Socrates Ltd., Mumbai Socrates Ltd. is engaged in redistribution of air coolers in India which are manufactured by its AE Aristotle Inc., USA. It is also engaged in redistribution of air coolers in India manufactured by Walters Ltd. of UK which is an unrelated party. During the financial year 2021-22, Socrates Ltd. sold 1.8 lakh air coolers of Aristotle Inc. and 60,000 air coolers of Walters Ltd. The gross profit margin was 10% of sales in the case of Aristotle Inc. and 20% of sales in the case of Walters Ltd. Aristotle Inc. is an internationally recognized brand and industry estimates peg the benefit of the brand value at 1% of sales. Walters Ltd. extended 3 months credit period and whereas Aristotle Inc. extended a credit period of only 1 month. The cost of capital was 12% per annum. There are no other differences between the transaction with related party and unrelated party. Total sales made by Socrates Ltd. in the financial year 2021-22 in respect of redistribution of goods of Aristotle Inc., was ₹90 crores and whereas it was ₹36 crores in respect of Walters Ltd. In light of the significant increase in the volume of business and to mitigate the risks of a transfer pricing litigation, Socrates Ltd. filed for an Advance Pricing Agreement and concluded the same in January 2021. It was valid for financial years beginning 2020-21. The APA which was signed also included a rollback provision. During the course of its business, Socrates Ltd. entered into an agreement for management consultancy services from McKolsey GmbH, Germany. As per the agreement, McKolsey GmbH, Germany was required to send its consultant(s) for conducting a work place improvement and productivity enhancement study at Socrates facilities. The said consultants were required to study certain process and practices of Socrates Ltd. at different locations where it operated and suggest areas of improvement. The consultant(s) were required to be present at the facilities of Socrates for specified time limit to complete the ground work as agreed in the agreement. McKolsey GmbH sent an expert in air cooler industry, Dr. Richards, to India. Dr. Richards was an employee of McKolsey and had resigned a few months before coming to India. However, Dr. Richards was working for McKolsey as a consultant and was sent to India for this special project. Socrates Ltd. is required to pay ₹ 150 lakhs to McKolsey GmbH for the management consultancy services including those furnished by Dr. Richards who came on their behalf and stayed in India. McKolsey GmbH's tax advisors have advised them to file for an advance ruling to obtain certainty on the tax treatment of the receipts from Socrates Ltd. in its hands. **Additional advertising efforts including digital marketing** Vivi Digital Services Pte Ltd. is a company registered in Singapore. Vivi Digital owns, operates and manages a digital platform for online sale of air coolers. Vivi Digital operates the platform 'buycoolers.com' which facilitates sale of air coolers owned by companies which are registered as sellers on its platform. Aristotle Inc, USA, entered into an agreement with Vivi Digital to register itself as a seller on the platform. Aristotle Inc wanted to sell certain high-end air coolers which were not currently marketed by Socrates Ltd. Vivi Digital facilitated sale of goods of Aristotle Inc to customers in India during the financial year 2021-22. During the said year, Aristotle was able to sell additional air coolers worth ₹5.60 crores through the buycooler.com platform to customers in India directly. **Aristotle Inc, USA** Aristotle Inc. USA besides supplying goods to Socrates Ltd. and selling its high-end air coolers on the digital platform was also engaged in systematic and continuous solicitation of business activities with users in India. Aristotle wanted to get a better understanding of the market and users in India to be able to expand its operations. During the financial year 2021-22, Aristotle Inc had its own website and was also using third party companies to engage in interaction with users directly. As per the last count, Aristotle had 2,50,000 users in India (i.e., who had IP address in India). Separately, Aristotle also paid $ 100,000 to Kiwi Research Limited, New Zealand for purchase of data relating to preferences of users residing in India. **Brand ambassador - Mike Pluto** In early 2021, Mike Pluto, a famous football player, was signed up as a brand ambassador by Aristotle for all its products around the world. In July 2021, Socrates Ltd. was planning the inauguration of a new retail outlet in Delhi which would also sell Aristotle air coolers. In June 2021, Mike Pluto came to India and participated in a local football tournament organized by RAPTO Co Ltd. in India. He was paid ₹10 lakhs as participation fee. He incurred 4 lakhs towards his travel and stay expenses. Socrates Ltd. agreed to pay ₹ 15 lakhs to Mike Pluto if he attended the inauguration of the new retail outlet since it would be a great advertisement given that he was the brand ambassador. Socrates also agreed to bear the taxes applicable on the said 15 lakhs, if any. Mike Pluto extended his stay and attended the inauguration and earned the advertising fee of 15 lakhs (net of tax applicable). While here in India, Mike Pluto participated in a game show on television and won 10 lakhs as prize money for winning the game. Choose the correct alternative for the following MCQs: (5 x 2 = 10 Marks) You are required to answer the following issues:
Sub-questions (8)
How much is the amount of equalization levy payable for the sales facilitated by Vivi Digital through buycoolers.com for sale of goods of Aristotle Inc, USA?
