Paper-2 International Tax Practice-NOV 20

DIPLOMA IN INTERNATIONAL TAXATION ASSESSMENT TEST
Paper-2: – International Tax Practice
SUGGESTED ANSWERS – NOVEMBER, 2020 ASSESSMENT TEST
Disclaimer
The suggested answers contained in this publication constitute ideal answers for
various questions. They do not constitute the basis for the evaluation of the
candidate’s answers in INTT-AT. These suggested answers are arranged with a view
to assist the candidates pursuing the DIIT Course for their preparation for the
Assessment Test. While due care has been taken in preparation of the answers, if any,
errors & omission is noticed, the same may be brought to the notice of the Secretary,
Committee on International Taxation. The Council and Committee on International
taxation of the Institute are not responsible in any way for correctness or otherwise of
the answers published herein under.
These suggested answers are based on the provisions of Income tax law as amended
by the Finance Act, 2019, the Finance (No.2) Act, 2019 and the Taxation Laws
(Amendment) Act, 2019 which are relevant for November 2020 examination
PART-A
There will be negative marking in Part-A.
For each wrong answer in Part-A, 50% marks will be deducted.
Marks
2X10 = 20
1. The GAAR provisions contained in the Income-tax Act, 1961 are applicable
from which assessment year onwards?
(a) The effective assessment year for the GAAR provisions is yet to be notified
(b) 2019-20
(c) 2018-19
(d) 2017-18
2. ABC Ltd declared interim dividend on 10.03.2020 @ 10% of the paid up capital.
Mr. A has 10,000 equity shares of ` 100 each. He is residing in UK and is a non-
resident under the Income-tax Act, 1961 for the assessment year 2020-21. He
INTT AT - NOV 2020 - PAPER 2
received the dividend vide cheque dated 05.04.2020 on 16.04.2020. When does the
income by way of dividend deemed to accrue or arise in India to Mr. A under
section 9 of the Income-tax Act, 1961?
(a) 31.03.2020
(b) 05.04.2020
(c) 10.03.2020
(d) 16.04.2020
3. On 01.10.2019, XYZ Inc. of Country A deputed its staff to India for supervisory
activities in connection with erection and installation of machinery at Mumbai. The
DTAA between India and Country A provides that where the employees remain in
India exceeding 6 months within a 12 month time frame, it would constitute a
supervisory PE. Now, the staff returned to Country A on 25.04.2020. What is the
effective date of constituting a supervisory PE in India for XYZ Inc. of Country A?
(a) 01.04.2020
(b) 25.04.2020
(c) 01.10.2019
(d) 01.04.2019
4. Singa Pte. Ltd of Singapore is engaged in erection of plant and machinery in

connection with a turnkey power project of TAP Power Co Ltd, which is approved
by the Central Government. The consideration payable to Singa Pte. Ltd for the
year ended 31.03.2020 is ` 90 lakhs. It opted for presumptive income-tax provisions
contained in section 44BBB of the Act. What sum would be deemed to be profits and
gains of such business chargeable to tax under section 44BBB of the Act?
(a) ₹ 9 lakhs
(b) ₹ 18 lakhs
(c) ₹ 4.50 lakhs
(d) ₹ 6.75 lakhs
5. Which of the following purpose is not served by the protocol contained in DTAAs?
(a) Putting certain matters beyond doubt
(b) Rectify unintended omissions in DTAAs
(c) To give effect to Most Favoured Nation clause
(d) To resolve tax disputes, which is not in accordance with the DTAAs
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©The Institute of Chartered Accountants of India
6. Which of the following items is not included in the term "interest" under the UN
Model Convention?
(a) Income from Government Securities
(b) Income from Bonds or Debentures
(c) Premia and prizes attached to Government Securities
(d) Penalty for late payment of suppliers bills
7. Which of the following is not a civil law doctrine applied to control general tax
abuse?
(a) Abuse of right
(b) Abuse of law
(c) Doctrine of simulation
(d) Doctrine of the Label
8. When a person is a resident in both the Contracting States, the tie-breaker test has
to be applied. They are
(i) place of habitual abode;
(ii) country of nationality;
(iii) availability of permanent home;
(iv) place where personal and economic interest or closer.
Which of the following sequence of tie-breaker test is correct?
(a) (i), (iii), (ii) and (iv)
(b) (iv), (i), (iii) and (ii)
(c) (iii), (iv), (i) and (ii)
(d) (i), (ii), (iii) and (iv)
9. Dividend distributed by a foreign company to a shareholder Indian Company,

