Mr. Ram is a citizen of India who has been a Non-resident for Indian tax and exchange control purposes. Ram holds 40% of voting power in ACo Inc, a company incorporated under the law of Country A. For the purpose of expansion of business, the said company enters into an agreement with MinMax Ltd., a company incorporated under the Indian laws. ACo Inc does not hold shares in MinMax Ltd. but only enters into a 'preferred distributor' agreement. **Business activities of MinMax Ltd.** As per one of the clauses of the above agreement, A Co Inc has the power to appoint 7 directors out of the 12 directors on the Board of MinMax Ltd. Mr. Ram is appointed as one of the Directors of the Indian company, MinMax Ltd. This is to exercise control over the operations of MinMax Ltd. and to ensure that interests of A Co Inc are protected and that MinMax does not enter into any agreement or business relationship with competitors of ACo Inc. The total purchase by MinMax Ltd. for the F.Y. 2021-22 is estimated to be ₹500 Crores, out of which, purchase of ₹50 Crores would be sourced locally and the balance is to be supplied by ACo Inc. The price for entire purchase has been fixed in the agreement and the conditions for supply are determined by ACo Inc. MinMax Ltd. would need to expand its operations to cater to the demands of ACo Inc and proposes to borrow ₹200 Crores from State Bank of India (SBI). Since the borrowing is for the purposes of operations of ACo Inc, 100% of the guarantees required by the Bank are provided by ACo Inc. This is the first time that ACo Inc has given guarantees to an unrelated company. The total borrowings of MinMax Ltd. is ₹1000 Crores. MinMax Ltd. buys mobile phones from ACo Inc. The mobile phones are branded for which royalty of ₹ 100 per mobile phone sold is paid to ACo Inc. Similar mobile phones are sold to other customers in India by ACo Inc directly. The credit period offered to MinMax Ltd. is 2 months, whereas other customers pay immediately. During the F.Y.2021-22, 10 lakh mobile phones were bought for an aggregate sum of ₹2600 Crores from ACo Inc. Assume the royalty is included in ₹2600 Crores. The entire purchase of MinMax Ltd. were sold in the F.Y. 2021-22. MinMax Ltd. failed to report ACo Inc as an Associated Enterprise and transactions with them were not reported as 'international transactions'. MinMax Ltd. has received a notice from the Income Tax department in this regard. MinMax Ltd. is now considering the option of filing Form 3CEB and TP study/documentation relating to determination of Arm's Length Price. **Contract with BigData Company** During the financial year 2020-2021, MinMax Ltd. entered into an agreement with BigData Company, a company registered and incorporated in Country K (India does not have a DTAA with Country K). The agreement was for provision of certain data analytics services which would amount to fees for technical services under the Income-tax Act. The agreement required an advance payment of USD 100,000. The payment being made by a resident company (i.e., MinMax Ltd.), taxes were required to be withheld at source under section 195 of the Act and net amount was to be remitted to BigData Company. BigData Company has drawn the attention of MinMax to a clause in the agreement which requires MinMax to pay the agreed amounts to BigData Company in full and that MinMax needs to bear the taxes in India, if applicable. Accordingly, the said advance of USD 100,000 has been paid to BigData Company on March 31, 2022. **Nesla Inc owned by Ram** Nesla Inc, a company manufacturing Electric vehicles. Nesla Inc is owned by Mr. Ram and is a company headquartered in Country A. Mr. Jeff is citizen and resident of Country A since 2005 and has been working in Nesla. Mr. Jeff is appointed as Head of South Asia - Operations in April 2021 to understand the prospects in South Asian market and preparation of a plan for selling vehicles in the South Asian market. Presently Ram's enterprises are not engaged in any business in South Asia. Jeff travels to India in April 2021 and stays in a hotel in New Delhi for ten days. Thereafter, Jeff travels extensively in India, Sri Lanka, Singapore, etc. to meet prospective dealers, automobile experts, etc. Jeff also gives interviews in various auto magazines and automobile shows on TV about the plans of Nesla. Jeff's job requires him to visit his head office in Country A every 25 days for reporting purposes. When Jeff visits the headquarters in June 2021, he discusses the possibility of importing one Model-N Electric vehicle of Nesla Inc. He feels that display of the car in India to prospective customers would increase the interest in the company's products. Ram approves the plan and one Model-N car is sent to India to be placed at the Mumbai airport for display. The car is imported in accordance with the Customs law. Mumbai Airport Limited, the operator of the airport, charges of ₹ 5,00,000·per month rent to Nesla Inc for space for displaying the car. Many prospective customers reach out to Jeff wanting to place orders for the car. Jeff informs that he is not autorised to obtain orders and the orders, if any, have to be placed directly on Nesla and the cars have to be imported directly by those who are interested. Given the increased interest, Mr. Jeff also meets prospective businessmen who could be appointed as dealers. It is decided that Nesla would appoint dealers in India and start selling their cars from April 2022. Jeff concludes the financial year 2021-2022 with a clear plan for India. He ends up spending about 80 days in India in the financial year. Choose the correct alternative for the following MCQs: (5 x 2 = 10 Marks) You are required to answer the following issues:
Sub-questions (8)
As regards the requirement for Mr. Ram to obtain a Permanent Account Number (PAN) in India, which of the below statements are true?
