Kalpesh Classes

Important Questions​​ - Part D

Internatinal Taxation

10 Mark Type Questions Top – 10

Question ​​ 1 (specific computations, Non resident) (CG ID 46)

Mr. N (non resident) purchased shares of Reliance industries on 01-01-2009 by remitting US $. The following data is given.

Cost of​​ acquisition : 5,85,000 (Dated : ​​ 1.1. 2009)

Sale price : 9,00,000 (Dated : ​​ 1.1. PY)

Expense on transfer : 6,600 (Dated : ​​ 28.12. PY)

On 24.04.AY 6,15,000 was invested out of above sale proceeds and it was sold on 18.08.AY for value of 10,50,000.

Question (ID 02) (Royalty Technical Fees)

Massy incorporated in Switzerland, a foreign company furnishes the following data for the previous year. Massy does​​ not have any branch offices in India.

Question A

Determine the total income of the foreign company and the tax payable by it.​​ 

Question B

What would be the total income and the tax payable,​​ if the donation was Rs. 4,00,000 instead of Rs. 6,00,000

Question C

What would be the total income and the tax payable, if the donation was Rs. 4,00,000 instead of Rs. 6,00,000 and DTAA between India and Switzerland provides for tax rate on royalty as 5​​ % and Interest income as 25 %.

Question D

What would be total income and tax payable if the donation is 100,000 instead of 600,000 and Massy have branch office in India for providing to services to Indian concern in form of royalty.

Question E

Determine​​ the total income of the foreign company and the tax payable by it in question D above if the place of effective management of the company is in India.​​ 

Question (ID 52)

Arnold Ltd. (incorporated in UK) has a branch office (PE) in India. The Net profit​​ of the Branch as per the statement of profit and loss for the year was Rs. 83 lakhs. It includes the following:

• • Dividend from Indian companies (listed) Rs. 8,00,000.

  • Dividend from Indian companies (unlisted) Rs. 4,00,000.

  • Interest received from MMS Ltd. of​​ Mumbai Rs. 7,00,000. The amount was received by the Indian company MMS Ltd. in foreign currency as per loan agreement dated 01.04.2014 (section 194LC applicable).

  • Fee for technical services received from Barun Co. Ltd., Kolkata Rs. 25,00,000. The agreement was made on 10.08.2007 and was approved by Central Government Expenditure incurred for providing technical service amount to Rs. 6,00,000.

  • Income out of trading in market at its prevailing market price of Carbon Credit Rs. 700,000.

  • Royalty income out of​​ patents registered in India 12,00,000.

  • Arnold Ltd is member of an AOP M/s Flingo an in India. Arnold ​​ Ltd has 60% share. Total Income of AOP is 10,00,000 Rupees.

Additional Information :

Total income chargeable to tax as per regular provisions of the Income-tax Act, 1961 (Act) is Rs. 20,00,000 (without considering the items (1) to (7) above). You are required to compute the book profit tax under section 115JB of the Act and also the total income-tax liability of the assessee.

Your working should be supported by notes.

Question (ID 06)​​ 

Ritesh, a Non-Resident Indian remitted USD 75,000 to India in 31.1.1992, part of which is utilized for acquiring 5,000 Shares of Akash Ltd. and Indian Company at Rs. 210 on 15.2.1992. These shares are sold for Rs. 1,760 per share on 28.3.PY. ​​ Ritesh deposited Rs. 50 Lakhs with an Indian Public Company on 1.8.AY ​​ (one day after due date of filing return of income).​​ 

Compute Capital Gains chargeable to tax on the basis of the following TT Rates (as per State Bank of India) ​​ 

If the above shares were sold through a Recognized Stock Exchange, what will be tax incidence?

Question (ID 01)

A non- resident​​ Indian has the following sources of income in India. ​​ You are required to compute his total income and determine his tax liability. ​​ Details of your workings, with reasons, should form part of your answer.