where Indian company holds 49% in nominal value of equity share capital of such
foreign company is chargeable to tax at the rate
(a) 15% plus surcharge and cess on Gross basis u/s 115-O
(b) 20% plus surcharge and cess on Gross basis u/s 115A
(c) 15% plus surcharge and cess on Gross basis u/s 115BBD
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(d) 10% plus surcharge and cess on Gross basis u/s 115BBDA
10. Which one of the following is not considered as an approach under CFC
regulations?
(a) Jurisdictional approach
(b) Transactional approach
(c) Entity-level approach
(d) Fixed Ratio approach
Answer
1. (c) 2018-19
2. (b) 05.04.2020
3. (c) 01.10.2019
4. (a) Rs. 9 lakhs
5. (d) To resolve tax disputes, which is not in accordance with the DTAA
6. (d) Penalty for late payment of suppliers bills
7. (d) Doctrine of the Label
8. (c) (iii), (iv), (i) and (ii)
9. (c) 15% plus surcharge and cess on Gross basis u/s 115BBD
10. (d) Fixed Ratio approach
PART-B
(Answer any four of the following five questions: Each question carries 20 marks.)
Question 11.
(a) Mr. Prasad, a non-resident Indian, acquired a land in India for the purpose of
establishing a business. Subsequently, he abandoned the idea of establishing a
business in India and sold the land to a resident individual in India. The said
transaction on computation resulted in long-term capital loss for Mr. Prasad. Now,
Mr. Prasad wants the sale proceeds to be paid to him without deduction of tax at
source.
Assuming, you are the tax advisor of Mr. Prasad, explain the applicable legal
provisions under section 195 of the Act. 7
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(b) The Tax treaty between India and Country C provides for taxation of payment for
‘computer software' in the source country (i.e. the payee's country). However, the
said tax treaty does not define the term ‘computer software'. In this scenario, how
would you interpret the term? 4
(c) Explain in brief the case of Formula One World Championship Ltd covering the
following aspects: 9
(i) Facts of the case;
(ii) Issue involved;
(iii) Decision of the AAR, Delhi High Court and Supreme Court.
Answer 11
(a) Receipt of sale consideration by a non-resident without TDS on sale of land in

India
Section 195(2) enables a payer to make application to AO for determination of

chargeable portion of the consolidated payment only when a part of the payment
constitutes income chargeable to tax. Practically, application under section 195(2) is
filed for both 'nil' as well as lower tax withholding. Section 195(2) was amended by
Finance (No.2) Act, 2019 to provide that payer is required to make an application in a
form and manner to be prescribed.
No time limit is prescribed under the law for passing the order by the Assessing Officer.
The AO may grant a certificate for lower or nil deduction of TDS or may refuse to grant
such certificate.
Further, the order passed under section 195(2) is provisional and not conclusive. The
AO can take a contrary view during the assessment proceedings.
The order passed by the Assessing Officer is appealable under section 248 only where
the payer is to bear the income-tax. The appeal can be filed within 30 days of the
receipt of the order and only after payment of tax as directed in the order.
Section 195(3) provides machinery under which a non-resident payee may also apply to
his Assessing Officer for grant of certificate to authorize resident payer to make
payment without any TDS.
The non-resident payee is eligible to make application only if the following conditions
laid out in Rule 29B are satisfied:
(i) The applicant i.e. payee is regularly assessed to income-tax in India and has furnished
returns of income for all assessment years for which such returns became due on or
before the date on which the application is made;
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(ii) The non-resident payee is not in default or deemed to be in default in respect of any
tax, (including advance tax and tax payable under section 140A, interest, penalty, fine or
any other sum payable under the Act).
(iii) The non-resident payee has not been subjected to penalty under section 271(1)(iii).
The application is to be made in Form No.15D. The AO will issue a certificate under
section 195(3) authorizing the recipient to receive the income without deduction of tax.
The certificate so issued is not an order and therefore it is not appealable.
(b) Interpretation of a term not defined in DTAA
Where a term is defined in the DTAA, it shall be adopted. If a particular term is not
defined in the treaty, its meaning can be ascertained with reference to the domestic laws
of the Source State. Accordingly, it shall have the same meaning as assigned to it in the
Income-tax Act,
If it is not defined in the domestic law of the Source State then it can be interpreted as per
the General Law of the Source State.
Section 90(3) says that any term used but not defined in the Act or the DTAA shall have
the meaning as assigned to it in the Notification issued by the Central Government in this
behalf.
However, when the term is defined in the Notification it must be in the context of the
relevant provision and should not be contrary to the provisions of the Act or relevant
DTAA.
The term so defined shall be deemed to have such meaning from the date on which the
relevant DTAA comes into force.
(c) Formula One World Championship Ltd v. CIT (2017) 80 taxmann.com 347 (SC)
(i) Brief facts of the case:
The Formula One World Championship Ltd (FOWC) is a UK tax resident company. It
entered into an agreement with two other companies, who granted all commercial rights
in the FIA Formula One World Championship to FOWC for 100 year term effective from
01.01.2011.
FOWC entered into a Race Promotion Contract (RPC) with Indian company viz., Jaypee
Sports International Ltd (Jaypee), which awarded Jaypee the right to host, stage and
promote Formula One Grand Prix of India event for a consideration of USD 40 million.
The FOWC wanted clarity as regards taxability of this consideration. It applied for
advance ruling as to whether the amount received by it would be treated as royalty as per
DTAA between India and UK. FOWC claimed that it did not have a PE in India.
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The AAR held as follows:
• Amount payable by Jaypee would be treated as royalty as per the India-UK DTAA.
• FOWC did not have a PE in India
• Jaypee is bound to make appropriate deduction from the amount payable to FOWC
under section 195 of the Act.
The Delhi High Court reversed the AAR ruling and held that:
• The amount paid by Jaypee to FOWC would not be treated as royalty.
• FOWC had a fixed place PE at the circuit and therefore consideration fee
attributable to PE in India is taxable in India.
• The High Court did not accept the plea of the Department on Dependent Agent PE
(DAPE)
• Jaypee is bound to make deductions from the amount payable to FOWC under
section 195 of the Act.
The Hon'ble Supreme Court after hearing the entire facts and arrangements of FOWC,
OECD Model Tax Convention commentaries, AP HC ruling in Vishakhapatnam Port
Trust held that:
• The international circuit is a fixed place and since races are conducted from this
circuit, it is an economic / business activity.
• The Apex Court referred to the arrangement between FOWC and its affiliates on one
hand and Jaypee on other hand. SC held the various agreements cannot be looked into
by isolating them from each other and their wholesome reading was necessary to
bring out the real transaction between the parties. Such an approach is essentially
required to find out as to who is having real and dominant control over the Event. The
SC concluded that the entire event was controlled by FWOC and its affiliates.
• SC clarified that the question of the PE has to be examined keeping in mind that the
race was to be conducted only for three days in a year and for this entire period, the
control of the circuit was of FOWC. Hence, the Assesse's stand that the duration of 3
days was not sufficient to constitute a degree of permanence necessary to establish a
fixed place PE was rejected.
• SC accepted Assesse's submission that only that portion of the business income of
FOWC which is attributable to the said PE, would be treated as business income
chargeable to tax in India.
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Question 12.
(a) Kodai Inc., USA had acquired the 50% shareholding in Ooty Ltd, a company
resident in the UK, for £ 70 lakhs on 10.05.2012. Ooty Ltd has business operations/
branches in India. Kodai Inc. sold 20% of its shareholding in Ooty Ltd to Simla Ltd,
UK for £ 30 lakhs on 05.06.2019. 8
Details of assets and liabilities of Ooty Ltd in UK and India are as under:
UK India
31.03.2019 31.03.2020 31.03.2019 31.03.2020
₹ in lakhs
Fair market 4,000 10,000 20,000 25,000
value of
assets
Liabilities 3,000 6,000 12,000 13,000
There was no change in the book value of assets of Ooty Ltd during the year 2019-
20. Both Kodai Inc. and Ooty Ltd adopt period ending 31st March for closing the
books of account.
The telegraphic transfer buying rate of 1 £ on various dates are as under.
10.05.2012 ₹ 55 31.03.2019 ₹ 78
05.06.2019 ₹ 80 31.03.2020 ₹ 90
Cost inflation index of F.Y. 2012-13 = 200 and of F.Y. 2019-20 = 289.
Briefly discuss and compute the capital gains accruing to Kodai Inc. and chargeable
to tax in India under the Income-tax Act, 1961, on sale of shares of Ooty Ltd to
Simla Ltd. Your answer must be supported with reasons.
(b) State briefly the objectives and the factors of a tax treaty made between two
contracting States. 6
(c) Which country would have the primary right to charge tax on the capital gains in
respect of the following capital assets under the UN Model Convention ? 6
(i) Agriculture land situated in State X owned by Mr. A, a resident of State Y.
(ii) Jewellery owned by Mr. Seth, a resident of State N, kept in State M.
(iii) A Ship operating in international traffic owned by Giant Shipping Co Ltd, a

