXAMINATION: MAY, 2023

participates in the management of AFL China and has capital and
control over AFL India, AFL India and AFL China would be associated
enterprises. Hence, interest on delayed payment to AFL China has
to be considered for the purpose of section 94B]
Interest paid or payable to non-resident AE for section 94B 2,12,00,000
Computation of EBITDA `
Net profit 1,12,00,000
Add: Depreciation 23,00,000
Tax 52,00,000
Interest
[` 30,80,000 + ` 72,41,667 + ` 1,05,00,000 + ` 1,07,00,000] 3,15,21,667
EBITDA 5,02,21,667
30% of EBITDA = 30% of ` 5,02,21,667 1,50,66,500
Excess Interest: Lower of the following would be disallowed
- Interest paid or payable to non-resident AE in excess of 30% of
EBIDTA [` 2,12,00,000 – ` 1,50,66,500] ` 61,33,500
- Interest paid or payable to non-resident AE ` 2,12,00,000
Lower of the above is ` 61,33,500. Hence, disallowance u/s 94B
would be ` 61,33,500.
Excess Interest of ` 34,00,000 carried forward from A.Y. 2022-23 is
not allowed in A.Y. 2023-24.
Interest allowed as deduction (` 3,15,21,667 – ` 61,33,500) 2,53,88,167

Note - Section 94B(1), provides that notwithstanding anything contained in this Act, where an
Indian company, or a permanent establishment of a foreign company in India, being the
borrower, incurs any expenditure by way of interest or of similar nature exceedin g one crore
rupees which is deductible in computing income chargeable under the head "Profits and gains
of business or profession" in respect of any debt issued by a non-resident, being an associated
enterprise of such borrower, the interest shall not be deductible in computation of income under
the said head to the extent that it arises from excess interest, as specified in sub -section (2).
The above solution has been worked out on the basis of the provisions of section 94B(1) read
with the intent expressed in the Explanatory Memorandum to the Finance Bill, 2017.
However, as per section 94B(2), the excess interest shall mean an amount of total interest paid
or payable in excess of 30% of earnings before interest, taxes, depreciation and amortization
(EBITDA) of the borrower in the previous year or interest paid or payable to associated
enterprises for that previous year, whichever is less.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 14 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 15

An alternate view may be possible on the basis of the interpretation as per the plain reading of
section 94B(2). Accordingly, the alternative computation on the basis of plain reading of section

m
c. o
94B(2) is given below -

m
co
Alternate Solution

. e m
m s
Section 94B is applicable to an Indian company or a permanent establishment of a foreign

s e la
company in India, being the borrower who pays interest in respect of any form of debt issued by -

l a a g
a• g byguarantee
• non-resident, being an associated enterprises (AE) of such borrower or
a lender which is not an AE but where the AE provides either implicit or explicit
to such lender or deposits a corresponding and matching amount of funds with
the lender, then such debt would be deemed to have been issued by an AE.
However, section 94B is not applicable in case of interest paid in respect of a debt issued by a
lender which is a PE in India of a non-resident, being person engaged in the business of banking.
Computation of permissible deduction under the head “Profits and gains from business
or profession” of AFL India for A.Y. 2023-24

m
Particulars Amount

. co
(` in crores)

em
Interest paid or payable to non-resident associated enterprises (as computed 2,12,00,000

a s
above)
Interest paid to other enterprises:
g l
Interest paid to AFL UK a
Interest paid to Indian branch of MNC Bank of UK
30,80,000
72,41,667
Total interest paid or payable 3,15,21,667
EBITDA (as computed above) ` 5,02,21,667
30% of EBITDA = 30% of ` 5,02,21,667 ` 1,50,66,500
Excess Interest: Lower of the following would be disallowed - 1,64,55,167
- ` 1,64,55,167
m
Interest paid or payable in excess of 30% of

c o
EBIDTA [` 3,15,21,667 – ` 1,50,66,500]

m Excess Interest of ` 34,00,000 carried forward from A.Y. 2022-23 is not m.
c. o allowed
- Interest paid or payable to non-resident AE ` 2,12,00,000

m s e
s e in A.Y. 2023-24.
g a
lhead
l a a be 1,50,66,500
ag
Therefore, interest paid or payable allowable as deduction under the
“Profits and gains of business or profession” would
` 1,50,66,500 (` 3,15,21,667 – ` 1,64,55,167).

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 15 of 36

16 FINAL EXAMINATION: MAY, 2023

Answer to 2.8
Application of GAAR Provisions
The allocation of composite price paid by AFL Precision to AFL Sweden between different
components can be challenged by the Assessing Officer by invoking GAAR provisions, if it has
been done in a manner as to reduce tax liability of the foreign company in Indi a (for example, a
higher value is attributed to the component which has a lower tax rate or which is not chargeable
to tax and a lower value is attributed to the component which has a higher tax rate).
Conditions for invoking GAAR provisions
1. The main purpose or one of the main purpose of the arrangement entered into by AFL
Precision to AFL Sweden is to obtain tax benefit and any of the following tests is satisfied
- creates, rights, or obligations, which are not ordinarily created between persons
dealing at arm’s length
- results, directly or indirectly, in the misuse, or abuse, of the provisions of the Act
- lacks commercial substance or is deemed to lack commercial substance
- is entered into, or carried out, by means, which are not ordinarily employed for bona
fide purpose.
2. The tax benefit in the relevant assessment year arising, in aggregate, to AFL Precision
and AFL Sweden to the arrangement should exceed ` 3 crores.
Examination of arrangement under SAAR provisions
AFL Precision and AFL Sweden are associated enterprises since both are subsidiaries of Autofit
Limited. Accordingly, transfer pricing provisions would be applicable in the hands of AFL
Precision on the transactions between AFL Precision and AFL Sweden, if such transactions are
not at arm’s length. However, the transfer pricing adjustment should not have the effect of
reducing the income chargeable to tax or increasing the loss of AFL Precision.
Case Study 3
Manish Ltd., Delhi
Manish Ltd., Delhi is engaged in manufacturing of Men's apparel. It is a subsidiary of Skylark
Inc. of Country N, which has 28% shareholding in it. For the year ended 31st March, 2022,
Manish Ltd. declared dividend and the quantum of dividend eligible for its holding company
Skylark Inc. of Country N was ` 2.10 crore. The DTAA between India and Country N provides
for taxation of dividend @15%. Country N is an OECD Country since 1 st April, 2012. The DTAA
between India and Country N came in to force w.e.f. 1st January, 2017. Later on, India entered
in to a DTAA with Country T which came into force w.e.f. 25th April, 2019 which provided for
taxation of dividend @ 5%. Country T was a member of OECD since 1st January, 2018. On 25th
October, 2022, Manish Ltd. celebrated its golden Jubilee and to add colour to the occasion,

