CA- FINAL NEW SYLLABUS – SAP EXAM

QUESTION PAPER

Timings Allowed – 3 Hours Maximum Marks- 70

International Taxation

Income-tax assessment of Surat Textiles (P) Ltd. was completed on 10th March, 2020 for
the assessment year 2018-19. Additions were made to the extent of Rs. 60 lakhs to the
returned income after making reference to the TPO. The TPO called for information and
documents relating to international transactions and those were furnished to him. To buy
peace, the assessee did not object to the upward revision of income due to ALP re-
determined by TPO and there was no other addition to the returned income.
Surat Textiles (P) Ltd. had 55% shares in Tiger Ltd. of UK. On 30th June, 2019, Surat
Textiles
(P) Ltd. sold all its shareholding in Tiger Ltd. UK to Deer Ltd. of USA for a consideration
of Rs. 10 crores. The shares were acquired on 05.06.2005 for Rs. 170 lakhs.
Surat Textiles (P) Ltd. has exported goods to its associated enterprise in France. The Tax
Manager of the company says that the DTAA between India and France contains Most
Favoured Nation (MFN) Clause.
Surat Textiles (P) Ltd. has a branch at Frankfurt, Germany. The increase or decrease in
value of assets and liabilities of the branch due to foreign exchange translation as on 31st
March, 2020 are given below:
Foreign currency translation gain: Cash Rs. 6 lakhs;
Receivables Rs. 9 lakhs;
Foreign currency translation loss: Office building Rs. 10 lakhs;
Payables to suppliers Rs. 8 lakhs.
Surat Textiles (P) Ltd. issued bonds in accordance with Foreign Currency Exchangeable
Bonds Scheme, 2008 and mobilized Rs. 50 crores during the previous year 2008-09.
Auckland Pte. of Singapore is one of the subscribers to bond to the extent of 20 % by
making payment in foreign currency. On 1st October, 2019, the bonds were converted to
equity shares and Surat Textiles (P) Ltd. allotted 8 lakh equity shares of Rs. 100 each in
exchange of the said bonds to Auckland Pte. Singapore. The value of each equity share of
Surat Textiles (P) Ltd. as per rule 11UA was determined at Rs. 250 per share.
Cost inflation index FY 2008-09 - 137; F.Y 2019-20 - 289. Pune Autos (P) Ltd.
Pune Autos (P) Ltd., is a subsidiary of Surat Textiles (P) Ltd. It is engaged in manufacture
of core auto components. In April, 2017, it received a bulk order from its associated
enterprise by name Randall Ltd. of Malaysia for manufacture and supply of core auto
components and it exported in bulk quantities on monthly basis from May, 2017. Randall
Ltd. would repack the auto components and sell the same in its brand name.
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Following details pertain to the previous year 20f9-20 of Pune Autos (P) Ltd:
Particulars Rs. in
Crores
Goods exported to Randall Ltd 687
Cost of goods exported (before considering below expenses/incomes) 397
ESOP shares allotted to employees 50
Interest paid / payable 20
Pre-operating expenses 15
Loss on account of currency fluctuations 5
Transport (Amount reimbursed to associated enterprise, who incurred Rs. 8 10
Crores the same on behalf of the assessee)
Depreciation 95
Income-tax paid 25
617
Net Profit 70
World Tex Inc. of Malaysia
World Tex Inc. of Malaysia is the holding company of Surat Textiles (P) Ltd. In the
previous year 2007-08, World Tex Inc. acquired a vacant land at Chennai for establishing a
manufacturing unit. It abandoned that idea and hence sold the vacant land in April, 2019.
Also, World Tex Inc. established a manufacturing unit in Pune in the previous year 2014 -
15 which was engaged in manufacture and sale of woolen garments in India. The
manufacturing unit being branch of World Tex Inc. had no connection with subsidiary
Surat Textiles (P) Ltd. in its business operations in India. In January, 2020, World Tex Inc.
decided to sell its manufacturing unit located in Pune and wind-up its operations in India.
It transferred plant and machinery, receivables, inventory, patents, payables for
composite consideration of
Rs. 800 lakhs. The net worth of the undertaking was arrived at Rs. 500 lakhs.
Anand Arora - MD of Surat Textiles (P) Ltd.
Anand Arora, who was Managing Director of Surat Textiles (P) Ltd. left India and settled
in UK from July, 2017. He acquired shares in listed companies in India after his departure
by remitting foreign currency and earned dividend income (covered by section 115-O) of
Rs. 1,20,000 credited to his bank account in India for the year ended 31st March, 2020. He
earned income by way of interest on debentures held in Indian companies of Rs. 3,00,000
credited to his bank account in India and those debentures were purchased during the
previous year 2018-19 by remitting foreign currency. He acquired 10,000 equity shares of
Rs. 100 each be remitting foreign currency viz. £ 15,000 on 5th June, 2018. He sold all the
equity shares on 30th January, 2020 through off-market transaction for £ 20,000.
TT buying rates of 1£ on various dates are as follows: 05.06.2018 = Rs. 80; 31.05.2018 = Rs.
78; 31.12.2019 = Rs. 88 and 30.01.2020 = Rs. 90
He has a let out property at Bengaluru fetching monthly rent of Rs. 25,000 which was
credited to his bank account in India.
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He is a partner in ABC & Co, Cochin since April, 2002 where he has 10 % share. His
income for the previous year 2019-20 from the firm was (i) interest on capital of Rs. 36,000
(at 18%); and (ii) share income from firm Rs. 25,000.