tax resident of UK, sold to Eastern Shipping Co Ltd, India. The Ship was
docked at Chennai port at the time of sale.
(iv) Mr. R's (a tax resident of Country E) interest in a partnership firm

incorporated in Country E. The partnership firm's only asset is a residential
house in India.
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(v) Equity shares held by Mrs. Ben (a tax resident of UK), in Michal LLC, a
company incorporated & registered in Country L, sold to Modern India (P)
Ltd, India.
(vi) Trademark owned by Mr. Tony, a resident of Germany, to Ramesh, a

resident of UAE. Ramesh has bought the trademark for use in his business in
India.
Answer 12
12. (a) Computation of Capital gains for a foreign company on transfer of shares in another
foreign company when those shares derive value from the assets located in India
Under Section 9(1)(i) of the Act, Capital gain arising from transfer of a capital asset
situated in India is deemed to accrue in India and subject to tax in India. Further, as per
Explanation 5 to the section, capital asset being any share in a company incorporated or
registered outside India shall be deemed to have been situated in India, if the share
derives, directly or indirectly, its value substantially from assets located in India.
In the instant fact, shares of Ooty Ltd., a foreign company, shall be deemed to be situated
in India if, the shares derives directly or indirectly, its value substantially from assets
located in India i.e., if on the specified date viz., 31.3.2019, the value of Indian assets –
• Exceed the amount of Rs.10 crore; and
• Represents at least 50% of the value of all the assets owned by the company
Shares of Ooty Ltd derives its value substantially from assets located in India since, the
value of assets located in India (without reduction of liabilities) on the specified date i.e.,
Rs. 20,000 lakhs exceeds Rs. 10 crores and also exceeds 50% of the value of assets of
Ooty Ltd. i.e., it is 83.33% of the value of assets of Ooty Ltd. [Rs. 20,000/Rs. 24,000 x
100].
Accordingly, the capital gains arising to Kodai Inc., from transfer of Ooty Ltd, UK would
be taxable in India.
Computation of capital gain chargeable to tax in the hands of In lakhs

Kodal Inc.
Full value of consideration for transfer of shares of Ooty Ltd. £ 30
Less: Cost of acquisition of shares of Ooty Ltd. (£ 70 lakhs x 50% x
20%) £ 14
Long term capital gains [Since, the shares have been held for more
than 24 months] £ 16
Long term capital gains in Rupees [£ 16 lakhs x 80 being the TTBR
on 30.05.2019 as per Rule 115[A] 1,280
Long term capital gains attributed to assets located in India 1066.62
[A x 83.33%]
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12.(b) Objectives of Tax Treaty
The primary intention of the countries in entering into tax treaty is to allocate taxing rights
and avoid the evil brunt of two-fold (double) taxation on Taxpayers. However, many a
times, it has been observed that the two-fold taxation is inevitable. In such cases, the
hardship caused is somewhat mitigated by providing credit for the tax paid in the country
of source.
In order to advance the object of avoiding / reducing the hardship caused by double
taxation, the following factors are considered in tax treaties:
(i) Scope of the treaty, taxes covered, entities covered.