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 16 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 17

invited Allan Wilson of Italy, a famous football player and Richie Rich a famous cricket umpire
from Australia. The company paid ` 20 lakhs to Allan Wilson and ` 10 lakhs to Richie Rich. It

m
was agreed that the company would bear their income-tax liability in respect of those incomes.

m c. o
co
Manish Ltd. has a subsidiary company in a low tax jurisdiction with 90% shareholding. It has

. e m
made its investment in the subsidiary by way of share capital of ` 45 crores, The normal profit

e m
of the subsidiary company is 20% of capital employed. Manish Ltd. on 20th August, 2022

la s
s g
received 90% of the post-tax profits of the subsidiary company of the year ended 31st March,

l a
g service from foreign companies
2022 being ` 8.10 crore by way of interest-free loan.
a
aAvailing
Donald, the Production Manager of Dolly GmbH of Germany, was sent to Manish Ltd. for doing
some supervisory activities for quality control of goods manufactured in India by Manish L td. He
was paid salary of ` 4,50,000 per month by Dolly GmbH. He stayed in India for 2 months during
the financial year 2022-23. Donald had no other income in India except the said salary income.
Dolly GmbH has no business activity in India and has sent Donald only for short stay in India.
Eagle Ltd. of Country S rendered some technical services to Manish Ltd. during the previous
year 2022-23. The amount payable to Eagle Ltd. towards fee for technical services (FTS)

m
co
amounts to ` 200 lakhs. The treaty between India and Country S provides for 10% as tax

.
withholding rate on FTS. The agreement is not covered by any approval from Indian

em
Government. The services were rendered for Manish Ltd. in India by the personnel deputed by

a s
Eagle Ltd. (who are regular employees of Eagle Ltd.). The period of stay of employees was from

l
g
1.7.2022 to 30.11.2022. Salary of those employees for the period of stay aggregating to ` 60

a
lakhs was paid directly in India by Manish Ltd. However, the original employer of those
employees viz; Eagle Ltd. paid them special allowance into their bank account in Country S
aggregating to ` 15 lakhs (converted in INR).
Jagdish, CEO of Manish Ltd.
Jagdish was Chief Executive Officer of Manish Ltd. for about 30 years and up to 31.07.2018. He had
acquired an apartment in the financial year 2017-18 for ` 40 lakhs of which only 50% was disclosed
in his ITR filed for assessment year 2018-19. Based on the information from the Enforcement
Directorate vide its report dated 05.06.2021 it came to light that the apartment was acquired outside

m
co
India by earning income in India which was not disclosed for income-tax purposes. Notice under

m .
c. o Ramesh, Director of Manish Ltd.
section 10 of the Black Money Act was issued on 30th June, 2022. The fair market value of the
m
se
apartment as on 01.04.2021 was ` 80 lakhs and as on 01.04.2022 ` 100 lakhs.

s em g l a
gla a under section 16(ia)
Ramesh is a director of Manish Ltd. who joined on 01.10.2022. His income in India for the previous

a
year 2022-23 consisted of (i) salary income without deduction
` 21 lakhs (computed); (ii) received as unit holder of Real Estate Investment Trust (REIT)
` 2,84,400 being interest component received from Hyper Ltd. a special purpose vehicle which
has opted for section 115BAA. His income outside India for the year ended 31.03.2023 consisted

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 17 of 36

18 FINAL EXAMINATION: MAY, 2023

of (a) Gross rent from a property in Country X ` 5 lakhs; (ii) loss from rubber business in Country
Y ` 3 lakhs; and (iii) agricultural income in Country Z ` 2 lakhs. The rate of tax in Country X,
Country Y and Country Z are 25%, 15% and 20% respectively. The DTAA between India and
Country Z provides for income from agriculture being taxed in the Source State and not taxable in
the Resident State. There is no agreement between India and Country X and between India and
Country Y. Assume there is no basic exemption limit in foreign countries where he has earned
income and that he has opted for section 115BAC of the Income-tax Act, 1961.
REQUIRED
Choose the correct alternative for the following MCQs:
3.1 What is the income tax payable by Manish Ltd. for the payments made to Allan Wilson and
Richie Rich, respectively?
(A) ` 5.25 lakhs / 4.29 lakhs
(B) ` 4.53 lakhs / 4.29 lakhs
(C) ` 5.25 lakhs / 4.53 lakhs
(D) ` 5 lakhs / 4.53 lakhs
3.2 How much is the optimal tax liability of Donald in respect of his salary income in India for
the assessment year 2023-24?
(A) ` 85,800
(B) ` 62,400
(C) ` 54,600
(D) ` Nil
3.3 What is the scope of section 192 for Manish Ltd. in respect of the salary paid by it to the
employees of Eagle Ltd. in India and special allowance paid to them in USA by Eagle Ltd.?
(A) TDS u/s 192 would apply only in respect of salary paid to them in India by Manish
Ltd.
(B) TDS at the rate applicable for fee for technical services as per DTAA between India
and USA or at the rate prescribed, whichever is lower, is deductible.
(C) TDS u/s 192 would apply both for salary paid to them in India by Manish Ltd. and
allowance paid by Eagle Ltd. in USA to those employees.
(D) TDS at the rate applicable for fee for technical services as per DTAA between India
and USA or at the rate prescribed, whichever is higher.
3.4 Which of the BEPS action plan is intended to curb the act of Manish Ltd. obtaining its share
of dividend in the guise of loan from the subsidiary company located in low tax jurisdiction?
(A) Action Plan 5 - Counter harmful tax practices

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 18 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 19

(B) Action Plan 4 - Interest deductions and other financial payments
(C) Action Plan 3 - Strengthen Controlled Foreign Company Rules
m
m c. o
(D) Action Plan 2-Neutralise the effects of hybrid mismatch arrangements

.co
3.5 How much would be the undisclosed foreign asset liable to tax under the Black Money
s e m
e m
(Undisclosed Foreign income and Assets) and Imposition of Tax Act, 2015 in the hands of
la
a s
l(A) ` 40 lakhs
Jagdish?
a g
ag (B) ` 50 lakhs
(C) ` 80 lakhs
(D) ` 100 lakhs (5 x 2 = 10 Marks)
DESCRIPTIVE QUESTIONS
You are required to answer the following questions:

m
3.6 (i) Examine whether as per UN Model Convention, Eagle Ltd. had PE in India in the

c o
(ii) State the documents to be furnished by. Eagle Ltd. to obtain treaty benefit in respect
previous year 2022-23?