The property was​​ acquired partly out of a loan from HDFC. The repayment of loan made during the year amounted to Rs. 20,000. The assessee also claims deduction of Rs. 10,000 by way of donation to the Prime Minister’s Relief Fund and of Rs. 50,000 towards repayment of loan​​ taken for higher education in India before his migration. It shall be assumed that capital gains in (3) above after the exchange fluctuation of Prov 1 to 48 is 82,000.

Question 3 (ID 031) (Non Resident Shipping / air crafts 172, 44B, 44BBA)

X (45 years),​​ a non resident, is engaged in the business of shipping. During the previous year, one of the ships owned by X collects freight as follows:

• On August 6, a sum of Rs. 40 lakh for shipping goods from Cochin Port (it includes demurrage of Rs. 10,000 and handling charges of Rs. 60,000); and

• On January 10, a sum of Rs. 25 lakh for shipping goods from Bombay (it is paid to X in New York).

Besides, X collects Rs. 22,70,000 in India on March 31, for shipping goods from Karachi to California. Barring the cases noted​​ above, X does not have any other income in India. X incurs an expenditure of Rs. 2,40,000 in India (out of which Rs. 65,000 is paid in cash). X has brought forward loss of Rs. 5,000 from a trading business in India which has discontinued 3 years back. Compute the tax liability of X.

Problem ​​ (BM act ID 02)​​ 

Mr. Jyotinder resident Aged 42 years is a partrner in a firm registered in British Virgin Islands. Mr. Jyotinder and Mr. Juntao of China are partners and sharing profit and losses in ratio of 60:40. Mr. Jyotinder has not disclosed this interest in firm to income tax authorities in India. The balancesheet of firm on 31st​​ March of PY in Euro Millions is given below. You are required to ascertain tax liablity to be paid by Jyotinder under BM act.

Following addition​​ information is available:-

Market Value of Drawing and Paintings as at 01st​​ April of PY is 110

Market Value of buildings in Panama Islands as at 01st​​ April of PY is 150

Bank account in HSBC represents total deposits of 112 and total withdrawal of 102 over​​ period of last 7 years since date of its opening.

Exchange Rate of Euro = 95 (1st​​ April of PY)

Exchange Rate of Euro = 96 (31st​​ March of PY)

Question: (ID 35) (Deemed to accrue or arise in India)

Foreign company Forbings Inc ​​ is operating its services in​​ Germany in the field of commission agency. An Indian company Raja Ram Ltd has paid commission to a foreign company Forbings Inc for procuring a machinery from Germany from Zoaapto Inc a German Company. The machinery imported by Raja Ram Ltd will be further supplied to prospective customer in Indonesia. Forbings Inc is registered as per law of Germany and selling commission is received by it in Germany in German Mark 25,000 (conversion rate assumed @ 40). Tax is not deducted as per the Indian Laws. Business​​ income of Raja Ram Ltd is 85,00,000 INR after claiming the deduction of the commission.​​ 

Question A

You are required to discuss the tax treatment of the above transaction.

Question B

Would your answer be different if Forbings Inc had place of operation in​​ India and would have undertaken the services to show demo of machinery in India.

Question C

Forbings Inc do not have any place of operations in India however it provides consultancy services for the sale of machinery in Germany for which the 25000 German​​ Mark have been paid.

Question (ID 07) (DTAA)

Y (24 years) and Z (26 years) are resident in India. The following points are noted for the previous year from the books of account -

Important​​ Questions - Part E

Internatinal Taxation

6 - 8 Mark Type Questions Top – 10

Question (ID 05) (DTAA)

X (28 years) is resident and ordinarily resident in India. His income is Rs.8,96,000 from a business in India and Rs. 1,92,000 from a business in a​​ foreign country with whom India has an ADT agreement. According to the ADT agreement, income is taxable in the country in which it is earned and not in the other country. However, in the other country such income can be included for computation of tax rate. According to the tax laws of the foreign country, business income of Rs. 1,92,000 is taxable @ 23 per cent. During the previous year, X has deposited Rs. 42,000 in his public provident fund account (out of which Rs. 10,000 is deposited out of foreign income). He has also received an interest of Rs. 32,000 on Government securities.