(ii) Determination of residential status of a person for the purpose of tax credit and
also to determine whether a person is entitled to treaty benefits (limitation of
benefits).
(iii) Provision for reduced rate of tax in the State of Source.
(iv) Exchange of Information
(v) Provision for procedural frame work for enforcement, availing credit of taxes
paid, collection of taxes and dispute resolution etc.
12.(c) Chargeability to tax of capital gains under UN Model Convention:
(i) Capital gain on sale of agriculture land being immovable property may be taxed
in the State in which the property is situated i.e. State X.
(ii) Capital gain from sale of movable property (such as jewellery) forming part of the
business property of a PE or a fixed base may be taxed in the country where the
PE or fixed base is situated. In this case, if Mr. Seth has fixed base in State M it
may be taxed there. Otherwise, it would be taxed in the State of residence i.e.
State N.
(iii) Capital gain from sale of ship operated in international traffic shall be taxed only
in the State in which Place of Effective Management (PoEM) of the seller is
situated. Since, Giant Shipping Co Ltd is a tax resident of UK, the capital gains
would be taxable in UK only.
(iv) Capital gains from alienation of interest in partnership firm, which principally
derives its value from immovable property (not used for business purpose), may
be taxed in the country, where the immovable property is situated. Accordingly,
the capital gains from the alienation of interest in partnership firm may be taxable
in India.
(v) Shares representing a participation of certain percent may be taxed in the State
where the company is resident. In this case, if Mrs. Ben has shares, at any time
during the 12 month period preceding the sale, directly or indirectly, of such
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percentage prescribed in the tax treaty between UK and Country L, then the same
may be taxed in Country L. Otherwise, it may be taxed in the UK.
(vi) Any other property shall be taxed only in the State of residence of the alienator. In
this case, the capital gain on sale of trademark by Mr. Tony may be taxed in his
country of residence i.e. Germany
Question 13
(a) Briefly explain the following subjects in the context of International Taxes: 8
(i) Exit Taxes

(ii) Branch Profit Taxes
(iii) Tax Havens
(iv) Exchange Controls
(b) A Ltd. is engaged in the business of rendering software services. It has borrowed
500 Crores from its associated enterprise viz., B Inc., USA, during the previous
year 2016-17. The borrowing continued during previous year 2018-19. As per the
loan agreement between entities, the applicable interest rate is SBI MCLR on first
day of year plus 2%. A Ltd has earned a EBITDA of 100 Crores during the
previous year. Explain the provisions of Section 94B of Income Tax Act,
considering the above facts. 6
(MCLR of State Bank of India as on 1st April 2018 - 8%).
(c) Is there any difference in treatment given to "royalty" under OECD vis a vis the UN
Model of tax conventions? When would “royalty”be taxed as business profits or
under "independent personal services”? 6
Answer 13
13.(a) (i) Transfer of Tax Residence and Exit Taxes
Certain countries regard a transfer of residence as a form of tax avoidance.
In jurisdictions with worldwide tax regime, taxpayers when they become non-residents
are no longer liable to pay taxes on their foreign source income. Moreover, the gains on
movable property accrued during period of residence but realized at time of departure
also escape taxation. Certain countries have enacted SAARs to prevent tax avoidance
through emigration. Examples are Australia, Canada, Denmark, USA, etc.
E.g. USA taxes its US Citizens/permanent Residents (Green Card Holders) on their
worldwide income. Further, USA tax law continues to tax (subject to conditions) even
after an individual gives up his or her citizenship or long-term permanent US residence.
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Regarding transfer of corporate residence, certain countries impose an 'exit tax' when a
company ceases to be their resident. The company in-such a case is subject to a capital
gain on deemed sale. Example includes USA, Canada and Austria.
(ii) Branch Profit Taxes
Under a classical tax system, host country taxes the corporate profits twice at company
level and again when company pays dividend. Most countries do not tax remittances of
after-tax branch profit to non-residents. A branch entity therefore avoids this economic
double taxation.
Several jurisdictions regard the use of a branch as an unjustified loss of tax revenue that
would have been due to them as dividend withholding taxes from a subsidiary. Thus,
additional taxes either on branch profits or on remittances to head office is levied at
Branch level. In India the proposed Direct Tax Code Bill, 2010 (not enacted) contains
provision of levy of branch profit tax in India.
(iii) Tax Havens
Tax havens are jurisdiction which tends to have nil or low taxation. Tax havens may also
be jurisdiction which has other benefits like financial secrecy, minimum reporting
requirements, ring fencing, discretionary tax privileges, allowing ownership to be held in
trust, no registry of companies and partnership, no taxes on dividends and interest
payments to non-residents, etc.
Several countries have SAARs to limit the deductions of tax expense or tax benefits to
entities located in tax havens. E.g. India has enacted section 94A, where on being
notified, there is restriction on allowability of payment to entity in such jurisdictions,
higher WHT, applicability of TP provisions etc.
(iv) Exchange Controls
Exchange control and tax clearances may be used by countries as anti-avoidance measures
on cross-border transactions. These transactions are subject either to prior government
approvals or post-transaction reporting thereof. Many countries (mostly developing
countries) have a partial or full exchange control.
E.g. in India all capital account transactions under FEMA are not freely allowed unless
provided otherwise and all revenue account transactions are freely allowed unless
provided otherwise.
13.(b) Provisions of Section 94B of the Act
Section 94B of the Act deals with limitation of interest deduction in certain cases (thin
capitalization rules).
The section provides that where any Indian company or a permanent establishment of a
foreign company in India, being a borrower, incurs any expenditure by way of interest or
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of similar nature for an amount exceeding Rs. One Crore, which is deductible in
computing income chargeable under the head "Profits and gains of business or
profession" and in respect of any debt issued by a non-resident associated enterprise of
the borrower, the interest deduction shall be limited to 30% of EBITDA or the interest
payable to AEs, whichever is less.
Further, where the debt is issued by a lender which is not AE but guaranteed or arranged
by an AE, such debt shall be deemed to have been issued by an AE.
The provisions do not apply to an assessee engaged in the business of banking or