s em
gla if the employees of Eagle Ltd. stay up to 10.01.2023,
of its income by way of FTS.

as per the OECD ModelaConvention?
(iii) Would your answer be different,
(5 Marks)
3.7 Compute the total income and tax liability of Ramesh for the assessment year 2023 -24.
[Tax rates may be calculated upto 2 decimal places] (4 Marks)
3.8 Explain briefly what is meant by the 'Most Favoured Nation' clause in treaties and examine
whether Skylark Inc. can seek concessional rate of tax in respect of its dividend income by
invoking the said clause based on the DTAA between India and Country T. Ass ume that
the protocol annexed to India's DTAAs with all the OECD member countries contain the

m
tax parity clause. (6 Marks)

m .co
Solution to Case Study 3

c. o Answers to Q.3.1 to Q.3.5 se
m
s em g la
a
MCQ No. Correct Option

l a
ag
3.1 C
3.2 D
3.3 C
3.4 C
3.5 A or B

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 19 of 36

20 FINAL EXAMINATION: MAY, 2023

Note – For Q. No. 3.5, undisclosed asset located outside India is to be charged to tax on its
value in the previous year in which the asset comes to the notice of the Assessing Officer.
Accordingly, the fair market value of the property as on the 1 st April of the said previous year is
to be considered for the purpose of determining the value of such undisclosed asset.
In the facts given in the question relating to Jagdish, CEO of Manish Ltd., it is stated that based
on the information from the Enforcement Directorate vide its report dated 05.6.2021 it came to
the light that apartment was acquired outside India which was not disclosed for income -tax
purposes. Notice under section 10 of the Black Money Act was issued on 30 th June 2022. The
date of report of ED is 5.6.2021 and date of issue of notice by the Assessing Officer is 30.3.2022.
However, the date when the asset comes to the notice of the Assessing Officer is not mentioned
– it could be any time between 5.6.2021 and 30.3.2022.
In the absence of such information, it is possible to assume that such apartment, being
undisclosed asset came to the notice of the AO in the P.Y. 2021-22 (i.e., between the date of
ED report 5.6.2021 and 31.3.2022). In such case, the value of undisclosed foreign asset wou ld
be ` 40 lakhs (` 80 lakhs, being the FMV as on 1.4.2021 x 50%). Alternatively, if it is assumed
that such asset came to the notice of the AO in the P.Y. 2022-23, being the year in which notice
is issued, the value of undisclosed foreign asset would be ` 50 lakhs (` 100 lakhs, being the
FMV as on 1.4.2022 x 50%). Accordingly, either option (A) or option (B) can be chosen as the
correct answer.
Answer to 3.6
(i) The UN Model Convention, 2017 incorporates the concept of service PE. To constitute a
PE, the activities carried on through the personnel engaged by the enterprise for furnishing
services, including consultancy services should continue within a Contracting State for a
period of periods aggregating more than 183 days in any 12 month period commencin g or
ending in the fiscal year concerned.
In this case, the personnel deputed by Eagle Ltd. stayed for a period from 1.7.2022 to
30.11.2022 i.e., for a period of 153 days in the P.Y.2022-23, and hence, a PE is not constituted.
(ii) As per section 90(4), Eagle Ltd. is required to furnish Tax Residence Certificate (TRC)
obtained by him from the Government of Country S declaring its residence in Country S.
In addition to such certificate, the following documents and information 1, to be furnished
by the Eagle Ltd. for claiming treaty benefits in respect of its income by way of FTS:
i. Status of Eagle Ltd. (company, in this case);
ii. Country of incorporation or registration (Country S in this case);

1 Prescribed by the CBDT vide Notification No. 57/2013 dated 01.08.2013

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 20 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 21

iii. Eagle Ltd.'s tax identification number in the Country S and in case there is no such
number, then, a unique number on the basis of which Eagle Ltd. is identified by the

m
Government of Country S;
iv.
o m
Period for which the residential status, as mentioned in the certificate referred to in
c. o
.c e m
section 90(4) or section 90A(4), is applicable; and

easmmentioned in (iv) above, is applicable.
v. Address of the Eagle Ltd. in the Country S, during the period for which the certificate,
l a s
l a s However, Eagle Ltd. may not be required to provide the information or any parta
g
ag thereof, if the information or the part thereof, as the case may be, is already contained
in the TRC referred to in section 90(4) or section 90A(4).
(iii) The OECD Model Convention, 2017 does not incorporate the concept of service PE.
Accordingly, no PE is constituted in India through personnel engaged by Eagle Ltd. in for
deputing personnel in India though their stay is more than 183 days.
Answer to 3.7
Computation of total income and tax liability of Ramesh for A.Y. 2023 -24

m
c. o
Particulars Amount (`)

Gross rent from a property in Country ‘X’ em
Salary Income (computed) 21,00,000

l a s ` 5,00,000

ag
Less: Deduction @30% ` 1,50,000 3,50,000

Interest from REIT [` 2,84,400 x 100/90] ` 3,16,000
Less: Loss from rubber business in Country ‘Y’ ` 3,00,000 16,000
Agricultural income in Country “Z” [Not included in total income, since the -
DTAA between India and Country Z provides that agriculture income is taxed
in Source State (i.e., Country Z) and is not taxable in the Resident State (i.e.,
India)]

m
c. o`
Total Income 24,66,000

m
c. o
Computation of tax liability as per section 115BAC `

m
sNile
Tax on ` 24,66,000

s em Upto ` 2,50,000
g la
gla a
` 2,50,001 – ` 5,00,000 [@5% of ` 2.50 lakhs] 12,500

a ` 5,00,001 – ` 7,50,000 [@10% of ` 2.50 lakhs]
` 7,50,001 – ` 10,00,000 [@15% of ` 2.5 lakhs]
25,000
37,500
` 10,00,001 – ` 12,50,000 [@20% of ` 2.5 lakhs] 50,000