Question (ID 02) (DTAA)

Arif, a resident both in India and Malaysia in previous year, owns immovable properties (including residential house) at Malaysia and India. He has earned income of Rs. 50 lakhs from rubber estates in Malaysia during the financial year. He also sold some property in Malaysia resulting in short-term capital gain of Rs. 10 lakhs during the year. Arif has no permanent establishment of business in India. However, he has derived rental income of Rs. 6 lakhs from property let out in India and he has a house in Lucknow where he stays during his visit to India. The Article 4 of the double taxation avoidance agreement between India and Malaysia provides that where​​ an individual is a resident of both the Contracting States, then he shall be deemed to be resident of the Contracting State in which he has permanent home available to him. If he has permanent home in both the Contracting States, he shall be deemed to be​​ a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests).

You are required to state with reasons whether the business income of Arif arising in Malaysia and the capital gains in respect of sale of the property situated in Malaysia can be taxed in India. Also explain the relevant provisions of law. ​​​​ 

Question: 1 (ID 07)

Kio Japan and AB Ltd, an Indian Company are associated enterprises. AB Ltd manufactures Cellule Phones and sells them to Kio Japan and Geel, a Company based at Beijing, During the year AB Ltd supplied 2,50,000 Cellular Phones to Kio Japan at a price of Rs. 3,000 per unit and 35,000 units Geel at a price of Rs. 4,800 per unit. The transactions of AB Ltd with Kio and Geel are comparable subject to the following considerations​​ 

• Sales to Kio is on FOB basis, sales to Geel are CIF basis. The freight and insurance paid by Kio for each unit is Rs. 700.

• Sales to Geel are under a free warranty for Two Years whereas sales to Kio are without any warranty. The estimated cost of executing such warranty is Rs. 500.

• Since Kio’s order was huge in volume, quantity discount of Rs. 200 per unit was offered to it.

Compute the Arm’s Length Price and the amount of increase in the Total income of AB​​ Ltd, if are due to such Arm’s Length Price. ​​ 

Question: 2 ​​ (ID 08)

Mobeaux LLP of Poland and Vamsi Ltd of India are associated enterprises. Vamsi imports 1000 compressors for Air Conditioners from Mobeaux at Rs. 7,500 per unit and these are sold to Winland cooling Solutions Ltd at a price of Rs. 11,000 per unit. Vamsi had also imported similar products from De-Heat Ltd and sold outside at a Gross Profit of 20% on Sales.

Mobeaux offered a quantity discount of Rs. 1,500 per unit. De-Heat could offer only Rs.​​ 500 per unit as quantity Discount. The freight and customs duty paid for imports from Poland had cost Vamsi Rs. 1,200 a piece. In respect of purchase from De-Heat, Vamsi had to pay Rs. 200 only as freight charges. Determine the Arm’s Length Price and the​​ amount of increase in Total income of Vamsi Ltd.

Question 5 (ID 03)

X Ltd. UK received an order from Y Ltd Germany for developing a software product for a sum of US $ 1,00,000. In order to execute the same, X Ltd., Z Ltd. (a company in which X Ltd. holds​​ 50% shares) and S Ltd India (where Z Ltd holds 40% shares) together develop the above software.

X Ltd. UK pays to Z Ltd and S Ltd. India a sum of US $ 24,000 and $ 27,000 resectively and keeps the balance for itself. In the entire transaction, a profit of​​ $16,000 is earned. S Ltd. India incurred a total cost of $24,000 in the execution of its work relating to the above project. Assume the relative contribution of X Ltd, Z Ltd and S Ltd. is 40%, 25% 35% respectively. Compute the arm’s length price and the amount of increase in the total income of S Ltd., if any due to such arm’s length price. ​​ 

Question (ID 033) (Oil Exploration 44BB)

ONGC has agreements (approved by the Government) with the following three foreign companies which provide services and facilities to ONGC in connection with prospecting for (or extraction / production of) mineral oils in India-

Find out the taxable income and tax liability of the foreign companies. Discuss whether tax liability borne by ONGC would be perquisite arising to B Inc. and C Inc.​​ under section 28(iv) and would be taxable separately in addition to income computed under section 44BB. You are also required to ascertain amount of taxes to be paid by ONGC for C Inc and offer your comments.