insurance.
The interest to the extent not allowable as deduction under this section can be carried
forward for eight assessment years and allowed as deduction, subject to the maximum
deduction allowed in the section
Amount of interest to be claimed deductible from business income - Rs 500 Cr x 10%

= Rs. 50 Cr.
Threshold of interest as per Section 94B(2) = 30% of EBITDA = Rs.30 Crores
Amount of interest allowable u/s 94B = Rs. 30 Crores
Amount of interest deduction allowed to carry forward for

eight assessment years = Rs. 20 cr.
13.(c) Taxation of Royalty under OECD vis a vis UN Model of tax conventions
The UN Model of tax convention provides as follows:
 Taxation of royalty in the State of residence of the recipient; and

 Taxability in the State of source also, but at a concessional rate where the
recipient is the "beneficial owner" of royalty.
Under OECD Model, royalty is taxable only in the State of residence, if the recipient is the
beneficial owner of royalty.
The Articles dealing with Royalty generally provide that royalty would be taxed as
'business profit' or 'independent personal service’ if
Business is carried on through a permanent establishment (PE); or Independent personal

services are rendered through a fixed base.
The right or property in respect of which the royalties are paid is effectively connected
with such PE or fixed base.
In other words, Royalties are taxable in the State of Source as part of business profit of
the PE / fixed base situated therein and owned by the royalties' beneficial owner, who is a
resident of the other State.
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Question 14
(a) A multinational group headquartered in USA is proposing to start business

operations in India. Briefly explain the types of entity that could be established in
India with possible tax consequences. 5
(b) TP Inc., USA is a leading consultant in the field of transfer pricing, providing
services to clients throughout the world. TP LLP, India is a wholly owned
subsidiary of TP Inc. On 10.04.2019, an agreement was entered into between TP
Inc., USA and TP LLP whereby TP LLP would render services from its center in
Bengaluru, India, whenever it is solicited by TP Inc. The beneficiaries of the
services rendered by TP LLP are clients of TP Inc. located outside India. 5
In the above facts, can the Indian tax authorities tax the income of TP Inc., from
services rendered by TP LLP? Please explain in brief quoting from relevant
judgement.
(c) Lawson Consultants LLC of UK is a reputed international consultancy firm whose

services were sought by PQR Ltd of Mumbai for the purpose of raising finance
through ECB to expand its business. PQR Ltd wanted to mobilize Rs. 200 crores
and the consultant is eligible for a fee of 0.5% for doing necessary services. The
ECB was arranged by the consultant from foreign investors and no person of the
consultant visited India for the purpose of doing or completing the transaction.
After the transaction was completed, the consultants raised a bill. You are the tax
manager of PQR Ltd. Decide whether the amount paid to the consultancy firm is
liable for tax deduction at source under the Income-tax Act, 1961 and the India-
UK tax treaty. 5
(d) Dr. Roy, a resident of Country Y, is a reputed surgeon and came to India for
performing a surgery to a celebrity. He stayed in India for one week and based on
the medical reports of the patient and discussion with the doctors at hospital, who
treated the patient previously, he performed surgery. He was paid surgery fee of
Rs. 5 lakhs. There is no DTAA between India and the Country Y. Decide whether
the amount received by him is chargeable to tax in India. Would your answer be
different in case there is a DTAA between India and the Country Y based on the
UN and OECD Model Tax Convention? 5
Answer 14
14.(a) Type of business entity to be set up in India by a multinational group located in

USA
MNE Group may operate in India through an entity which may be a liaison office or
branch office (unincorporated entity) or a subsidiary company or partnership firm or a
Limited Liability Partnership (LLP).
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Legal characterization of an entity may predominantly depend on business and

regulatory considerations.
The key regulatory and tax aspects of each type of entity are provided below:
(i) Branch office: A branch office of a foreign company in India does not have a separate
legal existence and is considered to be part of the main enterprise. The branch office
would constitute a permanent establishment in India and it may be taxed both in its
home jurisdiction (i.e. USA) as well as in India (branch jurisdiction). The branch office
would be subjected to income-tax as would be applied to non-resident not being a
foreign company or as applicable to the foreign company. The rate of tax is higher than
that applicable to a Indian company, however the distribution of profits is not subject to
further tax.
(ii) Liaison office (LO): A LO can represent the head office and other group companies
in India. It can promote export / import from / to India. It can promote technical /
financial collaborations between HO / group companies and third party entitles in India.
However, a LO may not be allowed by regulations to undertake business operations.
Normally, a LO may not be considered as permanent establishment in India and hence