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 21 of 36

22 FINAL EXAMINATION: MAY, 2023

` 12,50,001 – ` 15,00,000 [@25% of ` 2.5 lakhs] 62,500
` 15,00,001 – ` 24,66,000 [@30% of ` 9,66,000] 2,89,800 4,77,300
Add: Health and education cess@4% 19,092
Total tax liability 4,96,392
Average rate of tax in India 20.13%
[i.e., ` 4,96,392/` 24,66,000 x 100]
Rate of tax in Country X 25%
Doubly taxed income 3,50,000
Rebate under section 91 on ` 3,50,000 @20.13%
(lower of average Indian tax rate and rate of tax in Country X) 70,455
Tax liability 4,25,937
Tax liability (rounded off) 4,25,940
Answer to 3.8
Most Favoured Nations (MFN) clause is usually found in Protocols to DTAAs. The underlying
provision in MFN clause is that if, after signature/entry into force of the DTAA with the first State,
India enters into DTAA with another OECD Member State, wherein India limits its Source
taxation rights in relation to certain items of income (like dividend, interest, royalties, fees for
technical services etc.) to a rate lower or a scope more restricted than the scope provided for
those items of income in the DTAA with the first State, such beneficial treatment should also be
extended to the first State.
The CBDT has, vide Circular No. 3/2022 dated 3.2.2022, clarified that the applicability of the
Most Favoured Nation (MFN) clause and benefit of the lower rate or restric ted scope of source
taxation rights in relation to certain items of income including dividends provided in India's
DTAAs with the third State (Country T, in this case) will be available to the first (OECD) State
(Country N, in this case) only when all the following conditions are met:
Condition Satisfaction of condition in the case on hand
i. The second treaty (with the third This condition is satisfied as India has entered into
State) is entered into after the a DTAA with Country T on 25.4.2019, after it has
signature/ Entry into Force of entered into a DTAA with Country N on 1.1.2017.
the treaty between India and the
first state
ii. The second treaty is entered This condition is satisfied as India has entered into
into between India and a State a DTAA on 25.4.2019 with Country T, which is a
which is a member of the OECD member of OECD since January 2018. Hence, on
25.4.2019, Country T was an OECD member.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 22 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 23

at the time of signing the treaty
with it;

m
c. o
iii. India limits its taxing rights in the This condition is satisfied since in DTAA between

m
second treaty in relation to rate India and Country T, dividend is taxable@ 5%.

c. o e m
or scope of taxation in respect of

m notification has been Inabove a s
relevant items of income

s e g l
a
iv. A separate this case, conditions (i), (ii) and (iii) mentioned

l benefits of the second treaty into of 5% can be applied for taxing the dividend a
ag the treaty with the first State as received by Skylark Inc. of Country N from Manish
issued by India, importing the have been satisfied. The concessional rate

required by the provisions of Ltd., an Indian company, only if India has issued a
section 90(1) of the Income-tax separate notification importing the benefits of India-
Act, 1961. Country T tax treaty into India-Country N tax treaty,
as required by the provisions of sections 90(1). If
such notification has been issued, then, the
concessional rate of 5% can be applied for taxing
the dividend received by Skylark Inc. from Manish

m
c. o
Ltd., an Indian company; otherwise it cannot be
applied, even if other conditions are satisfied.

s emStudy 4
gla
Case

a
Rohan Ltd., Kolkata
Rohan Ltd., Kolkata, an associated enterprise of Glamour Inc. of USA, is engaged in
manufacturing activities besides software development. The following aspects/information are
made available to you:
(i) Software development:
During the financial year 2022-23, Glamour Inc. bid a contract for USD 500 million for
software development meant for use in medical treatment. Rohan Ltd., Glamour Inc. and
yet another group company were involved in developing the software contributing 40%,

m
co
30% and 30% respectively. The cost incurred by Rohan Ltd. was USD 50 million. The total

m .
profit earned by Glamour Inc. was USD 150 million. Glamour Inc. shared revenue of USD

c. o (ii) Royalty due to Mike Ltd.: se
m
100 million to its Indian subsidiary Rohan Ltd.

s em Rohan Ltd. entered into an agreement in April, 2022 with Mike lLtd.
g a of UK for use of
gla a product of Mike Ltd.
a
technology owned by Mike Ltd. to develop software, being the patented
The agreement was a regular agreement with neither the approval thereof from the Central
Government, nor being covered in the Industrial Policy of the Central Government. As per
the agreement, Rohan Ltd. had to pay ` 55 lakhs as royalty to Mike Ltd. for the year ended
31st March, 2023. The DTAA between India and UK provides for withholding tax@ 15%.

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 23 of 36

24 FINAL EXAMINATION: MAY, 2023

(iii) Liability to additional income-tax:
For the assessment year 2021-22, an addition of ` 205 lakhs due to ALP adjustment, was
determined in the assessment of Rohan Ltd., which was completed on·31st December,
2022. The assessee had filed the ITR of assessment year 2021-22 in March, 2022 under
section 139(4) and had decided to accept the addition to the ALP made by the Assessing
Officer vide order dated 31st December,2022. The additional income-tax and interest was
paid on 10th April, 2023. All the transactions of Rohan Ltd. were denominated in U S
dollars. The rate of interest applicable is @ 6-month LIBOR as on 30th September 2022
may be taken as 6%.
(iv) Remittance of tax for own sources and seeking refund:
In March, 2023, Rohan Ltd. had to pay ` 25 lakhs to McDermott Ltd. of Country N for
availing certain services. As per agreement between the parties, tax deductible on such
income under section 195 had to be borne by Rohan Ltd. The said services were rendered
by McDermott Ltd. online and no personnel came to India for rendering the said servi ce.
Rohan Ltd. remitted on 31st March, 2023, the tax deductible under section 195. The DTAA
between India and Country N provided for no tax in respect of such transaction. Rohan
Ltd. now wants to invoke relevant provisions of the Income-tax Act, 1961 to seek refund of
tax so remitted by it previously.
(v) Tax consequence of one of the directors: Chatterjee (aged 65) is one of the directors
of Rohan Ltd., whose residential status for the assessment year 2023-24 is non-resident.
He received ` 3 lakhs being component of rental income distributed by a REIT in which he
is a unit holder. He received ` 2 lakhs by way of dividend component distributed by the
REIT and the company whose income was so distributed by the REIT had exercised option
under section 115BAA. Chatterjee has to pay income-tax both on the aforesaid rental
income and dividend income components in the country of which he is presently a resident,
under appropriate heads of income there.
(vi) Payment of fee for technical services:
Rohan Ltd. had imported some machines from Blue Moon Ltd. of Country A. Since the
machines did not operate at 100% efficiency, Rohan Ltd. solicited the services of the
supplier who deputed its engineers to Rohan Ltd. The engineers came on 2nd June, 2022
and returned on 13th June, 2022. Again, the engineers came on 4th October, 2022 and
returned on 28th March, 2023. It paid ` 50 lakhs to Blue Moon Ltd. on 28.3.2023 net of
the withholding tax, as per the provisions of Income-tax Act, 1961. The agreement for
getting technical services and fee payable thereon is covered by approval from the Central
Government.
(vii) David & Co LLP, Singapore:
David & Co LLP in Singapore is a non-resident entity in which Rohan Ltd. has 30% profit
sharing rights. David & Co LLP is an e-commerce operator who sold goods of Rohan Ltd.
The receipts of David & Co LLP for the financial year 2022-23 consisted of (i) ` 180 lakhs