Problem ​​ (BM act ID 06)​​ 

Mr. Ritesh a resident in India is found to be operating a foreign bank account and following are the details of his bank account right from it opening it. The bank account has come to the notice of the assessing officer on 13th​​ July of previous year. The amount represent USD thousands.​​ 

Market Value of shares of Company X as per Rule 3 is 7,500 thousand USD.

Market Value of Painting as per Rule 3 is 3,500 thousand USD.

Exchange rate on 01/04/PY is​​ 70 and on 31/03/PY is 71.

You are required to​​ 

Compute the tax liability under the BM act.

Suppose instead of acquiring the shares of company X he would have acquired Property in China at total cost of 10,000 partly funded from above bank account and​​ other disclosed assets in India. The market value of property as per the report of registered valuer is 20,000.

List of Top 10 Important Questions will be updated

60 days before the examination.

Question (ID 14) (DTAA)

A Foreign Company Yam Inc​​ Incorporated in Armenia has entered into an approved agreement with an Indian Company Raju Ltd under which Technical services for plant at Orissa is to be provided for lump sum payment of US $ 71,50,000 (conversion rate to be taken as 1 $ = 70). Yam Inc has subsidiaries in Australia, Jordan and Japan. As per the corporate structure the Technical Services can provided from either of the countries or from Armenia. Expense claimed against the income of technical fees is US $ 10,15,000. You are required to advise Yam Inc on the selection of country from which said services to be provided. Yam Inc does not have PAN in India.

Tax rates as per IT Act vis a vis Tax Treaties

Note

1. Dividend/Interest earned by the Government and certain specified institutions, inter-alia, Reserve Bank of​​ India is exempt from taxation in the country of source.

2. Royalties and fees for technical services would be taxable in the country of source at the rates prescribed for different categories of royalties and fees for technical services. These rates shall​​ be subject to various conditions and nature of services/royalty for which payment is made. For detailed conditions refer to relevant Double Taxation Avoidance Agreements.

3. Royalties and fees for technical services would be taxable in the country of source at the following rates:

a. 10 per cent in case of royalties relating to the payments for the use of, or the right to use, industrial, commercial or scientific equipment;

b. 20 per cent in case of fees for technical services and other royalties.

4. From​​ Assessment Year 2016-17, Royalty and fees for technical service received by a foreign company or a non-resident non-corporate assessee from government or an Indian concern shall be taxed at the rate of 10% if agreement is made at any time after 31 March 1976.

From Assessment Year 2017-18, any income of a person resident in India by way of royalty in respect of a patent developed and registered in India shall be taxable at the rate of 10% as per section 115BBF,

5. (a)15 per cent of the gross amount of the dividends where those dividends are paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income annually and whose income from such​​ immovable property is exempted from tax;

(b) 10 per cent of the gross amount of the dividends, in all other cases

6. Dividend:

  a) Rate of tax shall be 10% on income from Global Depository Receipts under Section 115AC(1)(b) of Income-tax Act, 1961 (other​​ than dividends referred to in section 115-O).

  b) Rate of tax shall be 20% under Section 115A on dividend (other than dividends referred to in section 115-O) received by a foreign company or a non-resident non-corporate assessee

  c) Rate of tax shall be​​ 20% under Section 115AD on dividend (other than dividends referred to in section 115-O) received by a Foreign institutional investor.

 d) From Assessment Year 2017-18, dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of 10% as per section 115BBDA.

 e) From Assessment Year 2018-19, dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of person who is resident in India other than:

  i)   a domestic company; or

 ii)   a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via); or

iii)   a trust or institution registered under section 12AA.

at the rate of 10% as per section 115BBDA.

