Kalpesh Classes

Question (GAAR and Tax Avoidance) (ID 01)​​ 

V Tech Ltd is a company resident of country Cl. It enters into an agreement with Z Energy Ltd.. an​​ Indian company for setting up e power plant in India. It is a composite contract for an agreed pnce of US$ 100 million. The payment has been split in the following parts as per separate agreements​​ 

(i) US$ 10 million for design of power plant outside India​​ (payment for which is taxable at 10% on gross basis)

(ii) US$ 70 million for offshore supplies of equipment etc (not taxable as no role is played by any PE in India. There are not subject to import duty)​​ 

(iii) US$ 20 million for local supplies and installation charges (taxable on net income basis)

It is found that the fair market value of offshore design is about USD 30 million; therefore ​​ is under invoiced. On the other hand, offshore supplies were over invoiced. The arrangement resulted in significant​​ tax benefit to the taxpayer. Can GAAR be invoked in such a case ?

Question (GAAR and Tax Avoidance) (ID 02)​​ 

Under the provisions of a tax treaty between India and country F4. Any capital gains arising from the sale of shares of lndco, an Indian company​​ would be taxable only in F4 if the transferor is a resident of F4 except where the transferor holds more than 10% interest in the capital stack of lndco. A company. A Ltd. being resident in F4, makes an investment in indco through two wholly owned subsidiaries (K Ltd. and L Ltd.) located in F4. Each subsidiary holds 9.95% shareholding in the Indian Company, the total adding to 19.9% of equity of lndco. The subsidiaries sell the shares of Indco and claim exemption as each is holding less than 10% equity shares in the Indian company. Can GAAR be invoked to deny treaty benefit ?

Question (GAAR and Tax Avoidance) (ID 03)​​ 

An Indian company, A Ltd. makes an investment of 1 crore in shares of a listed company on l January. After a year, the prices go up and fair market value of shares becomes 11 crore. if A Ltd sells these shares, the long term capitel gains of 10 crore would be exempt but it would be liable to tax under MAT@ the applicable rate. A Ltd. forms partnership firm with another person with nominal partnership. It transfers its shares in the firm at a cost price. No capital gain arises as per section 45 of the Act. After a year, the firm sells these shares and realises the gains of 10 crore which is exempt from taxation and no MAT is payable. Subsequently. The firm is dissolved and share of A Ltd In the partnership firm is transferred back along with profits, which is exempt from tax under the Act. Can GAAR be invoked in this case ?

Question (GAAR and Tax Avoidance) (ID 04)​​ 

lndco incorporates a Subco in a NTJ (Low Tax Jurisdiction) with equity of US $100. Subco gives a loan of US $ 100 to another Indian company (X Ltd) at the rate of 10% p.a. X Ltd. claims deduction of interest payable to Subco from the profit of business. There is no other activity​​ in Subco. Can GAAR be invoked in such a case ?

Question (GAAR and Tax Avoidance) (ID 05)​​ 

(i) X Ltd. is a banking institution in LTJ (Low Tax Jurisdiction),

(ii) There is a closely held company Subco in LTJ which is a wholly owned subsidiary of another​​ closely held Indian company Indco;

(iii) Subco has reserves and, if it provides a loan to lndco. It may be treated as deemed dividend under section 2(22)(e) of the Act.

(iv) Subco makes a term deposit with X bank Ltd. and X bank Ltd., on the basis of this​​ security, provides a back to back loan to lndco.

Say, lndia- LTJ tax treaty provides that interest payment to LTJ banking company is not taxable in lndia

Can this be examined under GAAR ?

Question (GAAR and Tax Avoidance) (ID 06)​​ 

(i) Y Ltd. is a​​ company incorporated in country C1. It is a non-resident in India.

(ii) Z Ltd. Is a company resident in India.

(iii) A Ltd. is a company incorporated in country F1 and it is a 100% subsidiary of Y Ltd.

(iv) A Ltd. end Z Ltd. form a joint venture company X​​ Ltd. in India after the date of commencement of GAAR provisions. There is no other activity in A Ltd.

(v) The India-F1 tax treaty provides for non-taxation of capital gains in the source country and country F1 charges no capital gains tax in its domestic law.

(vi) A Ltd. is also designated as a permitted transferee of Y Ltd. Permitted transferee means that though shares are held by A Ltd. all rights of voting, management. Right to sell etc., are vested in Y Ltd.

(vii) As per the joint venture agreement, 49%​​ of X Ltd equity is allotted to A Ltd. And 51% is allotted to Z Ltd..

(viii) Thereafter, the shares of X Ltd. held by A Ltd. are sold to C Ltd., a company connected to the Z Ltd. group.

As per the tax treaty with country F1, capital gains arising to A Ltd.​​ are not taxable in India. Can GAAR be invoked to deny the treaty benefit ?

Question (GAAR and Tax Avoidance) (ID 07)​​ 

A Ltd. is incorporated in country F1 as a wholly owned subsidiary of company Y Ltd. which is not a resident of F1 or of India. The​​ India-Fl tax treaty provides for non-taxation of capital gains in India (the source country) and country F1 charges no capital gains tax in its domestic law. Some shares of X Ltd., an Indian company are acquired by A Ltd in the year after date of coming into force of GAAR provisions. The entire funding for investment by A Ltd. in X Ltd. was done by Y Ltd. These shares are subsequently disposed of by A Ltd after 5 years. This results in capital gains which A Ltd. claims as not being taxable in India by virtue of the India-F1 tax treaty. A Ltd. has not made any other transaction during this period. Can GAAR be invoked ?

Question (GAAR and Tax Avoidance) (ID 08)​​ 

Specify with reason, whether the following acts can be considered as (i) Tax planning; or (ii) Tax management: or (iii) Tax evasion

(i) Mr P deposits 1,00,000 in PPF account so as to reduce his total income from 3,40,000 to 2,40,000.

(ii) SQL Ltd. maintains register of tax deduction at source effected by it to enable timely compliance.

(iii) An individual tax payer making tax saver deposit of 1,00,000 in a nationalised bank

(iv) A partnership firm obtaining declaration from lenders and depositors in Form NO. 15G/15H and forwarding the same to income-tax authorities.

(v) A company installed an air-conditioner costing 75,000 at the residence of a director as per terms of his appointment but treats it as fitted in quality control section in the factory. This is with the objective to treat it as plant for the puipose of computing depreciation.

(vi) RR Ltd.​​ issued a credit note for 80,000 as brokerage payable to Mr. Ramana who is the son of the managing director of the company. The purpose is to increase the total income of Mr. Ramana from ​​ 4,00,000 to 4,80,000 and reduce the income of RR Ltd. correspondingly.

(vii) A company remitted provident fund contribution of both its own contribution and employees contribution on monthly basis before due date.

List of Important Question to be glanced for Revision before exam.

Wishing You all the best for exams.​​