(A) Ram is required to obtain a PAN if he has taxable income in India
(B) Ram is required to obtain a PAN since he is a director of an Indian company
(C) Ram is required to obtain a PAN since he is a director and has taxable Income
(D) Ram is not required to obtain a PAN in India
In respect of transfer pricing provisions, which of the following statement is NOT true?
(A) The Assessing Officer has powers to determine arm's length price if information and documents relating to an international transaction has not been maintained by the taxpayer.
(B) Where any other International Transaction, other than those reported by the assessee, come to the notice of the TPO, he cannot apply the transfer pricing provisions on such transactions.
(C) Where in respect of any international transaction, the assessee has not furnished the report u/s 92E, the TPO can apply the transfer pricing provisions on the same.
(D) The Assessing Officer will proceed for the assessment in conformity with the ALP as determined by the TPO.
Which of the below statement is False?
(A) 2% penalty is to be levied if the persons fail to report the international transaction which is required to be reported.
(B) The penalty of ₹ 2 lakhs shall be payable if the persons fail to file the report of an accountant.
(C) The penalty u/s 271AA shall be in addition and not in substitution of penalty u/s 271BA.
(D) Failure to report any international transaction would be considered as misreporting of income and 200% of the tax payable on underreported Income.
In respect of taxability of Mr. Jeff's salary (resident of Country A - India has a DTAA following UN Model), which statement is true?
(A) Salary is taxable for 80 days because he has rendered services in India.
(B) Salary is taxable, but he can claim short stay exemption because his stay is less than 90 days in India.
(C) Salary is not taxable, because the foreign enterprise is not engaged in any business or trade in India.
(D) Salary is not taxable because the remuneration is not liable to be deducted from the income of the employer chargeable under Income Tax Act, 1961.
Which is the most appropriate method for determining the arm's length price of the transaction of purchase of mobile phones by MinMax Ltd. from ACo Inc:
(A) Comparable Uncontrolled Price Method
(B) Resale Price Method
(C) Profit Split Method
(D) Cost Plus Method
Are ACo Inc and MinMax Ltd. 'associated enterprises'? If they are, list all the circumstances which lead to the conclusion that they are associated enterprises.
You are a practising Chartered Accountant specializing in International taxation and Nesla Inc approaches you to advise them on India tax implications of their presence in India. What would your advice be on presence of a Permanent Establishment, filing of returns or compliances, if any, for the F.Y. 2021-22.
In respect of the payment of USD 100,000 made to BigData Company on March 31, 2022, you are required to advise on the following: (a) MinMax Ltd. has not complied with the TDS provisions until date. What is the amount to be remitted if taxes are to be grossed up assuming a TDS rate of 10%? And what amount needs to be deposited today with applicable interest? (Assume applicable exchange rate to be 1 USD = 75.60 INR) (b) No work has commenced on the project as on date. MinMax Ltd. is contemplating cancelation of the contract. If the contract is cancelled after the TDS is remitted, would the amount remitted be refundable?If yes, who can claim that refund and what is the process?