CA Final May 2023 Suggested Answers Paper 7 Direct Tax Laws and International Taxation (Old Scheme)

FOR CA FINAL EXAM PREPARATION

CA Final 2023
Suggested Answers ·
Paper 7 Direct Tax
Laws and International
Taxation (Old Scheme)
EXAM YEAR TYPE

CA Final 2023 Suggested Answers
SUBJECT DATE

Paper 7 Direct Tax Laws and International Taxation (Old Scheme) May 2023

Notes · Sample Papers · Previous Year Papers · Mock Tests

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PAPER – 7: DIRECT TAX LAWS & INTERNATIONAL TAXATION
Part - II

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Question No.1 is compulsory.
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Answer any four questions out of the remaining five questions.

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Working notes should form part of the answer
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All questions relate to Assessment Year 2023-24, unless stated otherwise in the question.
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aX gLtd. is engaged in the manufacture and sale of textiles goods. Its net profit for the year
Question 1

ending March 31,2023 after debit/ credit of the following items to the profit and loss account
was ` 1,25,00,000.
(i) Advertisement expenditure includes a sum of ` 1.60 lakhs paid in cash to sister concern
of a director of the company. The Fair market value of such expenditure in the market is
` 52,000.
(ii) Repairs of plant and machinery include ` 1.80 lakhs towards replacement of worn out

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parts of machineries.

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(iii) The company used to include interest cost in valuation of its finished stock upto the

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financial year 2021-22. During the financial year 2022-23, the company changed its

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accounting policy to comply with the requirements of accounting standard issued by the

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ICAI and excluded interest cost in valuation of finished stock. This has resulted in a
decrease in the current year's profit by ` 10.70 lakhs.
(iv) An executive Mr. Q, while on business trip abroad, died and the company voluntarily paid
gratuity to his family amounting to ` 2.00 lakhs.
(v) Capital Expenditure of ` 1.80 lakhs incurred for the purpose of promoting family planning
amongst its employees debited in the Profit and Loss account.
(vi) Retrenchment compensation paid to employees of one of the unit of the company which
was closed down during the year amounted to ` 14 lakhs.

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(vii) ` 4 lakhs, being amounts waived by a co-operative bank out of principal and ` 1 lakh

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being amount waived by the bank on arrears of interest, respectively, in one-time

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settlement. The loan was obtained for meeting working capital requirement four years

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back.

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(viii) Contribution towards Employees' pension scheme notified by the Central

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80CCD for a sum of ` 3 lakhs calculated at 12% of basic salary and Dearness Allowance
(forming part of retirement benefits) payable to the employees.
The Suggested Answers for Paper 7: Direct Tax Laws and International Taxation are based on
the provisions of direct tax laws as amended by the Finance Act, 2022, which are relevant for
May, 2023 examination. The relevant assessment year is A.Y.2023-24.

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2 FINAL EXAMINATION: MAY, 2023

(ix) Marked to market loss amounting to ` 6 lakhs in respect of an unsettled derivative
contract. The contract was settled in May, 2023 with a gain of ` 1 lakh.
(x) Provision for gratuity based on actuarial valuation was ` 4 lakhs. Actual gratuity paid
debited to gratuity provision account was ` 2.75 lakhs. The gratuity paid to Mr. Q is
debited separately and not included in Provision for gratuity or Actual gratuity paid
mentioned here.
The company furnishes following additional information relating to it:
(i) The company has obtained a loan of ` 4 lakhs from ABC Private Limited in which it holds
16% voting rights. The accumulated profit of ABC Private Limited on the date of receipt of
loan was ` 1 lakh.
(ii) The company has given I phone Mobile sets to 5 distributors as incentive costing
` 60,000 each on 28.10.2022 on the occasion of Diwali. The accountant of the company
debited the same amount to Business Promotion Expenses, being business expenditure
and did not deduct any tax at source.
(iii) The company during the financial year 2022-23 has contributed a sum of ` 3,50,000 to
an approved Electoral trust by an RTGS directly to the account of the Trust.
You are required to compute the Total Income of X Ltd. for the A.Y. 2023-24 assuming that the
company has not opted for Section 115BAA/115BAB under the Income-tax Act, 1961.
(14 Marks)
Answer
Computation of Total Income of X Ltd. for the A.Y. 2023-24
Particulars Amount (in `)
I Profits and gains of business and profession
Net profit as per profit and loss account 1,25,00,000
Add: Items debited but to be considered separately
or to be disallowed
(i) Payment of advertisement expenditure of 1,60,000
` 1,60,000
[Sister concern of a director of X Ltd. falls under
specified person u/s 40A(2). ` 1,08,000, being
the excess payment to a specified person is
disallowed u/s 40A(2). Since the payment is made
in cash and since the remaining amount of
` 52,000 exceeds ` 10,000, the same would be
disallowed u/s 40A(3).
Since ` 1,60,000 has been debited to profit and
loss account, the same has to be added back.]

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 3

Note – Alternatively, the entire sum of ` 1,60,000
can be disallowed u/s 40A(3).

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(ii) Repair of plant and machinery -

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[As per ICDS V on Tangible Fixed Assets, only an

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expenditure that increases the future benefits

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from the existing asset beyond its previously

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assessed standard of performance has to be

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replacement of worn out parts does not bring in
any new asset into existence, such replacement
is in the nature of current repairs, which is
allowable as deduction. Since the same has been
debited to profit and loss account, no adjustment
is required.]
(iii) Interest cost in valuation of finished stock -
[X Ltd. has excluded interest cost in valuation of
finished stock as it has changed its accounting

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policy to comply with the requirements of

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accounting standard, which is a bona fide reason

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and would be followed consistently in future. The

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change in the method of valuation of stock, being

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a genuine reason, no further adjustment is

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required, as the said interest cost has been
already excluded and consequently profit has
been reduced.]
(iv) Payment of gratuity to Mr. Q’s family -
[Payment of gratuity ` 2.00 lakhs on account of
death of an executive while on business trip is
allowable as deduction1. Since it has already
been debited to the profit and loss account, no
further adjustment is required.]

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(v) 4/5th capital expenditure for promoting family 1,44,000

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planning

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[Capital expenditure incurred for the purpose of

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promoting family planning amongst employees is
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deductible over a period of 5 years as per the first
proviso to section 36(1)(ix). Hence, only ` 36,000
is deductible in the current year in respect of such

1 CIT vs. Laxmi Cement Distributors (P) Ltd. (1976) 104 ITR 711 (Gujarat)

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4 FINAL EXAMINATION: MAY, 2023

expenditure incurred by the company. Since
` 1,80,000 has been debited to the profit and loss
account, ` 1,44,000, being 4/5th capital
expenditure has to be added back.]
(vi) Retrenchment compensation to employees on -
closure of unit
[Retrenchment compensation paid to employees
at the time of closure of one of the units of the
company is allowable as deduction2. Since the
same has already been debited to the profit and
loss account, no further adjustment is required.]
(viii) Contribution towards NPS in excess of 10% of 50,000
salary disallowed
[Contribution to the extent of 10% of salary (basic
salary + dearness allowance, if it forms part of pay
for retirement benefits) is allowable as deduction
under section 36(1)(iva). In this case, 2%, which is
in excess of 10% i.e., ` 3,00,000 x 2/12, would be
disallowed.]
(ix) Marked to market losses 6,00,000
[Marked to market loss or other expected loss as
computed in accordance with the ICDS would be
allowed as deduction u/s 36(1)(xviii). As per ICDS
I, marked to market losses cannot be recognized
unless the recognition of such loss is in
accordance with the provisions of any other ICDS.
Marked to market loss in respect of an unsettled
derivative contract is not allowable as deduction.
Since such losses have been debited to the profit
and loss A/c, they have to be added back for
computing business income.]
(x) Provision for gratuity 1,25,000
[Provision of ` 4 lakhs for gratuity based on
actuarial valuation is not allowable as deduction
as per section 40A(7). However, actual gratuity of
` 2.75 lakhs paid is allowable as deduction.
Hence, the difference has to be added back]
A(ii) Incentive to distributor without deducting tax 90,000
at source [30% x ` 60,000 x 5]