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 24 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 25

received for sale of goods from persons resident in India; and (ii) ` 66 lakhs received for
sale of goods from persons who are not residents of India but residents in Europe. The

m
said sum of ` 66 lakhs included receipt of ` 40 lakhs from persons who used internet

m c. o
protocol address located in India.
REQUIRED
.c o e m
m be the additional income tax liability and interest (if any) payable by Rohan las
ewould
Choose the most appropriate alternative for the following MCQs:

l a
4.1 Whats a g
ag (A) Additional income-tax liability ` 42,98, 112 plus interest ` 1,05,981
Ltd., when it makes payment on 10th April, 2023?

(B) Additional income tax liability ` 20,96,640 plus interest ` 53,134
(C) Additional income tax liability ` 22,01,472 plus interest ` 54,283 ·
(D) Additional income tax liability ` 42,98,112 plus interest ` 1,07,041
4.2 Which of the following statement is correct in respect of tax liability of Mike Ltd. (In India)
on the royalty paid by Rohan Ltd.?

o m
(A) No tax liability being non-resident.

. c
(B) Liability computed under normal provisions of Income-tax Act, 1961.

e m
s
(C) Liability as computed as per India-UK DTAA.

l
(D) Liability as computed under thea
India-UK DTAA, whichevergis lower.
provisions of the Income-tax Act, 1961 and as per

a
4.3 Assuming that Chatterjee is liable to pay income-tax in India in respect of rental income
and dividend income distributed by REIT and also has to pay tax in the country where he
is presently a resident, it is an example of
(A) Territorial double taxation
(B) Economic double taxation
(C) Juridical double taxation

m
c. o
(D) Municipal double taxation

m
c. o em component
4.4 What should be the tax deducted at source by REIT in respect of payments made to

s
Chatterjee?

s em g la
(A) @30% on rental component of income distributed and @10% on dividend

la a @10.4% on dividend
of income distributed by the REIT.

ag (B) @31.2% on rental component of income distributed and
component of income distributed by the REIT.
(C) @31.2% on rental component of income distributed and @5.2% on dividend
component of income distributed by the REIT.

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 25 of 36

26 FINAL EXAMINATION: MAY, 2023

(D) @20% on rental component of income distributed and @5% on dividend component
of income distributed by the REIT.
4.5 How much should be paid by David & Co LLP, Singapore, as equalization levy for the sale
of goods for the financial year 2022-23?
(A) ` 14,76,000
(B) ` 4,92,000
(C) ` 13,20,000
(D) ` 4,40,000 (5 x 2 = 10 Marks)
DESCRIPTIVE QUESTIONS
You are required to answer the following descriptive questions:
4.6 Determine the Arm's Length Price (ALP) adjustment in respect of the transaction between
Rohan Ltd. and Glamour Inc. What would be the ALP adjustment in the hands of Rohan
Ltd., if the Glamour Inc. group has a practice of marking a minimum return of 30% on cost
incurred? (5 Marks)
4.7 Briefly outline the procedure for Rohan Ltd. to claim refund of tax remitted by it in respect
of the amounts paid to McDermott Ltd. as per the provisions of the Income-tax Act, 1961.
(5 Marks)
4.8 Examine whether the permanent establishment of Blue Moon Ltd. is located in India as per
the UN Model Convention. How much would be the amount of tax deductible in respect of
the payment made towards fees for technical services? Would your answer be the same,
in case the DT AA between India and Country A is as per the OECD Model? (5 Marks)
Solution to Case Study 4

Answers to Q.4.1 to Q.4.5
MCQ No. Correct Option
4.1 None of the options are correct
4.2 D
4.3 C
4.4 B
4.5 D
Answer to 4.6
In the present case, Rohan Ltd., Glamour Inc. (AE of Rohan Ltd.) and another group company
involved in developing the software meant for use in medical treatment. Since such international
transaction is entered into between Rohan Ltd. and AEs, the Arm’s Length Price adjustment

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 26 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 27

need to be determined applying the most appropriate method.
Since such international transaction involving development of software, which are so

m
c. o
interrelated that they cannot be evaluated separately, profit split method would be the most

o m
appropriate method. Accordingly, arm’s length adjustment would be determined as follows:

.c e m
m net profit of AEs s
I. In case the combined profits are USD 150 million $ in Million

s e
(A) Combined 150
g l a
l a a
a(C)g Share of profits in proportion to relative contribution of Rohan [40% of
(B) Relative contribution of Rohan, Glamour and other AE is 40%, 30% and
30%, respectively
60
USD 150 Million]
(D) Actual profit arising in the hands of Rohan Ltd. [USD 100 Million – USD
50 Million] 50
Arm’s Length adjustment [(C) – (D)] 10
II. In case combined profits are 30% of cost (where residuary profits are
split in the agreed ratio)
m
c. o
(A) Combined Profit [30% of USD 350 Million (USD 500 Million – USD 150 105

m 105 Million = USD 45 Million
Million)
(B) Residuary profits = USD 150 Million –eUSD
(C) Arm’s length share of profits la
s
30% of Cost = 30% of USD a 50gMillion = USD 15 Million
40% of Residuary Profits = 40% of USD 45 Million = USD 18 Million
(D) Arm’s length profit = USD 15 Million + USD 18 Million 33
(E) Actual profit arising in the hands of Rohan Ltd. [USD 100 Million – USD
50 Million] 50
Arm’s Length price adjustment [Since Actual profit > Arm’s length profit] Nil
Note - The second part of the question requires determination of the ALP
m
co
adjustment in the hands of Rohan Ltd., if the Glamour Inc. group has a practice

m .
c. o
of marking a minimum return of 30% on cost incurred. 30% of cost incurred

m
se
would be USD 105 Million as computed above. The residuary profits would

em la
be USD 45 Million as computed above.