(A) @2% being ₹11.20 lakhs payable by Vivi Digital, Singapore
(B) @2% being ₹11.20 lakhs payable by Aristotle Inc, USA
(C) NIL
(D) @6% being ₹33.60 lakhs payable by Socrates Ltd.
Assuming that the DTAA between India and Germany is as per UN Model, how many days of stay of Dr. Richards in India would lead to existence of PE of McKolsey GmbH in India?
(A) 90 days in total
(B) 183 days in the fiscal year
(C) 183 days in total
(D) Dr. Richards' stay in India does not create a PE of McKolsey GmbH since he is not an employee.
For which of the financial years, Socrates Ltd. can avail rollback benefit on the assumption that it has satisfied all other conditions contained in the Income-tax Act, 1961?
(A) Financial year 2016-17 to financial year 2019-20
(B) Financial year 2015-16 to financial year 2019-20
(C) Financial year 2017-18 to financial year 2020-21
(D) Financial year 2016-17 to financial year 2020-21
Socrates Ltd. had a dispute on the covered transaction under the APA for financial year 2017-18 and the ITAT has passed an order disposing such appeal as on the date of signing the APA. What would be the years of rollback under such a scenario?
(A) Socrates Ltd. can choose the years it wants to apply for rollback and it need not chose all applicable years.
(B) Rollback applies to all applicable years and Socrates Ltd. cannot choose. Hence, rollback doesn't apply for any year.
(C) Rollback applies to applicable years other than FY 2017-18.
(D) Rollback applies to all applicable years including FY 2017-18 and the ITAT order is not to be considered.
If McKolsey GmbH obtains an advance ruling in respect of the taxability of the receipts from the management consultancy agreement with Socrates, such ruling shall be binding on:
(A) McKolsey GmbH, in relation to the above receipt.
(B) For all similar income streams of McKolsey in India during this year.
(C) The Jurisdictional Assessing Officer of McKolsey GmbH in respect of all receipts of McKolsey.
(D) McKolsey and the Jurisdictional Assessing Officer of McKolsey in respect of the Socrates Agreement.
Compute the arm's length price of the transaction between Socrates Ltd. and Aristotle Inc. using the most appropriate method and state the amount of income liable for adjustment in the hands of Socrates Ltd., if any.
What is the total income and total tax liability of Mike Pluto for the A.Y.2022-23? How much is the amount of income tax liability for Socrates Ltd. in respect of the amount paid to Mike Pluto? Is Mike Pluto required to file ITR for the A.Y.2022-23?
State whether Aristotle Inc, USA, being engaged in systematic and continuous soliciting of business with users in India and/or incurring expenditure for obtaining data from KIWI Research Limited, New Zealand would lead to either Aristotle or KIWI Research Limited having a business connection in India? State the tax consequence, if any arising out of such actions for both companies.