2 Allahabad High Court in CIT v. JK Cotton Spinning & Weaving Co. Ltd. (2005) 145 Taxman 591

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 5

[Mobile phone to distributors is a perquisite or
benefit provided to the distributors and X Ltd. is

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liable to deduct tax at source under section 194R

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on such benefit or perquisite. Disallowance

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@30% would be attracted under section 40(a)(ia)

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for non-deduction of tax at source on such benefit
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or perquisite]

l a s 11,69,000
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a Less: Items credited but not taxable or chargeable
1,36,69,000

to tax under another head
(vii) Waiver of principal on bank loan -
[Waiver of principal amount of loan taken for
trading activity is a benefit in respect of a trading-
liability by way of remission or cessation thereof
and is, hence, taxable u/s 41(1)3. Since the loan

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is for meeting working capital requirement, it is

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logical to assume that is taken for trading activity.

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Since the loan waiver has already been credited

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to profit and loss account, no adjustment is

(vii) Waiver of interest on g
required.]
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a bank loan
[As per section 43B, since interest is allowable
1,00,000

only on actual payment, deduction in respect of
interest due on loan would not have been allowed
as deduction in any previous year. Therefore,
waiver of such interest cannot be brought to tax
by invoking section 41(1). Since such interest has
now been credited to profit and loss account, the

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same has to be deducted while computing

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business income.]

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se 1,35,69,000
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II Income from Other Sources

ag Deemed dividend under section 2(22)(e)
[Loan of ` 4 lakhs by ABC Pvt. Ltd., being a company
1,00,000

3 Solid Containers vs. DCIT (2009) 308 ITR 417 (Bom)

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6 FINAL EXAMINATION: MAY, 2023

in which the public are not substantially interested, to X
Ltd., being a shareholder who is holding 16% of voting
rights of the ABC Pvt. Ltd. will be deemed to be
dividend in the hands of X Ltd. to the extent of the
accumulated profits i.e., ` 1 lakh.]
Gross Total Income 1,36,69,000
Less: Deduction under Chapter VI-A
Under section 80GGB [Contribution by a company to 3,50,000
an approved Electoral trust is allowable as deduction,
since payment is made through RTGS.]
Total Income 1,33,19,000
Question 2
(a) (i) Mr. A, aged 34 years, is a salaried employee with TKM Limited. He has furnished
the following details for the previous year 2022-23:
Sr. Particulars Amount in
No. `
1. Gross Salary 23,00,000
2. Business Loss from a new part time business of trading in (4,50,000)
Mobiles
3. Short Term Capital Loss on sale of Property (computed) (3,60,000)
4. Mr. A purchased 1000 Bibcoins, a virtual digital currency on
01.04.2022 for ` 1,000 per coin, which he sold on
15.02.2023 for ` 1,300 per coin. Commission for transfer of
Bibcoins is 2% of the sale value.

You are required to compute the total income of Mr. A, assuming that he has not
opted for section 115BAC for the Assessment year 2023-24 as per the provisions of
the Income-tax Act, 1961. (4 Marks)
(ii) L, M and N are three partners of M/s. L & G Associates, a partnership firm
established on 01.04.1995. L retires from the firm on July 27,2022 and after his
retirement, business of the firm will be operated by M and N. Capital account
balance of L as on July 27,2022 is ` 20 Lakhs, (there is no revaluation of assets in
books of the firm at any time after 2003-04 when L joined the firm as a partner).
The firm gives to L the following to settle his account:
(i) Cash payment of ` 1,00,000
(ii) Stock in trade (Fair market value on July 27,2022 is ` 2,00,000).

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 7

This stock was purchased on April 15,2022 for ` 1,20,000.
(iii) Plot of Land at Kota (Fair market value of plot as on July 27,2022 is

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` 17,00,000)

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Book value of plot is ` 17,00,000. It was acquired during 1998-99 for ` 60,000.
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s etaxmAct, 1961 for L & G Associates for A.Y. 2023-24.
You are required to calculate the Taxable Income as per the provisions of Income-
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a(b) M/s ABC Inc., a company incorporated in Korea, entered into an agreement with XYZ
Ltd., an Indian company, for providing assistance to the latter in setting-up a power plant
in Gujarat. The scope of work includes -
(i) offshore services in the nature of drawing and design of Electrical and networking
work; and
(ii) onshore services in respect of installation of such machinery.

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The consideration for aforesaid scope of work was agreed to be ` 3 crores for offshore

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services and ` 2 crores for onshore services. The consideration was discharged as under:

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− ` 3 crores, in respect of offshore services, was paid in ABC's bank account in Korea

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on 1st July 2022;
−
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6% debentures for ` 2 crores were issued on 1st September, 2022 in consideration
for onshore services.
Discuss tax implications in India in respect of above transactions in the hands of
M/s ABC Inc. under the provisions of the Act for AY. 2023-24. For the purpose of your
answer, you may assume that activities of ABC Inc. do not constitute any business
connection in India.
Ignore the provisions of tax treaty and DTAA. (6 Marks)
Answer

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(a) (i) Computation of total income of Mr. A for A.Y.2023-24

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(under the regular provisions of the Income-tax Act, 1961)
Amount (in `) e
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Particulars

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Gross Salary 23,00,000
Less: Standard deduction under section 50,000
16(ia)
22,50,000

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8 FINAL EXAMINATION: MAY, 2023

II Profit and gains from business or
profession
Business loss from part time business (4,50,000)
Loss from business cannot be set off
against salary income.
No set off of business loss is allowed
against any capital gain from virtual
digital assets.
Business loss of ` 4,50,000 has to be
carried forward to A.Y. 2024-25.
III Capital Gains
Short term capital loss on sale of (3,60,000)
property
[Short term capital loss cannot be set off
against any income other than Capital
gains. Short term capital loss of
` 3,60,000 has to be carried forward to
A.Y. 2024-25].
It is not eligible for set off against capital
gain arising from transfer of virtual digital
asset.
IV Capital Gains
Income from transfer of virtual digital 3,00,000
assets
[(` 1,300 - ` 1,000) x 1,000 bib coins)
[No deduction in respect of any
expenditure other than cost of acquisition
is allowed]
Total Income 25,50,000
(ii) Computation of taxable income for M/s. L & G Associates for A.Y. 2023-24
Particulars Amount (in `) Amount (in `)
Profits and gains of business or
profession
Deemed transfer on receipt of stock in
trade by Mr. L from L & G associates
Receipt of stock in trade by Mr. L from L &
G associates in connection with

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 9

reconstitution of L & G associates would be
deemed to be transfer of stock in trade by L

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& G associates to Mr. L and would be

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taxable in the P.Y. 2022-23 u/s 9B

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Full value of consideration of stock in trade 2,00,000

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[FMV as on 27.7.2022, being the date on

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which stock in trade in received by Mr. L]

g l a 1,20,000

a Profits and gains from business
Capital Gains
80,000

Deemed transfer on receipt of plot of
Land by Mr. L from L & G associates
Receipt of plot of land by Mr. L from L & G
associates in connection with reconstitution
of L & G associates would be deemed to be
transfer of plot of land by L & G associates

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to Mr. L and would be taxable in the P.Y.