las The arm’s length share of profit of Rohan Ltd. can also be arrived at by
a g
g
considering its share (i.e., 40%) of combined profits and dividing residuary

a profits equally. An alternate solution has been worked out below on this basis-

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 27 of 36

28 FINAL EXAMINATION: MAY, 2023

II. In case combined profits are 30% of cost (where residuary profits
are split equally)
(A) Combined Profit [30% of USD 350 Million (USD 500 Million – USD 150 105
Million)
(B) Residuary profits = USD 150 Million – USD 105 Million = USD 45 Million
(C) Arm’s length share of profits
40% of USD 105 Million = USD 42 Million
Residuary Profits to be divided equally = USD 45 Million/3 = USD 15
Million
(D) Arm’s length profit = USD 42 Million + USD 15 Million 57
(E) Actual profit arising in the hands of Rohan Ltd. [USD 100 Million – USD
50 Million] 50
Arm’s Length price adjustment [(D) – (E)] 7
Answer to 4.7
As per section 239A, where under a DTAA, the tax deductible on any income, other than interest,
under section 195 is to be borne by the person by whom the income is payable, and such person
having paid such tax to the credit of the Central Government, claims that no tax was required to
be deducted on such income, such person can file an application before the Assessing Officer
for refund of such tax within 30 days from the date of payment of such tax.
In this case, Rohan has to file an application before the Assessing Officer for refund of such tax
on or before 30 th April, 2023.
Thereafter, the Assessing Officer has to follow the procedure for refund laid down in CBDT
Circular No.7/2007 dated 23.10.2007, which lays down the procedure for refund of TDS u/s 195
to the person deducting tax at source from the payment to a non-resident.
In accordance with this Circular, Rohan Ltd. can claim the refund of tax deducted at source
under section 195 on the amount paid to Mc Dermott Ltd of Country N which was remitted by it
to the Government account on 31.3.2023, since –
i. the tax deductible on the amount paid to Mc Dermott Ltd of Country N is borne by Rohan
Ltd; and
ii. the DTAA between India and Country N provides for no tax in respect of such transaction
In this case, since income has accrued but no tax is due on that income as per DTAA between
India and Country N, the amount deposited to the credit of Government to that extent under
section 195, cannot be said to be "tax".
The Assessing Officer may, after giving intimation to the deductor, adjust the refund against any
existing tax liability of the deductor under the Income-tax Act, 1961. The balance amount would
be refunded to the deductor. A refund in terms of this Circular should be granted only after

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 28 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 29

obtaining an undertaking that no certificate under section 203 has been issued to the non -
resident.

m
c. o
Answer to 4.8

m
co m
(i) The UN Model Convention, 2017 incorporates the concept of service PE. To constitute a

.
PE, the activities carried on through the personnel engaged by the enterprise for furnishing

m s e
e la
services, including consultancy services should continue within a Contracting State for a

l a s
period of periods aggregating more than 183 days in any 12 months period commencing
a g
ag Indaysthis+ case,
or ending in the fiscal year concerned.
since Blue Moon Ltd. deputed its engineers to Rohan Ltd. for 188 days (12
176 days) in the P.Y.2022-23, which is more than 183 days, a service PE of Blue
Moon Ltd. is constituted.
(ii) The services rendered by the engineers of Blue Moon Ltd. would fall within the definition
of Fees for technical services.
As per UN Model Convention, since service PE is constituted such amount attributable to
the service PE would be taxable as per Article 7.

m
As per section 115A of the Income-tax Act, where the total income of a foreign company

. co
includes any income by way of fees for technical services other than the income referred

em
to in section 44DA(1), received from an Indian concern in pursuance of an agreement made

s
by him with the Indian concern and the agreement is approved by the Central Government,

l a
ag under sections 28 to 44C and section 57 while computing
then, such FTS is taxable @10%.
No deduction would be allowable
such income.
Assuming that tax rate of 10% plus health and education cess @4% pe r the Income-tax
rate is more beneficial than DTAA, tax is to be deducted of ` 5.80 lakhs [(` 50 lakhs x
100/89.6) x 10.4%].
Note - Section 44DA brings to tax income by way of FTS received from an Indian concern
in pursuance of an agreement foreign company, where such foreign company carries on
business through a PE situated in India or performs professional services from a fixed

o m
place of profession situated in India and such FTS is effectively connected with such PE

m .c
c. o
or fixed place of profession. Such income shall be computed under the head “Profits and

m
e professional
gains from business or profession”.

em l s
a a fixed place of
However, in the present case, since engineers of Blue Moon Ltd. rendered

las services at Rohan Ltd.’s place and Blue Moon Ltd. does not have
a g
g
profession in India, such FTS would be taxable as per section 115A.
a (iii) The OECD Model Convention, 2017 does not incorporate the concept of service PE.
Accordingly, no PE is constituted in India through engineers deputed by Blue Moon Ltd.
for rendering services to Rohan Ltd. in India though their stay is more than 183 days.

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 29 of 36

30 FINAL EXAMINATION: MAY, 2023

In the absence of a PE, the fees for technical services cannot be taxed in India, since
provisions of DTAA are more beneficial, Accordingly, no tax is required to be deducted on
the amount paid by Rohan Ltd. to Blue Moon Ltd.
Case Study 5
Albert Ltd., Mumbai
Albert Ltd., Mumbai is a subsidiary of Pele Ltd. of Country J. Albert Ltd. has been manufacturing
semi-finished goods for supply to Pele Ltd. Also, it sold goods to unrelated parties, both in India
and world-wide. The annual turnover of Albert Ltd. is ` 500 to ` 600 crores, while the annual
turnover of Pele Ltd. was more than ` 7,000 crores. The accounting year of Country J is the
same as that of India, that is, 1st April to 31st March. Albert Ltd. is the notified resident
constituent entity who furnished the CbC report for the year ended 31st March, 2022 on 9th
April, 2023.
Albert Ltd. has paid ` 3,00,000 to Hendricks Ltd., UK for procuring online advertisement space
up to 31.10.2022 and had to pay ` 4,00,000 being the balance amount for the year ended
31.03.2023.
Albert Ltd. has been undertaking supply of goods to its associated enterprises in foreign
jurisdictions. It has identified comparable enterprises who have undertaken similar transactions
and the data set constructed with the comparable entities is given below for the year ended
31.03.2023:
S. No 1 2 3 4 5 6 7
Company A Co Ltd. B Co Ltd. C Co Ltd. D Co Ltd. E Co Ltd. F Co Ltd. G Co Ltd.
Values 3.2% 7% 9.2% 10% 11.10% 12.9% 13%
The transfer price of the international transaction of Albert Ltd. is computed at 6.8%. The total
transaction value by way of supply of goods to the AEs is ` 150 crores for the financial year
2022-23.
APA and rollback options
Albert Ltd. applied for Advance Pricing Agreement (APA) in June, 2022 and it was entered into
on 1st September, 2022. It applied for rollback in November, 2022 and it was entered into on
20th January, 2023. For assessment year 2021-22, the ITR was filed under section 139(4) in
March, 2022; For the assessment year 2020-21, there was some dispute about the ALP
determination and it was contested before CIT (Appeals) who decided against the assessee in
May 2022. For the assessment year 2019-20, against transfer pricing adjustment, appeal was
made to the ITAT and it was decided against the assessee by the ITAT in November, 2022.
Pele Ltd., Country J
Pele Ltd. was already engaged in the supply of mobile handsets directly to customers throughout
South East Asia except India. During the financial year 2022-23, it supplied mobile handsets to
various customers in India directly, based on their orders procured through internet facility. For
the financial year 2022-23, the total direct sale of mobile handsets to customers in India was

