6C Case Study Digest - Amendments in International taxation for May/ Nov 21 exams PDF

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Amendments in International taxation for May/ Nov 21 exams...

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FINAL COURSE (Revised Scheme of Education and Training)

ELECTIVE PAPER : 6C

International Taxation [Relevant for May, 2021 and November, 2021 Examinations]

CASE STUDY DIGEST

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This Case Study Digest has been prepared by the faculty of the Board of Studies. The objective of this digest is to provide good number of case studies for practice to the students to enable them to strengthen their preparation in the subject. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies. All care has been taken to provide interpretations and analysis in a manner useful for the students. However, the digest has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this book. ©

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All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Edition

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February, 2021

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Preface In the elective papers at the Final level, the assessment is open book and case-study based. Each case study would be of 25 marks and the ratio of MCQs and descriptive questions (in the form of computation or otherwise) based thereon is 40% and 60%, respectively. Thus, each case study would comprise of MCQs for 10 marks (5 MCQs of 2 marks each) and descriptive questions for 15 marks. The question paper would be of 100 marks comprising of five such case studies of 25 marks each, out of which candidates have to attempt any four within four hours. The Board of Studies, in its endeavour to familiarise students with the case study pattern of assessment, has come out with a Case Study Digest in each of the six elective papers at the Final level. Case study based MCQs and descriptive questions are all application-oriented and arise from the facts of the case. You need to integrate and apply the provisions of direct tax laws (dealt with in Final Paper 7: Direct Tax Laws and International Taxation) as well as the concepts and principles of international taxation discussed in Final Paper 6C: International Taxation in making computations and addressing relevant issues raised in case study based questions in this digest. The case study based MCQs and descriptive questions in this subject have to be answered on the basis of the provisions of direct tax laws, as amended by the Finance Act, 2020, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020; as well as the significant notifications and circulars issued and developments in international taxation upto 31.10.2020. The relevant assessment year on the basis of which questions have to be answered is A.Y. 2021-22, unless otherwise specified in the question. This Case Study Digest on International Taxation is relevant for May 2021 and November 2021 examinations. Students appearing in November 2021 examinations need to consider the Statutory Update (containing significant notifications, circulars and other legislative amendments as well as developments in international taxation between 01.11.2020 and 30.04.2021), which would be web-hosted at the BoS Knowledge Portal. Please note that before reading and solving the case studies in this digest, you have to be thorough with the concepts and provisions of direct tax laws and international taxation discussed in the November, 2020 edition of the Study Materials on Paper 6C and Paper 7, which are based on the provisions of direct tax laws as amended by the Finance Act, 2020, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020; as well as the significant notifications and circulars issued and developments in international taxation upto 31.10.2020. Further, students appearing in November 2021 examination also need to go through the Statutory Update which will be web-hosted at the BoS Knowledge Portal. In addition,

© The Institute of Chartered Accountants of India

for solving case studies, you may refer to the updated edition of the Income-tax Act, 1961, the Income-tax Rules, 1962, Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015, Chapter VIII of the Finance Act, 2016 (as amended by the Finance Act, 2020) on Equalisation Levy and Equalisation Levy Rules, 2016 [as amended by the Equalisation Levy (Amendment) Rules, 2020]. Thereafter, you are expected to apply the concepts and provisions in reading the case studies in this digest and answering the questions based thereon by analysing the issues involved and making the necessary computations, as per the requirement in the said questions. This process of reading the case studies, identifying the issues and solving the questions based thereon will help you hone your higher level analytical and interpretational skills and approach the examination with confidence and a positive attitude.

Wishing you happy reading!

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CASE STUDY 1 ‘A’ Ltd., an Indian company, was incorporated in the year 2010. It is a wholly owned subsidiary of A Inc, USA. A Ltd. is engaged in the business of manufacturing and selling virtual reality cameras. During the previous year 2020-21, A Ltd. entered into various transactions with the following enterprises for purchase of raw materials, use of technology and sale of finished goods. The earnings before interest, dividend, tax and amortization of A Ltd for F.Y. 2020-21 is ` 200 crores. The details of the transactions entered into by A Ltd. during F.Y.2020-21 are given hereunder:

S. No

Transaction

1 2

Purchase of raw-materials Payment of royalty

3

Sale of finished goods

Enterprise

Amount ( ` in crores)

AA Ltd, China A Inc, USA

150 5

AAA Ltd, Taiwan

50

Prior to F.Y.2020-21, A Ltd. had obtained loan of ` 1000 crores @8% from A LLC, Cyprus in April, 2019. The following additional information pertaining to loans obtained by A Ltd. is provided for the previous year 2020-21: •

Interest of ` 80 crores paid to A LLC, Cyprus on the loan of ` 1000 crores. The book value of the total assets of A Ltd is ` 1800 crores.

•

A Ltd. obtained loan of ` 100 crores from Bank of Chennai, India based on a guarantee provided by A Inc., USA. Interest of ` 8 crores paid on such loan and guarantee fee of ` 50 lacs paid to A Inc., USA.