does not have any income tax implications.
(iii) Subsidiary company: A company is treated as a separate entity both for legal and tax
purposes. The subsidiary company will subject to tax as any other Indian company and
normally will not be considered as PE of the foreign company. The dividends
distributed by the company would be subject to Dividend Distribution Tax or
withholding tax as per the Act or the rate under the India-US tax treaty, whichever is
beneficial.
(iv) Partnership Firm or LLP: The partnership firm may be unlimited liability
partnership or a limited liability partnership. Problems of double taxation may arise
where the firm or LLP is recognized for tax purposes in one jurisdiction but not in the
other jurisdiction where the entity operates. The profits of the firm are not liable for
dividend distribution tax. The interest on capital can be paid to the partners of the firm,
subject to interest rate cap.
14.(b) Whether a subsidiary rendering service to parent foreign company would become
PE?
The facts of the case given in the question are similar to the decision in the case of E-
Funds IT Solution Inc. (2017) 86 taxmann.com 240 (SC).
In this case, the Indian subsidiary rendered IT and IT enabled services to the foreign
holding company. The Revenue contended that the income of foreign holding company
from the services attributable to the Indian subsidiary have also to be taxed in India as it
had PE in India in the form of subsidiary.
15 | P a g e
The Supreme Court held that services rendered by Indian subsidiary which enabled
foreign company to render services to its clients abroad will not create PE of the foreign
parent company in India.
The Indian subsidiary did not create a fixed place PE of its foreign company in India
unless the premises of the subsidiary were at the disposal of the foreign company; or the
clients of the foreign company receive services in India.
Even if the foreign company is held to have a PE in India, the transaction between the
foreign company and the Indian subsidiary was at arm's length price and no further
profits can be attributed in India.
Based on the above ruling, the provision of services by TP LLP to TP Inc., for its clients
located outside India, should not create a PE for TP Inc. in India. Hence, the profits of
TP Inc. cannot be subject to tax in India. However, the transactions between TP Inc. and
TP LLP would have to be undertaken at arm's length prices in accordance with the
Transfer Pricing regulations in India.
14.(c) TDS on ECB arranged by foreign consultant
Under Section 9(1)(vii) of the Act, income by way of fees for technical services inter
alia payable by person who is resident, is deemed to accrue or arise in India.
Fees for technical services are defined inter alia to mean any consideration for the
rendering of any managerial, technical or consultancy services (except for services
utilized outside India).
The facts of the case are similar to that of GVK Industries Ltd v. ITO (2011) 332 ITR
130 (SC). In this case, the assessee had paid fees to a consultant for arranging loan
funds.
The Supreme Court held that an income of the recipient has to be charged in the country
where the source of payment is located, to clarify where the payer is located. Further,
the services rendered by the non-resident consultant would certainly come within the
ambit and sweep of the term "consultancy services" and therefore tax at source should
be deducted as the amount paid fell under the head "fee for technical service".
However, the Supreme Court ruling is based on the Income-tax Act and not based on tax
treaty which was not invoked by the assessee-company and hence the principle laid
down in this decision will have limited application.
Section 90(2) of the Act provides that the provisions of the Act or the applicable Tax
treaty, whichever is more beneficial should apply to an assessee.
Accordingly, the DTAA between India and UK needs to be examined to determine the
taxability of the payments by PQR Ltd to Lawson Consultants LLP.
16 | P a g e
The India-UK DTAA contain a more restrictive definition of FTS/FIS as it requires

satisfaction of the 'make available' condition with respect for services.
In the instant facts, the services provided by Lawson Consultants LLC do not make
available any technical knowledge, experience, skill know-how, or processes or consist
of the development of and transfer of a technical plan or technical design.
Accordingly, as held in the case of Raymonds Ltd and other Judicial precedents, the
payments for loan arrangement services cannot be liable to tax in India under the
beneficial provisions of the India-UK DTAA.
14.(d) Business connection vis a vis PE - tax consequence
The Supreme Court in Birendra Prasad Roy v. ITO 129 ITR 295 (SC) dealt with a
similar case in which the payment was made abroad to the London solicitors who
briefed the barrister who came to India and appeared in a case in India.
In the absence of DTAA between India and Country Y, in which Dr. Roy is a resident,
based on the SC ruling in above case, his visit and discussion with Doctors in India
establish a business connection in India. Accordingly, the said fee of Rs. 5 lakhs would
be chargeable to tax in India.
If there had been a treaty between India and the country Y, then the issue of business
connection would not have arisen and whether his presence constituted a PE or fixed
base for performance of independent personal services in India would have been the
question.
Under the UN Model, independent activities of physicians, are covered under Article
14- Independent Personal Services and liable to tax in the Source country only if he has
a fixed base regularly available to him in the Source country for the purpose of
performing his activities or if his stay in the Source country is for a period or periods
amounting to or exceeding 183 days in any 12 month period.
Article 14 was deleted from the OECD Model Tax Convention and now income derived
from professional services etc. is dealt with as 'Business Profits'. The income from
professional services would be taxable in source country only if there exists a PE of the
non-resident in that country.
Question 15
(a) Dev is a software engineer employed in an Indian company with a salary of ₹ 2 lakh
per month. He was sent by his Company for certain implementation support to a
client office in Belgium on 01.11.2019. This is his first travel outside India. Due to
visa restrictions on his activities, he had to quit his employment with the Indian
company and joined the Belgium Company as its employee. The Belgium Company
sponsored the work visa for him and agreed to pay him a salary of ₹ 3 lakhs per
month from 01.02.2020. How would his salary income during the previous year
ended March 31, 2020 be taxed in India and Belgium? 5
17 | P a g e
The DTAA between India and Belgium reads as under:
Article 15: Dependent personal services
1. Subject to the provisions of Articles 16, 17, 18, 19, 20 and 21, salaries, wages and
other similar remuneration derived by a resident of a Contracting State in respect
of an employment shall be taxable only in that State unless the employment is
exercised in the other Contracting State. If the employment is so exercised, such
remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a