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2022-23 u/s 9B

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Full value of consideration of plot of land 17,00,000

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[FMV as on 27.7.2022, being the date on

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which capital asset is received by Mr. L]

cost of acquisition (` a
Less: Indexed cost of acquisition
60,000) and FMV as 3,64,100
on 1.4.2001 (` 1,10,000) i.e., ` 1,10,000 x
331/100]
Capital Gains 13,35,900
Deemed income on receipt of cash and
plot of land by Mr. L from L & G
associates

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Profits and gains arising on receipt of cash

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and plot of land by Mr. L from L & G

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associates in connection with reconstitution

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of L & G associates would be deemed to be

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the income of L & G associates and would

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be taxable in the P.Y. 2022-23 under
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section 45(4)
Cash payment 1,00,000
FMV of plot of land as on 27.7.2022 17,00,000
18,00,000

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10 FINAL EXAMINATION: MAY, 2023

Less: Amount of balance in capital account 19,25,724
[See Working Note below]
Since, income chargeable is negative, it (1,25,724) -
would be deemed to be zero
Taxable Income 14,15,900
Working Note
Amount of balance in capital account for
section 45(4) = Capital balance as on date
27.7.2022 as increased / reduced by share
in book profit/loss arising on account of
deemed transfer
Book profit after income-tax on account
of deemed transfer u/s 9B
Book profit on transfer on land = Nil
(` 17,00,000 – ` 17,00,000)
Book profit on transfer on stock in trade
= 80,000 (` 2,00,000 – ` 1,20,000)
Tax on capital gains on transfer of land as
per section 9B = ` 13,35,900 x 20.8%
= ` 2,77,867
Tax on business income on transfer of stock
in trade under section 9B = ` 80,000 x
31.2% = ` 24,960
Profit as per books as reduced by Income-
tax on transfer u/s 9B
` 80,000 – ` 2,77,867 – ` 24,960
= (` 2,22,827)
Share of loss of Mr. L = ` 2,22,827/3
= ` 74,276
Capital account balance before adjustment 20,00,000
Less: Share of loss 74,276
Amount of balance in capital account on 19,25,724
27.7.2022

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 11

(b) Payment for offshore services in the nature of drawing and design of Electrical and
networking work:

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In this case, ` 3 crores, being the consideration towards offshore services of drawings

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and designs are in the nature of fee for technical services4.

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Income by fees for technical services payable by a resident in India for the purpose of

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business or profession carried on in India is deemed to accrue or arise in India under

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section 9(1)(vii), whether or not the non-resident has a residence; or place of business;
or business connection in India; or whether or not the non-resident has rendered services
in India.
Therefore, in the present case, even if drawing and design services are offshore services
provided by M/s ABC Inc., a Korean company, the consideration of ` 3 crore payable by
XYZ Ltd. would be deemed to accrue or arise in India since it is for setting up a power
plant in India. Hence, the consideration would be chargeable to tax in India.
Payment for onshore service in respect of installation of such machinery:

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` 2 crores, being the value of debentures issued by an XYZ Ltd., an Indian company in

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consideration of providing technical services i.e., onshore services for installation of

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machinery for setting up a power plant in Gujarat, is in the nature of fee for technical

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services and would be deemed to accrue or arise in India to M/s ABC Inc. under section
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9(1)(vii). Hence, it is taxable in India.
Payment of interest on debentures of ABC Ltd:
As per section 9(1)(v), income by way of interest payable by a person who is a resident
of India is deemed to accrue or arise in India except where the interest is payable for
debt incurred or money borrowed and used for the purpose of business carried on
outside India and for making or earning any income from any source outside India.
Therefore, interest income of ` 7 lakhs (` 2 crores x 6% x 7/12) from debentures of XYZ
Ltd., an Indian company is deemed to accrue or arise in India in the hands of M/s ABC

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Inc. by virtue of section 9(1)(v). Hence, it is taxable in India.

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c. o (a) (i) A public company has created a charitable trust exclusively forstheembenefit
Question 3

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of the

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public. The trust has granted interest free loans, inter alia, to some

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employees in order to enable their children to pursue higher studies, as per the
objects of the trust. The Assessing Officer considers this benefit as being covered
under section 13(3) and proposes to withdraw the exemption from tax granted to the

4 Aeg Aktiengesllschaft v. CIT (2004) 267 ITR 209 (Kar.)

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12 FINAL EXAMINATION: MAY, 2023

trust. Comment upon the correctness or otherwise of the view of the Assessing
Officer.
(ii) Leeladhar Memorial Trust runs an educational institution, which is engaged solely in
education, received annual receipts during F.Y. 2022-23 amounting to ` 2.40 crores.
The trust also runs a hospital for treatment of persons suffering from mental
defectiveness solely for philanthropic purposes. The total receipts for the hospital
during F.Y. 2022-23 amounted to ` 2.50 crores.
Leeladhar Memorial Trust is not registered under the Income-tax Act, 1961 for tax
exemption u/s. 11, 12 or any other such clause. The consultant of the trust told them
they are not required to pay any tax even not given Registration under the Act,
Examine the consultants' view discussing the relevant provisions of Income-tax Act,
1961. (4 x 2 = 8 Marks)
(b) Mr. Rizvi, an Indian resident, aged 35 years, works in the Welly Oilfields, Country S as a
Superintendent in charge at an emolument of AED 9,500 per month. In order to look after
his ailing mother residing in Mumbai, India, he shifted with his family on 1st July, 2022
and started his consultancy business in India. Before shifting to India, he let out his
house property in Country S@3,250 AED from the same month. The details of his income
in INR for the year ended 31st March, 2023 are as follows:
Profit from the consultancy business ` 8,65,000
Fixed Deposit interest from the bank of Country S ` 45,500
Savings bank interest from SBI, Mumbai ` 18,250
Dividend income from XYZ Ltd., an Indian company ` 7,750
Rate of income tax in Country S is 23%.
During the previous year, Mr. Rizvi paid ` 48,000 as medical insurance premium for
himself and ` 60,000 as medical insurance premium to insure the health of his father, a
non-resident aged 66 years, who is not dependent on him.
You are required to compute the total income and tax liability of Mr. Rizvi for assessment
year 2023-24 assuming that India has not entered into double taxation avoidance
agreement with Country S and he has not opted for the provisions of Section 115BAC.
You may consider (1 AED = 23 INR) (6 Marks)
Answer
(a) (i) (1) The benefit of section 11 would not be available to a public charitable trust, if
any part of its income enures directly or indirectly for the benefit of any person
to in section 13(3).

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 13

(2) The persons referred to in section 13(3) include an –
(i) author or trustee of the trust,

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(ii) person who has made contribution exceeding ` 50,000 to the trust upto
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the end of the relevant previous year,

m . (iii) where the author or trustee or person mentioned above is a HUF, a
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s e (iv) relative of such author, trustee or member
member of the HUF
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ag (v) person or a concern in which any person mentioned above has
substantial interest
(3) The list of prohibited persons in section 13(3), however, does not include
employees of the company.
(4) Therefore, the proposed action of the Assessing Officer to withdraw the
exemption from tax granted to the trust on account of interest-free loans
granted to company’s employees to pursue higher education as per the objects
of the trust, is incorrect.