Choose the most appropriate alternative for the following MCQs : (2 Marks each)

1.1 How much is the amount Surat Textiles (P) Ltd. has to pay by way of penalty for
under - reported income for the assessment year 2018-19 arising due to ALP determined
by the TPO? The rate of tax applicable to the assessee may be taken as 30 %.
(a) Nil
(b) Rs. 9 lakhs
(c) Rs. 6 lakhs
(d) Rs. 18 lakhs

1.2 How much of the foreign currency translation as on 31st March, 2020 would go to
impact the total income of Surat Textiles (P) Ltd. for the assessment year 2020-21?
(a) Total income would decrease by Rs. 3 lakhs
(b) Total income would increase by Rs. 7 lakhs
(c) Total income would increase by Rs. 5 lakhs
(d) Total income would increase by Rs. 15 lakhs

1.3 What is the time limit/due date within which Surat Textiles (P) Ltd. has to inform the
Assessing Officer having jurisdiction over it, about the sale of shares of Tiger Ltd. to Deer
Ltd.?
(a) 30th November, 2020 - due date for filing its return of income specified in section
139(1).
(b) 29th June, 2020 - within 90 days from the end of the financial year in which the shares
were sold.
(c) 31st March, 2020 - being the last day of the previous year in which the shares were
sold.
(d) 28th September, 2019 - within 90 days from the date of sale of shares held in foreign
company.

1.4 How much is the chargeable amount of capital gams in the hands of Auckland Pte.
on conversion of bonds into equity shares of Surat Textiles (P) Ltd.?
(a) Long-term capital loss Rs. 109.48 lakhs
(b) Long-term capital gain Rs. 10 crores
(c) No capital gain
(d) Long-term capital loss Rs. 13.094 crores

CA Final – SAP 29.08.2021

1.5 Where would you find the Most Favoured Nation clause in a tax treaty between
two Contracting States as per UN Model?
(a) Article 1 of the DTAA
(b) Article 25 of the DTAA
(c) Protocol to the DTAA
(d) Preamble to the DTAA

You are required to answer the following issues:

1.6 Compute the total income and tax liability of Anand Arora for the A.Y. 2020-21. (7
Marks)

1.7 Determine how World Tex Inc. on sale of its manufacturing unit located in Pune,
would be subjected to tax in India as per the UN Model Convention. No computation is
required. (4 Marks)

1.8 Determine whether the operating profit margin of Pune Autos (P) Ltd. is eligible for
availing Safe Harbour Rules (SHR) applicable for the assessment year 2020-21. Your
answer must show your workings to justify the conclusion. Also state the time period
within which it has to communicate its desire for opting SHR. (4 Marks)

2. Sprint Group Inc ('SOI') is a diversified US based multinational enterprise, operating

worldwide through various subsidiaries and joint ventures, engaged in variety of
businesses and ventures, having consolidated turnover exceeding INR 5,500 crores in
recent past three years. For FY 2018-19, corresponding to AY 2019-20, some of the entities
within Sprint Group had the following transactions having potential income tax
implications :

1. Product Distribution transactions of UK Ltd.

UK Ltd, a subsidiary of SOI, incorporated and tax resident of UK, manufactures and sells
engineering machines. These machines are sold in UK by UK Ltd and outside UK through
its Associate Enterprises who act as distributors of UK Ltd. UK Ltd. designs and
manufactures its machines country-wise. Machines designed for Country X are different
from machines designed for Country Y.
INITO Private Limited ('INITO) is another subsidiary of SOI incorporated in and tax
resident of India; functioning in India as the distributor of the machines of UK Ltd. INITO
promotes and sells UK Ltd.'s machines in India. INITO purchases machines from UK Ltd
and resells them to unrelated customers in India. INITO has adequate financial and
operating resources of its own to undertake such distribution and sales activities and has
been doing these activities for past 10 years not only for UK Ltd but also for other
CA Final – SAP 29.08.2021
unrelated international engineering machines manufacturers.
In FY 2018-19, the purchases and sales of INITO are tabulated below :
Sr. Particulars Qty Price/unit Value (INR
No. (INR) in crores)
Purchase Details
(i) Machine purchases from UK Ltd. 5,000 40,000 20.00
(ii) Machine purchases from unrelated 4,000 25,000 10.00
manufacturer 'A Inc.' of USA
(iii) Machine purchases from unrelated 2,000 30,000 6.00
manufacturer 'B Ltd' based in Japan
Sales Details:
(i) Sales of machines purchased from UK 5,000 46,000 23.00
Ltd.
(ii) Sales of machines purchased from 'A 4,000 27,500 11.00
Inc.'
(iii) Sales of machines purchased from 'B’ 2,000 36,000 7.20
Ltd.'
UK Ltd sells similar machines to its associate enterprise 'SL Ltd' in Srilanka at the per unit
price of INR 35,000 for distribution and• resale in the Sri Lankan market. Other terms and
conditions of sale of machines by UK Ltd to INITO and SL Ltd are same.
An overview of the Functions, Assets and Risk ('FAR') analysis of INITO's transactions
with UK Ltd, A Inc., and B Ltd (the manufacturers) is tabulated below:

FAR of INITO
Type of Functions Assets Risks
entity
Distributor - Budgeting - Storage/ Warehouse - Business risk
- Administration - Office equipment· - Inventory risk
- Purchasing - Land & Building - Credit & collection
- Inventory - Vehicles risk
management - Foreign exchange
- Logistics fluctuation risk
- Marketing
- Sales
- Customer support

II. FAR of UK Ltd, A Inc., and B Ltd -

Type of entity Functions Assets Risks

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 Manufacturer - Budgeting - Intangibles - Business
- Administration - Patents, technical risk
- Product strategy & knowhow, - Inventory
design trademarks, etc. risk
- R&D - Plant & Machine - Scheduling
- Procurement of raw - Storage/ risk
materials Warehouse - Product
- Product - Office equipment liability risk
manufacturing - Land & Building - credit and
- Quality control - Vehicles collection
risk
- Inventory
management - Foreign
exchange
- Logistics
fluctuation
- Sales &. Marketing risk
- Customer support
In respect of similar machine purchase transactions with UK Ltd, Transfer Pricing Officer
('TPO') has made transfer pricing adjustment of INR 2.5 crores for AY 2014 -15, in the
hands of INITO by determining the ALP purchase price of machine at lower price of INR
35,000 per machine.
2. External Commercial Borrowing Transaction :
For selling UK Ltd.'s machines in neighbouring Country 'X', INITO established a branch
office in Country X, following the due procedure under FEMA, 1999. INITO purchases
machines meant for Country X from UK Ltd and transfers such machines to its Country X
branch office for sale to unrelated customers in Country X.
Country X branch office maintains its own books of accounts and pays due Income tax in
Country X as per tax laws of Country X. Country X and India do not have a Double
Taxation Avoidance Agreement.
For financing the Country X branch operations, INITO borrowed INR 10 crores from SOI,
USA at 9% p.a. An interest of INR 90 lacs is required to be paid to SOI, USA by INITO in
this respect. The loan amount was remitted by SGI, USA to INITO, who in tum,
immediately transferred the money to bank account of Country X branch office outside
India.
3. Allegation of UK Ltd.'s Permanent Establishment in India.
In the course of assessment for AY 2014-15 of INITO, the Assessing Officer also issued a
show cause notice to INITO alleging that INITO' s arrangement with UK Ltd for
distribution of machines creates a permanent establishment of UK Ltd in India in terms of
India -UK DTAA and thus, why the consequential Income tax consequence arising out of
that shall not follow.

Choose the correct alternative from the following MCQs: (2 Marks each)
2.1. In respect of payment of interest by INITO to SOI USA, INITO is required to deduct
tax at source under the Act at the rate of :
(A) Nil.
(B) 10%
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(C) 20%
(D) 40%

2.2 The residential status of Country X branch of INITO for the purpose of the Act is:
(A) Resident of India
(B) Non-resident of India
(C) Foreign Company
(D) None

2.3 In the context of UK Ltd.' s transactions with INITO, answer the following :
(i) Discuss and determine "the most appropriate method" which INITO may apply to
determine the ALP of machine purchase transaction by it from UK Ltd, based on the facts
and information set out in the case study. (4 Marks)
(ii) In respect of the transfer pricing adjustment of INR 2.5 crore made by TPO in India in
the hands of INITO for AY 2014-15, can UK Ltd seek corresponding adjustment in UK to
adjust its reported UK taxable income, assuming that the text of India-UK DTAA is
identical to UN Model Tax Convention 2017. (2 Marks)
(iii) Assuming that both NITO and UK Ltd are not agreeable to the transfer pricing
adjustment of INR 2.5 crore made by the TPO, can UK Ltd invoke the Mutual Agreement
Procedure to seek appropriate relief in the matter? For this purpose, assume that the text
of India-UK DTAA is identical to UN Model Tax Convention 2017. (2 Marks)

2.4 Examine and discuss the validity of the Assessing Officer's claim, that the business
arrangement between INITO and UK Ltd creates UK Ltd.'s permanent establishment in
India. For this purpose, assume that the text of the India-UK DTAA is identical to UN
Model Tax Convention 2017. (3 Marks)

CA Final – SAP 29.08.2021