•

A Ltd. obtained loan of ` 50 crores from TN Mercantile Bank, India based on a letter of comfort provided by Mr. Balaji, who is an Indian resident and director of A Ltd. Interest of ` 4 crores is paid towards such loan.

•

A Ltd. obtained an independent loan of ` 300 crores from Union City Bank, India for which interest of ` 3 crores has been paid to the bank.

•

A Ltd. obtained loan of ` 50 crores from Bank of Taiwan , India Branch. Guarantee was provided by AAA Ltd., Taiwan. Interest paid for the concerned year is ` 3 crores. Guarantee fees paid to AAA Ltd. is ` 25 lakhs. A Ltd. holds shares carrying 25% voting power in AAA Ltd., Taiwan.

•

A Ltd. obtained interest-free loan of ` 50 crores from A Pty, Singapore. Out of the 25 directors of A Pty., Singapore, 10 are appointed by A Ltd.

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1.2

INTERNATIONAL TAXATION

•

A Ltd. obtained foreign currency loan of $ 10 million from Wells Cargo Bank of USA, in USA, based on a back to back deposit made by A Inc. USA to the tune of $ 5 million in the bank. Interest of ` 6 crores is paid on such loan.

•

A Ltd. obtained foreign currency loan of $ 20 million from Bank of USA, in USA, based on a back to back deposit made by A Inc., USA to the tune of $ 20 million in the bank. Interest works out to ` 12 crores.

•

A Ltd. had to incur a sum of ` 1 crore as an interest towards the delayed payment to AA Ltd. China, being its creditor for supply of raw material. 90% of raw materials required by A Ltd. is supplied by AA Ltd., China. The price and other conditions for supply of raw material are influenced by AA Ltd., China.

Based on the above facts, you are required to answer the following questions.

I.

Multiple Choice Questions

Write the most appropriate answer to each of the following questions by choosing one of the four options given. 1.

2.

3.

Which of the following enterprises are associated enterprises/deemed associated enterprises of A Ltd.? (a)

A Inc., USA; A LLC, Cyprus; and AAA Ltd., Taiwan

(b)

A Inc., USA; A LLC, Cyprus; and A Pty, Singapore

(c)

A Inc., USA; A LLC, Cyprus; and AA Ltd., China

(d)

A Inc., USA; AA Ltd., China; and A Pty, Singapore

If A Ltd. does not furnish transfer pricing report for F.Y.2020-21, what would be the quantum of penalty imposable under the Income-tax Act, 1961 for such a failure? (a)

1% of the value of international transaction

(b)

2% of the value of international transaction

(c)

` 1 crore – fixed penalty

(d)

` 1 lakh – fixed penalty

In a case where primary adjustment to transfer price is made suo motu by A Ltd., the time limit for repatriation of “excess money” is (a)

90 days from 30th September of the Assessment Year

(b)

90 days from 31st October of the Assessment Year

(c)

60 days from 30th November of the Assessment Year

(d)

90 days from 30 th November of the Assessment Year

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CASE STUDIES 4.

5.

1.3

The excess money which is available with the AE, if not repatriated to India within the prescribed time and A Ltd. does not pay the additional income-tax on such excess money, shall be deemed to be an advance made by A Ltd. to such AE, if the primary adjustment to transfer price, made by it suo motu in its return of income, is in respect of (a)

A.Y.2016-17 and the amount of primary adjustment is ` 2 crores

(b)

A.Y.2020-21 and the amount of primary adjustment is ` 1 crore

(c)

A.Y.2020-21 and the amount of primary adjustment is ` 1.05 crore

(d)

A.Y.2019-20 and the amount of primary adjustment is ` 1 crore

A Ltd. filed its return of income for A.Y.2019-20 disclosing total income of ` 20 crore. During the course of assessment, the Assessing Officer made a primary adjustment of ` 2 crore and passed an order on 1.6.2020 in respect of an international transaction denominated in Indian rupees, consequent to which the total income of A.Y.201 9-20 has increased to ` 22 crore. The excess money of ` 2 crore has not been repatriated till date. What are the consequences of the primary adjustment made and non-repatriation of excess money in computation of total income of A.Y.2021-22, if it is assumed that A Ltd. has opted to pay additional [email protected]% on ` 1 crore on 1.12.2020? Assume that the one year marginal cost of fund lending of SBI as on 1.4.2020 is 8.5% and as on 1.4.2021 is 9%. (a)

Interest of ` 9.754 lakhs to be included in total income of A.Y.2021-22

(b)

Interest of ` 9.792 lakhs to be included in total income of A.Y.2021-22

(c)

Interest of ` 15.645 lakhs to be included in total income of A.Y.2021-22

(d)

Interest of ` 16.311 lakhs to be included in total income of A.Y.2021-22

II.

Descriptive Questions

6.