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Note – Section 13(3) includes relative of an author or trustee. However, a person

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having relationship pursuant to a contract like that of an employer and an employee

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cannot be said to be a relative. “Relative” means a person connected by birth or

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marriage with another person. This line of reasoning is based on the Patna High

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a
Court ruling in CIT v. Tata Steel Charitable Trust (1993) 203 ITR 764.
(ii) The condition of approval or registration is not required in the following cases –
- An educational institution existing solely for educational purposes whose
aggregate annual receipts do not exceed ` 5 crore is eligible for exemption
under section 10(23C)(iiiad);
- A hospital for treatment of persons suffering from mental defectiveness
existing solely for philanthropic purposes whose aggregate annual receipts do
not exceed ` 5 crore is eligible for exemption under section 10(23C)(iiiae);

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A trust running an educational institution and a hospital or both would be eligible for

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exemption under section 10(23C), without the condition of approval or registration, if

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the combined aggregate annual receipts from the educational institution and

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hospital does not exceed ` 5 crore.

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In this case, Leeladhar Memorial Trust’s combined receipts of ` 4.90 crores from

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educational institution (` 2.40 crores) and hospital (` 2.50 crores), does not exceed
` 5 crores.
Therefore, the consultant’s view that the trust is not required to pay tax even if it is
not registered under section 11 or 12 or any other clause is correct.

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14 FINAL EXAMINATION: MAY, 2023

Note – The question can also be answered in the following manner -
Exemption under the first regime is available under section 10(23C), where the trust
is required to fulfil the prescribed conditions and be approved by the Principal
Commissioner/Commissioner in certain cases.
Exemption under the second regime under section 11 is available to a trust
registered under section 12AB and fulfilling the prescribed conditions. However, in
case of a trust whose combined receipts from educational institution and hospital
established solely for education and philanthropic purposes, respectively, do not
exceed ` 5 crores, neither approval of Principal Commissioner / Commissioner nor
registration is required.
Therefore, the consultant’s view that the trust is not required to pay tax even if it is
not registered under section 11 or 12 or any other clause is correct.
(b) Computation of total income and tax liability of Mr. Rizvi for A.Y.2023-24
Particulars ` `
Salaries
Salary income from Welly Oilfields, Country S (9500 AED 6,55,500
x 3 x ` 23)
Less: Standard deduction 50,000
6,05,500
Income from house property
Annual Value of house property in Country S (3,250 AED 6,72,750
x ` 23 x 9 months)
Less: Deduction u/s 24(a) 30% of Annual Value 2,01,825
4,70,925
Profits and Gains of Business or Profession
Profits from the Consultancy business in India 8,65,000
Income from Other Sources
Fixed deposit interest from the bank of Country S 45,500
Savings bank interest from SBI Mumbai 18,250
Dividend income from XYZ Ltd., an Indian company 7,750 71,500
Gross Total Income 20,12,925

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 15

Less: Deductions under Chapter VI-A
Under section 80D
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Mediclaim premium for self ` 48,000 restricted to 25,000

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Mediclaim premium for father ` 60,000 restricted to 25,000

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(Since father is a non-resident, even though he
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is of the age of 66 years)
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a Under section 80TTA
50,000

Interest on savings bank account `18,250, restricted to 10,000
60,000
Total Income 19,52,925
Total Income (rounded off) 19,52,930

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Tax liability on ` 19,52,930

Add: Health and Education cess@4% .
c o
Tax on total income [30% of ` 9,52,930 + ` 1,12,500] 3,98,379

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15,935
s
la Note below)
4,14,314
Less: Deduction u/s 91 (See g
Net tax liability
a Working 2,38,016
1,76,298
Net tax liability (Rounded off) 1,76,300

Working note – Calculation of deduction under section 91
Particulars `

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Doubly Taxed Income

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Salaries 6,05,500

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se 45,500
Income from house property 4,70,925

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FD interest in Country S

las a g 11,21,925

ag Indian rate of tax = 4,14,314/19,52,930 x 100 = 21.215%
Rate of tax in Country S = 23%
Lower of the above = 21.215%
Deduction u/s 91 [21.215% x ` 11,21,925] 2,38,016

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16 FINAL EXAMINATION: MAY, 2023

Note – The question mentions that Mr. Rizvi is an Indian resident working in Country
S. The facts given therein indicate the intent to test the application of the provisions
of section 91. Accordingly, the main solution has been worked out considering
Mr. Rizvi as a resident and ordinarily resident.

Alternate Solution
The question specifically mentions that Mr. Rizvi who was residing in Country S and was
in employment there, has shifted with his family to India on 1st July, 2022 and started his
consultancy business here. No information relating to his stay in India in the earlier
previous years is given. He is a resident in P.Y.2022-23 since the period of his stay in this
year is 182 days or more. However, since he has been ordinarily residing in Country S so
far and has shifted to India only on 1st July, 2022, he would be resident but not ordinarily
resident in India for A.Y.2023-24, in which case, the income earned by him in Country S
in the P.Y.2022-23 would not be chargeable to tax in India. Accordingly, on this basis, an
alternate solution is worked out below –
Computation of total income and tax liability of Mr. Rizvi for A.Y.2023-24

Particulars `
Income from Salaries
Salary income from Welly Oilfields Country S (not taxable, since the -
income accrues or arises outside India. Since the services are rendered
outside India, such income is not deemed to accrue or arise in India)
Income from house property
Income from house property in Country S (income accruing or arising -
outside India is not taxable since Mr. Rizvi is a RNOR)
Profits and Gains of Business or Profession ` `
Profits from the Consultancy business 8,65,000
Income from Other Sources
Fixed deposit interest from the bank of Country S (income -
accruing or arising outside India not taxable since Mr. Rizvi is
a RNOR)
Savings bank interest from SBI Mumbai 18,250
Dividend income from XYZ Ltd., an Indian company 7,750
26,000
Gross Total Income 8,91,000

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 17

Less: Deductions under Chapter VI-A

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Under section 80D

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Mediclaim premium for self ` 48,000 restricted to ` 25,000

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Mediclaim premium for father ` 60,000 restricted

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to
e ` 25,000
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(Since father is a non-resident, even though he is

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of the age of 66 years)
50,000
Under section 80TTA
Interest on savings bank account ` 18,250, restricted to 10,000
60,000
Total Income 8,31,000
Tax liability on ` 8,31,000

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Tax on total income [20% of ` 3,31,000 + ` 12,500] 78,700

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Add: Health and Education cess@4% 3,148

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Tax liability 81,848
Tax liability (Rounded off)
l a s 81,850

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Note – While working out the question on the basis that Mr. Rizvi is a RNOR, it may be
assumed that income from house property in Country S or FD interest from bank of Country
S or both is received in India, since effect of deduction under section 91 can be given only
when such assumption(s) is made. The figures of doubly taxed income, deduction under
section 91 and net tax liability would differ depending on the assumption made.
Question 4
(a) (i) During the previous year 2022-23, Mr. A purchased scrap of ` 55 lakhs from Mr. B
for the purpose of his manufacturing unit. Mr. A also furnished a certificate to Mr. B

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that the scrap shall be utilized for manufacturing process carried on by Mr. A and

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shall not be used for trading purposes. Mr. A made the payment of ` 45 lakhs

c. o se
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during F.Y 2022-23 to Mr. B. Assume turnover of both Mr. A and Mr. B from the

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business carried on by them exceeds ` 10 crores in the financial year 2021-22.