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 30 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 31

` 240 lakhs. It may be noted that the branch of Pele Ltd. at Chennai was not engaged in the
supply of such type of mobile handsets in India. The gross profit mark -up was 20% in respect

m
of mobile handsets directly sold by Pele Ltd. to the customers in India.

m c. o
co
Kishore, CFO of Albert Ltd.

. e m
s
Kishore a Chartered Accountant joined Albert Ltd. as CFO on O 1.11.2022 after remaining in

em
employment as General Manager (Finance) of Brita Ltd. of Country K. He is originally a citizen
la
l a s
of India who went on employment outside India in April, 2015 and had been visiting India for 40
a g
g
days in every financial year up to the financial year 2021-22. He returned to India permanently
aKishore
on 1st July, 2022 but was appointed as CFO position by Albert Ltd. w.e.f. 1st November, 2022.
gifted a vacant land at Jaipur to his sister Sujata (non-resident) residing in Singapore,
on 05.03.2023. The circle rate (stamp duty valuation) of the vacant land on the date of gift was
` 25 lakhs. On 14th January, 2023, he made a cash gift of ` 9 lakhs through online transfer to
his friend Hardik (non-resident) who resides in Dubai on the occasion of Hardik's 50th birthday.
Kishore has the following incomes for the financial year 2022-23:
(i) Salary from Brita Ltd. up to 30.06.2022 at USD 12,000 per month.

m
(ii) House property in Country K was let out throughout the financial year 2022-23 for USD

c. o
1,000 p.m. Assume that there is no deduction in Country K similar to section 24 of the

m
Income-tax Act, 1961.

s e
gla K (net) received USD 4,000 in March 2023. Assume
(iii) Dividend from Indian companies (gross) ` 1,08,000. All the shares were acquired in April,
m2014 when he was resident in India.
(iv) Dividend from companies in a
Country
the rate of TDS on dividend @ 20%.
(v) Salary income (computed) from Albert Ltd. ` 15,00,000.
Note: TT buying rate on the date of receipt of dividend 1 USD = ` 81; on 28.02.2023 1 USD =
` 80; and on 31.03.2023 1 USD = 82.
Kishore paid income-tax in Country K @ 20% and there is no basic exemption limit. He has
opted for the provisions of section 115BAC in India,
There is no DTAA between India and Country K.
o m
m c
c. o Choose the most appropriate alternative for the following MCQs: sem.
REQUIRED

s em l a
international group by name Pele Ltd.) for the delay in filing thegCbC report for the year
a a
5.1 What would be the quantum of penalty leviable on Albert Ltd. (being the reporting entity of
l
ag ended 31 March, 2022? st

(A) ` 45,000
(B) ` 1,35,000

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 31 of 36

32 FINAL EXAMINATION: MAY, 2023

(C) ` 50,000
(D) ` 40,000
5.2 How much is the amount liable towards tax deduction at source (TDS) or payable by way
of equalization levy (EL) by Albert Ltd. for the online advertisement space obtained from
Hendricks Ltd., UK?
(A) EL, 14,000
(B) TDS ` 72,800
(C) EL ` 42,000
(D) ` 19,600
5.3 How much of income is chargeable to tax in the hands of Chennai branch of Pele Ltd. in
respect of mobile handsets directly supplied by Pele Ltd. from Country J to the customers
in India? Assume that there is DTAA between India and Country J as per UN Model
Convention.
(A) No income would be chargeable to tax in the hands of Chennai branch of Pele Ltd.
since the supply was made directly from outside India and the branch had no role to
play in such supply.
(B) Since the goods supplied directly were not similar to those sold through the Chennai
branch, the force of attraction rule would not apply. Therefore, no income arising
thereon is chargeable to tax in India.
(C) By applying Force of Attraction Rule, the gross profit mark-up @20% on total supplies
of ` 210 lakhs, being ` 42 lakhs, would be deemed to be the income of Pele Ltd.
accruing in India and would be taxed in the hands of Chennai branch.
(D) The overall gross profit ratio of Pele Ltd. would be adopted for the purpose of
computing the income earned in respect of supplies made in India and it would be
chargeable to tax as income of foreign company separately.
5.4 How much of the gift received by Sujata and Hardik from Kishore is chargeable to Income-
tax in India?
(A) As both the recipients of gift are non-residents, no income would accrue in India.
(B) Sujata being relative of Kishore, no income would accrue in India for the gift of vacant
land at Jaipur. In the hands of Hardik, ` 9 lakhs would be chargeable to income-tax
in India.
(C) ` 25 lakhs is chargeable to tax as income in the hands of Sujata as the subject matter
of gift viz. vacant land is located in India. The cash gift of ` 9 lakhs received by Hardik
(from non-relative) is chargeable to tax in India.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 32 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 33

(D) ` 25 lakhs is chargeable to tax as income in the hands of Sujata as the subject matter
of gift is located in India. The cash gift of ` 9 lakhs received by Hardik though from

m
c. o
non-relative is not chargeable to tax as the amount was received through online

m
transfer outside India.