resident of a Contracting State in respect of an employment exercised in the other
Contracting State shall be taxable only in the first-mentioned State, if :-
(a) the recipient is present in the other State for a period or periods not exceeding
in aggregate 183 days in the relevant "previous year" or "taxable period", as
the case may be;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident
of the other State; and
(c) the remuneration is not deductible in computing the profits or income of a

permanent establishment or a fixed base which the employer has in the other
State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in

respect of an employment exercised aboard a ship or aircraft operated in
international traffic by an enterprise of a Contracting State may be taxed in that
State.
(b) How non-resident sportspersons would be taxed under the Income-tax Act, 1961
vis-a-vis as per the UN Model Convention? 5
(c) Describe the action plans under "Base Erosion and Profit Shifting" initiative of
OECD, where all the signatories are required to adopt new minimum standards.
10
[Describe each action plan in minimum 100 words]
Answer 15
(a) Salary income of Indian citizen being taxable outside India because of DTAA
The assessee Dev remained in India up to 31.10.2019. His aggregate stay in India was
182 days or more during the previous year 2019-20. He has always been in India in the
preceding financial years. Therefore his residential status is resident and ordinarily
resident. Accordingly, under the Act, all his income, including income accruing or
arising outside India, shall be subject to tax in India.
18 | P a g e
Under the Act, his remuneration from the Indian employer while serving in India and on
travel to Belgium is chargeable to tax in India.
As per Article 15(1) of the India-Belgium tax treaty, salaries, wages and other similar
remuneration derived by a resident of India in respect of an employment shall be taxable
only in India, unless the employment is exercised in Belgium. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in Belgium.
Further as per Article 15(2), remuneration derived by a resident of India in respect of an

employment exercised in Belgium shall be taxable only in India, if :—
(a) the recipient is present in the Belgium for a period or periods not exceeding in
aggregate 183 days in the relevant "previous year" or "taxable period", as the case
may be;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of
the Belgium; and
(c) the remuneration is not deductible in computing the profits or income of a PE or a

fixed base which the employer has in Belgium.
Based on the above treaty provisions, Dev's salary from the Indian company for the period
he travelled to Belgium is not taxable in Belgium.
However, Dev's salary from the Belgium Company is taxable in Belgium, as it is paid by
an employer who is resident of Belgium.
The tax on Dev's salary from the Belgium Company in Belgium and India result in double
taxation of the same income. However, Dev should be able to claim credit of the taxes
paid in Belgium against the tax liability on such income in India.
(b) Income of non-resident sportsperson taxed under domestic law and UN Model
Convention
Article 17 of the UN Model Convention specifically deals with taxation of artists and
sportspersons.
As per Para 1 of the Article, Income derived by a resident of a Contracting State as an

entertainer, such as theatre, motion picture, radio or television artists, or a musician or as
a sportsperson, from his personal activities as such exercised in the other contracting
State may be taxed in that other State.
As per Article 17(2), where income in respect of personal activities exercised by an

entertainer or a sports person in his capacity as such accrues not to entertainer or
sportsperson himself but to another person that income may notwithstanding the
provisions of Articles 7, 14 and 15 be taxed in the Contracting State in which the
activities of the entertainer or sportsperson are exercised.
19 | P a g e
Thus the income earned by the sportsperson is taxable in the State of source (i.e. state
where the sportsperson participates in events). Further, even where the income from the
activities of the sportsperson is exercised in a State, accrues to another person, it will
still be taxed in that State. The Model Convention does not provide the rate of taxation
of the income
Section 115BBA says that income of a sports person (including an athlete), who is not a
citizen of India and who is a non-resident, includes any income received or receivable
by way of:
(i) participation in India in any game (other than those taxable under section 115BB);
or
(ii) advertisement; or
(iii) contribution of articles relating to any game or sport in India in newspapers,

magazines or journals
It shall be taxed at the rate of 20%. Further, no expenditure is allowable against such
income.
The non-resident sportsperson need not furnish return of income under section 139 if (i)
his total income in India consists of those incomes listed above; and (ii) the tax
deductible at Source under Chapter XVII-B has been deducted from such income.
(c) BEPS Action Plan - Minimum Standard
Following are the action plans; where all the signatories to BEPS Action plan are
required to implement the minimum standards set under the recommendations of BEPS
action plan:-
(a) BEPS Action Plan 5 - Counter Harmful Tax practices
(b) BEPS Action Plan 6 - Preventing Treaty abuse
(c) BEPS Action Plan 13 - Re-examine Transfer Pricing Documentation
(d) BEPS Action Plan 14 - Making Dispute resolution mechanism more effective
BEPS Action plan 5- Counter Harmful Tax Practices
The report identifies factors for determining a potential harmful tax practice that results
in low or no effective tax rate, lack of transparency, negotiable tax rate or base etc.
The Action 5 minimum standard consists of two parts.
 One part relates to preferential tax regimes, where a peer review is undertaken to
identify features of such regimes that can facilitate base erosion and profit shifting
and therefore have the potential to unfairly impact the tax base of other jurisdiction.
20 | P a g e
 The second part includes a commitment to transparency through the compulsory