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Comment upon TDS/ TCS implication in the above case. (3 Marks)

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(ii) Mr. P provides technical consultancy to its various clients who deduct tax u/s 194-J

a of the Act. Mr. P applies for lower tax deduction certificate u/s 197 from the TDS
officer in respect of his receipts from consultancy. During the previous year
2022-23, Mr. P was issued the lower tax deduction certificate allowing him to
receive the consultancy payments after deduction of tax@1%. Mr. P forwarded this

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18 FINAL EXAMINATION: MAY, 2023

certificate to his client Mr. Q asking him to deduct tax@1% on the payments of ` 15
lakhs to be made to Mr. P.
Mr. Q has approached you to advise on the amount of tax to be deducted from the
payment to be made to Mr. P. You gathered the information that Mr. P is not filing his
ITRs for the last two Assessment years and TDS credit in his 26AS is more than ` 1
lakh in each last two years i.e. A.Y. 2021-22 and 2022-23. What would be your
advice to Mr. Q? (3 Marks)
(iii) Ms. Roshni sold her house property at Delhi to Ms. Shalini for a consideration of
` 60 lakhs on 1.8.2022. She has purchased the house property on 1.4.2015 for
` 36 lakhs. The Stamp duty value of the property on the date of sale i.e., 1.8.2022 is
` 82 lakhs.
Determine the TDS implications in the hands of Ms. Shalini as per the Income-tax
Act, 1961, assuming both Roshni and Shalini are resident individuals. (2 Marks)
(b) Shahi Pvt. Ltd., a domestic company, located in Special Economic Zone (SEZ) since
November 2013.
The company is engaged in manufacturing of consumables goods. The manufacturing is-
wholly dependent on raw material which is imported from Sumi Inc. of Japan.
The following details are furnished in respect of the financial year 2022-23:
(i) Shahi Pvt. Ltd. imported goods for ` 30 crores from Sumi Inc.
(ii) Sumi Inc. supplied similar raw materials to unrelated parties with a mark-up of 10%,
whereas for Shahi Pvt. Ltd. it earned a mark-up of 20%.
(iii) Shahi Pvt. Ltd. was allowed to use the brand name of Sumi Inc. without any
payment and whereas the unrelated parties cannot use such brand name in India.
The annual cost of brand value is ` 90 lakhs.
(iv) The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for
determination of Arm's Length Price (ALP).
You are required to answer the following:
(a) Compute the arm's length price of the transaction and adjustments to be made to
the income of Shahi Pvt. Ltd while discussing the relevant provisions.
(b) If Transfer Pricing Officer (TPO) had enhanced the income of Shahi Pvt. Ltd. by ` 2
crores, will that enhanced amount of income be eligible for deduction u/s 10AA?
(c) Will Shahi Pvt. Ltd. become liable for penalty for under-reporting of income based
on the report of the Transfer Pricing Officer (TPO)? (6 Marks)

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 19

Answer
(a) (i) By virtue of section 206C(1A), Mr. B is not required to collect tax at source under

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section 206C(1), since Mr. A has furnished a certificate to Mr. B that the scrap

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purchased from him is for manufacturing process carried on by him and not for

.c
trading purposes.
e m
m dated 25.11.2021, TDS under section 194Q will be attracted in the hands of la
e20/2021 s
s
However, as clarified vide Circular no. 13/2021 dated 30.6.2021 and Circular No.

a the buyer in such cases covered under section 206C(1A), if the conditions specifiedag
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ag under section 194Q are fulfilled.
In this case, tax is required to be deducted at source under section 194Q by the
buyer, Mr. A, since his turnover in the immediately preceding financial year i.e.,
F.Y.2021-22 exceeds ` 10 crores and he has purchased goods of the value or
aggregate of such value exceeding ` 50 lakhs in the F.Y.2022-23. TDS u/s 194Q
would be 0.1% of the sum exceeding ` 50 lakhs and the same has to be deducted
at the time of payment or credit of such sum to the account of resident seller,
whichever is earlier.

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Therefore, in the present case, Mr. A is required to deduct tax at source @ 0.1% of
` 5,00,000, being the amount exceeding ` 50 lakhs (` 45,00,000, being the

m would not apply where section 194Q is
e206C(1H)
payment made plus ` 10 lakhs, being the amount credited to the account of Mr. B).

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Note: It may be noted that section

g
(ii) As per section 194J, Mr.aQ is required to deduct tax at source @2% on ` 15 lakhs in
applicable.

respect of payment for technical consultancy to Mr. P. However, since Mr. P has
furnished lower tax deduction certificate issued under section 197 specifying lower
rate of 1% to Mr. Q, tax would be deducted at such lower rate of 1%.
However, as per section 206AB, since Mr. P has not furnished his return of income
for A.Y.2021-22 / A.Y.2022-23 relevant to the P.Y. 2020-21/P.Y.2021-22, respectively,
and the aggregate of TDS and TCS in his case is ` 1 lakh in the said previous year,

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which is more than the threshold of ` 50,000, Mr. Q is required to deduct tax at

c. o
source on payment of fees for technical consultancy to Mr. P, at higher of inter alia

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c. o (i) at twice the rate prescribed in the relevant provisions of the Actm
the following rates –

e
s sectionsince197,taxrateis
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i.e., 4% [being

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ag
twice the rate of 2% applicable under section 194J] [Alternatively,

la
deductible as per lower tax deduction certificate issued under

ag of 2% may be mentioned in the answer];
(ii) at 5%
Accordingly, Mr. Q is required to deduct tax at source @5% on ` 15 lakhs,
being the amount paid as technical consultancy fees.

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20 FINAL EXAMINATION: MAY, 2023

Note - The above answer is on the basis that receipts from technical consultancy
represents fees for technical services attracting TDS@2%. It may be noted that
“technical consultancy” is also covered under the definition of "Professional
Services" under section 194J. The rate of TDS for Fees for professional services is
10%. If receipts from technical consultancy is treated as fees for professional
services, the TDS rate applying section 206AB would be 20%, being the higher of
5% or twice the applicable rate of 10%. This is an alternate view possible since
technical consultancy is also included in the definition of "Professional Serv ices"
under section 194J.
(iii) In the case of transfer of any immovable property and the transferor is a resident,
where the consideration or the stamp duty value, whichever is higher, exceeds ` 50
lakhs, tax is deductible at source @1%.
As per section 194-IA, Ms. Shalini, being a resident transferee paying ` 60 lakhs to
Ms. Roshni, a resident transferor, as consideration for transfer of house property at
Delhi, is required to deducted tax at source @1% on ` 82 lakhs, being the higher of
Stamp duty value of ` 82 lakhs or consideration of ` 60 lakhs.
Therefore, tax to be deducted = ` 82,00,000 x 1% = ` 82,000.
(b) (a) Shahi Pvt. Ltd, an Indian company and Sumi Inc. of Japan, are deemed to be
associated enterprises as per section 92A(2), since Shahi Ltd.’s manufacturing is
wholly dependent on raw material5 imported from Sumi Inc. Further, the transaction
of purchasing raw material falls within the meaning of “international transaction” u/s
92B. Hence, transfer pricing provisions would be attracted in this case.
Computation of Arm’s length price and adjustment to be made ` in crores
Price of imported goods charged by Sumi Inc. from Shahi Pvt. Ltd. 30.00
Less: Mark up earned @ 20% [` 30 crores x 20/120] from Shahi Pvt. Ltd. 5.00
25.00
Add: Mark up earned in uncontrolled comparable transaction @10% 2.50
27.50
Add: Adjustment on account of brand value [Annual cost of brand value] 0.90
Arm’s length price of raw material purchase 28.40
Less: Price at which raw material was imported by Shahi Pvt. Ltd.
from Sumi Inc. 30.00
Adjustment to be made to the income of Shahi Pvt. Ltd. 1.60

5 Assuming the prices and terms of supply are decided by the Sumi Inc.

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 21

(b) Shahi Pvt. Ltd. cannot claim deduction under section 10AA in respect of ` 2 crores,
being the amount of income by which the total income is enhanced by the TPO, by

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virtue of the first proviso to section 92C(4).