7. Interest

  a) Rate of tax shall be 20% under Section 115A on interest received by a foreign company or a non-resident non-corporate assessee from Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency.

  b) Rate of tax shall be 10% under Section 115AC on income from bonds of an Indian company issued in accordance with such scheme as the Central Government may,​​ by notification in the Official Gazette, specify in this behalf, or on bonds of a public sector company sold by the Government, and purchased by non-resident in foreign currency

  c) Rate of tax shall be 5% in following cases:

  (i) Interest received from​​ an infrastructure debt fund as referred to in section 10(47)

 (ii) Interest received from an Indian company specified in section 194LC.

(iii) Interest of the nature and extent referred to in section 194LD (applicable from the assessment year 2014-15).

(iv)​​ Distributed income being interest referred to in section 194LBA(2) (section 194LBA is inserted by the Finance (No. 2) Act, 2014 w.e.f. 01-10-2014)

8. The CBDT has clarified that DTAA signed with Government of the Czech Republic on the 27th January 1986 continues to be applicable to the residents of the Slovak Republic. [Notification No. 25, dated 23-03-2015]

Important Questions - Part F

Internatinal Taxation

4 Mark Type Questions Top – 10

Question: 5 (ID 19) (Foreign collaboration contracts)

M/s Kangaru​​ Australia, a Non-Resident Foreign Company had entered into a collaboration agreement on 21.2.2008 with an Indian Company and was in receipt of the following payments during the Previous Year. How do you deal with them for computation, in the case of M/s Kangaroo Australia?

• Interest on 8% Debentures for Rs. 50 Lakhs issued by Indian Company on 1.7 in consideration of providing of technical know-how, manufacturing process and designs.

• Service Charges at 2.5% of the value of Plant and Machinery for Rs.500 Lakhs leased out to Indian Company payable each year before 31st​​ March.

Question (Tax Liability) (ID 53)

Mr. Mithun purchased 100 shares of Good money Co. Ltd. on 01-04-2005 at rate of 1,000 per share (FMV as on 31-01-2018 is 600 per share) in public issue​​ of the company by paying securities transaction tax. Company allotted bonus shares in the ratio of 1:1 on 4 years back. He has also received dividend of 10 per share on 01.05.PY. He has sold all the shares on 01.10.PY at the rate of ​​ 4,000 per share through a recognized stock exchange and paid brokerage of 1% and securities transaction tax of 0.02% to celebrate his birthday.​​ 

Compute his capital gains and tax liability.

Problem ​​ (BM act ID 03)​​ 

Mr. Rajest Aged 42 Resident in India acquired house property at British Virgin Islands located outside India in 1997 for twenty million USD. It was sold in 2001 for twenty five million USD which were deposited in a foreign bank account (BA). In 2002 another house property at Caymans Island was bought for thirty million USD. The investment in property at Caymans Island was made through withdrawal from HSBC bank account (BA) in Singapore. House at cayman’s islands has not been transferred before the valuation date and its value on the valuation date is 62 million USD. Assuming that the value of BA as computed under Rule 3(1)(e) is seventy million USD, find out the fair market value (FMV) of the assets. Exchange rate on 01/04/PY is 70 and on 31/03/PY is 71.

Question: ​​ (ID 14)​​ 

A Ltd. an Indian company, provides technical services to a company, XYZ Inc., located in a NJA for a consideration of 40 Iakhs in October. It charges ​​ 42 Iakhs for similar services rendered to PQR Inc., which is not located in a NJA. PQR Inc. is not an associated enterpnse of A Ltd. Discuss the​​ tax implications under section 94A read with section 92C in respect of the above transaction of provision of technical services by A Ltd. to XYZ Inc.