Based on the details provided in respect of interest paid by A Ltd., determine the amount of interest to be disallowed for A.Y.2021-22 under the relevant provisions of the Incometax Act, 1961 relating to limitation of interest deduction, giving reasons for treatment of each item of interest. Consequently, determine the permissible interest deduction while computing income under the head “Profits and gains of business or profession”.

7.

(i)

Which Action Plan of BEPS is based on thin capitalization? Mention the provision incorporated in the Income-tax Act, 1961 in line with this Action Plan.

(ii)

A Ltd. is contemplating to stop the current business activity and start a new business vertical. In this regard, it wants to know whether the interest disallowed under the relevant provision of the Income-tax Act, 1961 can be carried forward to next year and whether it could be set-off against the income of the new business.

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1.4 8.

INTERNATIONAL TAXATION A Ltd, being a wholly owned subsidiary of a US entity A Inc., wants to understand whether transfer pricing provisions under the Income-tax Act, 1961 will trigger if it receives interest-free loan from its foreign AE parent, A Inc., USA. Advise.

SOLUTION I.

Answers to Multiple Choice Questions

1.

(c)

A Inc., USA; A LLC, Cyprus; and AA Ltd., China

2.

(d)

` 1 lakh – fixed penalty

3.

(d)

90 days from 30th November of the assessment year

4.

(c)

A.Y.2020-21 and the amount of primary adjustment is ` 1.05 crore

5.

(c)

Interest of ` 15.645 lakhs to be included in total income of A.Y.2021-22

II.

Answers to Descriptive Questions

6.

Section 94B is applicable to an Indian company or a permanent establishment of a foreign company in India, being the borrower who pays interest in respect of any form of debt issued by •

non-resident, being an associated enterprises (AE) of such borrower or

•

by a lender which is not an AE but where the AE provides either implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, then such debt would be deemed to have been issued by an AE.

In order to determine the interest disallowance amount under section 94B, the interest paid to non -resident AEs and deemed AEs needs to be determined. Payment of interest to resident AEs is not to be considered for disallowance since the interest payment made to non-resident AEs alone are to be taken into account for such purpose. In the present case, the interest disallowance and permissible interest deduction under the head “Profits and gains from business or profession” would be Particulars Interest paid to A LLC Cyprus [See Note (i)]

Amount (` in crores) 80.00

Interest paid to Bank of Chennai based on guarantee provided by A Inc. USA [See Note (ii)]

8.00

Guarantee Fee paid to A Inc. USA [See Note (iii)]

0.50

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CASE STUDIES

1.5

Interest paid to TN Mercantile bank based on letter of comfort by director of A Ltd. [See Note (iv)]

Nil

Interest paid to Union City Bank, India [See Note (v)]

Nil

Interest paid to Bank of Taiwan [See Note (vi)]

Nil

Guarantee fee paid to AAA Ltd., Taiwan [See Note (vi)]

Nil

Interest paid to Wells Cargo Bank based on deposits made by A Inc. USA [See Note (vii)]

Nil

Interest paid to Bank of USA based on deposits made by A Inc. USA [See Note (viii)] Interest paid to AA Ltd, China, being interest on delayed payment to creditor [See Note (ix)]

12.00

Interest paid or payable to non-resident AE EBIDTA

1.00 101.50 200.00

Excess Interest: lower of the following would be disallowed - Interest paid or payable to non -resident AE in ` 41.50 crores excess of 30% of EBIDTA [` 101.50 crores ` 60.00 crores] - Interest paid or payable to non-resident AE ` 101.50 crores

41.50

Therefore, interest paid or payable allowable as deduction under the head “Profits and gains of business or profession” would be ` 76.25 crores [` 60 crores (` 101.50 crores – ` 41.50 crores), being the amount paid or payable to non-resident AE plus ` 16.25 crores, being the amount paid to other entities].

76.25

Notes: (i)

Interest paid to a non-resident AE falls within the scope of section 94B. A LLC, Cyprus is deemed to be an AE of A Ltd., since the loan advanced by it constitutes not less than 51% of the book value of total assets of A Ltd. Hence, interest paid to A LLC, Cyprus is to be considered for the purpose of limitation of interest deduction under section 94B.

(ii)

The proviso to Section 94B(1) states “where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.” Since A Ltd., India is a wholly owned subsidiary of A Inc., USA, A Ltd. and A Inc. are AEs.

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1.6

INTERNATIONAL TAXATION Thus, the debt issued by Bank of Chennai would be deemed as issued by the A Inc. USA, being the AE, hence, the amount of interest paid on such debt has to be considered for the purpose of limitation of interest deduction under section 94B. (iii)

As per section 94B(5)(ii), debt means, inter alia, any loan that gives rise to interest which is deductible while computing business income. Though guarantee fee is not specifically referred to in the meaning of the term “debt” defined under section 94B(5)(ii), the term ‘interest’ is defined in section 2(28A) of the Income-tax Act, 1961 to mean interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.” Therefore, given the wide definition that interest partakes, guarantee fee can be classified as interest. Accordingly, the same has to be considered for the purpose of limitation of interest deduction under section 94B.

(...