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(c) No, Shahi Pvt. Ltd. would not be liable for penalty for under reporting of income

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based on the report of the TPO, since the amount of under-reported income

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represented by any addition made in conformity with the arm’s length price

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determined by the Transfer Pricing Officer would not be included within the scope of

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under-reported income under section 270A, assuming Shahi Pvt. Ltd. has
maintained information and documents, as prescribed under section 92D, declared
the international transactions under Chapter X and disclosed all material facts
relating to the transaction.
Question 5
(a) Answer any two out of the following three sub-parts, viz. (i), (ii) and (iii).
Your answer should cover:
(a) Issue involved

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(b) Provisions applicable
(c) Analysis and Conclusion
(i) M/s Risky Construction Pvt. Ltd. m
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s e2022-23, it made payment to various parties und
is engaged in the construction of bridges and

a
deducted tax amounting to l` 1.60 crores. However, the company failed to deposit
flyovers. During the previous year

the said amount with theagincome-tax department within the time prescribed under
the Act. The company submitted that it is facing financial hardship since a large sum
of money has been stuck-up with its debtors and also with the income-tax
department in the form of tax refunds. It is further submitted that inspite of financial
crisis, the company has suo-moto deposited the TDS amount along-with interest u/s
201(1A) of the Act, before receiving any notice from the income-tax department in
this regard. However, Tax officer initiated prosecution proceedings under Section
276B of the Act against the company and its directors. The company has

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approached you to advise in the matter.

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(ii) XYZ Limited entered into a contract for purchase of software with M/s. Delta Inc, a

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non-resident company based in Sweden. It filed an application u/s 195(2) before the

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Assessing Officer to make payment to the non-resident company for purchase of

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software without deducting tax at source.

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The assessee, XYZ Limited, contended that said non-resident company had no
Permanent Establishment in India and in terms of the DTAA between India and
Sweden, no tax was to be deducted in India on same. The AO rejected the
assessee's application on grounds that consideration for software licensing
constituted royalty u/s 9(1)(vi) and was liable to be taxed in India and, accordingly,

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22 FINAL EXAMINATION: MAY, 2023

assessee was directed to deduct tax at source at rate of 10% on said royalty
payment.
On Appeal, the Commissioner (Appeals) passed an order in favour of the assessee.
On further appeal, the Tribunal upheld the order passed by the Assessing Officer on
grounds that payments made for purchase of software were Jn nature of royalty and
tax at source to be deducted on such payment.
The assessee company filed a miscellaneous application for rectification under
Section 254(2) before the Tribunal. The assessee had also filed an appeal before
the High Court.
Tribunal allowed said application in exercise of his powers under section 254(2) and
reheard entire appeal on merits and recalled its original order and passed an order
in favour the assessee. Thereafter, the writ petition filed by the assessee with High
Court was also withdrawn. Is Tribunal justified in recalling its original order? Please
state your answer on the basis of latest provisions of the Act and Supreme Court
rulings.
(iii) The assessee, MPV Ltd, being a branch office of US Company, MPV Inc, was
engaged in contract research activities and cultivation of parent seeds in India. It
had been claiming exemption by treating its entire income as agricultural income.
On Scrutiny assessment for the period from year 2010 to 2015, the Assessing
Officer treated entire income of the assessee as "Business Income" and attributed
deemed income from research activity holding the assessee company to be a
Permanent Establishment (PE) of MPV Inc. However, the assessee company
disputed the matter for resolution under Mutual Agreement Procedure (MAP) under
the DTAA agreement between India and USA. The MAP was culminated in the year
2020. The assessment was finalized and taxes alongwith interest were paid by the
assessee u/s 220.
However, the assessee disputed the amount of interest u/s.220(2) for the period
from 2015 to 2020.
Thereafter the assessee company filed an application before Jurisdictional
Commissioner of Income-tax under section 220(2A) for waiver of interest levied u/s
220(2). Commissioner dismissed application of the assessee.
The assessee company is a part of MPV Inc, a global conglomerate which had in
2020 ` 94,000 crores in net sales and ` 12,000 crores as operating profit. The
amount paid by it towards interest u/s.220(2) of the Act was 2.50 crores.
On the basis of the above facts and as per the latest ruling of the Supreme Court,
whether the Commissioner of Income-tax is justified in rejecting the claim of
Assessee or not. (4 x 2 = 8 Marks)

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 23

(b) Kiwi Inc., a company based in USA, is engaged in manufacturing and selling of mobile
phones, globally. It sells each mobile phone for USD 2,000. Alpha Inc., another company

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based in USA, owns and manages a website which acts as a marketplace for buying and

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selling of goods and also hosts advertisements. Gama LLC, a company incorporated in

c o
During the. previous year 2022-23, Kiwi Inc. sold 80,000 mobile phones, as under-
UK, is engaged in manufacturing and selling of printers.
e m
em through which the Customer to whom the Number of mobile gla s
s
la mobile phones are sold mobile phones are sold phones sold a
g
Platform

a Through Alpha Inc. Persons who are resident 15,000
in India
Through Alpha Inc. Persons who are not 25,000
resident in India, sitting in
U.K.
Through Kiwi Inc.'s own website Persons who are resident 7,000
in India

om
Through Kiwi Inc.'s own website
Persons who are not 12,000

. c
resident in India, using

em
Internet in U.K.

a s
Through Kiwi Inc.'s physical Persons who are resident
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store in US in India 21,000
Total
a 80,000

Gama LLC enters into a contract with Alpha Inc. for publishing its advertisement on the
website of Alpha Inc., for the period from 1st March 2023 to 31st March 2023. Gama LLC
paid USD 50,000 for hosting advertisement in India for Indian customers and USD
20,000 for hosting advertisement in UK for UK customers. Kiwi Inc., Alpha Inc. and Gama
LLC do not have any Permanent Establishment in India.
Discuss the India tax implications in the above scenario as per Income-tax Act, 1961. You

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may assume that sale of mobile phones was evenly distributed throughout the year and

m .c
c. o Answer
the rate of 1 USD is equal to ` 80. (6 Marks)

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aassessee suo moto,
las can be initiated where tax deducted has been deposited byg
(a) (i) Issue Involved: The issue under consideration is whether prosecution

g a notice from the income-
the

a
after the time prescribed under the Act but before receiving
tax department, along with interest under section 201(1A) and the assessee has
shown reasonable cause for such delay.

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24 FINAL EXAMINATION: MAY, 2023

Provisions Applicable: Prosecution proceedings are attracted under section 276B,
if a person fails to pay to the credit of the Central Government, the tax deducted at
source by him as required under the provisions of the Act.
Section 278AA provides that no person would be punishable for such failure if he
proves that there was reasonable cause for the same.
Analysis and Conclusion: In this case, the company has reasonable and
sufficient cause since it was facing financial hardship on account of large sum of
money stuck up with the debtors and also with the income-tax department on
account of refunds. In spite of the financial crisis, the company has suo moto
deposited the TDS along with interest under section 201(1A) of the Act, before
receiving any notice from the income-tax department in this regard.
Since it has deposited the TDS along with interest suo moto before receiving any
notice from the department and it has also shown reasonable cause for such delay
in deposit, the company cannot be punishable for the delay in deposit of TDS. The
initiation of prosecution proceedings under section 276B against the company and
the directors is, therefore, not correct.
(ii) Issue Involved: The issue under consideration is whether the powers under section
254(2) can be exercised by the Tribunal to recall an order and rehear the entire
appeal on merits.
Provisions applicable: Section 254(1) empowers the Appellate Tribunal to pass
such order thereon as it thinks fit, after giving both the parties to the appeal an
opportunity of being heard.
Under section 254(2), the Appellate Tribunal, may amend an order passed by it u/s
254(1) with a view to rectifying any mistake apparent from the record.
Analysis and Conclusion: The power u/s 254(2) is limited to rectification of a
mistake apparent on record and therefore, the Tribunal must restrict itself within
those parameters.
A detailed order was passed by the Tribunal upholding the order passed by the
Assessing Officer. While allowing the application u/s 254(2) and recalling its earlier
order, the Tribunal had reheard the entire appeal on the merits as if the Tribunal was
deciding the appeal against the order passed by the Commissioner (Appeals). The
subsequent order passed by the Tribunal recalling its earlier order was beyond the
scope and ambit of the powers u/s 254(2) and is not tenable in law.
Note – The facts given in the question are similar to the facts in Reliance Telecom
Ltd./Reliance Communications Ltd. (2022) 440 ITR 1 (SC) wherein the issue came
up before the Supreme Court. The above answer is based on the rationale of the
Supreme Court in the said case.
(iii) Issue Involved: The issue under consideration is whether pendency of dispute
resolution under MAP is a valid ground for waiver of interest under section 220(2A).