Question 6 (ID 06)

ABC Inc. a Non-resident investor Company is a beneficiary of a contributory trust established in India. The application for advance ruling u/s 245Q by ABC Inc. on a question affecting the trust involving, inter alia, provisions of Sections 161 to 164 is resisted by the Department on two grounds

• This is a question which really affects the contributory trust in India, and that the applicant though a non-resident cannot avail the benefits of Chapter XIX-B for getting clarifications about a resident assessee’s liability to income-tax merely because they have some mutual connections;

• Since the ruling given would bind only the applicant and the Department, any action at the time of assessment of the Indian trust cannot be questioned on the basis of the ruling and hence the ruling would be infructuous.

Discuss the pros and cons of the objections of​​ the Department.

Question 4 (ID 01)

Mr. Sushil Kumar is a non-resident. The appeal pertaining to the assessment year is pending before the Appellate Tribunal, the issue involved being computation of capital gains. The same issue persists for the subsequent​​ assessment year ​​ also. Mr. Sushil Kumar’s friend Mr. Sachin Gupta has obtained an advance ruling under chapter XIX-B of the Income-tax Act, 1961 from the Authority for Advance Rulings on an identical Point. Mr. Sushil Kumar proposed to use the said ruling​​ for his assessment. Can he do so? 

OR

R is a non-resident. The appeal pertaining to the assessment year is pending before the Appellate Tribunal, the issue involved being computation of income from house property. The same issue persists for the subsequent assessment year also. R’s friend has obtained an advance ruling under Chapter XIX-B from the Authority for Advance Rulings on an identical point. R proposes to use the said ruling for his assessment. Advise R suitably?

OR

Saba Karim is a non-resident. The appeal pertaining to the Assessment Year is pending before the Appellate Tribunal, the issue involved being computation of income form house property. The same issue persists for the subsequent Assessment Year also. Saba Karim’s friend Sheikh Ali has obtained an advance ruling under Chapter XIX-B of the Income Tax Act, 1961 from the Authority for Advance Rulings on an identical Point. Saba Karim proposes to use the said ruling for his assessment. Advise Saba Karim suitably?

OR

Who are the persons in respect of whom Advance Ruling given u/s 245R shall be binding?

Question 10 (ID 10) (Revision ​​ / Home work)

X & Co. filed an application for advance ruling for assessment years 2011-12, 2012-13 and 2013-14 with the Authority for Advance Ruling (AAR). For the assessment years 2011-12, 2012-13 notices section 143(2) were issued to the assessee and, subsequently, before the date of filing with AAR, notice under section 142(1) along with questionnaire was issued. For the assessment year 2013-14, notice under section 143(2) was issued before the date of filing of application with the AAR and notice under section 142(1) along with questionnaire was served on the assessee after the date of filing of application with AAR. Can the AAR reject the application on the ground​​ that proceedings are already pending? Assume that the provisions relating to Advance Ruling for the earlier assessment years are the same as those prevailing for the assessment year.

Question 1 (ID 11 and 20 and 24) (Representative assessee)

A Firm of solicitors in Delhi engaged a barrister of London for arguing a case before the Supreme Court in India. A payment of $ 50,000 was made to the barrister in London, according to the terms of the professional engagement. It is claimed that since the payment is​​ made outside India, no tax is payable on the fee paid. How should the Assessing Officer proceed in this matter ?

OR

C, a British barrister, was appointed by an English company to represent it in a patent case before the Delhi High Court. The High Court rules provided that an advocate who is not a member of the Delhi Bar can address the court only through a member advocate. B, a member of Delhi Bar, was appointed to be the advocate on record. B briefed C regarding Indian precedents relating to the case. The​​ English company paid him a fee of Rs. 10,000 while C received in England a fee of $ 25,000. The Assessing Officer treated B as the agent of C under section 163 and taxed him in respect of $ 25,000. Comment on the actions of the Assessing Officer.​​ 

OR

'K' was a non-resident Indian. He purchased certain agricultural land in a village in India. The entire income from such land was spent by K's father 'S' for household expenses. So no part of the income was paid to ‘K’. How can the assessment be made by the assessing officer in respect of income from such land ? what are the rights and duties of “S” under the income tax act ?