spontaneous exchange of relevant information on taxpayer-specific rulings which, in
the absence of such information exchange, could give rise to BEPS concerns.
BEPS Action plan 6- Preventing Treaty abuse
Treaty abuse has been the one of the most contentious areas in the BEPS. The objective of
the Action Plan is to make changes to the model tax convention and recommendation
regarding the design of the domestic rules, so as to prevent granting of treaty benefits in
appropriate circumstances. The proposed actions are:-
 A simplified limitation of benefits (LOB) rule proposed to combine the LOB rule
with a principal purpose test (PPT) rule;
 Multilateral treaties should be entered into;
 Stated are not obliged to apply the rule in their treaties if they have no objection to
treaty shopping as the state of source of income;
 Detailed LOB rule plus anti-conduit rule to be incorporated in the treaty or
domestic law;
 Adoption of simplified PPT rule and LOB rule;
BEPS Action plan 13- Re-examine Transfer Pricing Documentation
The minimum standard for transfer pricing documentation reiterates improving

transparency through providing the tax administrations with a global picture of the
operations of MNEs.
Action 13 contains a three-tiered standardized approach transfer pricing documentation

which consists of:
 Master file: Master file requires MNEs to provide tax administrations with high-
level information regarding their global business operations and transfer pricing
policies. The master file is to be delivered by MNEs directly to local tax
administrations.
 Local file: Local file requires maintaining of transactional information specific to

each country in detail covering related-party transactions, functional analysis and
economic analysis. The local file is to be delivered by MNEs directly to local tax
administrations.
 Country-by-country (CBC) report: CBC report requires MNEs to provide annual

report of economic indicators viz, the amount of revenue, profit before income tax,
income tax paid and accrued in relation to the tax jurisdiction in which they do
business. CBC reports are required to be filed in the jurisdiction of tax residence of
the ultimate parent entity, being subsequently shared between other jurisdictions
through automatic exchange of information mechanism.
21 | P a g e
BEPS Action plan 14 - Making Dispute resolution Mechanism More Effective
The report advocates setting up a Forum on Tax Administration (FTA), a subset of MAP
Forum to deal with practical issues, as a minimum standard. States have agreed to join the
FTA MAP Forum, report MAP statistics and agree to have their MAP performance
monitored. In this way, a peer review mechanism has been set in place to ensure
transparency in the area of exchange of information. In addition there is a list of 11 best
practices, being matters which either are not readily measurable or could not be agreed by
all states involved.
X-X-X
22 | P a g e

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DIPLOMA IN INTERNATIONAL TAXATION ASSESSMENT TEST

Paper-2: – International Tax Practice

SUGGESTED ANSWERS – NOVEMBER, 2020 ASSESSMENT TEST

There will be negative marking in Part-A.

For each wrong answer in Part-A, 50% marks will be deducted.

4. Singa Pte. Ltd of Singapore is engaged in erection of plant and machinery in

(c) ₹ 4.50 lakhs

(d) ₹ 6.75 lakhs

(a) Putting certain matters beyond doubt

(b) Rectify unintended omissions in DTAAs

(c) To give effect to Most Favoured Nation clause

(a) Income from Government Securities

(b) Income from Bonds or Debentures

(c) Premia and prizes attached to Government Securities

(d) Penalty for late payment of suppliers bills

(a) Abuse of right

(b) Abuse of law

(c) Doctrine of simulation

(d) Doctrine of the Label

(i) place of habitual abode;

(ii) country of nationality;

(iii) availability of permanent home;

(iv) place where personal and economic interest or closer.

Which of the following sequence of tie-breaker test is correct?

(a) (i), (iii), (ii) and (iv)

(b) (iv), (i), (iii) and (ii)

(c) (iii), (iv), (i) and (ii)

(d) (i), (ii), (iii) and (iv)

9. Dividend distributed by a foreign company to a shareholder Indian Company,

(a) Jurisdictional approach

(b) Transactional approach

(c) Entity-level approach

(d) Fixed Ratio approach

4. (a) Rs. 9 lakhs

6. (d) Penalty for late payment of suppliers bills

7. (d) Doctrine of the Label

8. (c) (iii), (iv), (i) and (ii)

10. (d) Fixed Ratio approach

(i) Facts of the case;

(ii) Issue involved;

(a) Receipt of sale consideration by a non-resident without TDS on sale of land in

Section 195(2) enables a payer to make application to AO for determination of

(b) Interpretation of a term not defined in DTAA

(i) Brief facts of the case:

The AAR held as follows:

• FOWC did not have a PE in India

• The amount paid by Jaypee to FOWC would not be treated as royalty.

The telegraphic transfer buying rate of 1 £ on various dates are as under.

(i) Agriculture land situated in State X owned by Mr. A, a resident of State Y.

(ii) Jewellery owned by Mr. Seth, a resident of State N, kept in State M.

(iii) A Ship operating in international traffic owned by Giant Shipping Co Ltd, a

(iv) Mr. R's (a tax resident of Country E) interest in a partnership firm

(vi) Trademark owned by Mr. Tony, a resident of Germany, to Ramesh, a

• Exceed the amount of Rs.10 crore; and

Computation of capital gain chargeable to tax in the hands of In lakhs

12.(b) Objectives of Tax Treaty

(i) Scope of the treaty, taxes covered, entities covered.

12.(c) Chargeability to tax of capital gains under UN Model Convention:

(i) Exit Taxes

(MCLR of State Bank of India as on 1st April 2018 - 8%).

13.(a) (i) Transfer of Tax Residence and Exit Taxes

Certain countries regard a transfer of residence as a form of tax avoidance.

(ii) Branch Profit Taxes