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Provisions Applicable: Section 220(2) provides for levy of simple interest for delay
in paying the sum specified in the notice of demand within the period specified

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thereunder.

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Section 220(2A) provides for reduction or waiver of interest payable under section
c. o
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220(2) if, inter alia, the Commissioner is satisfied that payment of such amount has

m and Conclusion: Merely raising the dispute before any authority cannot la s
caused or would cause genuine hardship to the assessee.

s eAnalysis
be a ground for waiver of interest under section 220(2A). Otherwise, each and every g
g l a assessee may raise a dispute and thereafter, may contend that since the litigationa
a was bona fide, no interest is leviable.
Further, in this case, the assessee is a part of a global conglomerate which had in
the 2020 ` 94,000 crores in net sales and ` 12,000 crores as operating profit. In
comparison to the profitability over the years, the amount paid by it towards interest
under section 220(2) was merely ` 2.50 crores. This fact is relevant in concluding
that no ‘genuine hardship’ can be said to have been caused to the assessee on
account of payment of interest.

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The Commissioner of Income-tax is, therefore, justified in rejecting the claim of

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assessee.

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Note – The facts given in the question are similar to the facts in Pioneer Overseas

a s
Corporation USA (India Branch) v. CIT (International Taxation) (2022) 449 ITR 186,

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wherein the issue came up before the Supreme Court. The above answer is based

a
on the rationale of the Supreme Court in the said case.
(b) Tax implications in the hands of Kiwi Inc/Alpha Inc.
(1) (2)
Transaction entered into by Tax implications in the hands of Kiwi Inc./ Alpha Inc.
Kiwi Inc.
(i) Sale of 15,000 mobile Alpha Inc, the e-commerce operator, has to pay
phones through Alpha equalisation levy@2%, since the e-commerce supply

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Inc. to persons who is to persons resident in India, the consideration for

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are resident in India which exceeds ` 2 crore.

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Consideration =15,000 x 2,000 x ` 80 = ` 240 crores

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EL payable by Alpha Inc = 2% x ` 240 crores

s la
= ` 4.80 crores

la a g
There would be no income-tax liability in the hands of

ag Kiwi Inc on account of exemption u/s 10(50).
Note – This view is taken since EL is leviable on the
gross sale consideration even though Alpha Inc. is
only facilitating sale of phones by Kiwi Inc. in this
case. Accordingly, Kiwi Inc. can avail benefit of

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26 FINAL EXAMINATION: MAY, 2023

exemption u/s 10(50), since the transaction has
already been subject to equalization levy in the
hands of Alpha Inc.
Alternatively, it is possible to take a view that
exemption u/s 10(50) would not be available to Kiwi
Inc since equalization levy is paid by Alpha Inc. If this
view is taken, then the income attributable to this
transaction would be subject to income-tax in the
hands of Kiwi Inc. on account of significant economic
presence of Kiwi Inc. in India leading to business
connection in India.
(ii) Sale of 25000 mobile Equalisation levy is not attracted in the hands of
phones through Alpha Alpha Inc. on sale of mobile phones to non-residents
Inc. to persons who based outside India.
are not resident in Income-tax liability is also not attracted in the hands
India, sitting in UK of Kiwi Inc. since the income accrues and arises
outside India and is received outside India by a non-
resident, i.e., Kiwi Inc.
(iii) Sale of 7,000 phones Equalisation levy@2% is attracted in the hands of Kiwi
through Kiwi Inc’s own Inc, since it has effected e-commerce supply to
website to persons persons resident in India, the consideration for which
resident in India exceeds ` 2 crores.
Consideration = 7,000 x 2,000 x ` 80 = ` 112 crores
EL payable by Kiwi Inc. = 2% x ` 112 crores =
` 2.24 crores
There would be no income-tax liability in the hands of
Kiwi Inc. on account of exemption u/s 10(50).
(iv) Sale of 12,000 phones Equalisation levy is not attracted in the hands of
through Kiwi Inc’s own Kiwi Inc. on sale of mobile phones to non-residents
website to persons based outside India using internet protocol address
who are not resident in outside India.
India, using internet in Income-tax liability is also not attracted in the hands
UK of Kiwi Inc. since the income accrues and arises
outside India and is received outside India by a non-
resident, i.e., Kiwi Inc.
(v) Sale of 21,000 phones Since the sale has taken place outside India, no
through Kiwi’s physical income is deemed to accrue or arise in the hands of
store in US to persons Kiwi Inc.
resident in India.

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 27

USD 50,000 received from Gama LLC by Alpha Inc. for hosting advertisement

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for Indian Customers

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Amount of USD 50,000 paid by Gamma Inc., a non-resident, to Alpha Inc, another
c. o
.co em
non-resident, being an e-commerce operator, would be subject to EL @2% in the

m a s
hands of Alpha Inc, since the same is for hosting advertisement in India which is a

s e
specified circumstance.
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l a a
ag in UK for UK customers
EL payable by Alpha Inc. = 2% x USD 50,000 x ` 80 = ` 80,000.
USD 20,000 received from Gama LLC by Alpha Inc. for hosting advertisement

No equalization levy is attracted in respect of the sum of USD 20,000 paid since it
is not for targeting Indian customers.
No income-tax liability is attracted since no income accrues or arises or is deemed
to accrue or arise in India to Alpha Inc.
Note – The question requires the candidates to discuss the India tax implications in
the given scenario as per the Income-tax Act, 1961. Since majority of the

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transactions listed therein is through a non-resident e-commerce operator, it

.
becomes imperative to first consider the equalisation levy implications. If the

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transaction is subject to equalisation levy, then, it would be exempt u/s 10(50) of the

a s
Income-tax Act, 1961. Otherwise, it has to be examined whether the income from the

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transaction is deemed to accrue or arise in India to attract chargeability of income-tax

a
u/s 9 of the Income-tax Act, 1961. The main answer given above has been prepared
on these lines.
However, due to the specific reference to “as per the Income-tax Act, 1961” in Q.5(b),
an alternate answer is given below ignoring the provisions of equalisation levy, since
the levy itself is through Chapter VIII of the Finance Act, 2016 and not through the
Income-tax Act, 1961:
Tax implications under the Income-tax Act, 1961 ignoring equalisation levy

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(1) (2)

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c. o
Transaction entered into by Tax implications in the hands of Kiwi Inc.

emInc in India
Kiwi Inc.
(i) Sale of 15,000 mobile Significant economic presence of s
s em laarereferred
Kiwi

la a g
phones@ USD 2,000 arises in these cases [transactions to in (i)

ag
through Alpha Inc. to and (iii)] since these transactions with persons
persons who are resident in India in respect of which the aggregate
in India payments in the P.Y.2022-23 exceeds ` 2 crores.