.co
5.5 How much will be added to the total income of Albert Ltd. after considering the comparable
s e m
em
and data set constructed and furnished in the Case Study?
la
l a s a g
ag (B)
(A) ` 4.80 crores
` 3.60 crores
(C) ` 4.485 crores
(D) No addition to the total income is required because of ALP adjustment.
(5 x 2 = 10 Marks)
DESCRIPTIVE QUESTIONS
You are required to answer the following descriptive questions:

o m
5.6 Compute the total income of Kishore for the assessment year 2023-24 after determining
his residential status.
. c (6 Marks)

e m
s
5.7 State the legal position as to when Albert Ltd. is not obliged to furnish CbC report of the
international group in India.

g a
l for which APA and the rollback provisions would apply
(5 Marks)

a
5.8 Briefly state the assessment years
for Albert Ltd., indicating whether the rollback benefit can be availed for each of such years
involved. (4 Marks)
Solution to Case Study 5

Answers to Q.5.1 to Q.5.5
MCQ No. Correct Option

m
5.1 A

co
5.2 C
m .
c. o m
5.3 B

em se
5.4 B

s
5.5 A
g l a
gla a
a
Answer to 5.6
Determination of Residential Status of Kishore for the PY 2022-23
During the P.Y. 2022-23, Kishore permanently shifted to India and stayed for 274 days in India.
Since he stayed in India for 182 days or more during the P.Y. 2022 -23, he would be resident in

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 33 of 36

34 FINAL EXAMINATION: MAY, 2023

India for the A.Y. 2023-24.
An individual is said to be “Resident but not ordinarily resident [RNOR]” in India in any previous
year, if he satisfies any one of the following conditions:
- He is a non-resident in at least 9 out of 10 previous years preceding the relevant previous
year; or
- His stay in India in the last 7 years preceding the relevant previous year is 729 days or
less.
His stay in India in the last 7 years preceding the P.Y.2022-23 is only 280 days (40 days x 7
years). Since Kishore satisfies the second condition, he would be resident but not ordinarily
resident in India for P.Y.2022-23.
Accordingly, the following income would be taxable in his hands in India for the P.Y.2022 -23 –
i. Income which accrues or arises in India,
ii. Income which is deemed to accrue or arise in India,
iii. Income which is received or deemed to be received in India and
iv. Income which accrues or arises outside India but is derived from a business controlled in
or profession set up in India
Computation of total income of Kishore for the A.Y. 2023-24 under section 115BAC
Particulars Amount
(`)
Salaries
Salary from Brita Ltd., Country K [Not taxable in India, since income accrues or -
arises outside India and is not deemed to accrue or arise in India since services
are not rendered in India.]
Salary from Albert Ltd. (Computed) [Taxable in India, since services are 15,00,000
rendered in India]
Income from house property
Rental Income from house property in Country K [Not taxable in India, since -
property is situated outside India and income accrues, arises, and is received
outside India]
Income from Other Sources
Dividend Income from Indian Company (gross) [Taxable in India, since such 1,08,000
shares, being a capital asset is situated in India]

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 34 of 36

m
m .co
c. o

e m
em l a s
s a g
PAPER – 6C: INTERNATIONAL TAXATION 35

Dividend from companies in Country K [Not taxable in India, since such shares
are not situated in India. Such income accrues, arises and is received outside

m
India] ______-_

m
Gross Total Income/Total Income 16,08,000
c. o
c. o e m
m when Albert Ltd., being a constituent entity resident in India, is not las
Answer to 5.7

s e g
a
Circumstances

l a
aAsIndiagperi.e.,section
required to file CbC report in India
286(5), if an international group, having parent entity which is not resident in
Pele Ltd., Country J, had designated an alternate entity for filing its report with the tax
jurisdiction in which the alternate entity is resident, then, the entities of such group operating in
India i.e., Albert Ltd. would not be obliged to furnish report if the following conditions are
satisfied-
- such alternate entity has furnished CbC report with the tax authority of the country or
territory in which such entity is resident on or before the date specified by that country or

m
territory;
-
c. o
the CbC report is required to be furnished under the law for the time being in said country

em into an agreement with India providing for
or territory;
-
la s
the said country or territory has entered
exchange of the said report;
a g
- the prescribed authority has not conveyed any systemic failure in respect of the said
country or territory to any constituent entity of the group that is resident in India;
- the said country or territory has been informed in writing by the constituent entity that is
the alternative reporting entity on behalf of the international group and
- the same has been informed to the prescribed authority by the constituent entity resident
in India i.e., Albert Ltd. in accordance with section 286(1).

m
co
Answer to 5.8

m .
c. o m
The application for advance pricing agreement may be filed at any time before the first day of

se
the previous year relevant to the first assessment year for which the application is made, in

s em l a
respect of transactions which are of a continuing nature from dealings that are already occurring;

la g
a exceeding four previous
or before undertaking the transaction in respect of remaining transactions.

ag Roll back year means any previous year, falling within the period not
years, preceding the first of the five consecutive previous years for which advance pricing
agreement is valid.

m .
.co s e m
m
e Accountants of India l a
l a s a g
g
© The Institute of Chartered
a For more Question Papers, Sample Papers, Notes & Syllabus visit Page 35 of 36

36 FINAL EXAMINATION: MAY, 2023

In the present case, since Albert Ltd. has applied for APA and also opted for rollback provisions,
the APA is apparently in respect of international transactions which are of continuing nature.
Accordingly, the APA application filed in June, 2022 would be in respect of five previous years
beginning with P.Y. 2023-24 relevant to the A.Y. 2024-25.
Consequently, Albert Ltd. made an application for roll back. Roll back provisions would be
applicable for four previous years immediately preceding P.Y.2023-24 i.e., P.Y.2022-23
(A.Y. 2023-24), P.Y.2021-22 (A.Y. 2022-23), P.Y.2020-21 (A.Y. 2021-22) and P.Y.2019-20
(A.Y. 2020-21).
In respect of A.Y. 2023-24 and A.Y. 2022-23, benefit of rollback can be availed if the return of
income of those years has been furnished on or before the due date specified u/s 139(1).
Since the return of income for A.Y. 2021-22 was filed belatedly u/s 139(4), benefit of rollback
cannot be given for A.Y. 2021-22.
In respect of A.Y. 2020-21, even if the dispute was contested before CIT(A) and decided against
the assessee, benefit of rollback can be availed, since the prohibition is only in respect of a
dispute contested before Tribunal and decided against the assessee. Modified return has to be
filed in respect of A.Y.2020-21.
Benefit of rollback cannot be availed in respect of A.Y. 2019-20 since it falls beyond the four
year period.

© The Institute of Chartered Accountants of India
For more Question Papers, Sample Papers, Notes & Syllabus visit Page 36 of 36