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28 FINAL EXAMINATION: MAY, 2023

(iii) Sale of 7,000 phones@ Hence, business connection is constituted and
USD 2,000 through Kiwi income attributable to such transactions shall be
Inc’s own website to deemed to accrue or arise in India and would be
persons resident in India chargeable to income-tax in the hands of Kiwi Inc.
(ii) Sale of 25000 mobile Income-tax liability is not attracted in the hands of
phones through Alpha Kiwi Inc. in respect of transactions referred to in (ii)
Inc. to persons who areand (iv) since the income accrues and arises
not resident in India, outside India and is received outside India by a
sitting in UK non-resident, i.e., Kiwi Inc.
(iv) Sale of 12,000 phones No business connection is established in this case,
through Kiwi Inc’s own and hence, no income is deemed to accrue or
website to persons who arise in India in the hands of Kiwi Inc.
are not resident in India,
using internet in UK
(v) Sale of 21,000 phones Since the sale has taken place outside India, no
through Kiwi’s physical income is deemed to accrue or arise in the hands of
store in US to persons Kiwi Inc.
resident in India.
USD 50,000 received from Gama LLC by Alpha Inc. for hosting advertisement in
India for Indian Customers
Income attributable to operations carried out in India which is deemed to accrue or
arise in India would include income from advertisement which targets customers
residing in India. Accordingly, income of USD 50,000 received from Gama LLC by
Alpha Inc. for hosting advertisement in India for Indian customers would be
chargeable to income-tax in the hands of Alpha Inc.
USD 20,000 received from Gama LLC by Alpha Inc. for hosting advertisement in UK
for UK customers
No income-tax liability is attracted since no income accrues or arises or is deemed to
accrue or arise in India to Alpha Inc.

Question 6
(a) (i) Comment whether the following transactions, undertaken during the financial year
2022-23, are required to be reported under the Statement of Financial Transaction
or Reportable Account as required u/s 285BA of the Income-tax Act, 1961. Please
give your answer alongwith suitable reasons and Category of Reporting Person.
(a) Mr. A purchased five bank drafts of ` 3 lakh each from his current A/c with
State Bank of India, Jaipur;

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PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 29

(b) Ms. Q made two time deposits with Canara Bank, Jaipur - (a) a time deposit
of ` 7 lakhs made on 07-08-2022 and (b) Renewal of Time deposit of ` 5

m
lakhs originally made on 1.1.2022 and renewed on 1.1.2023;

m the months of April to - ` 19,500 for each month, in cash c. o
c. • o For
(c) Ms. C made following payments in respect of credit card payments-

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e m July, 2022 l a s
l a s ag
ag
• For the months of Aug. to - ` 59,500 for each month, through
Dec., 2022 bank A/c
• For the months of Jan to - ` 13,300 for each month, in cash
Mar, 2023
(d) Mr. Z purchased garments of ` 2 lakhs in cash from M/s Arora Designers on
the occasion of his marriage. M/s Arora Designers is liable for audit u/s 44AB
of the Income-tax Act, 1961. (4 Marks)
(ii) Doctrine of precedence would be applicable in case of tax laws. In light of the

o m
Doctrine of Precedence, comment on the correctness or otherwise of the following

c
(a) The ratio decendi (the rationale. for deciding a case) of a Supreme Court
statements alongwith reasons for your answers:

s emon all lower courts, Tribunals and authorities.
l a Tribunals and authorities are not bound by the
decision is absolutely binding

a g
However, the lower courts,
obiter dicta (additional remarks or things said by the way) of Supreme Court
decisions.
(b) Where there are two irreconcilable decisions of two Benches of similar strength
of the Supreme Court, the decision with more detailed discussion on the
subject shall prevail.
(c) Lower courts are bound by the decisions of Supreme Court. The only
exception to this principle is the judgments passed by the Supreme Court per

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incuriam (i.e. without referring the statutory provision).

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(d) Lower authorities may deviate from the decision of the High Court within

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whose jurisdiction they function, only in a situation to keep the issue alive

s g l a
where the Department has not accepted the said decision and has taken the

la a
matter to the Supreme Court. (4 Marks)

ag (b) (i) What is the "General Rule of Interpretation" of tax treaty as provided under Vienna.
Convention on Law of Treaties? (2 Marks)

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30 FINAL EXAMINATION: MAY, 2023

(ii) Explain the following terms "Pacta Sunt Servanda (in good faith)” in view of
Principles enunciated in the Vienna Convention on law of treaties. (1 Mark)
(iii) Explain the term "Mutual Agreement Procedure" as per Article 25 of Model Tax
Conventions under OECD model and UN Model. (3 Marks)
Answer
(a) (i) (a) State Bank of India, Jaipur, is not required to report value of bank drafts
purchased by Mr. A, even though aggregate value of such bank drafts i.e.,
` 15 lakhs, exceed ` 10 lakhs in the F.Y.2022-23, since such bank drafts are
purchased from his current A/c and not in cash.
(b) Canara Bank, Jaipur is not required to report time deposits made by Ms. Q,
since the value of time deposits other than time deposit renewed on 1.1.2023
is only ` 7 lakhs, and hence, does not aggregate to ` 10 lakhs or more in the
F.Y.2022-23.
(c) The bank or institution issuing credit card is required to report cash payment
made by Ms. C in respect of credit card, since aggregate cash payments of
` 1,17,900 (` 19,500 x 4 + ` 13,300 x 3) exceeds ` 1 lakh in the F.Y.2022-23.
However, payment of ` 59,500 for each month from August 2022 to December
2022 need not be reported by such bank or company or institution since,
aggregate value of such transactions, being ` 2,97,500, is less than ` 10
lakhs.
(d) Payment of ` 2 lakhs by Mr. Z is not required to be reported by M/s Arora
Designers, since receipt of cash payment against sale of garments from Mr. Z
does not exceed ` 2 lakhs.
(ii) Doctrine of precedence
(a) Incorrect - Not only the ratio decidendi (the rationale for deciding a case), but
also obiter dicta (additional observations, remarks, and opinions given while
deciding a case) of the Supreme Court are binding on all the Courts.
(b) Incorrect - When there are two irreconcilable decisions of two Benches of
similar strength of Supreme Court, the decision later in time shall prevail.
(c) Incorrect - The Supreme Court judgments cannot be ignored by the lower
courts though such judgments are per incuriam (i.e., without referring the
statutory provisions).

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(d) Incorrect - Lower authorities cannot pass orders which are inconsistent with
the decisions of the High Court within whose jurisdiction they function, even for

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the purpose of keeping the issue alive.

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(b) (i) General Rule of Interpretation implies that a treaty shall be interpreted –

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a
- in good faith;

s e- in accordance with the ordinary meaning to be given to the terms thereof; and g l
la - in the context and in the light of its object and purpose. a
ag (ii) Pacta Sunt Servanda (in good faith) implies that every treaty in force-
- is binding upon the parties; and
- must be followed by them in good faith.
(iii) There may be a situation wherein a tax payer may believe that the treatment
accorded by either or both Contracting States is not in accordance with the
provisions of the tax treaty.

m
In such a case, there is a need for dispute resolution which is addressed by Article

. co
25 of Model Tax Convention under OECD Model and UN Model. This Article

em
requires competent authorities of both countries to endeavor to resolve the conflict

s
by engaging in bilateral negotiations.

g l a
The UN Model Convention provides two alternatives - Alternative A and

a
Alternative B, for the article on Mutual Agreement Procedure. Under OECD Model
Convention, the taxpayer may make a request to either Contracting State while UN
Model (Alternative A) contemplates taxpayer going to Residence State or the
country of his nationality. Alternative B of UN Model Article 25 contemplates
reference to an arbitration process as part of the Mutual Agreement Procedure.

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